It won't be long before the ECB Governing Council decides whether a country defaults or not.
We only need to go back a decade to see this unfold. Greece amassed €323bn billion in debt and the market decided it was unsustainable. In 2012, 10-year Greek yields rose to nearly 30% as part of a brutal six-year period of uncertainty, tax hikes and political instability.
How would that play out today?
The ECB has now given itself the tools to say whether or not government debt is sustainable. If they say it is, then they can buy unlimited amounts of it and narrow spreads. That will only encourage more fiscal recklessness and delay market-driven change.
How long would Greece have been able to continue if the Governing Council had deemed it sustainable and drove yields down to 3-4%? How much more unsustainable debt would it have piled on?
Moreover, when the bubble would have inevitably burst, it would have been the ECB holding the bag. The criteria published today said the central bank will be pari passu with private creditors.
In many ways this rubicon has already been crossed with OMT and pandemic programs but it also puts a whole new level of power in the ECB's hands.
One of the criteria is whether a country has "sound and sustainable fiscal and macroeconomic policies". Embedded in that is plans via the Recovery and Resilience Facility, which includes things like climate policy.
This takes away power from elected governments and gives it to the ECB.
This is a disaster waiting to happen
Can you imagine the ECB pulling the plug on Italian debt support? The political and public response would be violent. What if the ECB gets duped into buying debt by a country hiding debt, similar to what happened in Greece?
Given the trends in periphery debt and the eurozone economy, I don't think we're going to have to wait long to see how this plays out.
EUR/USD is up 15 pips to 1.0195.
