Bonds, Italian style

The ECB's new long-term funding scheme is a cunning plan worthy of Baldrick himself.   The so-called LTROs provide cheap financing for the Eurozone's banks, which can then invest the proceeds in sovereign debt at a much higher yield. This allows the central bank to fool Kanzlerin Merkel's voters into thinking that it isn't bailing anyone out; it backstops the sovereign debt market;  and it allows the banks to rake in profits on the spread between what they pay for the LTROs and what they earn on the government bonds, which can be used to rebuild their balance sheets.  Everyone's a winner --  provided of course that the sovereign debtors don't default.  Trebles all round, as Private Eye might say.

Banks enthusiastically hoovered up the first tranche of LTRO money earlier this month, and the past couple of days have provided the first test for the whole scheme, as Italy has come to market with several tranches of debt. Two issues of short-dated paper were well-received, with yields falling sharply from prior levels.  Then came a tougher challenge, in the form of two tranches of longer-dated securities that were issued on December 29 (not, one might think, the most auspicious timing). Here is how the Daily Telegraph website reported the outcome:  

Italy raised €7bn (£5.9bn) in the first big test of the bond markets since the ECB opened its doors with €489bn of cheap loans in an attempt to inject liquidity into Europe's arid banking system. Rome paid 5.62pc to sell €2.5bn three-year debt – a much lower yield compared to the record high of 7.89pc paid a month ago. It paid 6.98pc to shift its 10-year bonds, compared with 7.56pc in November.

The total amount raised in the auction fell short of the €8.5bn target and the cost was still deemed to be unsustainable. The yield on Italian 10-year bonds closed at 7.06pc – stubbornly above the 7pc level seen as signifying the need for a bail-out.

The auction doused the optimism that followed Wednesday's auction of Italian six-month bills when the borrowing costs were halved from a month ago. Analysts said the auctions showed the ECB's action had eased pressure on shorter-term debt, but investors were still wary of longer-dated bonds. 

Let's look at a couple of aspects of that report, starting with the now-obligatory reference to 7% yield "seen as signifying the need for a bailout". Obviously the sub-editor was short of space and cut that sentence down; it must originally have read "seen by lazy journalists as signifying the need for a bailout".  Let's get this straight one more time: even if Italy were issuing all its new debt at 7% yields -- which it isn't -- that wouldn't mean its overall borrowing costs were at that level. The cost of its earlier borrowings is unaffected by today's market yields.

At least one reputable study has been carried out in response to this 7% nonsense, and found that even if Italy had to carry out all its refinancings and new borrowings between now and 2014 at a cost of 8%, the added interest cost would still equate to only half of what Italy expects to save through austerity measures, so the fisc would be better off overall.  That very much gives the lie to the notion that Italy is facing an insolvency problem, rather than just one of illiquidity.  (I have no real hope that repeating these verities will stop journalists from getting it wrong.  Still, I can but try).

Turning now to the somewhat different reception of the short-dated and the longer dated debt this week, an explanation is readily apparent, but unfortunately it's one that suggests that the LTRO scheme may distort the Eurozone's bond markets even as it calms them.  Maturity mismatches -- financing long-term assets like bonds or mortgages with shorter-term liabilities like deposits (or LTROs) -- are the lifeblood of banking, but prudent bankers know not to overdo it.  (Example: Northern Rock blew up because the funding of its long-dated mortgage portfolio relied much too heavily on very short-dated wholesale deposits. When those dried up, the Rock was finished).

The LTROs have a maximum term of 3 years, and every bank that has taken advantage of the scheme can happily count on a positive outcome as long as it buys assets of a shorter term than that.  Hence the enthusiastic response to Italy's short-dated paper.  There is a risk that banks will find themselves rolling this paper over into new issues at a lower yield when it matures in six or twelve months, but that would simply reduce the spread they earn, not drive them into losses.

