Last week, it looked like the Euro-crisis was about to be resolved.
Media hype was high, the European Council, originally scheduled for Sunday October 23 finally met on Wednesday October 26 and by Thursday the markets were ecstatic, happily bounding up.
By Friday, the euphoria had died down. It had become crystal clear that Italy was the problem.
Since Italy is not Greece, that was rather bad news. The nearly two trillion Euro Italian debt was bandied about and it sounded like an uncomfortably large amount of money. Plus German Chancellor Merkel, in her inimitable school-marmy style had grimly told everyone that this crisis was going to last a long, long time. And that unless everyone buckled up German-style, the Euro would not be saved.
We've all heard that before: austerity ja. Follow the German model or die.
So what's new about the Euro-crisis?
The efforts of our European political elite, particularly the European Council, have an increasing Alice-in-Wonderland quality: the results of the last European Council looked very much like non-results.
Yet those were non-results the markets liked.
Does that mean investors know something we don't? Does it mean that the Euro crisis is a non-crisis? Yes to the first question and no to the second.
What happened on Wednesday at the European Council was this: in very simple terms, the banks bowed to Mrs. Merkel's (firm) entreaties and agreed to take a 50% haircut voluntarily. Money was set aside by governments to help those banks that might find themselves in difficulty because of said haircut.
The point here is that the agreement is voluntary. This means that an official declaration of default is avoided. Therefore, the insurance systems currently in place that rely on derivatives are NOT triggered into action. That was a huge relief for the markets, because derivatives are so opaque - and possibly so widespread - that nobody knows what sort of tsunami à la Lehman Bros might occur if an actual default by Greece was announced.
Moreover, for the banks involved (that hold Greek bonds), it's not a bad deal: the markets had valued Greek bonds at 40% of their face value. They're getting 10% more. For sure. That's nice, right, so it's no wonder the markets bounded up for joy.
The euphoria didn't last because the fundamental problems remain unchanged.
The Euro crisis is unfortunately very real. I've said it many times on this blog: the Euro hobbles along on one leg only (the monetary one). It needs a second leg (the fiscal one) to walk properly.
That's because the European Central Bank (ECB) is NOT a real central bank. It's not at all like the Federal Reserve. It can't engage in "quantitative easing" or, put more bluntly, it can't print money if that's what's needed to convince the markets that the currency will be defended.
That's something the ECB won't do. Because that's the way the Germans want it: a Central Bank to fight inflation, not a Central Bank to defend its currency from market attacks.
So what instruments are there to defend the Euro?
The main one, the European Financial Stability Facility (EFSF) is still sitting at a modest €440 billion - nowhere near the amount needed to save Italy should it go under. At this moment, people are busy in Brussels. All sorts of financial machinations ("special vehicles" and an additional, stronger role for the IMF) are being concocted to try and expand the reach of said Facility. Like for example turning it into an insurer and/or trying to make it palatable to the Chinese.
Actually other big holders of Euro reserves (of which there are quite a few among the BRICS but also in other countries like Norway or the Gulf States) can be expected to show interest. Nobody really wants to see the Euro go under: that would mean their most lucrative markets would go under too...
And yet, and yet...when all is said and done, as Krugman and Charlemagne (of the Economist) recently pointed out, the Euro crisis would be disarmingly simple to solve. All you have to do is turn the European Central Bank into a real central bank with the ability to print money as needed...
Wonder when that will happen...Any idea?