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 EuropeanCentral Bank (ECB), Mario Draghi opened the floodgates and offeredunlimited amounts of euros to banks in 3-year loans at 1% interest,with the intention that they would lend that money to businesses andspur growth. Hundreds of European banks took advantage of the money,borrowing something like 1 trillion euros in the program, known as theLong-Term Financing Operation or LTRO. But the program was a failure,in that the banks hardly lent any money to businesses, using the moneyinstead to pay off some of their own higher interest loans. They diduse the money to purchase Spanish and Italian government bonds,pushing down yields (interest rates) on those bonds, and allowingthose countries to continue spending as before and go ever deeper intounsustainable debt. However, even that effect ended when the LTROprogram ended at the end of March, and the eurozone has beendeteriorating steadily since then, with lots of talk of “Grexit”, andexit by Greece. 

Since then, Draghi has promised “to do anything” to save the euro, andon Thursday he opened the floodgates again. Instead of pouring moneyinto the banks, he proposed to pour it directly into the coffers ofgovernments in trouble, by purchasing the bonds of any country introuble on the open market, without any built-in limitations. Thereare 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 previousbailouts, the country said for months, up till the last nanosecond,that no bailout was necessary, and only said they needed a bailoutwhen the bailout was announced. And we know what’s happened with theausterity measures demanded of Greece, Spain and Italy. 

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

But investors also know that if the ECB is going to buy a country’sbonds on the open market as long as necessary to push yields down,then the country’s politicians and labor unions will also know thatthey 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 beenslowing. Irish Times and Washington Post and Bloomberg

Stocks returning to height of 2007 bubble levels

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

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

Against the backdrop of the Mario Draghi’s Big Bazooka unlimitedbailout program announcement, a drama was occurring in Budapest, whenHungary’s premier Viktor Orbán used his Facebook page to tell theInternational Monetary Fund (IMF) to buzz off. He said that he wouldseek an unspecified “alternative negotiating proposal,” and reject theausterity measures that the IMF was demanding in return for a 15billion euro bailout loan. The bailout loan has been repeatedlydelayed, because Orbán has repeatedly refused to do as the IMFdemanded. The value of Hungary’s currency collapsed during the day,as news of the Facebook announcement spread, so this drama will go onfor a while. For now, at a time when Greece is begging for a two-yearpostponement of its own austerity requirements, what it does show ishow unrealistic Draghi’s announcement was, even though he had nochoice 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 beingsmuggled across the Aegean Sea from Turkey drowned on Thursdaymorning, when their boat struck rocks and capsized just 50 meters fromthe shore of Turkey. Many on the boat were able to swim to shore, but18 women, 29 children and 2 babies drowned because they were lockedbelow decks and could not escape. The survivors were interrogatedwith the help of Kurdish-speaking security personnel, and they wereIraqi, Palestinian and Syrian citizens, who had intended to enterGreece and then travel through Europe to the United Kingdom. As we reported yesterday, Greece hasclosed the land border between Turkey and Greece, with the result thatthere’s been a huge surge of migrants attempting to reach Greecethrough the Aegean Sea. As many as 6,000 would-be immigrants arewaiting their turn in Turkey to be smuggled into Greece. Hurriyet (Ankara) and National Turk

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