The Wall Street Journal published an interview this morning with German Finance Minister Wolfgang Schäuble. Since Germany holds the purse strings, his comments are important. Two potentially positive developments are included in the interview. The first relates to trying to calm markets in the short-term:
Mr. Schäuble acknowledged that Europe might have to take short-term action to stop the exodus of private-sector capital from the region’s bond markets and said there were a number of instruments that could be used, including direct purchases of government debt by euro-zone bailout funds—the European Financial Stability Facility and the European Stability Mechanism.
The second relates to longer-term solutions:
Mr. Schäuble said Germany could agree to some form of debt mutualization as soon as Berlin is convinced that the path toward establishing centralized European controls over national fiscal policy is irreversible. That could happen before full implementation of treaty changes.
Any program that buys Spanish and Italian bonds leans bullish for risk assets. However, the question of firepower may arise soon thereafter. The markets are not confident the European bailout mechanisms have enough capital to calm bond markets the size of Spain’s or Italy’s.