Europe -Where’s there’s Smoke there’s fire.

Over the last 18 months this Euro crisis has had its ups and downs, but the story remains the same: Every time Europe takes a step in the right direction it takes several steps in the wrong direction. Yesterday’s impressive Spanish and Italian bond sale made me naïvely start crediting the ECB for their three year refinancing operation, and I briefly thought that they might just have pulled it off. I started thinking that perhaps, their unorthodox quantitive easing operation (that’s what it is… despite the ECB not agreeing with the terminology) might just have been enough...

Banks naturally used some of this newly available ECB money to repay shorter term/more expensive outstanding loans (ironically owed to the ECB). And with the rest of the money the ECB hopes that the banks would start buying large amounts of Sovereign debt. Using this three year refinancing operation (aka Quantitive Easing) the idea was that the ECB would solve the sovereign liquidity problem, recapitalise banks all while keeping their promise of not directly interfering as lender of last resort. Pretty clever I guess, but before my joy looms large, I get the feeling that I should perhaps postpone my optimism. What if banks just use the money to buy back their own debt as well as higher-yielding corporate bonds while parking government debts? This way the liquidity problem continues and the debt crisis remains to hang over Europe as it has done for the last year. The next chapter in the EU is anyone’s guess, but if you are expecting anything less than a EU27 recession I would not recommend you hold your breath. A stressed scenerio includes a complete lose of market access for both Spain and Italy.