Johnson's Andrew Karolyi asks "Where is the European Central Bank?"
11/28/2011 9:26:00 AM
In the aftermath of Germany's recent inability to sell 6b euros in 10-year debt, the Johnson expert in sovereign debt and emerging markets responds
Johnson and EMI's Andrew Karolyi
, professor of finance, considers "Where is the European Central Bank (ECB)?"
"In the aftermath of the Spanish election and the next-day's refunding of Spanish sovereign debt (of which they have 150 billion euros to rollover in the next 12 months), the sovereign yield spreads widened dramatically.
This would have been a great opportunity for the ECB to utilize their balance sheet to render some kind of vote of confidence for the markets. I would have expected the same with the handover from Silvio Berlusconi to the caretaker administration of Mario Monti, but yet we see Italian sovereign yield spreads widening along the way during the past two weeks.
The ECB has to understand that this inaction or weak action has to be at the core of the problems for Hungary and its downgrade to Ba1 junk status today. The big story for Italy and Europe will really take place starting in February through April when about 150 billion of their 350 billion euros of debt outstanding needs to be rolled over. These auctions will be the bigger test of the appetite of the private markets for the eurozone and ultimately the will of the ECB to accommodate the political uncertainty."
Today, the Organization for Economic Cooperation and Development (OECD) issued a report that concurs with Karolyi's call for action by the ECB. See "OECD Urges Boldness From ECB" (Wall Street Journal, Nov. 28)