By Robert Romano — As the European Central Bank (ECB) continues with secondary market bond purchases of sovereign debt to keep down rates, taking its total ante up to €213 billion, it appears to be having very little effect on the rates of the bonds themselves.
Consider the following rates on Portugal, Ireland, Italy, Greece and Spain (PIIGS) as of Jan. 9, 2012: Portugal 10-years are at 13.06 percent, Ireland 10-years at 8.2 percent, Italy 10-years at 7.15 percent, Greece 10-years at 35.65 percent, and Spain 10-years at 5.56 percent. Greece 1-year notes have gotten so bad they’re still up at about 381 percent!
With the exception of Spain, this is pretty much where rates have been since November. And yet, the ECB has bought about €30 billion more since then. Which means the policy — limited in its scope because of Lisbon Treaty restrictions on direct purchases of government debt by the central bank — is largely a failure by its own metrics.
Said to have a natural limit of €300 billion of how much government debt it can hold, there is not much room left for the ECB to navigate in the way of bond purchases, making whatever pressure ECB’s purchases have taken off of bonds only a temporary reprieve.
Which means guaranteeing the €3 trillion of PIIGS debt will have to come from elsewhere. So far, the European Financial Stability Facility (EFSF) has promised €440 billion and the International Monetary Fund (IMF) €78.5 billion.
Coupled with the ECB’s €300 billion maximum possible allotment, only €818.5 billion of the debts have been guaranteed thus far — nowhere near the €3 trillion mark. The IMF is said to have about €290 billion left to lend, but even if it put every bit of that into propping up Europe, it wouldn’t be enough.
To add firepower to the bailout, Europe is now proposing ratification of the European Stability Mechanism (ESM), a new treaty that would host a €500 billion permanent bailout fund intended to perpetually refinance European debt should the need arise.
This new fund would exist alongside the current €440 billion European Financial Stability Facility (EFSF), even though ESM was originally intended to replace the “temporary” EFSF.
Alarmingly, even if the €500 billion ESM were enacted, that would bring the bailout funds’ collective firepower to only €1.6 trillion, not enough to cover all of the PIIGS’ debts, although enough to last through about 2015 — but that’s assuming the PIIGS take on no new debt.
It also assumes that the IMF expends all of its available resources to dealing singularly with Europe, hardly its intended purpose. Should the fund max out its capacity just to buy Europe perhaps a few years before more bonds come due?
It similarly assumes that the ESM is even ratified, with referenda passing in Ireland, the UK, and perhaps Germany — something that could prove to be a very hard sell to peoples already weary of these perpetual bailouts. Recent polling has shown that 59 percent of Germans and 65 percent of British are opposed to any further action to prop up members of the Eurozone.
But claiming the new treaty changes — which would establish a permanent bailout fund to prop up the debts of sovereign nations forever — are “limited,” the European Council has declared no referenda will be necessary for ratification of the treaty.
Pretty convenient. But, lacking public support, if a deeply corrupt system emerges where more austere nations are supposed to come to the rescue of other states that refuse to get their own fiscal houses in order, such a treaty — and the Eurozone itself — may not last much longer anyway.
Robert Romano is the Senior Editor of Americans for Limited Government.
