The second revelation is that regardless of what they do to scale up the EFSF, it wont be big enough to backstop sovereigns in a way that will prevent contagion. However, this doesnt matter as the ECB will be forced to step injust as it did in August and for exactly the same reason. Contagion spreading to Italy, Spain, Belgium, Malta, France etc would spell a very rapid and very ugly end to the euro zone. Besides, they have the ready excuse that they employed in August about orderly markets and monetary policy. But not all is for the best in this best of all possible worlds. The law of unintended consequences will be fully enforced.
2) Their half-hearted solution on the banks will almost surely lead to a recession. The most likely outcome is that the bank recapitalisation scheme gives Europes stronger banks a chance to create a credit crunch instead of taking government money. This is especially true since German banks are resisting both forcible recapitalisation and further write-down of Greek debts. The euro-zone governments are probably going to insist on the former but not on the latter. As the figure above shows, the recession is likely to start up all three of the vortices again, so well be back at the drawing board in a few months time. But at least well have avoided a truly historic crisis. Now lets just hope the Greek street plays along with the role assigned to them this weekend. If euro-zone leaders dont do enough to help the Greeksto make sure they see a light at the end of the tunnelwe may see political chaos and a disorderly default that would severely test my hypotheses that the nuclear-threat has been removed.
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2016-02-26
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