Big news from Europe

It should not be understated how important this would be for the world, and more importantly for New Zealand ;)

The suggestion that there is now a clear consensus for a plan that will essentially make the ECB a lender of last resort for the European financial system will help to knock the “financial crisis” element of what is going at the moment on its head.

If the ECB commits to limiting bond yields on government debt in the Eurozone, and backs that commitment with a statment saying it will do “unlimited purchases of bonds” we will finally have a conclusion to the bitter uncertainty that the European debt crisis has created for the world more generally.  As a result, Europe will continue to struggle, but the rest of the world can move forward.

Another thing that will become clear is the nature of the crisis – are peripheral governments facing a crisis of liquidity, or are they insolvent?  If it is liquidity, the ECB’s commitment will be enough to solve the problem – they won’t even need to actually buy many bonds!  If these countries are insolvent then the ECB is taking on a bunch of bad debt – a cost that will have to be faced by someone eventually.

If the ECB does come out full hog, we are going to see a significant improvement in the outlook for the global and New Zealand economies – albeit from the current incredibly negative outlook that most people currently have.

  • Mark Hubbard

    But what ‘is’ the result of all the debt taken over? What does this mean for inflation generally? Our inflation? Interest rates? Particularly, won’t this start to see a swift rise in our interest rates, and much soon than has been expected?

    (I couldn’t connect this post via Twitter: wonder what is wrong there? I do seem to have the odd problem with Disqus.)

    • http://tvhe.co.nz/ Matt Nolan

      Yes it would lead to interest rates increasing from current levels more quickly.

  • Guest

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