Ten-year bonds are a different question, however, because the banks can't be sure whether the LTRO scheme will still be in place when the first batch matures in three years time.  If things have stabilised and the ECB is no longer providing such funding, the banks will be faced with raising market funding at much higher rates -- conceivably higher than the yield on the bonds -- or with liquidating some of their holdings.  If a large number of banks choose the latter option, the price of the bonds could plummet, creating substantial losses.

The bottom line here is that the performance of the various Italian auctions this week may well have been driven by the LTRO scheme itself.  The first quarter of 2012 brings a lot of new issuance in the Eurozone, and if we continue to see short auctions doing much better than long ones, the ECB may have some thinking to do.  A very steep yield curve might tempt some issuers into shortening the average maturity of their new issuance in order to save money, but that would of course be risky in itself, if the debt crisis proves very protracted.

Wow,  this is a very long and serious post, considering most people are probably gearing up for their New Year's blowout!  Happy new year to all readers of the blog.    

Doing God, in London and Beijing

Tony Blair's lacertilian* press secretary, Alastair Campbell, once remarked that the Labour government "didn't do God", even though Blair himself famously did, often giving the impression that his most controversial decisions had been taken after direct talks with the Almighty.

The problem with God, of course, is that whether you "do" him or not, he never seems to give up and go away.  Especially at the Christmas season,  He seems to bring confusion both to those who would rather not acknowledge even the possibility of his existence, and to those who aren't quite sure what to make of Him. Thus, in The Times for December 26, we saw a quite remarkable juxtaposition of stories.

The main headline on the front page of the paper was 'Archbishop under fire for "political" riot sermon'.  The Archbishop of Canterbury, Rowan Williams, had chosen to use his Christmas Day sermon to link last summer's riots in London and elsewhere with the activities of City speculators: "The most pressing question we now face, we might well say, is who and where we are as a society.  Bonds have been broken, trust has been lost....Whether it is an urban rioter mindlessly burning down a small shop that serves his community, or a speculator turning his back on the question of who bears the ultimate cost for his acquisitive adventures in the virtual reality of today's financial world, the picture is of atoms spinning apart in the dark".

Just a couple of weeks ago, PM David Cameron, who by his own admission "does God" a whole lot less than Tony Blair did, had taken it upon himself to call for a return to Christian values in Britain, calling on Archbishop Williams's Church of England in particular "to help shape the future of our communities".  Dr Williams may well have intended his Christmas sermon to take up that challenge; if so, he will have been disappointed by the reaction.  Though the government itself has refrained from commenting, a Tory MP, Gary Streeter -- who is, rather surprisingly in the circumstances, a Christian himself  -- pronounced that "The Archbishop of Canterbury is on safer ground when he sticks to moral and spiritual issues. He would be wiser to leave the politics to the politicians and focus on giving us much-needed spiritual leadership". Turn that on its head and it reads remarkably like an admission that there is no morality in politics, which rather proves the Archbishop's point.

The rest of the media paid little attention to this spat, preferring to focus on the Duke of Edinburgh's stent and the Downton Abbey Christmas special.  The fact that The Times made it the lead story for the day perhaps permits us to draw the inference that the paper agrees that Dr Williams and his ilk should butt out of politics.  This makes the editorial that appeared on the very next page of the paper all the more surprising.        

The editorial was titled "Darkness at Christmas: China's communists appear intent on snuffing out the growth of Christianity."  This is, as you would surmise, a robust criticism of the Chinese government's attitude to the rapid growth in  religious practice in the country.   A couple of extracts will give the flavour: "The party sees religion, and Christianity in particular, as a threat because it worries about the existence of a rival organisation whose members have a different loyalty and are guided by priorities set by others".  And "The real problem for China, as it was for the Soviet Union, is the growing cynicism and spiritual vacuum in public life.  This makes it increasingly difficult to underpin standards of ethics or to enforce respect for social norms".

