Notes From Underground: Europe Is Back to Center Stage … It’s the Crisis That Never Sleeps

This week has again seen the resurrection of the European debt crisis as the world pays close attention to BOND prices in EURO BONDS. Yesterday saw the German Schatz fall to an all-time-low of 9 BASIS POINTS. Today as some calm was restored to the Spanish and Italian debt markets, the yield on the German 2-YEAR increased to 14 BASIS POINTS. Prompting the rally in the PERIPHERAL DEBT PRICES was a comment by ECB Executive Board Member Benoit Coeure.

In a Financial Times article, Coeure raised the issue that the ECB still had room in the Security Market Program (SMP) to purchase Spanish and Italian debt even though the ECB had not done so since January. This sent short positions scurrying for cover and thus the spread between Italian and German bonds narrowed after yesterday’s aggressive widening. Coeure went on to say in the FT piece that Spain had taken “very strong deficit measures and was showing enormous political will. What is happening at the moment in the market does not reflect the fundamentals.”

This line of thinking by an ECB board member shows how detached from reality the European policy makers continue to be. This week’s action is not a one-off event marked by wild swings in market prices but rather a long drawn out drama played out over the last 28 months. It is the ECB and other European banks that are distorting the market as policies like the LTRO are aimed to curb short-term threats to Europe’s credit markets. The financial markets are merely raising new-found concerns about the effectiveness of EURO policies. Mr. Coeure has no concept of the damage that will be done by the proposed AUSTERITY BUDGETS.

The idea of ADVERSE FEEDBACK LOOPS never are considered. The Spanish may be showing ‘enormous political will’ but the damage done to the economy is real as is the 24% unemployment rate. If the market is wrong on Spain they will pay, but I wonder who will bear the cost of ill-conceived plans designed by the Benoit Coeure’s of the world. The authorities prevailed today through jawboning, but policymakers would be wise to remember that they have two ears and one mouth and therefore need to listen more and talk less.
***Tomorrow’s FT has another opinion piece by the PHILOSOPHER KING, George Soros. It is titled, “Europe’s Future Is Not Up to the Bundesbank.” It is a fairly well thought out piece about the way forward for the EU in order to survive. As usual, Mr. Soros fails to recognize the rule of LAW. Yes, he cites Article 123 of the Lisbon Treaty and other EU dictates but he fails to allow for the role of the GERMAN FEDERAL CONSTITUTIONAL COURT. It is not the Bundesbank that will be the slayer of the FISCAL COMPACT but the German High Court that will protect the sovereign rights of the Bavarian Burghers. The COURT has already warned the German Legislature that EUROPEAN BAILOUTS are in contravention of German Law and even prior to the LTROs were concerned about the ECB stepping on German sovereignty.
Mr. Soros gives no nod to the role of the FCC in his views–a recurring shortcoming in his opinions on the Euro financial crisis–but those German’s opposed to turning Brussels into a full-blown TRANSFER UNION hold the test of CONSTITUTIONALITY as their BIG BAZOOKA. Soros sums up his piece with the following: “The Bundesbank will never accept those proposals, but the European authorities ought to take them seriously. The future of Europe is a political issue: it is beyond the Bundesbank’s competence to decide.” I await to hear the response from Bundesbank President Jens Weidemann.
***QUICK NOTE: The Greek elections are now set for May 6, the same day as the second round of the French elections. What a coincidence that the Greeks will be on the second page avoiding the limelight as a possible victory by Mr. Hollande will be the larger story. May 6 is setting up for great volatility.

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4 Responses to “Notes From Underground: Europe Is Back to Center Stage … It’s the Crisis That Never Sleeps”

  1. danderose Says:

    May 6th? Is that a joke? As if that date doesn’t have enough market history already… Good thing it’s on a Sunday this year!

  2. yra Says:

    Danderose–nice catch on that–wow it must have been a “fatfinger” error when they sent it out

  3. Mayank Says:

    Hi Yra,

    You probably read the story of Fed’s number 2 official Janet Yellen coming out saying she supports the the low-interest rate policy and Fed might need to take further action if the recovery stalls. With the jobless number coming out disappointing and narrowing trade deficit, do you think we could see further easing.

    http://online.wsj.com/article/SB10001424052702304444604577337933640521546.html?mod=WSJ_Bonds_LEFTTopNews

  4. yra Says:

    Mayank–operation twist expires at the end of June—that will be the signal if they extend and I believe we will see it extended

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