The global markets were on the verge of a failed rally when a news story broke about the resignation of Bini Smaghi. In my mind this is a very significant event as it portends the beginning of a major deal on EFSF funding in the works. WHY? Two weeks ago it appeared that Mr. Berlusconi had castrated President Sarkozy by reneging on an agreement for Mr. Bini Smaghi to resign his ECB position once Mario Draghi assumed the Presidency of the ECB. If SMAGHI retained his seat it meant Italy would occupy two key positions in the ECB and France would have none. Sarkozy supported Draghi only on that basis that the Bini Smaghi seat would go to a Frenchman.
However, Berlusconi did not force the issue and the French were left without a seat on the key policy-making board. Sarkozy was furious and the criticism and pressure increased on the Italians and Berlusconi. Now, after all the acrimony and the pressure on Italian debt, Bini Smaghi is resigning and heading to Harvard. This is Europe and nothing is done without a quid pro quo: THERE HAS TO BE A PAYOFF.
Has a back room agreement been reached to greatly enhance the credit power of the EFSF? What has been promised to Germany to get movement on the increasing the firepower of the ECB as the lender of last resort? Many questions are left unanswered but if you look at the CHARTS the rally in the EURO and risk on indicators all turned when the Smaghi announcement became headline news.
This is an extended weekend because of Veteran’s Day in the U.S. with BOND and CURRENCY markets closed as it is a bank holiday. This is not a conspiratorial view but a tip of the hat to the realities of the home of Machiavelli. The pressure on EUROPE to resolve its current crisis is building as the world worries about contagion. Some plan is in motion so I urge that attention be paid to the risk-on paradigm.
***Jefferson County, Alabama declares bankruptcy. It is the largest municipal bankruptcy in U.S. history and is the result of its financial advisors putting it into a derivative contract that incurred great loses. The county tried to get inventive and used derivatives to fund a sewer project. In an effort to save money, the Wall Street-induced derivative plan blew up and cost the county an enormous amount of money. How many more of these funding plans exist and will Merdith Whitney be proven right? The problems in the U.S. are immense which is probably why the EURO is still higher on the year against the DOLLAR.