Mario Draghi’s bottomless pit


The flagging economy of the Eurozone, plagued by swingeing youth unemployment, deindustrialization, low output and vast external debt has been the source of great concern for many financial markets participants recently, with events such as the removal of the 1.20 peg on the Euro by the Swiss National Bank, and Mario Draghi’s $1.2 trillion quantitative easing program striking fear into the heart of investors.

Today, large financial conglomerate Societe Generale has voiced its concern over the sustainability of the bond-buying program which was deemed legal by the European judiciary prior to Mr. Draghi’s introduction of the quantitative easing program which commits the European Central Bank to buying $60 billion worth of ‘assets’ until late 2016, from a financial position in which it relies on bailouts and debt.

Inevitably, the bond rates have turned negative.

Societe Generale, perhaps quite sensibly, has stated that the European Central Bank is on an unsustainable path.

“It’s like the ECB is chasing its own tail,” Ciaran O’Hagan, head of European rates strategy at Societe Generale in Paris, said today in a report by Bloomberg. “Yesterday, the Bundesbank could have bought 2018 notes. Today it needs to go out to 2019. The universe of buyable bonds is melting like snow in the spring sun.”

The European Central Bank exposed itself to debt by purchasing Greek bonds secured against now insolvent Greek banks, with the European Union potentially becoming the subject of fragmentation as a result of the potential exodus of Greece, which would expose the European Central Bank to approximately 190 billion Euros in unserviceable debt, and with it bringing further economic woes to the already indebted eurozone.

Yesterday, the Euro almost met parity with the dollar, at $1.07, representing the bleak view that the investing world holds with regard to the European central currency.

When considering the vast external debt which many European member states are responsible for, compared to high-producing nations such as China, Indonesia, Mexico and Malaysia, it is clear that Societe Generale’s concerns are far from unfounded.

 

 

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Mario Draghi's bottomless pit

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