Nov. 16 (Bloomberg) -- Europe has as little as days or weeks to act to avoid a default by a euro-region country, Citigroup Inc. Chief Economist Willem Buiter said today.
“Time is running out fast,” Buiter said in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “I think we have maybe a few months -- it could be weeks, it could be days -- before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging down the European banking system and North America with it. So they have to act now.”
Inaction by Europe’s leaders and resistance from the European Central Bank to expand purchases of government bonds raised the prospect of contagion to so-called core euro nations such as Finland and Austria. Italy’s 10-year-bond yield opened today above the 7 percent threshold that prompted Greece, Ireland and Portugal to seek bailouts.
Yields on Spanish five-year government securities today reached 5.82 percent, the highest since before the euro was created in 1999. Bonds issued by countries from Finland to Austria slid yesterday, driving up their premiums over benchmark German securities.
The European Central Bank bought larger-than-usual sizes and quantities of Italian debt today, said two people with knowledge of the trades, who declined to be identified because the deals are private. A spokesman for the central bank in Frankfurt declined to comment.
Buiter said the ECB is reluctant to purchase sovereign debt directly.
“They consider central banks purchasing sovereign debt outright to be like swearing in church,” he said. “It’s just not done.”
Absent increasing the size of the European Financial Stability Facility, Buiter said the ECB is the only channel for assisting the euro area.
“They may have to hold their noses while they do it, but if they don’t do it, it’s the end of the euro zone,” he said. He added that the ECB rejects a role as a lender of last resort for sovereigns.
“They just are a central bank that prefers to fight with both hands tied behind their back,” Buiter said. “If they just let go of one that would be enough.”
The cost for European banks to fund in dollars rose to a three-year high, according to money-market indicators. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 123 basis points below the euro interbank offered rate at 12:50 p.m. in London, from minus 119.5 yesterday, data compiled by Bloomberg show. That’s the most expensive funding level based on closing prices since December 2008, when the measure reached minus 145.
--Editors: Kevin Costelloe, Carlos Torres
To contact the reporters on this story: Cheyenne Hopkins at Chopkins19@bloomberg.net; Thomas R. Keene in New York at firstname.lastname@example.org
To contact the editor responsible for this story: Christopher Wellisz at email@example.com