At the Very Least, the Fed and the Treasury Need to Flood the RIsk-Tolerance Zone to Decouple America from the Looming Eurocrisis Now
It's no longer "eurotail risk" that we are worried about.
The euro crisis: Faster toward the end: THE bad news out of Europe is coming fast and thick now. Markets were still digesting news of Spain's terrible bond auction yesterday, in which the yield on its 3-month debt more than doubled, from 2.3% to over 5%. That was but an appetizer, however; in an auction of 10-year debt today, Germany failed to place some 40% of the issuance. The lack of appetite for German debt has come as a shock to many, and the language being used to describe matters is increasingly apocalyptic. "It is a complete and utter disaster", Reuters has one strategist saying. On the secondary market, German bond yields have finally joined those of its neighbours on their upward march. The German 10-year yield is up over 7 percentage points today, and back above 2%. It still has a ways to go to catch France and Austria (approaching 4%), Belgium (over 5%), and Spain and Italy (back near 7%).
Trouble at big European banks is growing; the euro-zone banking system is increasingly reliant on the European Central Bank for funding. The prospect of bank failures is a troubling one given the fiscal strain on European sovereigns; no one wants to find itself in Ireland's position, squarely in bond vigilantes' crosshairs having assumed the obligations of sinking banks. Uncontrolled collapses are too awful to contemplate, however, and so the pressure on the ECB will grow. Meanwhile, trouble is growing around the eastern periphery of the euro zone. Poland's zloty is under pressure, and there are signs of bank runs in the Baltics.
Perhaps worst of all, the financial strain in the euro zone is increasingly apparent in the real economy. New data indicate that euro-zone industrial orders plummeted in September, falling 6.4%. Orders dropped 4.4% in Germany, 6.2% in France, and 9.2% in Italy. Predictions that the euro zone will face little more than a shallow recession oin 2012 increasingly seem to be wildly optimistic….
The good news, such as it is, is that the stunning German bond-market failure may shock leaders their into recognising their own great vulnerability and pushing for bold initiatives to slow the crisis…. It will take the power of the printing press to stop the panic. But the ECB seems if anything more reluctant to save the situation than the German government. As Martin Wolf quips today, "the ECB risks being remembered by historians as the magnificently orthodox central bank of a failed currency union".
The world can give thanks that a new Depression is not yet upon it. Enjoy the sentiment now, while it lasts.