The ECB must deploy full resources to halt a possible crisis of confidence
Jörg Zeuner, chief economist of Switzerland’s VP Bank, feels that the financing of deficits is not a must, as long as the ECB intervenes in the secondary market. January 06, 2012 | Joerg ZeunerThe announced reassessment of the ratings of 13 euro nations over the next three months, including all AAA states, underscores the problem: the debt crisis has mutated into a crisis of confidence. The situation in the financial markets corresponds more to the night before a bank run that it does to the eve of a state insolvency. Out of risk concerns, analysts and investors alike are no longer differentiating between solvent and insolvent states. The rise in yields has undermined the ability of hitherto solid countries to arrange and service debt financing. For purposes of creditor protection, the rating agencies are forced to respond to these developments; their trust in the euro zone’s ability to come up with sustainable solutions appears to be limited. A crisis of confidence is system-relevant, thus it allows the deployment of the European Central Bank’s (ECB) unlimited resources. In any case, the ECB is the only institution that can definitively put an end to the spiral of rising yields, declining growth rates and major debt problems. At best, the leveraging of the European Financial Stability Facility is likely to come about only after a certain delay and probably in a significantly smaller scale than is needed to restore confidence in European government bonds. Ideally, the ECB would announce yield targets for the (five- or ten-year) government bonds of all euro states and enforce those targets with all possible means at its disposal. The Swiss National Bank (SNB) successfully demonstrated this policy in its approach to defending the EUR/CHF 1.20 floor, and has enforced it ever since at very little cost. Because of the monopoly the ECB has in creating “central bank money”, such an announcement would be credible; however, as is the case in Switzerland, the use of that money would be limited. From an economic standpoint, the financing of deficits is not a must. As long as the ECB intervenes in the secondary market, investors... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: Capital & Strategic Issues, Government Finance, Risk and RegulationCapital & Strategic Issues,Government Finance,Risk and Regulation, Capital & Strategic Issues,Government Finance,Risk and Regulation, , Aid Disbursementaid, Aid Disbursement , Keywords:Jörg Zeuner, VP Bank, Switzerland, European Central Bank, Government Bonds, Swiss National Bank, Greece, GDP Jörg Zeuner, VP Bank, Switzerland, European Central Bank, Government Bonds, Swiss National Bank, Greece, GDP
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