The only institution with enough money to bail out the PIIGS is the European Central Bank. The threat of a domino effect is increasing.
By treaty, the ECB is not allowed to buy the debt of governments. It gets around this by lending to banks that buy government debt. But the bankers are beginning to panic. Why should they buy PIIGS debt, and borrow money from the ECB to load up?
The ECB is stuck. There is a huge bank run going on: not just from one or two banks, but from entire nations’ banks. This is why rates are soaring. The rich are selling national bonds, moving their money to German banks, and letting the domestic PIIGS banks and governments swim for shore.
There is no shore.
The Keynesians are calling for the ECB to inflate. Here is a typical article promoting this. But how can it do this? It has to buy assets. Like what? It cannot legally buy government bonds directly.
Then the light dawns! Let it buy bonds issued by the International Monetary Fund. The IMF can then lend this money — buy bonds — to PIIGS governments. They can continue to pay interest to the banks. The system is saved!
Then one of two things happens: (1) prices rise or (2) banks stop lending and put excess reserves with the ECB. Then Europe turns into Japan or the USA: no price inflation but no growth — maybe recession.
This IMF strategy is a flim-flam. It was what the treaties promised voters would not happen. Suckers!