Really depressing, as policy mistakes compound the problems
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The euro crisis is back with a vengeance. This isn’t actually surprising, as the way to solve it has been distinctly dubious. At the heart, there was a trade-off. The ECB would, when asked, buy unlimited quantities of bonds (via its OMT program, or “Outright Monetary Transactions”) from countries in trouble, if the latter ascribed to the policies du rigeur, that means, strict austerity and economic reforms.
So far, there wasn’t a need for the ECB to activate the OMT program, as there was no formal request from any country. More importantly, just announcing the OMT program was enough to douse the flames of panic in the peripheral bond markets, just as we always argued it would.
Adding to the calm was the fact that, most countries more or less adhered to the ‘virtual’ terms of the OMT program, or the diktat from Brussels (or Berlin), enforcing austerity and economic reforms on the periphery. But there are two problems with that:
- Austerity doesn’t work
- Voters see it doesn’t work, and are deserting in droves, witness the Italian elections