Notes From Underground: A Little Austerity Goes a Long Way

The new autocratic regime in Italy has agreed to a ramped up AUSTERITY BUDGET in which an extra 30 BILLION EUROS will have to be found and then cut from the public arena. Being that Mario Monti was the Eurocrats’ choice to head the Italian government, it seems that PM MONTI is only concerned about meeting the desires of the powers that insisted on his taking the reins of governance. ITALIAN BOND FUTURES staged a very impressive rally as the BTP (10-year note) dropped 71 basis points to close under 6%. Also, the 2/10 year curve in Italy also steepened to +52 basis points from Friday’s close of +38 points. Spain and the other PERIPHERALS also performed well and the FRENCH/GERMAN 10-year differential closed at a mere 92 basis points. As the BTP futures rallied 500+ points, the EURO actually underperformed and by the close the EURO currency was basically unchanged .

The late afternoon sell-off on the EURO came as S&P put all of the EUROZONE ON CREDIT WATCH AND THREATENED TO DOWNGRADE FRANCE AND GERMANY FROM AAA status. GEE, WHERE HAVE YOU BEEN?! MORE BOTHERSOME IS HOW THIS INFORMATION IS RELEASED TO THE MARKETS. AGAIN, IF I AM AN S&P CLIENT AND RECEIVE THE RELEASE BEFORE THE GENERAL MARKET, DOES THAT CONSTITUTE INSIDER TRADING? THE PROBLEM WITH THE RATING AGENCIES IS THAT THEY ATTEMPT TO SERVE MYRIAD CLIENTS. SEAN EGAN, you and EGAN-JONES are one of the few financial firms left with any integrity. IT IS TIME TO APPLY MASSIVE DOSES OF PEPPER SPRAY TO THE BIG THREE RATING AGENCIES AS THEY NEED TO SHED REAL TEARS FOR THE SINS OF COMMISSION.

***In a Financial Times article for tomorrow, it is reported that Sarkozy and Merkel have agreed to new rules for a more stringent fiscal Europe. The NEW EU, “which includes a commitment not to force PRIVATE SECTOR BONDHOLDERS to take losses on any future Eurozone bail-outs.” After the Greece debacle, the ECB wants it known that there will be no private sector involvement (PSI). During the Greece non default, Merkel pushed for PSI and the result was that investors began selling off the other peripherals BONDS so as to avoid a huge write downs by the way of HAIRCUTS.

Because the ECB had bought a great deal of this debt, the potential hit to the ECB’s BALANCE SHEET and its CREDIBILITY was a great concern. What was the trade-off for Chancellor Merkel and President Sarkozy agreeing to this? What is Mario Draghi going to deliver as a quid pro quo? Thursday’s ECB meeting is getting curiouser and curiouser. All these meetings and this is what was decided? HMMM…

***Tomorrow morning the Bank of Canada meets to set its overnight rates and the consensus is for no change–expect rates to remain at 1%. In this fragile environment and with the BOC being part of last Wednesday’s gang of six, there is no chance of a rate increase. The Canadian economy is too healthy to cut rates but the post-meeting statement should be watched closely as Governor Mark Carney is always a good read on the global economy. He has been very correct and very forthright so pay attention to what the BOC has to say about the European situation and its impact on Canada.

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