Over 6 weeks ago we distributed the attached Eurosystem Solutions paper.
It described the unique non-standard measures being used for by the Eurosystem and ECB to address bank solvency and national solvency issues and the movement towards a real solution involving the ECB.
Now the ECB has announced what is very close to the real solution: unlimited bond purchases.
Regardless of conditionality, or even in spite of conditionality, this is the crossing of the line into the notion that there is an entity that can credit accounts in Euro in unlimited amounts.
While conditionality is the apparent necessary circumstance, and it’s likely national authorities will play along, these ECB purchases will have to take place regardless of conditionality. If Spain says they can’t comply, is the ECB going to let them default? The ECB has done all this to avoid Spanish default.
The best case is for the markets to recognize the ECB backstop and so regular purchases aren’t very necessary. There will be lots of movement towards coordination of budgets and banking supervision.
But the ECB line has been crossed.
Sixteen years after our AVM/III July 1996 Bretton Woods conference that identified the severe credit problems with the looming Maastrict rules (1/1/99), and eleven years after Warren’s famous paper on the potential European credit crisis “The Rites of Passage” we are finally seeing the necessary repair to the EMU.
There still remain political obstacles, court challenges and the like, but the imperatives to avoid a complete collapse of the Euro financial system have driven virtually all the important constituents to this necessary path of solution.