Notes From Underground: Did Socrates Drink the POISON of a European Bailout?

Tomorrow will bring interest rate announcements from two key central banks, okay three , if we count the BOJ but the Japanese have so many problems it is a forgone conclusion that Mr. SHIRAKAWA will hold the line and, if anything, find away to flood the market with more liquidity. The Bank of England (BOE) will announce at 6:00 a.m. Chicago time. Though there are a few analysts who think the Mervyn King-led BANK will raise to head off the increase in inflation, I would say that the chances are maybe 5 percent.

The European Central Bank (ECB) will announce at 6:45 a.m. and the markets have priced in a 100 percent probability, therefore a sure thing. I will provide some words of caution. Trichet and company despise speculators, traders and investors for they have a tendency to spoil the well laid plans of European bureaucrats. If the ECB mandarins could find a comfortable way to not raise rates and momentarily screw the money markets and all its actors, they would in a heartbeat. If Mr. Trichet could say that the EURO was so strong that the bank decided to hold off raising, he would.

Better yet, let’s suppose that after all the cajoling by Brussels, Portugal finally decided to take the bailout that they had been refusing, the day before a significant ECB meeting. I have to ask if Prime Minister Socrates made a deal to take EURO funding so as to prevent a RATE RISE. Remember that the ECB is very irritated that it has to hold the BONDS it bought from Greece and Ireland–it tried to make a deal to unload them in the deal crafted on March 25 but was rebuffed. If Portugal failed to take a bailout, the ECB stood to acquire even more of the PIIGS’ DEBT.

Spain may have pushed Lisbon to negotiate a hold on rates by accepting a last minute bailout for no one will be more harmed by an increase in the EURIBOR RATE than Spain. It seems that more than 90 percent of Spanish mortgages are adjustable to EURIBOR, so a VIGILANT ECB IS SPAIN’S TORQUEMADA. Any time the markets are pricing a SURE THING, it is imperative to look beyond the headlines to see where the consensus is wrong. THAT IS WHY THIS IS NOTES FROM UNDERGROUND WHERE 2+2=5.

If the ECB were to check rather then raise short term rates will rally, equities will rally, precious metals rally. The EURO will initially sell off against all currencies but the test will be at which levels of support it would hold because ultimately it is still about the FED and the DOLLAR. This is a low probability outcome that I have outlined but it just makes traders aware of alternative policy action. The one thing we know is the Portugal took the package that had been an offer for quite awhile and did it the night before an ECB meeting. Interestingly, Portugal has consistently stated that it had enough funds to meet the April redemptions. It was June that COULD BE a problem. Just food for thought!

Also, I am doing a quick post of the 2/10 yield curve for different countries just as a refresher (data courtesy of Bloomberg):

U.S.: 269.5+
U.K.: 237+
Swiss: 132+
Germany: 159+
Aussie: 63+
Japan: 109+
Ireland: 56+
Portugal: 16- (inverted)
Greece: 286- (inverted)

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8 Responses to “Notes From Underground: Did Socrates Drink the POISON of a European Bailout?”

  1. perl Says:


  2. Pat Lynch Says:

    Yra, this all comes back to this: it goes back to two basic different worlds/economies that have nothing in common except geographical location. Actually need and want opposite actions. But instead of trying I wi to expound I will say read “rotten heart of europe” by Bernard Connley. He was a m way ahead of his time. Its all there, foreshadowed 15 years ago plus. .

  3. Bill Says:

    thought provoking article. thank you, Bill

  4. Jess_T Says:

    Yra: Several quesitons posted here (not sure if I shud post separate or lump them together) :

    How is one to interpret those yield curve numbers on a relative basis? So USD and GBP are the steepest suggesting a macro background for continued weakness against the flat curve of the AUSSIE? Yen curve is relatively flat, yet extremely weak currency — should be considered an exception due to post-quake monetary looseness? How do you interpret the USD vs CHF based on these numbers?

    How do you see USDSEK and USDNOK? — Dollar is weak here — is that more of a sound central bank vs money printing central bank issue ? or is that a yield curve function too?

    Lastly, USDSGP is very weak — same sort of question: relative yield curve function or is the driving force high growth Asia vs week growth western developed country issue?

    thanks, Jesse

  5. Jess_T Says:

    The Bernank suggests: “I think the increase in inflation will be transitory,” Bernanke said. But we added: “we have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct than we would certainly have to respond to that.” Meanwhile ECB is now raising rates while this week’s Swiss CPI exceeded consensus in surprise to upside. You think the “inflation is transitory” assumption by Bernank juxtaposed against the European’s perception and actions that they are taking inflation seriously now will sustain the bid for EURUSD into the summer or do you think recent move up since the end of the year has already priced in the divergent perceptions between Fed vs ECB? thanks again, Jesse

  6. yra Says:

    Jess–et al–there is so much here which is the purpose of trading and thinking–I will answer this and all the points in tonights blog—remember that when it comes to the PIIGS we are not dealing with countries that control their currencies—think back to september of 1992 and what happened when the EMU-was jolted out of complacency but tonight’s blog will attemopt to answer the big questions—-thanks for everybodies input

  7. yra Says:

    Jess– Iwas going to answer you in the BLOG but let me say this about the scnadies—Norway and Sweden about the same on the 2-10 curve –about 111 basis points and I think that is representative of a very normal steepness and does represent two banks that have done a good job.The Norge is going to have to raise rates again because the high oil revenues are juicing the economy as the Norwegian trust fund has to spend some of its revenues in the domestic economy and as they grow the stimulus increases so it will be important to monitor the curve in Norway.Denmark raised rates today after the ECB but its curve is much steeper.As for Singapore and its currency–the SINGAPORE city state wants to become the Switzerland of Asia and they are doing a fine job and the currency reflects it.The most powerful economic model is an autocratic capitalist sytem.And I don’t agree with you that the YEN curve is flat for a country in a long term deflationary period I think it is fairly steep

  8. Jess_T Says:

    Thanks for the comments rergarding SGD, JPY, NOK and SEK…

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