July 9, 2010, 10:52 a.m. EDT
IMF, ECB slug it out over European debt crisis
Commentary: Washington-based IMF right to still have concerns over Europe
By MarketWatch
LONDON (MarketWatch) -- In the polite world of international economics, the International Monetary Fund and the European Central Bank are engaging in the verbal equivalent of hand-to-hand combat.
The two organizations -- both led by members of the French establishment (Dominique Strauss-Kahn of the IMF, Jean-Claude Trichet of the ECB) -- are at odds at whether the European debt crisis is over.
The European Central Bank says, for all intents, it is. Greece has been drawing from a 110 billion euro ($139 billion) rescue package, and another 750 billion euros has been earmarked for any other country, be it Spain, Portugal or Italy -- that slides into the abyss.
The yield on 10-year Spanish bonds has been holding below 5%, the euro is on the mend, the maturation of the 442 billion euro one-year tender passed without incident and bank share prices have rallied since details of the European stress tests for July 23 have emerged.
The IMF says, not so fast.
European governments still have 300 billion euros of bonds they will need to refinance in the second half of the year, it says.
Banks are hoarding cash at the ECB, non-financial European corporates are largely absent from the bond market, the economic impact from the austerity measures rolled out throughout Europe still has to be felt, and it's unclear who will inject capital into banks that fail their stress tests.
The IMF has a point, and the market is largely siding more with the Washington-based organization than the Frankfurt-based one.
Yes, sovereign bond yields aren't as high as the worst levels of the crisis in May. But they are still pretty bad, and actually have been slowly but steadily increasing since the ECB began buying government bond debt.
Trichet was right on Thursday when he said market pessimism toward Europe was overplayed, and pre-stress test criticism by the IMF and others is overwrought -- any simulation assuming the European economy will contract by as much as 2% this year is pricing in a pretty severe stress.
Still, the IMF is asking very valid questions. And until bank and national government balance sheets are recapitalized, the market will be asking them too.