Crisis over before Christmas?

With bond yields collapsing in Europe the implied “bank run” on the periphery appears to be over.  This is due to the ECB backstopping European banks for the next three years – in some sense they have taken on the lender of last resort role, just in a confusing, seemingly temporary, and poorly communicated way. Note:  Whether this is really “happening” is still an open question – we won’t have confirmation of this, or its impact on CDS’s, until tomorrow at the earliest.

This in no way means that the fundamental issues in Europe are over – in fact, it makes focus on the structural problems in Europe an essential part of what people should now be doing.

However, if the bank run really is over, and credit markets really are unfreezing (something we will know in the next couple of days), it is a positive for the short-term for a little country like NZ.  But lets not forget a few things:

  1. Japan, and now Europe, have shown us the vulnerability of public and private finances to changes in demographic structure – we ignore these issues at our peril, and with plenty of warning.
  2. Europe still has massive structural issues.  These still need to be solved, or we will merely have another crisis down the line.
  3. If Europe isn’t going to sort itself out, hopefully the rest of the world will see the risk and reduce their implied exposure to Europe.