I opined a few weeks ago that I expected the crunch to come for the Euro around mid September. Well the ides of September has come and the US Treasury Sec Geithner rode into town and told the Europeans to stop arguing and do something at an internal Eurozone meeting. That is bad enough but when you put it together with the concerted action by the five main central banks to supply dollar liquidity on demand then you know things are pretty bad. The problem with this latter operation is to get sufficient eligible collateral into the settlement system for the central banks to lend dollars that the market won't supply because it fears banks going bust and their money disappearing.
There is of course no high quality or even low quality bond collateral left. All there is is the dross of PIGS' paper which the ECB in desperation have been buying outright. They did this with Greece but lost their nerve when the market continued to fall. Greek 10 year bond rates are now at 23.6%! The ECB have also been buying huge quantities of Italian and Spanish bonds but I suspect they are losing their nerve there also. Italians 10 years are at 5.65% and Spanish at 5.34% despite the ECB spening over 100 bn€ buying them!
Before wee George and Dave congratulate themselves UK gilts are starting to weaken as the market realises the dire straits the UK economy is in. Reuters reports it thus,
"Lagarde recently warned that the egos of world leaders are putting the global economy at risk. This is a nice way of saying that none of the leaders of the G-20, elected or not, are in the mood to take the risk themselves of publicly confessing to the true scale of the problem of excess debt and shrinking demand facing each nation. But as Geithner goes to the EU to preach tough love to his European counterparts, he leaves a lot of unfinished business at home."
All we are getting is hot air. The longer it goes on the worse things will be. Greece should have ben allowed to default months ago. Now the cancer is spreading throughout the Eurozone. The German ECB chief economist Juergen Stark jumped ship last week following German ECB board memeber Axel Webber. As always its the poor that will pay