Believe Draghi? We doubt it

Submitted by Matthew on 1 August, 2012 - 11:08

With interest rates on Spain’s and Italy’s debt remaining high, it is clear that yet another plan by the European Union and European Central Bank supposed to solve the dance of death in Europe’s economies has failed.

Governments become less able to get credit because they are dragged down by collapsing banks; banks are collapsing because the government bonds which make up a large part of their assets lose value; the spiral is speeded by dwindling output because cuts are pushing economies into slump.

ECB president Mario Draghi declared on Thursday 26 July that the ECB was “ready to do whatever it takes” to preserve the single currency. “Believe me, it will be enough”.

But he offered no specifics. A few days later the Financial Times reported ECB officials warning that the ECB was unlikely even to restart the “Securities Markets Programme” under which, between May and July 2010 and between August 2011 and January 2012, it bought up bonds of countries in credit difficulties, so as to limit the collapse in those bonds’ selling prices (or, in other words, to limit the rise in the effective rate of interest on their market value which the fixed rate of interest on their face value converted to).

Meanwhile, Greek economist Yanis Varoufakis reports that on 20 August Greece will have to borrow 3.2 billion euros to pay back money it borrowed from the ECB last year — to the amount of 2.3 billion euros.

In other words, the “bailouts” do not bail out countries like Greece from their debt burdens. They help maintain payments to the banks on previous Greek debt, but they do not help the people of Greece.

Varoufakis comments: “The bottom line is that, once again, they [the EU leaders] have not decided. They are are afraid to throw us [Greece] out, but also unwilling to get on our feet regarding the debt, and therefore in practice lead us to the abyss”.

Economists studying the macabre spiral are moving to one or another of two views.

One: that the spiral will with months or a year force Greece out of the eurozone, and that the consequent disruption will motivate EU leaders, or give them cover, to make more radical moves to save Spain, Italy, Portugal, etc. from spinning out.

Two: that things have got so bad that the EU leaders will be forced to cut slack for Greece, because the eurozone has now become so fragile that Greece spinning out would lead to wider collapse quicker than can be controlled.

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