Here's Why Roger Altman Is Wrong About How The Markets Forced Austerity On Europe

Evercore chairman Roger Altman was on CNBC this morning arguing that austerity in Europe was not a "choice" but rather something that was forced onto countries by raging credit markets that were rebelling against high debt loads.

This is incorrect, and provably so.

Here's a chart going back 3 years of Italian borrowing costs (the yield on the 10-year Italian bond).

There were two big peaks in the country's borrowing costs. The first was in late 2011, and the second was in summer 2012.

Something important happened at both of those peaks: The European Central Bank stepped up and began to backstop the entire Eurozone financial system.

First, in late 2011, the ECB announced its 3-year LTRO program, which was a scheme that let banks pledge all sorts of collateral in exchange for cheap liquidity. These massively eased strains on the banks. Borrowing costs then fell sharply.

Then in mid-2012, Mario Draghi announced the OMT program, which is a promise to backstop government bond markets in exchange for outside budget oversight. Borrowing costs fell sharply again, and now Italian borrowing is at record lows.

So we can trace the two peaks of Eurozone debt stress directly to two times the ECB intervened. Austerity has had nothing to do with the improvement in borrowing costs.

This point can further be proven by making two additional observations. Italy replaced its Prime Minister in late 2011, booting out Berlusconi and introducing the reformist Mario Monti, who had the political clout to introduce austerity. But obviously that swap did nothing, as borrowing costs surged through the summer of 2012, before the ECB intervened in 2012.

And then furthermore, there's been a big backlash lately against austerity (in France, in Italy, etc.) and the markets haven't moved at all, and the reason for this is because the ECB is there, ready to stand backstopping governments.

So this is not about markets. This is about ECB actions. When the ECB stepped up and performed the role of other big central banks (Bank of England, the Fed, Bank of Japan) and started backstopping the system, the debt crisis went away. Cutting spending had nothing to do with it.