Earlier we brought you commentary from Nomura’s Richard Koo who says it’s basically times up in Europe: The only solution is for big, no strings attached bailouts to the banks at this point.
In the same note, he also touches on an interesting idea.
Balance sheet recession and eurozone-specific problems will persist even if crisis is avoided
Even if all of these measures are successfully implemented, the moral hazard created by rescuing fiscally profligate Greece and the fundamental problem of how to rebuild the economies of countries like Spain and Ireland, which are experiencing severe balance sheet recessions, will remain.
Principal reductions alone will not be enough to foster growth in these countries. As I have argued in previous reports, these eurozone-specific problems can be addressed by the adoption of a rule stating that eurozone governments can sell bonds only to their own citizens.
If countries agree to adopt such a rule within, say, five years of the end of this crisis, the problem of moral hazard in Greece would disappear, and countries like Spain and Ireland would regain the fiscal flexibility needed to deal with their balance sheet recessions.
In a way, this is the opposite of fiscal union. Rather than solving Europe by having everyone share a Treasury, the idea is to make sure that each country sees all of its government spending recycled back into domestic bond purchases.
It does stand to reason that one reason spreads are blowing out between German bonds and everyone else’s bonds is that so much money is flowing into (seemingly) safe German banks, which then buy German bonds, ultimately crowding out the bond sales of the PIIGS and even France.
This chart from CFR shots that bank deposit flow:
But ultimately, it’s really hard to see how the mechanics of Koo’s idea, especially since you’d then, presumably, have to stop inter-border bank deposit flows. Even fiscal union is probably more feasible.
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