European Central Bank is Not Panicking; European Central Bank is Making Preparations to Panic

They Want to be Ready for the Kickoff of the 2011 Fall Panic Season 



While the U. S. contemplated whether or not to default on its debt, or put a bunch of FAA and Construction Workers out on the streets or whether to increase the deficit by keeping a payroll tax cut, Europe was in the process of growing and harvesting some real problems.  At the beginning of the summer, the European Central Bank, the region’s version of a Federal Reserve system was worried about inflation, even though everyone else was worried about the fiscal health of the countries of Europe. 



A Country too close to Greece



So the ECB started raising interest rates.  Well, in Spain and Italy they need not have bothered.  Concerns about the economic and fiscal health of both countries, along with concerns about government stability (Spain’s government has fallen, Italy’s Prime Minister keeps going on trial, most recently for problems involving a young lady) have raised the cost of borrowing for these two countries to near unsustainable levels.

Well there is an easy fix, according to economist Carl Weinberg

“The solution is for Italy and Spain to get their house in order fast, so markets don’t have to be scared about what happens next,” Mr. Weinberg said, adding, “I don’t know if that can happen by Monday.”

Yes, he does mean this Monday.  And yes it is hard to see how it can happen that soon.  And no, Mr. Weinberg was not being funny.



Discovery of Spain: Edinburgh's
National Gallery



So the ECB is going to reverse course and start buying Spanish and Italian bonds on the open market in an attempt to lower interest rates on the debt of those two nations and to bring confidence to the market.  How is the ECB doing so far?



The European Central Bank on Thursday intervened in European bond markets for the first time since March. But it appeared that the bank was buying only relatively small amounts of Portuguese and Irish bonds. The central bank may have intended a warning shot to signal its resolve, but markets seemed to have interpreted the modest intervention as a sign of weakness.

Not very good is the verdict from this side of the Atlantic.  It seems the inability to properly act and react to adverse economic and financial conditions is not just the privilege of the U. S. officials.

And what is at stake?

They just can’t allow the Italian economy to go down the tubes," Uri Dadush, a senior associate at the Carnegie Endowment for International Peace, said Sunday. ‘‘It would be a Lehman-type situation.’’  

He was referring to the collapse of the investment bank Lehman Brothers in September 2008, which touched off the global financial crisis.

Mr. Dadush put the cost of a bailout of Italy at $1.4 trillion, with Spain requiring an additional $700 billion. Those sums would be a challenge even for the most solvent European countries, foremost among them Germany.

In the 20th Century the United States twice intervened in Europe, at great cost of lives and money.  This time Europe, you are on your own.  Sorry, but as you may have noticed we have some problems over here to deal with.