Monday, August 20, 2012

20/8/2012: ECB yield cap - more questions than answers?

So ECB is discussing putting an upper bound on euro area yields. One question: what 'bounds'?

Here's a chart (courtesy of ) showing interest rates 1995-2011 for a number of euro area states.

Should the 'ceiling' be set at Greek, Italian, Spanish and Portuguese (GISP) yields pre-1995 (around 10% or above) or German, Irish and French (GIF) yields pre-1995 (around 6.0%) or 1999-2008 average (of ca 4.2%) or what? What should be a benchmark? The delusion of the euro turning ECB-targeted gospel or the (already optimistic) pre-euro rates reality? And can euro area finances be sustained at even around 6% yields?

After all, these are hardly trivial questions. Yields must reflect fiscal and monetary realities. Setting an artificial ceiling on them by definition means evading that reality (otherwise constraint will not bind). Does Italian reality justify 6% yield target? Does French reality do same? Is the current level of Greek yields reflective of the reversion to the fundamentals-warranted long-term historical mean (perhaps with some moderate overshooting in the short run) or should Greece really be treated distinctly from Germany, France, and even Italy?

Updated: more questions:

Suppose ECB does effectively cap bond yields. Then what? Will this restore growth to the Euro area? No. Deleverage households or corporates? No. Reduce pressure on taxes? Potentially marginally. Increase Gov's capacity to borrow to 'stimulate' economy? No. Reduce pressure on Governments to reform & incentivise more public spending? Yes. Decrease the Sovereign liquidity trap? Maybe. Increase banking sector liquidity trap? Possibly.

So the price of getting better sleep for politicians will be what? Real economy still in deep deleveraging & Governments slipping back into comfort zone of tax-borrow-spend economics? A logical denouement to the failed economic analysis that see sovereign debt crisis as the main source of economic decline in the euro area.

No comments: