In the 1969 cult classic Putney Swope written by Robert Downey, Sr., the film opens with the death at the board room table of the firm’s chairman, Mario. Not realizing he has had a heart attack the sycophants play charades to get at the message Mario is trying to convey, thus asking HOW MANY SYLLABLES MARIO? Tomorrow, the world will be asking Mario a different question. How much QE, Mario? How long? The European equity markets were en fuego early this morning, led by the German DAX, even as the SPOOs were lower to unchanged. There were rumors about a nationalization of Monti Paschi but it seems that the Italians were trying to delay an actual bailout of the troubled lender and wanted more time from the ECB. MY OPINION IS THAT THE ECB WILL ANNOUNCE SOME EFFORT TO BUY FINANCIAL DEBT FOLLOWING TOMORROW’S MEETING. The ECB has avoided buying financial debt in its QE program because it is also the banking supervisor for the EU.
LISTEN CLOSELY TO ANY TALK OF PURCHASING SENIOR UNSECURED DEBT. This would be an attempt to ring-fence the massive amount of NONPERFORMING LOANS clogging the liquidity channels of many European domestic banks. Remember, Europe’s corporate bond market is not the main financing vehicle for small- and medium-sized enterprises. It is the European banks that are the conduit for financing business. If the ECB enters this realm it will be a panic move by President Draghi. The EU does not have a community-wide deposit insurance program, which has resulted in the bail-in of depositors to stem the collapse of the banking system. The Renzi loss has scared the Brussels eurocrats, especially Draghi. In an effort to halt the rise of further anti-euro sentiment the ECB will seek to provide “shelter from the storm.”
It is now the elites’ job to provide support to the mainstream French political parties for a Marine Le Pen victory would spell doom for the ECB, German savers, and, most importantly, the global financial system. In July 2012, President Draghi swore he would do “whatever it takes” to preserve the EURO and the EU and there would be “NO TABOOS.” The European Court of Justice has also opined that preserving the UNION is the ultimate priority. Recently, UBS Chairman Axel Weber warned that the ECB would TAPER its QE program sooner than many market participants have anticipated and that bond markets were vulnerable to significant losses. I have great respect for Weber, so much so that in this BLOG I advised Angela Merkel to secure his appointment as ECB President instead of Draghi back in 2011.
French President Sarkozy outmaneuvered Merkel so Weber ‘s musings are something I watch. But, I think he is misjudging President Draghi’s desire to play the role of the savior of the EU project. Listen closely to the Draghi press conference to get a sense of the fear pervading the Eurocratic policy makers. Saving France from Marine Le Pen will be paramount. The extension of the QE program, the increasing the amount of monthly asset purchases, or initiating the purchase of senior unsecured bank debt will be the keys for equity markets, precious metals,and, of course, European sovereign debt.
***In the Financial Times today there was a wonderful column by John Plender, “Italy Stuck Between Fiscal Straitjacket and Ailing Banking System.” Mr. Plender raises many issues plaguing Italy that have been covered in Notes From Underground during the years. But Plender brings to the fore that Italy is suffocating under a public debt/GDP ratio of 133%, well above the restrictions accorded to European countries under the Maastricht Accord. In 2012, when the Italian 10-year yields were at 7 PERCENT, the GDP/DEBT ratio was 127%. President Draghi drove interest rates down to 2 PERCENT the next four years, even down to ONE PERCENT for a brief period, and with lower servicing costs the ratio increased too 133%. Italy is in a very dangerous situation and the only way out is to make the ECB the buyer of its bank debt.
Italy’s GDP is stagnant and without dynamic growth no way to stimulate its economy, because it cannot depreciate its currency, the EURO. Because of China’s entry into the WTO, “… Italy was more exposed than most to Chinese competition because its exports were concentrated in price-sensitive, low value-added goods.” The outcome has left Italy’s exports falling and no internal investment has provided jobs from newer industries. The election loss for Renzi has sent a message about the discontent festering in all demographic groups. Do you really think this is the environment for a tapering by the ECB? HOW MANY LARGE SCALE ASSET PURCHASES, MARIO?