Spanish and Italian yields are rising through the roof, and these extraordinary funding costs mean just one thing: both countries will eventually turn to international EU organisations to help them fund their sovereign borrowing, Citigroup Chief Economist Willem Buiter told investors in a conference call with investors this morning.
While Buiter said he doesn’t expect international dollars to completely fund either country’s sovereign debt obligations—if simply because the ESM and EFSF bailout funds will never be big enough to do so—he opined, “I still think there will be a program in place that partially funds the sovereign.”
He suggested a handful of measures we’re likely to see in the coming months as Europe struggles to bolster Spain and Italy:
- “The domestic authorities [could continue to] lean on the domestic banks…to purchase sovereign bonds at yields lower than they would accept normally,” as they did in the case of the LTROs. Buiter said there’s some possibility that the European Central Bank could pressure banks to do this, calling this behaviour “very naughty.”
- “Its’ even possible that, if all else fails, the ECB might reopen its least favourite tool at the moment—the SMP program” of sovereign bond purchases on the secondary market. And those wouldn’t be just any sovereign bond purchases: The ECB “could basically focus SMP purchases in limited amounts around the time of sovereign auctions,” effectively rendering them “back-to-back primary market purchases, of course leaning on domestic banks.”
Despite pulling out all the stops—so far as eventual sovereign funding for Spain and Italy—Buiter reiterated his call that Greece is probably out of luck.
“There will be no big moneybags appearing to keep Greece in [the eurozone],” he said, adding that the fallout of the elections will most likely be “more time being given to achieve otherwise unchanged targets and token gestures.”
An ultimate end to the euro crisis will come only after much bigger action is taken. “Hopefully the esm will be given its banking licence, but again there’s not sufficient appetite for that
. It will probably take another couple of panics.”
“That should be enough to keep a 16-nation euro area on the road,” Buiter concluded.
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