NEW YORK (
) -- The
latest coordinated central bank action to ease liquidity problems in Europe has been welcomed by the markets as a sign that more aggressive global policy intervention might be in store.
But market analysts say there is no easy way out of the sovereign crisis, which will likely have a lasting effect.
Some have even more dire predictions. James Dailey, portfolio manager of Team Asset Management says central banks in their increasing willingness to ease liquidity and the sovereign debt crisis in Europe are risking inflation and an eventual currency crisis.
According to the analyst, the latest coordinated action is a tipping point that suggests that global central banks will make more an effort to stem the crisis. "It does not make sense that they would do this coordinated effort and do nothing else," said Dailey. "Most of the major central banks and governments are set for more stimulative action. They want to stimulate and inflate their way out of their debt."
On Wednesday, the Fed, along with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank, agreed to "lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points. The central banks also "agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant."
The effort was targeted at easing the funding pressures facing European banks, but analysts contend that it
does not really help lower the high yields on sovereign debt.
"It doesn't solve the overall problem," Robert Pavlik, chief investment officer with Banyan Partners in New York told
. "Even if they are able to stabilize the banks in Europe, they're almost prevented from lending because of capital requirements, the unwinding of assets and the austerity measures. It'll be like what we saw in the U.S. a few years ago where they got cheap money but never lent out any of it."
Jim Paulsen of Wells Capital Management says he expects the sovereign debt crisis to shift from one of "imminent calamity" to "a chronic problem". "The crisis will be with us for years. The U.S. was still writing off Brady Bonds in 1992 ten years after the
Latin American crisis."
But he, like other analysts, says the central banks might be getting ready for a period of further monetary easing as they look to help Europe out of its crisis.
"Easy policy is necessary globally in order to make it easier for Europe," says Marc Pado, market strategist at Cantor Fitzgerald. "You can't have a slowdown in China or India. You need the big powers growing so that Europe has someone to sell to. It is very important for it to grow out of the crisis."
Central banks have little trouble justifying the monetary easing for now as inflation concerns in the market remain at bay. "The markets have created a perverse incentive for central banks to continue printing money. The whole term bond vigilantes is a farce" says Dailey noting that the countries that have been printing the money the most have the lowest rates on their 10-year bonds. "There is no limit to the printing presses as long as countries can finance debt for 10-years at rates less than 2%. "
According to Dailey, the continued efforts from the central banks to ease the sovereign debt crisis will simply shift the crisis to the currency markets. "The problem can't be wished away. Just the nature of the problem changes," he said. "Just like the private sector deleveraging took two-to-three years to shift to the public sector balance sheet, I think we could see a currency crisis in a year or two."
Dailey expects Japan to be next in line for a crisis and is shorting the Japanese yen.
--Written by Shanthi Bharatwaj in New York
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