Where is the Euro’s lender of last resort? asks AllianceBernstein’s Darren Williams
Darren Williams, senior European economist at AllianceBernstein, adds his name to the list of managers asking, where is the Euro’s lender of last resort?
The sovereign-debt crisis is spreading to the core and has all the hallmarks of a traditional bank run. Until someone steps in to backstop ‘solvent’ but illiquid euro-area countries, it will be impossible to stabilize euro-area sovereigns or their banks.
What began two years ago as a problem in a small, over-indebted country on the euro-area fringe is now a crisis engulfing the whole of the region.
This can be seen most vividly in the 10-year bond yield differential between France and Germany, which is at its highest since 1990 and the same as the spread between Italian and German government bonds just a few months ago.
The rest of ‘core’ Europe is also starting to suffer. The worst-affected country has been Belgium, but the Netherlands, Finland and Austria have also seen spreads widen sharply.
This is happening despite the fact that all three countries have credit metrics on a par with Germany, and that two of them, the Netherlands and Austria, have operated a de facto monetary union with their German neighbour since the early 1980s.
In our view, the recent intensification of the sovereign-debt crisis is a direct result of decisions taken by Europe’s leaders. Policymakers continue to insist that Greece is a special case, with no relevance for other euro-area countries. But many investors disagree, regarding Greece as a precedent for other heavily indebted euro-area nations.
After the May 2010 summit, when governments agreed to bailout Greece and create a backstop for other euro-area countries – the European Financial Stability Facility – the spread between Italian and German bond yields narrowed.
But in October 2010, when governments agreed to establish a permanent crisis-resolution mechanism with an explicit provision for private-sector losses – the European Stability Mechanism – Italy’s yield premium rose.
And after this year’s 21 July and 26 October summits-the first of which saw private investors accept modest losses on their Greek bond holdings; the second of which saw governments increase those losses-the spread between Italian and German bond yields rose sharply.