Sovereign debt bubble thread

[citizen k]

... maybe we should just ask MIT what to do.

They'll say a bigger and better algo is the solution.

[Sheilbh]

So far he's only been able to supply money to banks, that use it to deleverage so it doesn't enter the economy.

A big chunk was used by banks to buy sovereign debt.

Article in the Economist on Spanish regional debt: debt/regional GDP ratios range from 10 to 20%.

Spanish regional debt's normally included. I think central government debt's around 60-70%.

Also it's not clear that very much LTRO money went on sovereigns. That's one of the problems with the program. It's closer to the off balance sheet aid the Fed and BofE gave banks than anything to help sovereigns.

[Admiral Yi]

Spanish regional debt's normally included. I think central government debt's around 60-70%.

Not in the articles I read.

Also it's not clear that very much LTRO money went on sovereigns. That's one of the problems with the program. It's closer to the off balance sheet aid the Fed and BofE gave banks than anything to help sovereigns.

I don't know what you are saying.  The ECB lent banks a bunch of money at cheap rates.  The banks turned around and bought home country sovereigns, causing a temporary dip in Italian and Spanish yields to 4%.

[Iormlund]

Some Spanish and Italian banks used part of the money to buy their own sovereign bonds. But for the most part the money reached creditor banks and was then parked at the ECB overnight deposit facility instead of entering the economy. The ECB had to slash interest rates paid to 0% to discourage this behaviour.

[MadImmortalMan]

That's similar to what Sweden did in the 90s. It looks like it worked well for them.

[Sheilbh]

I don't know what you are saying.  The ECB lent banks a bunch of money at cheap rates.  The banks turned around and bought home country sovereigns, causing a temporary dip in Italian and Spanish yields to 4%.

Basically what Iorm said.  The majority of the money went straight back to the ECB, though it's clear that some bought sovereign bonds first.  There was an improvement in the issuance of bonds for some peripheral states but it wasn't that massive. 

That helped bring yields down but a more significant benefit was that LTRO looked to break the sovereign-bank link, which as the suggestion of banking union at the last Eurosummit demonstrated is something the markets are desperate to happen.  It also had a big effect in removing some of the problems with European banking system in general was having.  It's worth observing that LTRO had a big effect on Spanish yields especially because Spanish banks bought home country sovereigns, after all they're probably safer than, say, mortgage backed securities or much else in Spain at the minute.  The reverse was the case in Italy.

In terms of its operation LTRO wasn't like QE, but like the (off balance-sheet) short-term refinancing support extended to British and American banks by the BofE and Fed in 2008.

Monti made an interesting point today about the challenge for leaders being to stop psychological differences between Europe as old, negative national stereotypes and attitudes begin to dictate politics.  I think he's right in identifying a sort-of cultural reversal of Euro success, the same's happening with capital, apparently its renationalisation is continuing at a very rapid pace

[Iormlund]

LTRO didn't break bank-sovereign loop at all. It just bought time. Time politicians everywhere wasted.

In fact during that time foreign holdings of Spanish debt decreased considerably. And that's the only card we can still play ...

[Sheilbh]

LTRO didn't break bank-sovereign loop at all. It just bought time. Time politicians everywhere wasted.

The markets thought it was a step in that direction, like the last Eurosummit.  They were then disappointed by Euro-disagreements and vacillation.

[MadImmortalMan]

LTRO didn't break bank-sovereign loop at all. It just bought time. Time politicians everywhere wasted.

In fact during that time foreign holdings of Spanish debt decreased considerably. And that's the only card we can still play ...

It's like a march into the inevitable...

[Iormlund]

Latest polling data for Spain (before the latest austerity measures were announced):



Backed by this strong popular mandate, PP is focusing on what counts. For starters, fetal malformation won't be grounds for abortion anymore ...

[Sheilbh]

Shell are pulling their money from peripheral banks due to the credit risks. They're also re-evaluating their credit relationships down the supply chain. Apparently they're worried about whether their suppliers will be able to access credit if they have to rely on local banks.

The problem's already happened in Greece, solvent businesses have gone under because their partners in other countries won't extend Greek banks a line of credit.

[Martim Silva]

LTRO didn't break bank-sovereign loop at all. It just bought time. Time politicians everywhere wasted.

In fact during that time foreign holdings of Spanish debt decreased considerably. And that's the only card we can still play ...

Unfortunately, not really wasted. Most of that time was meant to reduce exposure to the PIIGS... it is appearently clear that it is safer to try to rebuild the periphery (adfter painful reform) than to try and hold it indefinitely in the way it was now.

It's also for the survival of the EU as a whole: without the risk of general crisis from a southern european financial collapse, the EU can concentrate itself better in fixing what's wrong down here. The main doubt is, will the local populations endure it?

(for Portugal, I can guarantee that they will; for Greece, Italy and Spain, I'm not so sure...)

[Iormlund]

The Troika has absolutely no intention of fixing what's wrong in Club Med. It just wants its money back.

[Tamas]

The Troika has absolutely no intention of fixing what's wrong in Club Med. It just wants its money back.

They can't fix it if you don't want to.

[Sheilbh]

The Troika has absolutely no intention of fixing what's wrong in Club Med. It just wants its money back.

They can't fix it if you don't want to.

So that's Greece. Portugal, Spain, Ireland and Italy have all been doing what they should or what they've been told, with gusto.

Even with all that it's not clear that internal devaluation will work, without a common language there's not practically the same opportunity for labour mobility as in, say the US. The IMF blog had a post on internal devaluation and lessons from the Baltics. They concluded that the conditions for is success are a small, open economy with a flexible labour market. At best, it could work for Ireland.

But the Shell story I think matters and highlights a difference. I think that the Euro will live or die based on what happens in Wall Street and the City, I think that's the general Anglo-Saxon view. I think the Euroview is that what matters is Brussels and Frankfurt, with national capitals. That view and suspicion of Anglo-Saxon speculators seems universal.