"Another day andthe markets remain fixated on whether Greece comes to a “voluntary” arrangement with its creditors. The key word is“voluntary” because the myth of “voluntary compliance has to be sustained so that those deadly credit default swaps avoid being triggered.
But let’s face it: Greece is a pimple. If the rest of the euro zone could cut itlose with a minimum of systemic risk, Athens would have long gone the way of Troy. The real issue is whether the credit default swaps trigger such a huge mess with the counterparties that it creates renewed systemic stress which more than offsets the benefits to the holders of the CDSs.
The more interesting question is: suppose Greece finally does get a deal? I realize everybody says it is a “one-off”, but do you really think the Irish, Portuguese, or even the Spanish and Italians will go along with that, particularly if (as is likely) they continue to experience double digit unemployment and minimal growth?
Now you could argue that Portugal and Ireland, like Greece, are but small components of the European Union and could well be covered in one form or another via the existing backstops established over the last several months, notably the European Financial Stability Fund (EFSF) and the European Stability Mechanism(ESM).
But you can’t say this about Spain, which remains the real elephant in the room – not Italy – even though Spain’s borrowing costs remain lower than Italy’s. This is perverse.
Though Italy has a high sovereign debt, it has a low private debt (the product of years of high budget deficits, but that’s the story for another blog). Italy has a fiscal deficit that is low relative to most economies today. It already has a primary surplus.The greater than expected past expansion of the ESCB and the current ongoing LTROs are likely to absorb panic and forced selling of Italian debt. The Italian 10-year yield could fall back below 5% (having already fallen from the 7% plus levels, pertaining a mere 6 weeks ago)..."
at http://www.nakedcapitalism.com/2012/02/marshall-auerback-the-elephant-in-the-room-is-spain-not-italy.html
But let’s face it: Greece is a pimple. If the rest of the euro zone could cut itlose with a minimum of systemic risk, Athens would have long gone the way of Troy. The real issue is whether the credit default swaps trigger such a huge mess with the counterparties that it creates renewed systemic stress which more than offsets the benefits to the holders of the CDSs.
The more interesting question is: suppose Greece finally does get a deal? I realize everybody says it is a “one-off”, but do you really think the Irish, Portuguese, or even the Spanish and Italians will go along with that, particularly if (as is likely) they continue to experience double digit unemployment and minimal growth?
Now you could argue that Portugal and Ireland, like Greece, are but small components of the European Union and could well be covered in one form or another via the existing backstops established over the last several months, notably the European Financial Stability Fund (EFSF) and the European Stability Mechanism(ESM).
But you can’t say this about Spain, which remains the real elephant in the room – not Italy – even though Spain’s borrowing costs remain lower than Italy’s. This is perverse.
Though Italy has a high sovereign debt, it has a low private debt (the product of years of high budget deficits, but that’s the story for another blog). Italy has a fiscal deficit that is low relative to most economies today. It already has a primary surplus.The greater than expected past expansion of the ESCB and the current ongoing LTROs are likely to absorb panic and forced selling of Italian debt. The Italian 10-year yield could fall back below 5% (having already fallen from the 7% plus levels, pertaining a mere 6 weeks ago)..."
at http://www.nakedcapitalism.com/2012/02/marshall-auerback-the-elephant-in-the-room-is-spain-not-italy.html
