The main political news of the weekend was the falling electoral support of German Chancellor Angela Merkel in the three regional elections. The refugee issue continued to be the theme of voter discontent, according to the script presented by the nattering nabobs of nonsense. I have written that the financial repression foisted upon the German saving class was going to be a problem for Chancellor Merkel as insurance and pension funds were being punished in an effort to bail out the peripheral banks and ultimately the heavily indebted governments of the non-German core countries. Unlike the U.S., which has some political input on the role of the Federal Reserve, the German electorate is subjugated to a central bank over which it has no authority.
Under Mario Draghi, the ECB’s enhanced QE and TLTRO plan is being loaded with a massive amount of debt of which the Bavarian Burghers are the ultimate guarantors. The question that nobody asks Draghi: What if the debt on the ECB’s balance sheet cannot be supported by the credit authority in Brussels for there is no harmonized fiscal authority and thus no EUROBOND (only the individual bonds of a multitude of sovereign authorities)? The ECB has the ability to print money and the only thing standing behind the authority of Draghi are more barrels of ink. The refugee crisis is one of the SPARKS TO IGNITE A PRAIRIE FIRE FUELED BY THE NEGATIVE INTEREST RATE POLICY of the ECB.
David Marsh, the world’s authority on the history of the Bundesbank, also posited this thesis today in an article published on Market Watch titled, “German Right Wing Tells Mario Draghi: This May Be the Last Time.” Marsh notes that Merkel may find some solace in knowing that her coalition partners, the SPD, fared worse than the Christian Democratic Union leaving Merkel without a strong challenger. But Marsh is quick to note that, “Chancellor Angela Merkel has leeway to defend the ECB President against the domestic criticism of unpopular measures on negative interest rates and government bond purchases, seen as undermining savers and monetary soundness.” This will be the issue facing the Germans: Who guarantees the soundness of our money.
What’s perplexing for investors is why the EURO currency has rallied in response to the ECB’s aggressive monetary ease and the political difficulties facing Chancellor Merkel. In my OPINION, investors are rushing to buy up corporate debt and some non-performing loans in the belief that TLTRO (targeted long-term repurchase operation) will provide a backstop for hedge funds and private equity groups looking to purchase some debt and be secure that the ECB will backstop the outcome. On Friday, the Greek 2/10 yield curve steepened 144 basis points as investors and the ECB rushed to buy Greek two-year notes yielding more than EIGHT percent. The Greeks cannot come to terms with the Troika over its bail out. Portugal is a political mess. Spain cannot form a government. Italian banks have at least 17% of non-performing loans. And France is suffering economic and political malaise. The QUESTION REMAINS: WHO GUARANTEES DRAGHI?
A question arises from this weekend’s Financial Times. There was an article detailing out the French utility EDF being unable to afford the planned project of a massive nuclear power plant at Hinkley Point in the U.K. The nuclear facility is projected to supply up to 7 percent of the Britain’s electricity and it is a project backed by the political powers of both nations. But Thomas Piquemal, finance director of EDF, told his bosses that the company ‘s finances were to fragile and could implode if the project experienced cost overruns or failed to deliver the anticipated results. The financial report was badly received and Mr. Piquemal resigned. There are many questions about the technology used in the planned reactor, European Pressurized Reactor, which has experienced massive time delays and costs overruns at other construction sites.
EDF employs 110,000 people in France so the French government is eager to protect the firm’s solvency (the state also owns 85% of the company). The 20 billion-plus EURO project could easily be financed by the ECB as these types of BONDS are currently investment grade and not bank debt. This fits the perfect profile for Draghi’s TLTRO. Does anybody see the logic of financing this program with Germany’s credit card? There is no question that this project gets financed by Draghi money and that will be regardless of the vote on Brexit. There is nothing like living on OPM: other people’s money.
***Tonight the Bank of Japan will announce its monetary policy decision and I doubt Kuroda will surprise the markets by any change to the present QQE levels. The G-20 severely criticized the BOJ for its decision to invoke further efforts to weaken the YEN by adding more stimulus and were warned by the Europeans not to target a weakened YEN. Tobias Harris of the Teneo group has allowed me to cite his thoughts:
“It is therefore not guaranteed that Kuroda will announce new asset purchases next week. He may, for example, prefer to wait for more clarity on wages and inflation and the outcome of the FOMC’s March 15-16 meeting. He may also prefer to avoid another 5-4 vote and could therefore choose to wait for the BOJ’s April meeting, when Makoto Sakurai, believed to support Kuroda’s ‘reflationist’ approach, is expected to join the board.” I think this has the politics correct from a domestic basis and the global issue of allowing the ECB’s recent effort time to be absorbed by the markets.”