Pater Tenebrarum's Blog

First of all, there is of course the 25 basis points rate cut, which immediately sent all key Euribor rates down sharply. First off, it should be stressed that in spite of the adverse reaction in 'risk' markets to the ECB announcement yesterday, the ECB has in fact taken very significant steps designed to bring the liquidity gusher to bear and ease the banking system's funding pressures.

Before launching into the chart update, here are a few items that caught our attention. One was a Reuters report that European central banks that are members of the euro-system are quietly planning for a 'shock' that could lead to a break-up of the currency union.

As Reuters reports, the EU financial and economics commissar Olli Rehn has let us in on his current crisis appraisal, specifically the time line he now envisages as crucial to arrive at a 'solution' (we could also call it the bazooka production deadline). Only ten days are separating us from Armageddon it seems.

Yesterday, we were struck by the increasing convergence of the views of various market observers as to the outcome of the ongoing crisis. It seems now widely accepted as almost a fait accompli that the euro will disintegrate within weeks. Even Jim Cramer (euro bears please take note…) is now on 'Defcon 3', predicting imminent 'financial collapse'. The Economist writes 'Unless Germany and the ECB act quickly, the single currency's collapse is looming'.

If one considers the euro area debt crisis properly, it should be clear that it is not – at least not yet – a currency crisis. It is a sovereign debt crisis combined with a bank solvency crisis that has the potential to become a currency crisis.

Both inter- and intra-market correlations have lately become extremely pronounced. In the stock market it has become very difficult for investors to produce 'alpha', this is to say outperformance based on judicious stock picking.

It is becoming difficult to keep track of the many fires that are now burning in the euro area's banking landscape. Not surprisingly, EU president Barroso now speaks of a 'systemic crisis' being faced by the euro-area.

What happened on Tuesday in the euro area's sovereign debt and associated markets has probably set alarm bells ringing everywhere. Considering yet another day of widespread carnage in euro area sovereign debt, it was almost comical to see the US stock market rising following comments by the Fed's über-dove Charles Evans.

We want to return to a theme we have recently discussed in these pages, namely the allegedly exhaustive hypotheses regarding the possible solutions to the euro area's problems that are regularly presented to us in the media.

There once was a time when the science of economics – based on sound reasoning - concluded that economic liberalism was the best way to achieve lasting and growing prosperity. Classical economists may have been stumped by the theory of value, a problem satisfactorily solved by Carl Menger in the 1870's, but on the whole, their teachings were conducive to the adoption of free market capitalism. This ushered in an age of unprecedented capital accumulation and prosperity.