Substitute Britain for China in that last quote, and it would have slotted seamlessly into Dr Williams's speech, whereupon The Times would presumably have seen fit to refute it on the front page!  There is, of course, an explanation for this glaring inconsistency:  The Times is now by far the most pro-Cameron newspaper in the UK, and seems increasingly unwilling to brook any criticism of him,  even from the head of the established church.      

* You can probably guess, but if you can't....look it up!

It's not all bad news!

This was buried deep on the BBC website today:

"Retail sales volumes grew in December for the first time since May, the CBI has said, but were still considered weak for this time of year. The CBI's monthly Distributive Trades Survey found 41% of retailers had seen sales rise in the first two weeks of December, while 32% saw sales fall. The positive balance of 9% was better than had been expected.

However, the CBI warned that the uplift was not expected to last, with sales expected to fall again in January. Judith McKenna, chair of the CBI Distributive Trades Panel, said: 'Early discounting helped retailers add a little extra sparkle to their sales in December, although the reprieve appears to only be temporary as they don't expect sales to continue to grow into January.'"

You can almost hear the little wheels spinning in the spokesperson's brain as she tries to find a way to put a negative spin on a positive survey. The last part is especially good: "they don't expect sales to continue to grow in January"! Well, they didn't expect them to grow in December either, but annoyingly, that's exactly what just happened.

Meanwhile, Germany's Ifo indicator, a key signal of business confidence, just recorded a sharp improvement, which was reported in the UK media as -- guess what? -- a surprise. Spain sold a big tranche of debt today at yields way lower than at the previous auction. And the US economy is continuing to do much better than anyone expected, the latest positive indicator being a big jump in housing starts in November.

So take a break from all the doomsters and gloomsters, and have a happy Christmas. Thanks for reading the blog over the past year -- there have been visitors from places as far-flung as Iran and Paraguay. Please stop by again in 2012, because I'm sure we'll have plenty to talk about.

 Update, 21 December: John Lewis says its sales this month are running 10% above last year's levels....UK government borrowing in November was 10% down on November 2010....

Bette Davis on the death of Kim Jong-Il

This has been quite a year for the Grim Reaper, and it shows no signs of letting up just yet. In just the last few days he/she/it has claimed the lives of Christopher Hitchens and Vaclav Havel, both of whom have drawn well-earned tributes.

Today it's the turn of North Korea's Dear Leader, Kim Jong-Il, and the global response has been, let's say, a tad different. I'm reminded of the comment made by Bette Davis on the death of her hated rival, Joan Crawford: "You should never say bad things about the dead. You should only say good. Joan Crawford is dead. Good". That goes double for you, Kim!

Still, with the Reaper having already removed Usama bin Laden and Muammar Gadhafi from our midst this year, we can be sure that Kim is unlikely to be lonely in his new home.

Isn't it rich?

So, the ratings agency Fitch has downgraded seven of the world's biggest banks, including Citigroup, Barclays and Deutsche, saying they are "particularly sensitive" to the challenges faced by financial markets. Meanwhile Standard & Poors has the axe poised over almost the entire Eurozone -- which has prompted a bizarre attack on the UK by the French Finance Minister -- and the third of the Axis of Drivel, Moody's, is also on the rampage, firing off warnings in all directions.

Here's the question: why do these people matter any more? Just three years ago, their abysmal performance made it abundantly clear that they wouldn't recognise pig manure if they were showering in it and drinking it at the same time. Why does anyone think they've suddenly become omniscient? It's perfectly obvious to anyone with the intelligence of an amoeba that the world economy is in big trouble, so why do these dolts get to charge fees for telling us what we already know, and why do markets pay attention to them when they do?

Actually, the real question is this: why do these agencies even exist any more? Whether their failure in correctly assessing the blizzard of structured deals in the mid-noughties was the result of greed, ignorance or incompetence, it was surely a major contributor to the financial crisis that followed. Now they seem to feel their role is to pour gasoline on the flames of the next financial crisis, through a string of crassly mistimed announcements.

