To date, the European Central Bank has purchased €212.1 billion in sovereign debt and bailed out European banks with more than €1 trillion in 1% loans. The ECB knows that cutting the benchmark rate to 0.5% and buying more distressed debt will not work, given how much has already been pumped into Eurozone banks. And while sovereign borrowing is getting expensive, the problem is too much debt, not insufficient capital for purchasing bonds.
he went on to offer two solutions:
Eurozone exit. For months, Spanish, Italian, and other periphery depositors have been fleeing southern Eurozone banks by transferring their euro deposits to the safe havens of northern banks, in fear of losing their savings if they are converted to a discounted national currency. Bloomberg estimates that Spanish, Italian, and other periphery depositors have transferred €789 billion to banks in Germany, the Netherlands, and Luxembourg. Thus while periphery governments are borrowing hundreds of billions to recapitalize their failing banks, their depositors are depleting those banks’ reserves by shifting currency abroad.
Sovereign bankruptcy. The United States can also help establish a sovereign default facility under the auspices of the International Monetary Fund to allow countries plagued by insurmountable debt a chance to recover.
He concluded by saying:
It will be better to use limited funds and political capital to mitigate the short-term economic and social hardships that may result from countries exiting the Eurozone and declaring bankruptcy, than to deplete those funds and watch the contagion spread. At the least Europeans deserve the choice.
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