Friday, January 23, 2015

23/1/2015: A Liquidity Fix for the Euro? What for?...

So Euro area needs liquidity... sovereign liquidity, right?

Take a look at the latest Eurostat data:

Even after all statistical 'methodology' re-jigging and re-juggling, Q1-Q3 2014 saw Government spending accounting for 49.5% of GDP and deficit averaged 2.43% of GDP. Meanwhile, debt/GDP ratio stood at 92.1% of GDP excluding inter-governmental loans (2.4% of GDP):

Yields on Government bonds are hitting all-time lows, including for 'rude health' exemplars such as Spain and Italy:

(credit @Schuldensuehner )

Clearly, liquidity is not  a problem for European sovereigns. But pumping in more liquidity into the euro system might just become a problem: the lower the yields go, the higher the debt climbs. With this, the lower will be the incentives for structural reforms, and the higher will be the debt overhang. All the while, without doing a ditch to repair the actual crisis causes: excessive legacy debts in the households' and corporates' systems.

Meanwhile, the press is lavishing praise on the ECB's Mario Draghi for... well I am not quite sure what is being praised: Mr Draghi is planning on doing in March 2015 what the Fed, BofE, and BoJ have been doing since (on average) 2009, albeit he is facing German (and others') opposition.

Being 6 years too-late into the game, Mr Draghi, therefore, is equivalent to a lazy and tardy student who finally showed up for the class after all other students have left, but bearing an elaborate excuse for not doing his homework.

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