The Euro’s Death Wish
The comments below are an edited and abridged synopsis of an article by Goldmoney Insights
The ECB, through its system of satellite national central banks, is now almost solely committed to financing national government debts and papering over the consequences. The result is a commercial banking system both leveraged and burdened with overvalued government debt secured only by an implied ECB guarantee.
The failings of this system have been covered up by a pass-the-parcel of any collateral over €10 trillion plus repo market, which with the TARGET2 settlement system has concealed the progressive accumulation of private sector bad debts ever since the first Eurozone crisis hit Spain in 2012.
These distortions can only continue as long as interest rates are suppressed. But rising interest rates globally are now a certainty—but officially unrecognized by central bankers—so there can only be two major consequences. First, the inevitable Eurozone economic recession (now being given a push through Covid restrictions) will send debt-burdened government deficits, already soaring, requiring an accelerated pace of inflationary financing by the ECB. And second, the collapse of the bloated repo market will almost certainly be triggered.
It is hardly surprising that, for the ECB, raising interest rates is not an option. Therefore, the recent weakness of the euro on the foreign exchanges marks the start of a threat to the euro system, the outcome of which will be decided by the markets, not the ECB.
Up for discussion: Introduction; government debt creation out of control; the ECB’s policy failure; the ECB, TARGET2 and the repo market; and inflation and interest rate outlook.