Notes From Underground

The ECB performed to expectations today and left EURO interest rates at 1%. In Trichet’s post-meeting Q and A, majority of questions from the media mainly concerned Greece and Portugal. In an answer to Stefan Ruhkamp of the Frankfurter Allgemeine Zeitung, the ECB made his views clear:

“I have already said what I have to say as regards our own position. No government, no state must–can expect from us any special treatment. We have our own rules and we will apply our rules without special treatment of any kind.”

The problem of help is not a real issue. Belonging to the EURO area, you are helped because you have an easy financing of your current account deficit. You share a currency, which is credible, so you have a level of financing that corresponds to a credible currency. So the problem is not help. THE PROBLEM IS TO DO THE JOB, to take the appropriate decisions. That is what is at stake. As expected, the German/Greek spread widened another 20 basis points to 276 and the German/Portuguese spread widened 11 to 86 basis points.

ASIDE: Tonight there are rumors in Asia that German Chancellor Merkle is going to resign. There is about as much chance of that as Greece meeting its new budget promises, but the EURO has sold off on the rumors. We think that is just markets looking for a reason and the rumor has ZERO validity.

Europe is dominating the NOTE tonight as we have follow up to the Renault story. Neelie Kroes, the European competition commissioner, was very unhappy with the French announcement blocking Renault moving auto production to Turkey. Kroes said that the French assured her in their February 2009 loans to auto producers that the money would not be used as leverage to direct manufacturing policy. It should be known that the French government is Renault’s largest shareholder with 15 % of its stock. Kroes went on to explain that she and the Commission were opposed to financial aid to the automakers for the fear that they would set conditions to keep jobs in the country.

“Economic nationalism risks setting off a spiral of retaliation that would make the crisis 10 times worse and destroy any chance of recovery,” Kroes said.

The theme tonight is overwhlemingly Europe for good reason: The EURO has brought the spotlight onto itself with its threat of default by the PIIGS. Throw in the intransigence of the Germans and the chauvinism of the French and it is becoming a financial mess. Finishing up with this we wish to point out an article in tomorrow’s Financial Times by Simon Tilford, chief economist at THE CENTER for European Reform. He writes about the need for tough fiscal rules but he also maintains that there must be limits on eurozone current account surpluses and deficits. Calling for a fiscal union, hence a real and full political union, “would involve the ‘stronger’ economies transferring money to the ‘weaker’ ones on an ongoing basis … no one appears to want this, least of all the ‘strong’ currnecies.” This is a wonderful summation of the mess that Europe has created. The Ultimate question becomes, WILL THE GOOD BURGHERS of BAVARIA send their hard earned EUROs to bail out the profligate PIIGS?!

To end tonight, we are putting out for thought and concern the rising battle on the Arabian peninsula between the Saudis and the Yemenis. Keep this on your radar screens as it has severe consequences for the Saudi Royal Family and the stability of the Middle-East oil production facilities. As this situation heats up, we will be looking at the ramifications on currencies,commodities and of course, GOLD.

Tags: Euro, Gold

This entry was posted on January 14, 2010 at 10:34 pm and is filed under Currency. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.