Notes From Underground: Juncker Bonds, Eurospeak for Junk Bonds

The biggest story making the rounds is the op-ed in Wednesday’s Financial Times by two European heavyweights: Finance Ministers Giulio Tremonti of Italy and Jean-Claude Juncker of Luxembourg. In the FT piece, they argue for the ECB and Ecofin to get behind a push for a EUROBOND that is backed by the entire Eurozone and guaranteed by its coffers. While a good idea in theory, the Germans immediately said NEIN to the idea as they realized that they would be the one holding the bag for the entire project.

If the Germans had to bail out the finacially stressed it would make the European Union a transfer union with the good Bavarian Burghers being heavily taxed to absorb the debts of European “brethren.” If there is to be a EUROBOND, a fiscal union is mandatory and thus UNION-WIDE tax policy. Many of the critics of the Tremonti/Juncker proposal have raised the issue that present EU law prohibits a fiscal union, no one more vociferous than German Finance Minister Wolfgang Schauble.

Today, France joined Germany in its opposition to adding any funds to the present rescue fund and also of EUROBONDS. The BUNDS rallied today in relief that the Germans will not have a competitive instrument to deal with, one, of course, that is ultimately guaranteed by the Germans–nothing like competing against yourself. A question that will have to be answered: Why were the French so quick to agree with the Germans, instead of Sarkozy trying to upstage Merkel–as usual–and play the adversary to an instransigent Germany. In an interview in tomorrow’s FT, Italian Central Bank Governor Mario Draghi comes out against increased ECB bond purchases and/or quantitative ease. The Germans and its allies of fiscal responsibility appear to have stopped the effort to create a possible JUNCKer BOND.

In other relevant news, Brazilian Finance Minister Guido Mantega raised the issue of Brazil using other tools to halt the rise in the Brazilian real. After yesterday’s decision by the Brazilian Central Bank to hold rates, Mantega voiced his concern about further appreciation of the REAL. He said, “With the situation in Europe under stress we expect to see a continuation of the currency war in the coming months.”

Mantega’s statement is why I think next year we’ll see wide divergence in the financial performance of the emerging markets. (So much for the harmonious communiques issued by the G-20.) Also, the Australian DOLLAR was well bid as Aussie employment was very strong. The market anticipated a 20,000 job gain but the data showed 55,000 full-time jobs created. The RBA held rates this week waiting to see how the global growth unfolds. It’s now China’s move as the People’s Bank Of China is expected to raise rates this weekend. The markets await.

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4 Responses to “Notes From Underground: Juncker Bonds, Eurospeak for Junk Bonds”

  1. Arthur Says:

    I´d like to add the South Korea central bank´ statement:

    South Korea’s economy appears to be on track for solid growth. Consumer price inflation is likely to maintain an upward trend of above three percent on a year-on-year basis due to a rise in inflation expectations, international raw material prices and increasing demand-side price pressures… but the fiscal problems of euro zone countries and geopolitical risks will act as downside risk factors.

  2. Arthur Says:

    Yra, about Russia, Goldman & HSBC are following Notes from Underground.

    http://www.reuters.com/article/idUSTRE6B73S920101208

  3. yra Says:

    Arhtur–I don’t think they read NOTES but if they do let them add some replies.Again Russia is a relative value play whic is what I believe the Global macro investment quilt is all about.As an aside—a cnbc commentator earlier in the week scoffed and snickered about Russia and waved it off with a mere wave of the hand.Being that is history of being right is weak—well the reast is commentary but if I can not profit from this view well I am not really much better–just another guy with an opinion

  4. Notes From Underground: A Spectre of Arrogance Chains Europe to Its Past « Notes From Underground Says:

    […] JUNCKER BONDS, EUROSPEAK FOR JUNK BONDS (December 9, 2010) […]

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