Send in the clowns? Don't bother, they're here.

Anti-social behaviour -- now it's Canada's turn

First it was David Cameron flipping the bird to the EU, by refusing to go along with plans to revise the Lisbon Treaty in order to deal with the Eurozone debt crisis. (Great line from Ed Miliband, by the way: "It's not a veto if the thing you're trying to stop goes ahead without you. That's called losing".)

Now it's Canada giving an "up yours" to the world, announcing that it will withdraw from the 1997 Kyoto Protocol on climate change, rather than pay the $14 billion (yes, really!) in fines it has racked up by not meeting its commitments under the Treaty. (Story from The Independent here). The timing, just a day after the new Durban climate change agreement, looks bizarre, but in fact it is this new deal that has given Canada a figleaf of cover for its withdrawal from Kyoto. It claims that Kyoto never stood a chance of working because of the lack of enthusiasm from the US and China, the two biggest carbon emitters, whereas the Durban agreement stands a much better chance of being effective.

Truth to tell, the main attraction of the Durban accord for Canada is that it is not due to come into force until 2020, giving the country eight years to find a new set of excuses for non-compliance. Although the US and China create far more atmospheric carbon in the aggregate, Canada is probably the worst offender in the world on a per capita basis. Canadians drive big cars over long distances and tend to shun public transit in the cities, and the extreme climate requires huge amounts of energy use for heating in the winter.

Over the past decade, however, the biggest driver of a huge increase in carbon emissions (and in water wastage, another bone of contention for environmentalists) has been the rapid expansion in extraction of oil from the tar sands in Northern Alberta, in response to surging demand from the US. Because the tar sands are in a remote location and are frozen for much of the year, extracting the energy from them and getting it to market is itself a highly energy-intensive process. There is no realistic chance of any slowdown in tar sands activities over the next ten years -- Alberta would walk away from the Canadian confederation in a heartbeat if the Ottawa government attempted to force the issue -- so any warm words about the Durban deal should be taken with a bushel of salt.

Interestingly, the Canadian media are treating the Kyoto withdrawal in a very low key fashion, with even the heart-on-sleeve Toronto Star barely raising a peep. Just as surprising is the reaction of Independent readers to the story linked above. Judging from the comments, even the left-leaning Indy types are a bit jaded with the whole climate change thing. Environmentalists will have to ask themselves whether that's a natural consequence of the economic and financial crisis, or whether, just maybe, it has something to do with all the dubious data fiddling that scientists have resorted to in their zeal to prove that climate change is man-made.

London Olympics: unsportsmanlike conduct

If I haven't had a rant here about the 2012 London Olympics for some time, it hasn't been for any lack of provocation. The Games organisers ("LOCOG") continue to do infuriating things on an almost daily basis. Just in the last couple of weeks....

* A charity that had hoped to raise money by raffling tickets for the Games has been ordered to take the tickets back from the winners and return all the money it had collected. Spivs all over the world are dealing in the tickets at great profit, but LOCOG sees fit to stop a local charity from using them to raise some much needed funds. Considering that vast amounts of National Lottery funding has been diverted into the Games, at the expense of a large number of good causes, that's simply obscene.

* And speaking of obscene, the Government has agreed to allow LOCOG to spend an extra £40 million on the opening and closing ceremonies, which will now cost £80 million (including the Paralympics, which follow the main Games). For heaven's sake -- the ceremonies are basically a giant and tedious parade of athletes, most of whom would rather be resting up for their events anyway, followed by a big fireworks display. Apparently David "No Mates" Cameron saw the initial plans and felt that unless more money was thrown around, the ceremonies would not show the UK in the best possible light. Whereas, of course, his impetuous decision to veto the new EU treaty has won us a lot of new friends.

