This latest euro bailout won’t work either – here’s why
THE last couple of years have been something of a sad sight: we keep seeing the EU stumbling from one attempt at correcting the euro mess to another without ever quite reaching the point where they’ve solved it. This is essentially because there are only three solutions: break up, inflation or fiscal union (also known as Germany paying for Spain, Italy, Portugal and Greece). None of those options appeals to enough people to be enacted.
Thus we have the continuing series of sttempting to solve the problem without doing any of those three. The latest is the ESM, a €500 billion fund which will lend to countries in trouble. The problem here is:
Assuming there are no voting hiccups in getting the ESM to buy sovereign bonds on the secondary market…
Some arguments that bailout fund’s limited size means it will eventually hit a floor which will ultimately make bond market liquidity worse.
Quite, the fund is too small for the job that it has been given. We’re going to get 20% or so of it put into the Spanish banks: that’s just the banks, that doesn’t solve Spain’s other problems. Then there’s Italy still to come.
Given that it’s not big enough, given that it will run out at some point, then the next stage comes into play:
– Investors will start forecasting the moment when the ESM will run out of cash.
They will then do what one expects from clever people.
– They will sell bonds now rather than later.
And if they sell the bonds now rather than later then the whole system falls over now rather than later.
It just ain’t gonna work.