Citi Economics
Global Economics View
January 7, 2011
- There are no absolutely safe sovereigns — ‘rates analysis’ has to be done simultaneously with ‘credit analysis’ for all sovereigns, including the G3.
- There are likely to be several sovereign debt restructurings in the euro area (EA) in the next few years. Liquidity support should not stop this; only permanent bail-outs would.
- The sovereign debt crises of the euro area periphery interact with banking sector weaknesses throughout the EU. Both need to be addressed for a lasting solution.
- Ireland’s financial support package will buy time, but does not address the fundamental insolvency issues of the consolidated sovereign and banking system. The Irish case also highlights the need for an EU-wide bank special resolution regime (SRR).
- Portugal is likely to access the EFSF soon.
- The current size of the liquidity facilities looks insufficient to prevent speculative attacks or even to fund Spain completely for three years.
- EA break-up remains extremely unlikely and would be an economic disaster. EA exit looks irrational for fiscally weak euro area members, such as Greece.
- A viable and dynamic EA requires i) a much larger liquidity support facility, ii) restructuring of the unsecured debt of EU zombie banks and recapitalisation of the systemically important
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