* It's being reported that LOCOG is planning to spend £15 million on food and drink for the international Olympic bigwigs during the Games. The on-site entertainment centre alone will cost as much as £5 million, and will no doubt be demolished as soon as the last canape and glass of Krug have been downed. At least we now know why half the main roads in London will be closed off so that the "Olympic family" can be shuttled around in limousines. These guys and gals are all going to be so stuffed and pickled that they'll barely be able to walk.

Lastly, and just in case you had forgotten the real purpose of these Games -- to allow a bunch of toffs to impress their foreign friends by spending unthinkable amounts of other people's money -- we have the news that Pippa Middleton is in negotiations to play some role at the Games. Ms Middleton is undeniably decorative, but her value to a sporting event, even one as overhyped as these Games, is hard to discern. Here's a suggestion, though. She could walk into the Stadium as part of the UK team -- bringing up the rear, obviously.

Cameron: stupide Dummkopf!

Evidently my previous posting greatly overestimated the strength of David Cameron's backbone. In making the UK the only one of the 27 EU members to reject outright the idea of a new Treaty (though three other countries have taken it under advisement for the time being), he has certainly delighted his Eurosceptic Tory colleagues. The rest of us, however, have precious little to be happy about.

Just consider the bare facts. The UK has a higher public sector deficit than any other country in the EU, aside from Greece. It has lower growth than most EU countries, but higher inflation. This doesn't sound like a very strong platform for "going it alone".

And why has Cameron taken this risk? It's to protect the UK's financial sector, which is by any measure the most bloated in the world. UK bank assets amount to more than 500% of annual GDP, far higher than for any comparable developed economy. In the US, for example, the ratio is closer to 100%.

Much of Europe believes, with considerable justification, that the financial crisis is largely the result of unregulated and unproductive growth in financial "services", with the City of London at the root of the problem. There have been times when the UK government has appeared sympathetic to this analysis, but evidently the Tories are not prepared to do anything that might jeopardise the huge tax revenues that the City currently provides. More than 10% of total UK tax revenues come from the City. That's a lot of money. Of course, it's just a fraction of what the financial crisis has cost the UK in the past three years, but evidently Cameron and his xenophobic cronies are choosing to ignore that side of the picture.

We can only hope that the UK banking system never needs to be rescued, because after last night's debacle in Brussels, it's hard to see who would come to Britain's aid.

With friends like these...

Charles de Gaulle, be he watching proceedings from Heaven or from Hell, must be chortling to himself: "J'avais raison. I always knew it would be a mistake to let the British into the EU".

UK Prime Minister David Cameron has lost no opportunity over the past three months to tell the Eurozone that it has to get its act together to save the Euro, and BE QUICK ABOUT IT!! He was so insistent that at one summit, President Sarkozy lost his Gallic cool (well, he is part Hungarian) and snapped to Cameron "You have missed a perfect opportunity to shut up".

Now that there are signs that the Eurozone countries really are moving toward a more durable deal to reform the way the single currency works, what's Cameron's reaction? He's delighted, relieved and supportive, right? Wrong! His first reaction has been to threaten to veto the deal unless "essential" UK interests (as defined by the UK itself) are protected.

President Sarkozy and Chancellor Merkel must be bemused and infuriated by this, but it plays well with the Eurosceptic wing of Cameron's own Conservative party, the kind of knuckle-dragging xenophobes who often manage to give the impression that they think the ghost of Hitler still stalks the halls of the Chancellery in Berlin. These people's political idol, Margaret Thatcher, supported UK entry into the EU at the time, but the party has since become a lot more hostile to the European "project", egged on by much of the tabloid press, which likes nothing more than a chance to bash Johnny Foreigner, especially foreigners of a German or French persuasion.

