Fiscal cliff dangers

ON ASSET ALLOCATION

Risk assets have reacted strongly since ECB President Mario Draghi's comments to do "whatever it takes to save the euro" and July's better than expected US employment data.

The potentially more aggressive stance indicated by the ECB – primarily buying short-dated sovereign bonds in the secondary market following a request for EFSF/ESM funding - could represent a significant step in European efforts to tackle the sovereign debt crisis. This is because (i) the ECB is the only institution with sufficient firepower to tackle the debt crisis with any credibility and it had seemed reluctant to step into bond markets again; (ii) the size of EFSF/ESM funds would be less of a constraint; (iii) moral hazard risks diminish since countries will be faced with stricter c...