That's because they need us in the Euro much more than we need to be in it.
A precis on how the bond markets work, so you will understand the ECB's position below. When a country issues a bond, say a 10 year one at 3.5% interest. The price on the bond market is 100 or 100%. Now bond trading is like share trading. If a countries bonds are popular like Germany's and UK's are at the moment, then the price will go up, so lets say they are trading at 200, then the interest they pay with respect to the buy price is 1.75%, now if they go down like Greece or Italy to say 50 then the effective interest rate is 7%. Now if you want to issue and sell new bonds, the interest rate has to be slightly better than what your current bonds are trading at, otherwise you are better off going into the market and buying your bonds. Greek 10 year bonds are currently trading at about 235%!
The ECB is buying Greek and Italian bonds at the moment at up to €20bn a week with money the bank has borrowed. The interest it receives for these bonds is booked as a profit less the interest from the money they have borrowed. So far so good. Now the ECB values the bonds it has bought at 100% of that price. Now it has bought a lot of Greek and Italian bonds which have dropped significantly in price, but these losses don't show due to their 100% valuation, not the current market valuation like any other bank would have to show in their accounts, if they did they would be insolvent. Now they are either going to have to hold the bonds until their maturity (maybe with haircuts of 20-50%) or sell them. If they sell them for a loss and we are talking about big losses here, maybe €100-200bn, then this money will have to come from somewhere, yes you've probably guessed where by now.
The good old Eurozone tax payer. Now the more countries in the Eurozone, the more you can spread the losses. Now if they have to buy more countries bonds like this, with Spain, Belgium and France firmly in the sights of joining Greece and Italy, who knows what the losses will be?.
The next reason is that people keep saying that the problem could be solved by issuing Eurobonds (vetoed by Germany) or a massive expansion of the Eurozone money supply (vetoed by Germany) to use inflation to reduce sovereign debt levels. The German economy is built on the foundation of low inflation after what happened in the 1920's and they don't want Eurobonds as the interest rate would be much higher than they are currently paying, which would have a big impact on their bond interest payments where their Sovereign Debt is about 82% of GDP.
The other thing quoted regular is that Germany could bail out the other countries, the beastly Germans are just saying no, but will come to the table as the country (and bank) of last resort to save the Euro.
Using 2010 figures. The three major strong economies in the Eurozone are Germany, The Netherlands and Austria which have a combined GDP €3,374bn or 37% of the Eurozone GDP with a combined sovereign debt of 79% of GDP (probably nearer 82-83% now). Now if we say countries can borrow up to 100% of GDP before the markets start getting twitchy then this gives a combined fire power of €600bn. Now the 7 countries to a greater or lessor extent in trouble are Belgium, France, Greece, Ireland, Italy, Portugal and Spain. Their combined GDP is €5453bn or 59% of the Eurozone GDP. Their combined sovereign dept is 93% of GDP (now about 100% as most have budget deficits of 5-10%). The other 7 Eurozone countries have relatively low sovereign debt but only account for 4% of the Eurozone GDP, so they are too small to make any difference. IMHO the stong countries don't have enough fire power to bail out the weak ones.
Now the Greek 50% haircut will have a major effect of French banks which may need bailing out, if (more likely when) Italy need a 20-30% haircut, then France will be in big trouble. The Spanish Government and banks have consistently kicked the can down the road on the losses from their housing bubble, mortgages are still sitting at 100% value on their books and their regional governments can raise their own money, with rumors of much larger debts than given in official figures.
The problem of large austerity measures over a short period of time is that economies take time to readjust, so you tend to have a recession which increases the sovereign debt at a % of GDP, tax revenues are reduced, so the country misses their budget deficit targets, which means more austerity measures are required. Greece is currently in this death spiral. Italy have average 0.75% growth over the last 10 years with virtually no growth at the moment, so guess what their austerity measures are likely to do.
Now the EFSF bailout fund of €440bn is not fit for purpose and as each country need help, they drop out, so any further contribution disappears, so the fund gets smaller! Now if we were in the Eurozone and in the fund it would get much bigger, with of course full UK taxpayer loss liability.
http://en.wikipedia.org/wiki/European_Financial_Stability_FacilityNow I can't see anyway out of this mess, can any of you? When the Eurozone collapses it is going to be brutal and bloody where all banks have massive exposure to Eurozone countries bonds including the UK to the tune of €500bn.
Author
Topic: Britain will join the Euro before long says German Finance Minister (Read 5000 times)