Tuesday, September 13, 2016

Here’s How Europe Implodes: 
Italian Junk Bonds 
& The End Of Austerity
John Rubino* highlights the plight of the euro zone .. sees Europe hitting a wall soon as the European Central Bank considers buying Italian junk bonds .. "While the ECB is subsidizing badly-run companies, the peripheral eurozone countries that can’t function in a strong currency regime are lobbying for a massive welfare program of their own .. Central banks buying even high-grade bonds was, not so long ago, seen as a risky and experimental departure from commonly understood practice, something to do temporarily in an emergency. But a central bank buying junk bonds (and equities, as the Japanese and Swiss banks have been doing) is something altogether different because it changes the nature of the marketplace. In a functioning capitalist system, badly-run companies aren’t just expected to fail, they must fail in order to show everyone else what not to do. But give the worst-run firms effectively-unlimited funds and they’ll continue to limp along, expanding their dysfunctional business models and generally making it impossible for their competitors to know what does and does not work. The result: even more misallocated capital and – soon — an epic bust .. It’s not as obvious why the second development – the end of austerity and beginning of a massive transfer of wealth from Germany to Greece, Italy, et al – is such a bad idea. It might not have been a decade or two ago. But today most European governments carry record levels of debt and the ECB’s balance sheet is multiples of what it was at the dawn of the euro .. Ramping up borrowing and spending now is just adding to an already crushing burden, guaranteeing that interest rates can never be normalized (because everyone’s debt would have to be rolled over at higher rates, causing interest costs to skyrocket). Here again,
the credit market’s price signaling mechanism is paralyzed, with eventually-catastrophic results."
link here to the commentary

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