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The November 30 announcement "looks to me like a non-event. Yet markets went wild. Are they taking this as a signal that substantive action - like the ECB finally doing what has to be done - is just around the corner? Are they misunderstanding the policy? Was this cheap talk that nonetheless moved us to good equilibrium?" If so, it's not enough. Italian bonds still top 7%.Pimco's Tony Crescenzi believes "liquidity is no substitute for other actions that Europe must take to solve its current woes. The world continues to wait on European actions on fiscal rules, discipline, and enforcement, as well as use of the balance sheet that matters most in the current situation: the European Central Bank."
Smith also wondered why markets reacted so positively to what little, in fact, was done. He also focused on two underreported issues, including acute withdrawal of dollar funding from Eurobanks.
As a result, he believes coordinated Fed action was less about reducing interest rates and more about systemic seizing up. The response was "telling the markets they were on the case."
However, "this is giving a probably dying patient emergency oxygen when he needs to be put in intensive care."
Smith also mentioned Nouriel Roubini saying Italian sovereign debt needs to be written down. If the ECB buys it, "the result will be that pretty much every private holder will hit its bid. And he doubts the ECB is prepared to balloon its balance sheet up" to $1.9 trillion or higher.
That amount deals with Italy alone, excluding five other troubled Eurozone members.
Commenting on Italy's unstable condition, Roubini said it needs "a primary surplus of 5 per cent of (GDP), not the current near-zero, merely to stabilize its debt. Soon real rates will be higher and growth negative. Moreover, the austerity that the (ECB) and Germany are imposing on Italy will turn recession into depression...."
Roubini also said debt restructuring is needed with investors sharing the burden to reduce public debt "to at worst 90 per cent of GDP from the current 120 per cent."
However, with bondholders unwilling to take losses, resolution won't be forthcoming. Instead of tough action, policy measures have lurched from one bad solution to another. As a result, expect more stopgap measures after current ones fail.
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