Does Chancellor Angela Merkel really care about German and French banks being repaid those €529.1 billion of Spanish debt?
Not that QE and OMT were the cure for coming bouts of volatility and depression. “Taking the two together, it is easy to tell a story of bold central banks getting ahead of events. Yet, it would be wrong to become too bullish too soon”, said in a client note today Ian Kernohan, who is an economist at £40 billion-portfolio investment house Royal London Asset Management.
Kernohan's opinion is increasingly becoming the common view in all major capital markets.
While the Quantitative Easing policy re-enacted by the US Federal Reserve may pour freshly-printed money into the economy, the reverse holds true: the American economy remains too cold for recovery.
And the same story goes for the Outright Market Transactions, through which the European Central Bank set itself as last resort lender by purchasing on the secondary market an unlimited volume of state bonds, whenever a euro zone country sees strangled its access to international credit.
Ratings agency Fitch qualified the ECB move as a positive initiative. In a report issued Wednesday, Fitch concluded that the OMT would “ease financing and credit conditions for the economy as well as the sovereign and render ECB monetary policy more effective.”
More importantly, the possibility of the European Stability Mechanism (ESM, the new rescue fund) recapitalising banks meant that “by sharing the fiscal cost of bank restructuring rather than letting it fall solely on the home sovereign, banking union would weaken the vicious circle between banks and sovereigns that has been a key feature of the crisis.”
Unfortunately, Germany has not only reinforced markets' suspicions but also burnt the roots of a possible, sustainable improvement in the euro crisis.
The communique hours ago of its Finance minister, made jointly with Finland's and the Netherland's, rejects the current project for a European banking supervisor and then seizes the ESM capability of bailing banks out until a centralised banking supervisor is established.
The main beneficiary of the latest relaxation in credit costs had been the Spanish government. It will be the main victim of this boomerang that Berlin just threw (yields of 10-year Spanish bonds are once again approaching 6 percent).
But it will not be the only one hit. Forcing Spain to officially require a bailout and cede its financial sovereignty would be better accepted had Brussels' and Berlin's record in managing the crisis been successful. It is not.