|
|
What is clear is that the eurozone impact was not at the top of Ben Bernanke’s worry list when he set out plans last week to start “tapering” the Fed’s quantitative easing later this year. As Richard Fisher, president of the Dallas Federal Reserve, told the Financial Times in London this week, even central banks whose influence extends way beyond their shores remain accountable to national constituencies. “It is an oddity in a globalised world”, he admitted.
The good news is that spreads between the yield on Italian and Spanish bonds and German Bunds remain well below those seen when the eurozone debt crisis was at its most intense. That confirms that investors are taking a more sanguine view of risks in the eurozone periphery – especially compared with emerging market debt. Street protests in Turkey and Brazil have put social unrest in western Europe into context. More crucially, Mr Draghi’s pledge last July to do “whatever it takes” to preserve the euro’s integrity remains credible. Spanish and Italian debt are performing more like government bonds should – and less like default-prone credit markets.
Limiting the scope for a further sell-off, the most footloose foreign investors have long fled the riskiest bonds. True, crisis-hit Portugal will have more difficulty returning to markets than imagined only a few weeks ago. But we are far from the point where peripheral bond markets dive into the sort of death spiral we saw last year.
With southern Europe undergoing deep restructuring, eurozone deflation is also a bigger danger than in the US. Underlying eurozone inflation measures are hovering around 1 per cent – way below the ECB’s target of an annual rate “below but close” to 2 per cent. It all points to a need for serious policy loosening.
One escape route for the ECB would be a significant weakening in the euro. But that has not happened so far. Instead the unwinding of diversification trades has supported the currency.
While Mr Draghi has said options for further action are under discussion, he has hesitated so far – hoping an economic pick-up will avert the need to act. The possibilities include fresh offers of three-year liquidity, perhaps on even more favourable terms than in 2011; a negative interest rate on deposits parked by banks at the ECB; or a variety of asset-purchase schemes, some tailored for specific markets, others larger scale.
Full article (FT subscription required)
See also Fed tapering - timing still depends on data © Deutsche Bank