Cameron is being forced to walk a thin line between indulging this kind of xenophobia and following what still appears to be his main instinct, which is to offer as much help as possible (though no UK taxpayers' money) to those within the EU who are trying to sort out the crisis. The Europhobes want at a minimum to use the crisis to "bring powers back from Brussels" (though they're notably vague on which powers these might be); ideally, they would like to force a fresh UK referendum on the UK's entire membership of the EU. Cameron's initial goals, in contrast, are to see a solution to the Eurozone debt crisis take shape, and to preserve the free market in goods and services that is the EU's main raison d'etre. He is probably right to judge that the Eurozone will be much more willing to accommodate British concerns if the UK is helpful at this moment of crisis, whereas his right-wingers seem to want to give the wounded beast a good kick in the privates, and to hell with the longer-term consequences.

Non-UK readers of this blog (thank you for coming by!), who may be puzzled at this hostility, may like to ponder the usual mass media reaction in the UK whenever England prepares to play Germany at football. Pictures of Prussian helmets appear on the sports pages, along with phrases like "the old enemy" and slogans like "two world wars and one World Cup". It's bad enough that people on the football terraces can still be egged on in this way; the fact that a great chunk of today's Tory party appears to think along similar lines is truly depressing. There must be many moments when President Sarkozy wishes that President de Gaulle had won the argument all those years ago.

You're having a Laffer

Bank of England Governor Sir Mervyn King has come under fire for the gloomy assessment of the economic outlook that he delivered this week, but he's got nothing on the media, who are lining up to bombard us with "things can only get apocalyptic" features. Case in point: today's Sunday Times has a two-page Focus special (paywall-protected), with a zillion-point headline reading "By George, we're in trouble!".

Most of the content is not worth bothering with, on a Sunday when most of the media are giving wall-to-wall coverage to two giant pandas arriving in Edinburgh. (Non-UK readers: I kid you not). However, I was struck by a comment from the right-wing Tory grandee, David Davis, who proposes a very specific cure to the nation's ills: abolition of the 50% top rate of income tax.

Passing swiftly over the question of whether there's ever a time when David Davis would not favour reducing taxes on the wealthy, let's take a look at his logic. He asserts that it's "plain as a pikestaff" that the 50% rate is costing the Treasury money, because it encourages the better-off to take more tax avoidance measures. As evidence, he cites the fact that income tax revenues increased back in the 1980s, when Margaret Thatcher's government cut the top tax rate from 83% to 40%.

The view that lower tax rates will tend to produce higher revenues is often illustrated using the so-called Laffer curve, named after a Reagan-era US economist who supposedly first drew it on a napkin in a Washington restaurant. The graph plots the total tax take on the x-axis (that's the horizontal one, for the non-mathematical) and the tax rate on the y-axis. This article on wikipedia is accurate and comprehensive.

Without doing any research, we can safely assert the positions of two points on this curve. At a tax rate of zero, or at one of 100%, no tax will be collected, in the latter case because nobody would work if they got to keep none of the proceeds. Between those points, though, it's all to play for. Laffer, and presumably also David Davis, want to believe that the total tax rate starts to turn lower as soon as tax rates reach a moderate level -- Davis, evidently, is thinking the point of diminishing returns is a rate of less than 50%. However, as the wikipedia article points out, some of the academic evidence suggests the rate that maximises revenues might be more like 65%. If this is the case, then it's no surprise to find that the Iron Lady's cut from 83% to 40% boosted the government's take. However, it's quite wrong to use that example to assert that a cut from 50% to 40% would have the same effect today.

Leaving all that aside, you have to wonder how David Davis would seek to square a top-rate tax cut with the government's "all in this together" mantra, though presumably a man who employs similes about pikestaffs may not be a natural supporter of the "Big Society" anyway. If Davis has any evidence that a lower tax rate would induce tax exiles like Lewis Hamilton or Sir Philip Green to start contributing more to the British exchequer, he should feel free to produce it, but otherwise this all just sounds like a standard Tory whinge, and at a most inappropriate time.

Coming back briefly to the Sunday Times, one corner of today's two-page armageddon story was given over to a box containing three possible scenarios for the coming months, written by the economics editor (and blogger), David Smith. The three scenarios are each awarded a probability score, on an "X out of 10" basis. Why don't you count along on your fingers as I go through them? The "grim" scenario has a probability of 7 out of 10. The "Goldilocks" scenario: 5 out of 10. And Armageddon: 4 out of 10!

