How Do We Break The Positive Feedback Loop / Contagion?
While waiting for the German vote on the Greek bailout package on Friday and the ECB meeting on Thursday, equity markets and peripheral bond markets are in free fall. The moves count as serious contagion, with risks for the eurozone economy as a whole. This now has all the hallmarks of a self-fulfilling crisis. If this sell-off is allowed to persist it will get increasingly systemic with the bank channel the biggest risk. While Greece alone would not bring down the system, there is a real risk that it may be the fuse. If governments stood behind the banks, who stands behind the governments? The likelihood of ECB quantitative easing must be increasing. But would that seed the demise of the hard-won credibility of the ECB, the rock of the euro? That, it would seem, is the direction we are heading, whether we be keen to test the idea, or are just sliding toward it under a momentum no one can act alone to stop. How do you break the positive feedback loop? Well the ECB could again go down u
