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Quoting the Crisis
02/02/2012
“ The total amount of sovereign debt maturing in 2012 exceeds $1 trillion. We doubt it will happen without a bump or two in the road, especially if the overall European economy is in recession, and the fundamentals of individual countries are really weak. It could be unsettling for the financial markets, if yields climb for the weak members of the E.U. as they are issuing new bonds. Although the ECB has repeatedly said they will not buy sovereign bonds, they are loaning money to banks, and then applying pressure on those banks to buy sovereign debt in their stead. Since last summer, the ECB has expanded its balance sheet from $700 billion to more than $1.2 trillion, an increase of more than 70%. They may not call it Quantitative Easing, since they are not buying bonds directly, but that’s effectively what the ECB is doing. The ECB’s mandate is to maintain price stability and keep inflation near 2%. On December 1, Mario Draghi, president of the ECB, noted that the mandate required the ECB to ensure price stability “in either direction”. This suggests that if the ECB felt that deflation was a serious threat it could use this as justification to buy government bonds directly, just like the Federal Reserve. This could prove a significant dynamic in the financial markets during 2012. If Europe’s economy does slow more than expected and yields in weak countries rise too much, equity markets will potentially suffer a 15% to 20% decline. This development could force the ECB’s hand, and lead them to announce that they would begin buying government bonds. That action may not spur economic growth, but the announcement would ignite a substantial rally in stock markets around the world. The volatility index (VIX) may be trading at 20.5, but that’s not likely to continue. „
(
Source:
ritholtz.com
)
Is Decoupling Possible in a Global Economy? | The Big Picture
