Notes From Underground: ECB agrees to accept all dogs and junk

In an effort to ensure against a solvency crisis in the EU, the European Central Bank has agreed to accept all levels of Greek and other sovereign debt regardless of its investment rating. Greek debt that has been downgraded to junk status is being readily accepted at the ECB lending facility and no haircut on the value is being taken. The next step is for Trichet and company to actually start purchasing sovereign debt in what would be a move for quantitative easing. The ECB is not there yet but by accepting Greek debt as collateral, the ECB is one step away from total abdication of its role as the defender of the EURO.

The Europeans have waited so long that the ECB has had to adopt a bigger role and that certainly entertains the possibility that ECB credibilty could be undermined. We will say it again: German acceptance of any type of “bailout” can only be met with the appointment of Axel Weber as the next ECB president. It is time for Angela Merkel to flex her financial muscle and gain control of the monetary authority of Europe. The French enarques are nervous as the basic tenet of De Gaullism is experiencing its last hurrah. What will be the impact of the ECB’s act of capitulation? A weaker EURO down the road, but for the moment the market has beningly accepted the most recent effort at financial engineering.

The Brits go to the polls on Thursday and it appears that the Tories will win but have to form some type of governing coalition in what is called a hung parliament. Nick Clegg and the liberal-democrats seem to be in second position as the electorate is tired of the Labour party–similar to BUSH/Clinton fatigue in the U.S. Clegg has been making overtures to David Cameron about what compromises the LIBS need to make in a power-sharing agreement with the Tories. This pre-election negotiating is why we are not overly bothered by a hung parliament. In order to govern, both parties will have to compromise their rigid positions and the outcome often results in a more pragmatic set of goals. Britain needs to come to terms with its own fiscal profligacy and if tough decisions are needed, a coalition may be the best way to produce national support. Nick Clegg believes that the LIB-DEMS cannot coalesce with the Labourites for the country is just exhausted with all the years of Blair/Brown, and the Libs would not be forgiven for bringing Brown back to govern.

The market has been short of STERLING as a hung parliament was viewed as a negative. While we disagree with the assessment, we will let the price action of the market tell us whether we are correct. As we always caution, check your technicals and let your risk analysis be your guide. The sterling crosses may prove to be the best indicator so pay close attention to the relative value sterling relative to all of the developed world’s currencies.

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3 Responses to “Notes From Underground: ECB agrees to accept all dogs and junk”

  1. Jeff Carter Says:

    A hung parliament only delays the march of socialism. These guys never give up, and embrace the free market without a lot of social assistance.

    What we are seeing worldwide is that the productive class is unable to produce enough GDP growth to cover for the spending of governments-or, the productive class shuts down because the opportunity cost of production is far greater than the cost to not produce.

    I think there is a choice, follow the path to socialism-or wipe the decks clean. Ayn Rand.

  2. yra Says:

    hayek–road to serfdom.can’t quote Ayn Rand because of the taint of Greenspan

  3. apple407 Says:

    Does “Productive class” — mean Wall Street Bankers and all — ? Broad brush no longer works in our current environs. On the other hand, pin-pointing your targets can get you into troubles you won’t be able to get out of.

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