“By this time next week,” says Simone Foxman, “the euro crisis could be over”; she obviously doesn’t think much of Fitch’s analysis, which concludes that “a ‘comprehensive solution’ to the eurozone crisis is technically and politically beyond reach”.
I’m with Fitch on this one. But it’s worth looking at the bull case for the eurozone, as spelled out by the likes of Foxman and Tyler Cowen. At heart, it’s pretty simple: The way to solve the euro crisis, at least for the next couple of years, is for the ECB to act as a lender of last resort.
The ECB is, quietly, doing just that — specifically by lending money for as long as three years against a much wider range of collateral than it accepted in the past.
Even though that money is going to banks rather than sovereigns, the banks will borrow as much as they can, at interest rates of about 1%, and invest the proceeds in Spanish and Italian debt yielding more like 6%, in a massive carry trade. Which means that the ECB is, effectively, printing hundreds of billions of euros and lending it to distressed European sovereigns after all….
http://blogs.reuters.com/felix-salmon/2011/12/17/why-ecb-lending-wont-solve-the-euro-crisis/
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