There has been one change since Draghi’s infamous boast of July 26th. The ECB has adopted the policy of debt monetization for its failing members. In the short term, this has lessened eurozone risk and caused assets linked to the eurozone to rise in value.
What hasn’t changed is the reality of European government finance. Several basket cases cannot finance themselves. One basket case, France, is currently masquerading as a stable country and looks set to join the others.
The Eurocrisis ebbs and flows. In May and June, it looked like we were heading for an imminent disaster. Today, the mainstream media portrays the situation with hope because market prices for the euro, Eurozone banks and some sovereign debt have improved.
Do not be fooled by the market. Greece needs a third bailout. Spain and Cyprus need their first bailouts. The crux of the problem is the PIIGS need foreigners to buy its debt, because they cannot finance themselves exclusively with domestic sources. The ECB may be able to print to finance in the short-term, but this program will ultimately fail unless foreigners enter the market for PIIGS debt.
Will foreigners enter the market for this debt? Those countries are still broke, and their finances are getting worse. There is still the potential for reversions back to the national currencies. Additionally, the ECB says that it does not have seniority on its purchases, but it does not have a legal basis for seniority on prior purchases yet there it is.
The Eurozone will come to an endgame with a crisis event. Just because the realists do not have the timing right is no reason to discount their warnings.