Those pesky markets are confusing even the really smart economists these days. For the last couple months, all eyes have been on Europe and whatever is the latest country to be having major debt problems. Sonic Charmer has been blogging for awhile about the roller coaster that has ensued as headlines spit out good news or bad news about “plans” to “save” the “euro.” I haven’t bothered to keep up the details, which mostly seem to be concerned with either accounting tricks to hide the large amounts of debt that European countries have, or public relations tricks to try to convince the less indebted nations to sacrifice for the more indebted ones.
Anyway, Italy started to snag the headlines in November as its borrowing costs reached the “unsustainable” level of 7% that had previously forced Portugal, Greece, and Ireland to ask for bailouts. Italy was the biggest country yet, and if they needed a bailout – and they probably wouldn’t be the last country, either – this was probably going to be the death blow for the euro. Then last week Germany had a failed bond auction. Investors weren’t interested in about 2 of the 6 billion euros they wanted to borrow.
Suddenly, all hell broke loose. Germany was supposed to be one of the good countries that happened to be using the same currency that the severely indebted nations were threatening to destroy. If investors were getting so scared about the euro that they didn’t even want to loan to Germany, then the EURO WAS COMPLETELY DOOMED. The good Germans couldn’t sell $6 billion in bonds and the bad euro countries had $115 billion in bonds coming due by the end of the year! The stock market, down all week already, extended its collapse for the worst Thanksgiving week since the 1930’s. Smart people started giving the euro 10 days to live! Even the generally calm Tyler Cowen thought the eurozone should “really, really, really want to have something ready before trading starts Monday morning.” And as Sunday dragged on and we never got any good news about the latest greatest plan to save the euro, we were supposed to get ready for a huge market collapse this week as countries failed to sell more bonds.
Then Monday, Italy sold about 500 million and Belgium sold 1 or 2 billion. The interest rates rose to records – which normally has led to headlines of despair – but after Germany’s failed auction I guess expectations had been lowered so much that everyone was just relieved that they managed to find enough investors, regardless of the price. But those euro bonds were smaller than the ones that failed Germany last week, and Italy had a bigger one on Tuesday… maybe this was when it would all come crashing down.
But yesterday Italy sold 8 billion euros worth of bonds for a record yield of 7.89% – and the stock markets soared.
Now the economists are just confused!
Today, the Federal Reserve announced some kind of joint action with other central banks of the world that involves things too complicated for me to understand (I think it “boosts liquidity”), but is somehow supposed to make things easier on the euro… without any consequences to anyone, I’m sure. And I guess the stocks love it again. How long will this latest magical out-of-nowhere “plan” distract investors from the structural problems still facing all these indebted European countries? December 9 is now the latest “deadline” for European leaders meeting and coming up with some sort of something. I’m not so good with the details of these ups and downs, but I’m starting to get tired of this roller coaster… This latest climb is just too unexpected for there not to be another drop coming around the corner any moment now…. but hey, what do I know? All I can tell is that the flailings of the leaders of the world have managed to kick the Euro Collapse Can down the road for at least another week. But this road is on a hill, and it’s still getting steeper…