World View: European Central Bank Announces Unlimited Bailout Program

This morning's key headlines from GenerationalDynamics.com:
  • ECB announces huge new unlimited bailout program
  • Stocks returning to height of 2007 bubble levels
  • Hungary rejects IMF/EU's austerity demands for a bailout
  • 60 migrants drown in smuggling attempt from Turkey to Greece

ECB announces huge new unlimited bailout program

Last December, shortly after he became the new chief of the European Central Bank (ECB), Mario Draghi opened the floodgates and offered unlimited amounts of euros to banks in 3-year loans at 1% interest, with the intention that they would lend that money to businesses and spur growth. Hundreds of European banks took advantage of the money, borrowing something like 1 trillion euros in the program, known as the Long-Term Financing Operation or LTRO. But the program was a failure, in that the banks hardly lent any money to businesses, using the money instead to pay off some of their own higher interest loans. They did use the money to purchase Spanish and Italian government bonds, pushing down yields (interest rates) on those bonds, and allowing those countries to continue spending as before and go ever deeper into unsustainable debt. However, even that effect ended when the LTRO program ended at the end of March, and the eurozone has been deteriorating steadily since then, with lots of talk of "Grexit", and exit by Greece. 

Since then, Draghi has promised "to do anything" to save the euro, and on Thursday he opened the floodgates again. Instead of pouring money into the banks, he proposed to pour it directly into the coffers of governments in trouble, by purchasing the bonds of any country in trouble on the open market, without any built-in limitations. There are two requirements:

  • The country must first ask/beg for a bailout. It's thought that this will discourage some countries from getting bailouts, since it will be too humiliating to beg.
  • The country must agree to implement the usual list of austerity measures.

There's nothing new about this. In the case of several previous bailouts, the country said for months, up till the last nanosecond, that no bailout was necessary, and only said they needed a bailout when the bailout was announced. And we know what's happened with the austerity measures demanded of Greece, Spain and Italy. 

There's something else that we've heard before: Draghi claims that it won't even be necessary to bail anyone out, because investors will know that it's safe to buy bonds from the troubled country with the ECB backstop. Thus the scenario that Draghi imagines is as follows: When investors start demanding high bond yields (interest rates) from a troubled country, the ECB will start buying that country's bonds until the yields fall to sustainable levels again. But since investors know that's going to happen, they won't demand high yields in the first place.

But investors also know that if the ECB is going to buy a country's bonds on the open market as long as necessary to push yields down, then the country's politicians and labor unions will also know that they can sell as many bonds as they want, and go on spending as usual, and go infinitely deep into debt.

And so, we have a new fantasy "Big Bazooka" plan from the ECB. Meanwhile, as we've been reporting, the world economy has been slowing. Irish Times and Washington Post and Bloomberg

Stocks returning to height of 2007 bubble levels

Throughout 2006 and 2007, I frequently wrote commentaries mocking the investors who seemed to pop champagne corks every day and push the stock market to new bubble highs. Well, if you listened carefully on Thursday, you could hear lots of champagne corks popping again, as Wall Street Stocks seemed to be approaching the 2007 bubble levels again. According to my Dow Jones historical page, stock prices have remained at almost exactly 200% of their long-term trend value for almost two years now. Stocks have been way overpriced continuously since 1995, and by the Law of Mean Reversion, this bubble will burst, and a major panic will push stock prices below the Dow 3000 level. AP

Hungary rejects IMF/EU's austerity demands for a bailout

Against the backdrop of the Mario Draghi's Big Bazooka unlimited bailout program announcement, a drama was occurring in Budapest, when Hungary's premier Viktor Orbán used his Facebook page to tell the International Monetary Fund (IMF) to buzz off. He said that he would seek an unspecified "alternative negotiating proposal," and reject the austerity measures that the IMF was demanding in return for a 15 billion euro bailout loan. The bailout loan has been repeatedly delayed, because Orbán has repeatedly refused to do as the IMF demanded. The value of Hungary's currency collapsed during the day, as news of the Facebook announcement spread, so this drama will go on for a while. For now, at a time when Greece is begging for a two-year postponement of its own austerity requirements, what it does show is how unrealistic Draghi's announcement was, even though he had no choice but to make it. Bloomberg and Politics Hungary

60 migrants drown in smuggling attempt from Turkey to Greece

At least 61 migrants trying to reach Greece and then Europe by being smuggled across the Aegean Sea from Turkey drowned on Thursday morning, when their boat struck rocks and capsized just 50 meters from the shore of Turkey. Many on the boat were able to swim to shore, but 18 women, 29 children and 2 babies drowned because they were locked below decks and could not escape. The survivors were interrogated with the help of Kurdish-speaking security personnel, and they were Iraqi, Palestinian and Syrian citizens, who had intended to enter Greece and then travel through Europe to the United Kingdom. As we reported yesterday, Greece has closed the land border between Turkey and Greece, with the result that there's been a huge surge of migrants attempting to reach Greece through the Aegean Sea. As many as 6,000 would-be immigrants are waiting their turn in Turkey to be smuggled into Greece. Hurriyet (Ankara) and National Turk

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