Friday, June 18, 2010

More Signs the EU Could Blow at Any Time

Ambrose Evans-Pritchard is reporting that Brian Coulton, head of sovereign ratings for the rating agency Fitch, has said that "it may take massive asset purchases by the European Central Bank to prevent Europe's sovereign debt crisis escalating out of control."  Hundreds of billions of bond purchases is what Coulton is apparently thinking. Will this happen? It doesn't appear likely.

"There has been an unwillingness to follow through, and markets are going to want to see the ECB's money," Coulton told a global banking conference.

Total purchases so far have been €47 billion and its all been sterilized, meaning no new money has been added to the system. The ECB puts the money in one part of the system, but drains it out in another part. Thus, eliminating inflationary consequences, but distorting the EU economy none the less, as the drain comes from the private sector and rewards the credit standing of the reckless sovereigns.

To understand the fragility of the situation, keep in mind that, Fitch said European banks must refinance nearly €2 trillion of long-term debt by the end of 2012 in an unfriendly market, according to Pritchard. "There's an awful lot of debt coming due in 2011 and 2012, and that is becoming a concern," said Bridget Gandy, the agency's banking expert.

Further, Pritchard reports that the Bundesbank is reportedly irked that French banks have led the rush to the exits while German banks have stuck by a gentleman's agreement to keep their Greek assets. This is not the kind of environment that is conducive to "hundreds of billions" in bailouts.

The instability of the situation is truly mind boggling. It could blow at any time.

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