From Professor Tim Duy: Is Anyone Answering the Phones at the ECB?. Excerpt:
It is never a good sign when the monetary authority – the lender of last resort – is no longer willing to buy your bonds. If the ECB sees only risk at these rates, why should private investors jump into the pool?
Honestly, I find it incomprehensible to believe that the ECB will not soon come to the aid of Spain and Italy with additional bond purchases. Only the most irresponsible policy body would take such a risk. To not do so almost guarantees the destruction of the Eurozone and a deepening recession if not depression throughout Europe. They cannot possibly believe that fiscal and structural reforms will bear sufficient fruit in any reasonable time frame. Nor can they possibly believe that Spain and Italy can implement a IMF-type structural reform program in the absence of the competitive boost provided by currency devaluation.
Or can they? If they do believe these things – that they can do no more, the job is entirely on the shoulders of fiscal policymakers – then we all need to be afraid, very afraid. Because when the ECB fully abdicates its role as a provider of financial stability for the Eurozone, all Hell is going to break loose.