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Euro Land May Face Full-on Bond Meltdown: Economist

Tuesday, 6 Sep 2011 | 1:56 AM ET

Sometimes a summer vacation can set you up for the autumn, allowing you some-hard earned rest to recharge the batteries before returning to the office, light of heart and confident about the prospects for the rest of the year.

Recession-themed newsprint cuttings
Recession-themed newsprint cuttings

That was clearly the case for Carl Weinberg, the chief economist at High Frequency Economics who hit the office on Monday night with the following words of cheer.

“We fear a global economic depression—less severe in North America—originating in Euro land’s sovereign debt crisis and banking sector fragility,” he said.

“This is now our baseline forecast. It includes near-zero interest rates and bond yields , at least on the safest sovereign credits. It includes flat prices, or outright deflation , and the highest unemployment rates the G7 economies have experienced since the 1930’s,” said Weinberg in a research note.

The reasons for this late summer cheer over at High Frequency Economics are as follows: the Eurpean Central Bank bond support operation is failing, plans to replace the ECB action with the European Financial Stability Fund are failing, governments are reneging on fiscal promises, and no TARP-like rescue is legally possible as the banking industry faces widespread failures.

“Money and credit are flat or contracting depending on the measure chosen,” said Weinberg.

“Even though interest rates are low, credit is unavailable to most borrowers," the economist warned. “Fiscal policy has turned austere in every Euro land economy…five Euro land economies, representing nearly one third of GDP of the zone, are in receivership.”

With Europe on the edge of a major financial crisis, Weinberg believes the only thing standing in the way of a bond market collapse is the ECB.

“ECB support for sovereign bond markets is the only thing preventing a bond market meltdown. We fear catastrophe is imminent, as no mechanism is in place to avert it,” said Weinberg .

“ECB bond support is a perilously thin thread upon which to hang the fate of Euro land’s financial system. The ECB did not buy bonds last week. This week, we expect it to resume purchases of all PIIGs' debt in size. If not, bond markets will collapse.”

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