ECB President Mario Draghi has been able to convince the world that the Euro’s problems have been contained and it is safe to re-enter the financial pool of credit assets throughout Europe. The July 2012 speech that proclaimed the ECB had no taboos and would “do whatever it takes” to preserve the euro has been a masterpiece of doing nothing while generating the desired outcome. The master plumber of all things credit (JA) alerted me to the ECB’s balance sheet (as seen on the Bloomberg terminal). After Mario Draghi pledged to offer the Outright Monetary Transactions (OMT) to any European country that contracted with the ESM or EFSF for help, the sovereign debt markets in Europe have quieted and yield spreads returned to a sense of normalcy. Many people believed that the euro currency would suffer from Draghi’s promise of massive liquidity to meet funding needs. The EURO shorts were wrong and the proof lies in the three charts I am providing.
Posts Tagged ‘EFSF’
As the sun sets on the Greek drama, the most predicted outcome has indeed taken place as the IMF/EU and ECB/EFSF/ESM have come to an agreement about bringing the Greek debt load to a robust level of 124% debt-to-GDP ratio by 2020. There was no way the TROIKA was going to risk the entire EURO project on a mere 44 BILLION EURO payout to the Greek government. The game was played out to the 11th hour–oh those drama queens in Brussels–and although the OFFICIAL SECTOR did not take an official haircut, the core nations of the European financial system do stand to take a bath. IMF Director Lagarde was able to save face as the Greek debt levels will reach the previously promised levels of 120%. Madame Lagarde can now go to the IMF Board and report that all previously agreed to conditions have been ratified by the EU and await the signing of the memorandum of understanding with the Greek leadership. The IMF needed to get Greece out of the way so it can figure out the role it will play in the Spanish bailout and/or Italy.
First and foremost, a happy Thanksgiving to all the readers of NOTES FROM UNDERGROUND. The growth in readership and the high level of discourse is something I am very grateful and certainly thankful for in full measure. As much energy as I expend in formulating the blog, it is worth the effort because it helps anchor my thoughts about the impact of the global political economy. It is certainly the definition of a give-get. So again, thanks to all my readers.
Well, Moody’s downgraded the France’ sovereign rating from AAA in what was an obvious bow to reality. MOODY’s, WHAT TOOK YOU SO LONG? This will really be a bitter pill for President Hollande as it was only last week that the “French cock” was crowing about how well the bond markets were evaluating his performance as the leader of France. I reminded readers that the recent performance of the French debt had more to do with Mr. Draghi’s aggressive actions than any policy put forward by the Hollande government.
Europe was/is/will be the catalyst for the markets, from equities and commodities to, of course, currencies. Whether the problems are violent strikes in Athens or insolvent banks in France and Spain, the issues that PLAGUE EUROPE ARE EXISTENTIAL IN NATURE. Can the problems of sovereign default and the deflationary impact rippling from a massive deleveraging be contained by a massive douse of LTRO or QE3 in the U.S.? For now the markets are CONTENT to allow the flood of liquidity be the potion for increased portfolio risk.
Sound bites from the left. Sound bites to the right; here I am, stuck in the middle with you (STEALERS WHEEL). The House Budget Committee was in full political regalia as posturing for the home folks and November’s election was in full force. Most of the questions are redundant or ridiculous and in some cases, both. An exception was Committee Chairman Paul Ryan, who asked Mr.Bernanke if the FED‘s policies had corrupted the BOND markets that they stopped sending a credible signal. It has been a consistent theme of NOTES that the BOND market is broken as an indicator of inflation expectations because the FED‘s large scale asset program has created an artificial support to LONG-TERM BOND PRICES.
Today, IMF MANAGING DIRECTOR CHRISTINE LAGARDE announced that she would try to raise more capital to shore up the IMF‘s balance sheet as to be able to aid the peripheral nations of the European Union. Ms. Lagarde was going to approach the members of the G-20 to provide additional funds to prevent a further assault on the European sovereign debt by securing funds to support the troubled sovereigns. The IMF director will be depending on the BRICS and Japan to increase their contributions so as the IMF may actually be able to help GREECE and PORTUGAL meet immediate funding needs and let the ECB and EFSF do the heavy lifting for Spain and Italy. (At this time, the U.S. said they will not be contributing.)
Almost 67 years ago, U.S. General McAuliffe told the German command that the U.S. forces at Bastogne would not surrender and actually said it in a one-word response: NUTS. In a parallel response to German/Franco demands that all European nations surrender their sovereignty by succumbing to a “FISCAL COMPACT”, British Prime Minister David Cameron basically said the same as the U.K. moved to cast a veto vote on the proposals that resulted from the European Summit.
The market is rife with rumors about the previous agreement to bail out the bank and insurance firm DEXIA is coming apart as the Belgians are balking at the cost. Something that needs to be considered is that the French are probably putting pressure on the deal to force the Germans to agree an EBC-sponsored bailout so as to get a major infusion of capital. Dexia is already a problem for Europe so by getting the Belgians to pull the plug on the deal the French can force the Germans to immediately step up and agree to a large role for the ECB.
It has been the best of times. It has been the worst of times. President Sarkozy began the year with such high hopes and aspirations as he desired to raise his stature on the world stage. He won his early skirmishes against Chancellor Angela Merkel by first defeating Germany’s desire for Axel Weber to attain the ECB Presidency and then forcing the German Chancellor’s hand for a larger pool of capital for the European Financial Stability Facility. But the taste of victory has now faded as the FRENCH BOND MARKET is suffering under the weight of its deeply troubled banks and the GERMAN/FRENCH 10-YEAR BOND SPREAD CONTINUES TO WIDEN. France is deemed to be very vulnerable for its banks own so much EURO SOVEREIGN DEBT that of course is deemed to be riskless and require no haircut or capital to support it.