For much of last year, Ambrose Evans-Pritchard warned of inflation and economies overheating. Now he’s writing of doom-loops and a credit crisis. Oh well, one shouldn’t expect consistency, or much in the way of insight, out of journalists or politicians. From Evans-Pritchard at telegraph.co.uk:
‘We all know that QE2 is not really going to work but the market says “I’m a smoker, I know it kills me, but so long as I can get cigarettes, I’m happy”‘
Credit stress in the European banking system has suddenly turned virulent and begun spreading to Italian, Spanish and Portuguese government debt, reviving fears of the sovereign “doom-loop” that ravaged the region four years ago.
“People are scared. This is very close to a potentially self-fulfilling credit crisis,” said Antonio Guglielmi, head of European banking research at Italy’s Mediobanca.
“We have a major dislocation in the credit markets. Liquidity is totally drained and it is very difficult to exit trades. You can’t find a buyer,” he said.
The perverse result is that investors are “shorting” the equity of bank stocks in order to hedge their positions, making matters worse.
Marc Ostwald, a credit expert at ADM, said the ominous new development is that bank stress has suddenly begun to drive up yields in the former crisis states of southern Europe.
“The doom-loop is rearing its ugly head again,” he said, referring to the vicious cycle in 2011 and 2012 when eurozone banks and states engulfed in each other in a destructive vortex.
It comes just as sovereign wealth funds from the commodity bloc and emerging markets are forced to liquidate foreign assets on a grand scale, either to defend their currencies or to cover spending crises at home.
Mr Ostwald said the Bank of Japan’s failure to gain any traction by cutting interest rates below zero last month was the trigger for the latest crisis, undermining faith in the magic of global central banks. “That was unquestionably the straw that broke the camel’s back. It has created havoc,” he said.
To continue reading: Europe’s ‘doom-loop’ returns as credit markets seize up
