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World: The ECB Has Done Its Job

ByThe National Bank of Canada
Published 09/13/2012, 07:59 AM
Updated 05/14/2017, 06:45 AM

Last week the ECB announced officially its intention to engage in unlimited purchase of the bonds of distressed countries if they request aid from the rescue fund and respect the conditions. This development along with today’s announcement that the ESM bailout fund is legal from a German standpoint reduces considerably the risk of a sovereign default in the euro area. As today’s Hot Charts shows, probability of default derived from default swap rates fell sharply in the eurozone lately.

Both Ireland and Portugal have seen their probability of default cut by half since their peak this year. In regard to Spain and Italy, they are now around 25% while they were close to the worrisome level of 40% just last July. At that time, fears reached such a high level that a default was a self-fulfilling prophecy, with financial markets being effectively inaccessible for those countries in the periphery.

For its part, the ECB has done its jobs since market concerns will not be the cause of a default for now. Ironically, there is now less chance to see Spain and Italy asking for a bailout plan and adopt tough fiscal and structural reforms that goes with it. The ball is now in politicians’ court to reduce fears even more. We hope that they deliver.
The ECB Has Done Its Job

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