I don't know about you, but I ran out of fingers about half-way through the Goldilocks scenario. David Smith is a good and logical writer and it's very likely that those scores were assigned by the sub editors. Still, as a sign of chronic innumeracy in the business press, that's hard to beat.

Handbags at ten paces!

Britain's favourite rent-a-gob, Jeremy Clarkson, got himself into hot water this week by declaring on national TV that public sector strikers "should be shot". Then to emphasise the point he reiterated that they should be "executed in front of their families". The public sector unions were incensed and threatened legal action. Clarkson, to his credit, realised the offence he had caused and offered an apology, which the main union involved, Unison, appears to have accepted.

These days, such a spat would be inconceivable without an accompanying battle of words on Twitter. Sure enough, Clarkson was a trending topic there throughout Thursday. By my entirely unbiased reckoning, the "Clarkson is a thoughtless oaf" tweets marginally outnumbered the "don't you lefties got no sense of humour" postings.

One person who threw in his two cents' worth was the only man in the UK who may be more widely disliked than Clarkson: the TV "personality" Piers Morgan. Piers, whose tweets always seem to suggest that he is under the profound delusion that people actually like him, tweeted something to this effect: "Leave Clarkson to me. I owe him a slap".

Well! There's a fight I'd certainly pay to watch, while hoping for the same outcome as you'd want in a battle between Iran and North Korea: "Please, God, can't they both lose?"

Irrational expectations

Financial market theorists, or at least capitalist ones, profess to believe that the market prices of securities, either equity or debt, reflect a distillation of all market participants' knowledge about the state of the world and prospects for the future. This viewpoint, known as the efficient markets hypothesis, has become very hard to sustain this year, as global markets have oscillated wildly, often in response to little or no new information. Investors have been behaving less like the rational players that the theory demands, and more like schizophrenics who just dropped some bad acid.

Consider recent events relating to the Eurozone crisis. Wednesday's coordinated move by the major central banks to free up dollar liquidity was certainly a Big Event, but most pundits were quick to point out that it was no more than a sticking plaster, with the fundamental causes of the crisis still to be addressed. So how come stock markets rallied so massively? How come France and Spain have today been able to issue bonds at much lower interest rates than would have been the case a couple of days ago? If we rely on financial markets theory, those developments surely suggest that investors see the central banks' action as more than just a palliative.

In contrast, look at how markets have reacted to events that really might portend fundamental change. Over the past month, governments have fallen (or been voted out) in Greece, Italy and Spain, in each case to be replaced by new regimes committed to pushing through the reforms that the markets (and Frau Merkel) seem to be demanding. Markets wasted no time delivering their reaction to this news, in the form of further enthusiastic selling that has carried secondary market bond yields to new Euro-era highs.

One explanation that has been offered for this apparently irrational behaviour is that investors have realised that austerity might make it harder rather than easier for indebted countries to meet their obligations. This is very much the lesson that can be drawn from the experience of Italy, which has consistently maintained a primary budget surplus (government revenues in excess of spending other than interest payments), but has seen its debt/GDP ratio swell as a result of persistently low growth. Canada's escape from its debt problems in the 1990s is the flipside of the same coin: it was growth that fixed Canada's ills, not austerity. Even so, it would be a brave country indeed that tried to test investor sentiment by announcing a "go-for-growth" strategy as a means of getting out of debt.

Reverting to this week's coordinated central bank action, it seems reasonable to suggest that the positive reaction of markets reflects relief that at least someone was taking action to address a situation that, it seems, nobody fully understands. That reaction suggests that it would still be possible for Eurozone leaders to reassure markets and stabilise the situation, if only they could bring themselves to agree on a strategy, rather than perpetually bickering and procrastinating. We should all hope that they get on with it.