Thursday, January 29, 2015

The ECB Has a Challenge (excerpt)

The introduction of the euro at the start of 1999 caused bond yields to converge in the Eurozone as investors no longer distinguished between the credit risk of the different members of the monetary union.

The spread between both Spanish and Italian government bond yields versus the comparable German yield narrowed to zero during the previous decade. Spreads widened again at the beginning of the current decade, but narrowed significantly after Mario Draghi pledged to do whatever it takes to defend the euro on July 26, 2012.

ECB data show that loans to the Eurozone private sector soared by €4.0 trillion to a record €11.1 trillion from the start of 2004 through the end of 2011. As of November 2014, this debt measure was down to €10.4 trillion. In other words, the ECB’s various attempts to revive lending since the financial crisis have failed. That might be because borrowers are already maxed out on their ability to service more debt.

Today's Morning Briefing: How the World Works. (1) Two big questions. (2) Global liquidity doubles since start of 2009. (3) Easy money losing its effectiveness. (4) Debt-financed supply exceeds debt-financed demand, resulting in deflation. (5) Central banks doing more of the same and producing more secular stagnation and deflation. (6) The Greek solution to too much debt. (7) The death of the debt super-cycle. (8) Central banks messing with currency war. (9) The patient Fed. (10) Too many maxed-out borrowers in Eurozone? (11) Less bang-per-yuan. (12) Profit margin review. (More for subscribers.)

No comments: