The Unsolved Euro Crisis

04/12/12 Jacobus, Pennsylvania – The Euro crisis is not “solved.” Not by a long shot. Yet Bloomberg reports this morning (i,e, March 2nd) that European leaders “declared a turning point in the Greece-fueled debt crisis.” The next project for the busybodies: a commitment to a “pro-growth agenda.” This agenda, we can be sure, will involve the few remaining creditworthy EU governments borrowing even more money for stimulus plans.
But aren’t the problems in Europe rooted in spending more than incomes and tax revenues and having to borrow the difference? Yes. Europe has already run out of money — that is, money defined as having a certain amount of purchasing power today. But what about paper money that will buy less goods and services in the future? Isn’t there plenty of that? Sure, there is! In fact, [in order to finance its Long-Term Financing Operation (LTRO)] the European Central Bank printed about 1 trillion euros in just the last few months.
But this much-heralded LTRO isn’t fueling purchases of risky assets — at least not yet. If investors follow the money, they’ll discover that banks are depositing the three-year euro loans they borrowed from the ECB right back at the ECB! These banks are, obviously, not in a hurry to speculate with the cash proceeds from their three-year LTRO loans.
Here’s the part about EU bank behavior that should terrify anyone basing an investment strategy on the fact that the PIIGS governments will continue to enjoy lower and lower yields at sovereign bond auctions: The banks that borrowed three-year money from the ECB at a cost of 1% per year are willing to redeposit the cash at the ECB for a 0.25% per year return. In other words, banks are willing to suffer a “negative carry” of 75 basis points just to have cash available to satisfy depositors at a moment’s notice.

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The Unsolved Euro Crisis