What was it Winston Churchill said about the Americans? They could always be counted on to do the right thing after they exhausted all the other options.
Could same could be said about Eurozone finance ministers, who are now considering using the European Financial Stability Facility mechanism to directly purchase government bonds — about seven months after the idea was first floated.
Indeed, Gary Jenkins of Evolution Securities was writing about this in January:
It is widely reported that the European Union governments are considering significantly boosting the European Financial Stability Facility (EFSF) to deal with the on-going crisis. Amongst other things it appears that they may use the EFSF to directly purchase government bonds. Expanding the EFSF would be a step in the direction of further fiscal union with the fund borrowing centrally to finance countries struggling to access markets individually…….
If the political opposition can be overcome direct intervention in bond markets by an enlarged EFSF fund could drive down peripheral yields significantly, although it might not do a lot for Bunds. As we have mentioned previously it might well be the case that the EU is moving towards a fiscal union by default. It might be better if they were to agree to a temporary fiscal union with a common European bond used to fund all EU member states for a period of time before being gradually phased out. This would reduce some of the moral hazard of a permanent union and also give the troubled borrowers some time away from the market
Of course, trying to do the right thing (i.e reducing Greece’s debt burden) is much easier said than done.
Is there the political will for secondary market purchases, or will it take further spread widening to force the eurozone into what would be an effective fiscal transfer?
The European rates team at RBS has its doubts.
Note there was no discussion of upsizing the EFSF [in Monday's statement] and that EFSF secondary market purchases would require parliamentary approvals (though lending the money to Greece to conduct its own buybacks is less time-consuming but would also be controversial in a few countries). On the ESM, there was little surprise in the official documentation with no seniority proposal but also little pre-emptive to assist in this or a future crisis.
Judging by conversations with investors there is market hope is that the ECB comes to the rescue with large scale bond purchasing. We think this is unlikely near/medium term given the politics of the region. For instance, for the ECB to buy and not conduct a Zimbabwe style fiscal operation that would in turn antagonise Germany, it will need a tacit and perhaps public statement from Germany that any ECB buying will be ultimately absorbed by a new or existing vehicle, such as the EFSF or ESM. This in turn is a common bond in disguise where regional country risks morph into pan-Euro liabilities. It is the birth pangs of a new country – based not on popular demand – but a financial necessity and is unlikely to be seen until German politicians have no choice but to decide on the future of the monetary union. This means that the pain must get higher before any solution or dissolution for Europe follows.
Pass me the tin hat.
Related links:
Is fiscal union the only answer? – FT Alphaville
A Greek debt buyback? - FT Alphaville