The big news in the financial markets today is that Portugalâ€™s â‚¬1.25 billion auction of 10 year bonds went well, being oversubscribed at about a 2.6 to 1 ratio. The Iberian countryâ€™s Prime Minister, Jose Socrates, declared the auction a success and reiterated that, â€œPortugal does not need a bailoutâ€. Only time will tell it if will need to tap the EU/IMF assistance fund, just like Greece and Ireland already has (for an historical overview of how Portugal came to this pass, see my Dec. 1 article in the National Post). One thing is already certain:Â Portugal is already in the process of being bailed out by the European Central Bank (ECB)
Much of the buying in these types of auctions is done by banks. The banks, in turn, take the bonds they purchased and use them as collateral for loans from the ECB â€“at the same time as the latter has lowered the minimum bond rating required in order to accept distressed Euro zone debt. Since May 2010, the ECB has been buying eurozone bonds, getting around a law that prohibits such purchases by going into the secondary market. Reports suggest the ECB has been â€œmassivelyâ€ buying Portuguese bonds. Its independence, which originally was supposed to be equal to that possessed by the German BundesbankÂ when the Deutschemark was around, has been fatally compromised. Â Â
Since the Greek crisis came to a head last spring, much has been written about the future of the Euro — with the best contribution being Phillipp Bagus’ The Tragedy of the Euro (available in PDF here) Putting it in the most simplest terms, two possibilities exist: either the Euro survives or it doesnâ€™t.
If it collapses, it will either be (1) because one or a group of the fiscally sound countries decide it is no longer in their interest to support its fiscally profligate counterparts; or (2) because one or more countries in the latter group decide they are better off returning to their legacy currency and devaluing so as to render their workers more competitive in export markets.
If, instead, the Euro survives, it will either be (3) the fiscally profligate group successfully bring their budgets under control and reform their product and labour markets so as to improve the export competitiveness of its workers; or (4) the fiscally sound countries figure the Euro is so crucial to maintaining the greater political project of a unified Europe that they institute a regime that effectively subsidizes the less competitive group of nations.
In light of what the ECB has been doing, as well as recent talk about augmenting the EU/IMF assistance fund, the trend appears to be favouring scenario 4. In that case, Euroland willÂ get even closer toÂ being like Canada with its provincial equalization payment regime.