STOCK MARKET WATCH, Monday, December 19, 2011.

[Ghost Dog]

6. The Eurozone’s policy breakthrough?

Today’s money quote, obviously, is this, from Fitch:

"a ‘comprehensive solution’ to the eurozone crisis is technically and politically beyond reach."

Fitch’s view reflects the clear consensus of Anglo-American commentators. But Anglo-American commentators aren’t always right. Ezra Klein writes that the German policy establishment “remain[s] serenely confident that they will save [the Eurozone].” Note that Klein attributes this to no one in particular. He characterizes it as a view drawn from “members of Angela Merkel’s government, members of the opposition Social Democrats, industrialists, and bankers.” In other words, Klein heard this in private conversations, not market-moving public statements. Jean-Claude Junker’s famous when-it-becomes-serious-you-have-to-lie rule doesn’t apply. These are smart people who know everything we know, and they think they’ve got the situation covered.

Tyler Cowen has been emphasizing the possibility that the ECB will quietly fund sovereigns via the banking system. The ECB would lend to banks at very low rates, accepting sovereign debt as collateral. Banks would earn the spread between the yield on sovereign debt (which is currently distressed and very yieldy) and the sliver of interest demanded by the ECB. As a matter of mechanics, this plan could work. It’s the same as direct ECB lending to sovereigns, except ECB gets added security (in theory) by interposing banks as guarantors, and pays a fee for the privilege.

The Anglo-American punditosphere is unimpressed...

... A lot of commentators have derided Europe’s “policy breakthrough” as just a restatement of the old stability and growth pact with some institutional changes at the margin. Talk of automatic consequences and qualified majorities may just be blah blah blah. But if European states become dependent on bank finance, they become dependent on ECB finance. The ECB would have the power to manufacture fiscal crises for a misbehaving state at will, and with marvelous deniability. Laundered through banks and then through capital markets, ECB actions would be attributed to nameless bond vigilantes rather than unelected technocrats. ECB haircuts would very quickly be self-justifying, and disentangling cause from effect would be nearly impossible as officials might privately telegraph changes before anything is put in writing. Control would be hidden as a market outcome, a fact of nature...

/... http://www.interfluidity.com/v2/2617.html

The first comment mirrors my first thought: Isn't this just like the USA's QE?

Correct me if I’m way off, but this sounds like a variation of QE in America. Instead of outright exchange of treasuries for dollars, this is just the exchange of almost interest free loans (cash) for sovereign debt. Best case scenario is this inflationary tactic balances out the deflationary austerity/deleveraging and we all live happily ever after. Worst case scenario we get the worst of both worlds: outrageous asset prices and high unemployment. Here’s hoping we muddle through, Japan style...

Also,

... Laundered through banks and then through capital markets, ECB actions would be attributed to nameless bond vigilantes...

Sounds very much like the ECB reading from the Fed/Treasury/PPT (+ UK equivalents) playbook.