The Long Way Out of the Crisis
Thursday 01 December 2011By Christian Meyer zu Natrup
Despite the constant repeating of comments by Europe’s political leaders about decisive actions they have taken, unprecedented steps and firm commitments, it should be clear that Europe’s single currency crisis will be with us for a long time.
At the moment any hopes for a speedy recovery seem far-fetched. Italy’s 10-year bond still costs more than 6.5%; borrowing costs that are not sustainable and would in the long run make the country insolvent. But the biggest problem currently is not Italy but Spain.
Despite having excelled in implementing budget deficiency reducing measures, it found it very hard to attract any buyers at a recent debt auction. The only thing worse than a high bond yield is being unable attract bond buyers at all. These renewed troubles come even after the Greece debt restructuring, the setting up of a large bail out fund and a host of other measure that all seem unable to instil some credibility and confidence into the EURO’s solvency.
Why is that? Mr Mario Draghi, the European Central Bank’s president delivered part of the answer in a recent speech by pointing out that “Gaining credibility is a long and laborious process.”. But loosing it can happen very quickly and doubts about an investments ability to perform spreads even quicker.
A sovereign solvency depends on the ability to raise cheap finance. The problem is that as soon as a country has slipped into the higher bond rates areas, it takes a lot of work to convince investors why they should expect less. The other problem why peripheral economies are finding it hard to attract sufficient debt capital is that investors simply have better alternatives. Why should Banks with money to lend channel it to ............
You can read Christian Meyer zu Natrup's article in full in EU Reporter's digital magazine at
http://www.eureporter.co/magazine/201112/