Op-ed: A patch for public debt

Yesterday sales of sovereign debt in Spain and Italy were finalized at significantly lower costs than predicted. Spain was able to raise twice as much than expected and raise eight percent of its annual capital requirements. Italy will pay fifty-four percent less for its 12-month notes. Can the savings be attributed to measures taken by prime ministers in both countries?

We do not think that is the case. It looks more like European Central Bank (ECB) sophistry at working. Even though Merkel is preventing the ECB from buying European sovereign debt, there was an obscure plan for how the banks could do so. Draghi offered the banks liquidity for three years so that they could buy sovereign debt that pays much higher rates of interest.

This move was an artifice to buy some time, but it strengthens the dangerous connection between the public sector and financial sector, which previously allowed unrestrained spending on both sides. In this way, solvency problems for both banks and national governments are not being addressed. But the greatest risk is that this closed circuit of cash will keep money from entering the real economy.

They will further privatize various business initiatives and not extend working capital to sustainable companies. We could walk into a liquidity trap simply because the money is there right now, but banks are not going to lend to companies because they have no expectation that the loans would generate returns. This patch has merely served to stop the wound from bleeding.

But a lack of capital flow could end up letting the patient bleed to death. A misdiagnosis on the part of European leaders could plunge Spain into economic stagnation comparable to what happened in Japan.