This morning's (December 28, 2011) auction of Italian sovereign debt was met with greater enthusiasm in terms of demand and interest rates that needed to be paid. This has raised hopes that the Eurozone crisis may be receding. That is perhaps still overoptimistic; however the crisis surrounding the Euro may be becoming better defined - greater clarity does translate into less uncertainty which has been the spark for cycles of financial crisis over much of the latter part of this year. Most of the fundamental/structural problems persist, although along with a better definition of such, there is also some perspective/plan taking hold toward resolution albeit it be still long way from full design and implementation. In the financial markets these complex tides are explained as "sentiment."


Sentiment is fickle though. Today, it appears that there is some confidence in Italian PM Mario Monti's budget and austerity plan to stem the rise of deficits. However, as of the last couple of weeks the role/commitments of the IMF is still fluid. The amounts available for Eurozone assistance (Italy and other economies) may be less than originally anticipated - UK and US infusions to enhance the IMF's capacity may be less than originally believed. Further, the willingness and/or capacity of Germany and the ECB is restrained. Finally, the political actions adopted by the EU/Eurozone (less UK) leaders a month early still need to be translated into institutions and actions with many elements still relatively vague.


New Infusion of ECB Loan Money:

What appears to be the difference for now in boosting sentiment may be something very tangible - the ECB has been pumping billions of Euro's into system through very cheap loans to banks. Read: - "Record Cash to European Banks" - diplomaticallyincorrect.org/films/blog_post/record-cash-to-european-banks-by-ambassador-mo/43058. However, only 10 days earlier the International Financing Review had reported that the European Banks had not been buying, and in fact had continued to sell their holdings of EU sovereign debt. Read: -“European Banks Not Buying EU Debt” - diplomaticallyincorrect.org/films/blog_post/european-banks-not-buying-eu-debt-by-ambassador-mo/42987. Presumably this sentiment has changed - perhaps by market reflection or an implicit/explicit arrangement with the ECB that banks use the cheap loans to purchase sovereign debt as evidenced by today's Italian sovereign debt auction. Regardless, if European banks return to becoming the primary buyers of Euro debt, (rather than hedge funds, speculators etc), then this is a significant change, or more accurately significant stride and return toward normalcy.


Austerity & Stagnating Economy:

The ECB infusion will definitely help bank balance sheets, and it may aid in re-stimulating the EU/Eurozone economies. However, the next year or more will be more defined by austerity and its impact on economic activity/growth. For this factor I expect the Eurozone crisis to become more of a malaise for the medium term. The other factor though much more to predict in a positive or negative sense for European economies is "sentiment." However, it is difficult to envision both a dramatic and sustained turn toward the positive, at least until the immediate fiscal and structural ills of the Eurozone are remedied.


By Ambassador Muhamed Sacirbey

Facebook – Become a Fan at “Diplomatically Incorrect”



Twitter – Follow us at DiplomaticallyX



International Financial Crisis Channel - diplomaticallyincorrect.org/c/international-financial-crisis