JPMorgan CEO Jamie Dimon was on CNBC this morning from Davos, where he talked about, among other things, the situation in Europe and what the ECB has doen to alleviate the crisis.
Before we get to his comments, let’s take 10 seconds to step back.
Late last year, the ECB announced a scheme whereby banks could pledge virtually any collateral to borrow cheaply, and the hope was that they’d turn around and buy European sovereign debt.
And by all accounts it’s been a screaming success.
Here’s a look at 2-year Spanish yields. Massively lower.
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Anyway, Dimon said two things on CNBC that were key. We’re paraphrasing.
First: The ECB has taken the fear of cascading bank failures off the table.
This is key. While the ECB hasn’t actually fixed the sovereign debt problem (that’s a much bigger issue), by unambiguously plying the banks with ultra-cheap capital, a major avenue of crisis (bank failure) has been halted.
Following that, Dimon was asked whether the carry trade is dangerous, since it has encouraged banks to load up further on European sovereign debt.
Dimon’s answer: If Italy, goes down, and you’re an Italian bank, you’re going down too.
Nailed it. Ultimately there’s no divorcing the fate of a sovereign and the fates of banks within the country. Might as well get them to finance each other.