Could the end of the Eurozone Crisis be in sight?

Stock markets across the world have risen by their fastest levels since March 2009 on optimism that the European debt crisis can be contained. Central banks have also taken coordinated action to improve bank lending. The Central Banks of Japan, UK, Canada the USA and the Eurozone have formulated a plan to give commercial banks cheaper access to US dollars. The Scheme is also likely to be expanded to cover non-USD currencies. In addition, the Chinese government has reduced the capital requirements for banks by 0.5% allowing Chinese banks to boost lending after many months of tightening.

Yields for Spanish, German, French and Italian bonds have begun to fall after recent successful auctions. Last month German bond yields began to rise exceeding the rate the United Kingdom pays. Markets have responded well to the UK’s decision to increase its quantitative easing program while maintaining its budget deficit reduction program.

The rise in German bond yields may finally cause the ECB to intervene in the markets in the way that both the UK and the USA have done. Essentially the ECB would print money and use that cash to purchase Italian, Spanish and other indented European economies bonds pushing up the price of these securities to reduce the interest rate yield.  So far the ECB has resisted calls to do this largely based on German concerns of inflation. However, as European economic growth continues to slow, inflation becomes less of a concern.

The expansion of the Eurozone debt crisis to Italy is also likely to eventually lead EU leaders to seek help from the IMF. Last week the IMF was rumored to be readying a EUR 600 billion loan for Italy. However, these rumors were later denied by both sides. However, it is clear that with the European Stability fund already increased up to EUR 1 trillion and Germany alone having to contribute over EUR 250 billion that the Eurozone economies do not have the resources alone to bail out Italy.

The European debt crisis was always going to have to get worse before it got better. With the spreading of the yield crunch beginning to affect Germany it may be that we will see the final resolution to the crisis in 2012.

 

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