Monday, September 5, 2011

Cat and mouse play by the ECB

I'm back from a nice holiday and sad to see that Greece is making the headlines again together with Italy. Two interesting things have happened that caught my attention.

First, Greece has caused representatives of the IMF (International Monetary Fund), EU (European Union) and the ECB (European Central Bank) to walk away from a progress monitoring event which was suspended for 10 days causing the bond yields of Greek 2-year bonds to rise to more than 50% today! The price of the bond has fallen lower than 50% of its initial value. This means that investors are getting more confident over a Greek default. Greek finance minister Evangelos Venizelos claims that Greece is not willing to make any more budget cuts this year.

The second interesting thing is that at the same time the ECB has not commented on whether they are continuing to buy Italian government bonds or not. This has caused yields of Italian 10-year bonds to rise above 5% again which is considered to be not-sustainable.

The ECB doesn't have too many instruments to put some pressure on Italy and Greece carrying out their austerity programmes. While couple of weeks ago we could see worrying statements by Papandreou, Berlusconi and Tremonti (Italian finance minister) then suddenly we're seeing both governments dropping some of their austerity plans. So right now we might just be seeing the ECB taking a more straightforward line with the two governments.

Even though both sides want to find a solution to the crisis it is not so easy to find it. The economies of both countries aren't doing so well and extra austerity measures might temporarily lower the growth even more. At the same time the ECB has to stand against Germany who opposes bond buying programme. Who will be the cat and who will be the mouse in the end?

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