Mario Draghi and the European Central Bank are broadcasting their policy change. Clearly they are going to construct an enterprise to purchase additional sovereign debt of the troubled peripheral countries.
In doing so, they will invite the private-sector holders to sell. Remember, the economies of Spain, Italy and other peripheral countries are contracting, which means the debt-GDP ratio is rising from both sides. These economies are imposing additional and increasing costs that only exacerbate the downward spiral. At the same time, they have not altered the concept of borrowing in order to fund transfer payments, which add no productivity to those economies. That combination means the debt structure of each of these countries continues to weaken.
When the central bank broadcasts its entry into the purchasing of this sovereign debt, it offers private-sector holders an opportunity to exit. Private-sector holders need an extensive and deep liquid bid in order to sell. The central bank is inviting them to do so.
The discussions in Maine about the ECB, Draghi, the policy, the debt-GDP ratios, and Europe in general are intense and terrific in terms of debate.
We are out to the lake for a brief fishing stint and then back to the news flow.
|