Why the ECB might want to back Spain. The Economist

WITH yields on Italian debt rising the euro problem is not getting better. It might be time for the ECB to make a bold move that even the Germans may approve of, albeit grudgingly.

Any solution to the euro crisis has to accomplish two goals: prevent a big country like Italy from failing because of illiquidity-turned-insolvency, and maintain the political pressure to reform and adjust so that this big country really is solvent in the future (see also Nick Rowe on this). Any commitment to support a country will be tested by markets and the more debt the ECB owns, the less negotiating power it has over the large country that will in this case be reluctant to continue its reform efforts.

In the case of Italy, there hasn't been much in the way of reform during the nearly 2 years of crisis. Spain on the other hand has shown quite a bit of resolve and is likely to elect another reform-minded government in the next election with an absolute majority.

Imagine the ECB were to announce publicly that if the Spanish government continued its reform efforts according to an independent IMF supervision, it would back Spanish debt in full from a certain point in time on (for instance a year from now depending on the IMF-approved reform plan) and will not tolerate yields above, say, 4% at that point. This target could be lowered to 3.5% after another year if the Spanish progress continues further, or increased if it doesn’t.

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