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Tuesday, July 12, 2011

Running scared….

As we’re sure you’ve noticed, things are heating up in the eurozone (well going supernova now) with fears spreading to Spain and more crucially Italy. As we noted earlier, the Italian and Spanish cost of borrowing has been skyrocketing and bond prices crashing (along with bank shares and stock markets). There have been rumours that this has prompted the ECB to begin buying bonds from struggling eurozone countries again (possibly in tandem with the Chinese Central Bank).

Normally, we’d question the ECB for dredging up the bond-buying programme which they had tried so hard to leave behind but given the speed at which the fears have spread to Italy we can understand their concern. More importantly, this highlights that the current bail-out 'sticking plasters' policy is failing miserably, especially when it comes to containing contagion.

In any case, Willem Buiter, Chief Economist at Citi, thinks this is just the start, saying yesterday:
“If the ECB doesn’t come in, the Italian bond auction [today] is likely to fail. What we’re going to have is the ECB are going to be doing the heavy lifting."
So, Italian bond auctions may already be struggling to get off the ground meaning that the ECB - whose balance sheet is already already looking vulnerable - will have to start splashing around in a €1.6 trillion bond market.

We'll keep you updated on how the bond auction goes and if there are any signs of ECB intervention. In any case, this whole situation seems to have spurred on eurozone leaders a bit, since they've announced another emergency meeting for Friday, although given their track record for consistently failing to agree on a solution we won't be holding our breath...

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