MONETARY POLICies KEY FACTS OF THE CRISIS
Te sovereign debt crisis that broke out in Spring 2010 and was initially limited to Greece has since then expanded rapidly and led to a profound crisis of confidence. Since treasury bonds have traditionally formed the secure core of the financial system, the uncertainty has increasingly spilled over into the banking sector, which has in turn impacted negatively on the credit rating of public sector borrowers. Neither the ambitious consolidation programs in the countries in difficulty nor the rescue plans, floated on an
ever-larger scale, have been able to
fundamentally change this vicious circle to date. Te euro area’s increasing instability contrasts with conditions in Japan, the United States and the United Kingdom, countries which -despite far higher budget deficits during the same period - have been able to secure refinancing at historically low interest rates. Tis discrepancy reflects the constitutive element of a monetary union that bars its member states from taking the comfortable albeit highly questionable route of central bank financing from the viewpoint of stability policy.
FX
In this article I will move from what is likely to be the main unknown able to drive markets in the first few months of 2012 (i.e. Will ECB print and how much?) to an attempt at forecasting the potential consequences of a break- up of the monetary union (thanks to a Nomura study). Re-offering a brilliant WSJ article from historian Niall Ferguson on a fantasy 2021 Europe will give us some solace before summing up that ECB help or a more severe enforcement of fiscal rules cannot be the solution of the euro area problems by themselves.
FX TRADER MAGAZINE January - March 2012 31
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