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Eurozone: Structural reforms without the ECB is utopia

ByThe National Bank of Canada
Published 11/29/2011, 10:14 AM
Updated 05/14/2017, 06:45 AM

Italy’s two-year government bond yields shot up to near 8% today as euro-zone politicians failed to allay investors’ concerns. Mrs. Merkel and Mr. Sarkozy continue to oppose using the ECB as a lender of last resort, arguing instead for more structural reforms as the sole solution to the current debt woes. This is utopia, at least for the short term. As today’s Hot Chart shows, Italy’s refinancing needs stand at more than €300 billion in 2012, with more than €200 billion set to mature in Q1 alone. In light of this week’s disastrous German bond auction, does Italy really stand a chance to get a bid on all these bonds? By our calculations, the country would have to run a primary surplus of more than 5% of GDP to stabilize its debt-to-GDP while paying an interest rate of 7%. That is too high a cost for the new government to succeed in implementing economic reforms (a financing rate of between 3% and 4% would, on the other hand, probably do the trick). We continue to think that the current crisis can only be solved by using the ECB to smooth the transition while structural reforms are put in place. Politicians have only a few weeks left to adjust their rhetoric as to reflect the reality.
Structural reforms without the ECB is utopia

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