Photo: Nihnih, Wikimedia Commons
As we explained last night, there’s basically just one solution left in Europe, and everybody knows it: The ECB must come in forcefully to suppress sovereign yields.We’re not talking about nibbling around the edges here: We’re talking about the ECB basically announcing that it won’t let Italian yields go above, say, 4.5%, and stick to that.
It’s hard to envision anything else working.
There are three key points to understand here.
- First, there is a big split in Europe between Germany (which doesn’t want to see this happen) and basically everyone else, including France, which would love to see the ECB intervene.
- Second, this is legal. Some people think the ECB can’t bail out countries, but it can, via unlimited secondary market purchases. The only think it can’t do is participate directly in a national auction, but as long as bidders know they can toss the bonds to the ECB right away, this is a mere technicality.
- Third (and this is the most important thing) such action wouldn’t even be extraordinary. The EB isn’t being asked to do something remarkable. It’s merely being asked to do what central banks in every other modern economy around the world do all the time.
Meanwhile, none of this is happening, so spreads are blowing out once again everywhere.