Following the central bank’s actions last Tuesday its been right to wait and see how prices of the different asset classes have reacted to the intervensions before commenting and taking too many actions. On the news last week, it was correct to add risk via reducing the hedging shorts and adding a few euros. The pro risk rally enabled by the central banks was hard and fast as so many (inc myself, although not a net bear) were short the market and bearish the euro. Equities across the globe have rallied up to their current resistances. The central bank action crucially bought the European’s some time which was the point of the action. All eyes remain on European matters and little else.
The ECB is lending the european banks as much liquidity as they desire accepting all sorts of assets as collateral for the loans. This is repeated across the developed world. The Italian government is talkng budget cuts as is the Spain’s new government as is France’s. Merkel and Sarkozy are talking fiscal union as the issue to emerge from the 9th of December euro meeting. The ECB is saying it could be more aggressive in monetizing soverign debt (printing) if europe enables closer fiscal integration. (The ECB makes no mention of how this would affect the German constitution nor its own terms of reference that prohibit debt monetization). The ECB came out last week and acknoweldged that several billion of debt monetization had not been sterilized on its latest round of monetizations. This presents consititutional issues to the all powerful German courts but for the moment silence on the matter it seems. Greece remains in chaos and Portgual remains shut out of debt markets.
We have said this so many times before re europe but this week seems to a crucial week in determining a ‘final solution’, or not, to the European farce. Today Merkel meeting Sarkozy. Tomorrow Geitner in Europe and so on.
Looking through the political ‘fog’ there are several strands emerging that need to be woven into some sort of solution.
I include:
1) Fiscal Union
The reality of a fiscal union would mean that any national executive could have their budgets over turned by the european courts if they provided a deficit over and above that which was approved by the European fiscal executive. This would be the price/protection Germany is seeking. Henri Guaino has today come out and declared this would unacceptable to France although how else would such a measure be implemented? As ive commented before fiscal union will force some states out of the euro. Especially the fiscally weak states. In spite of the public noise this is what policy makers in Paris and Berlin actually desire.
2) To Monetize debt or not to Monetize debt, this is the question?
Will the ECB finally be given a green light to print? She gave a clear signal last week that the process has started. She did not sterilize all the debt she monetized so there was fresh money pumped into the system without the corresponding money being parked at the ECB by her banking system. The no money printing virginity has been lost. Its a tiny amount of money thus far vs the US and UK but the principle is clear. We have the prospect re fiscal union for a treaty change of the European Union. This is an opportunity to change the prinicples under which the ECB operates visavis inflation targeting, monetizations, etc etc. As interesting as the issue of fiscal union is, for my mind, the issue of debt monetization is even more interesting and relevent to asset markets and speculators therefore.The issues are joined at the hip as a fiscal union on a core europe would let the door open to allow the ECB to monetize as the amount of monetization needed would be restricted and managable. In theory, note.
3) Euro Bonds
The issue of euro bonds is being pushed by the French who desire euro bonds. Merkel is being clear she is not an advocate of joint euro bonds although this view is not represative of the broader German political scene. Most of the political parties in German are strong advocates of euro bonds and fiscal union. If the issue of fiscal union is agreed then the path to accepting euro bonds becomes almost inevitable, imo. I don’t expect euro bonds to be agreed anytime soon but i do believe core europe is on a path toward this event. For speculators a key indicator to this this occuring is how many states the ‘core’ is made up of. Imo the more states there are the weaker the euro core will be and therefore the more likely euro bonds will be needed. If both Spain and Italy are in the ‘core’ without massive ECB intervensions the more likely euro bonds will come into existance.
4) EFSF
The EFSF is in a mess.. A complete mess. We learnt last week that the EFSF is to be doubled not trebled due to debt market stress. An EFSF bond sale was cancelled last week as it was clear no buyers would be coming forward for EFSF bonds or that the prices they would demand would be too high as confidence was so low. This would have made a mokery of the EFSF triple A rating. Better to call the sale off than risk a public humiliation.
The new Italian premiere nicely summed up the lack of clarity last week.
http://uk.reuters.com/article/2011/11/30/eu-italy-monti-idUKR1E7MC02A20111130
The IMF’s role in supporting the EFSF is still very unclear. The IMF has around 280bn in funds given her current SDRs. Beyond this she would need permission from her members to allow SDRs to be increased. This permission would need an emergency meeting of the IMF to be called and the members to agree. At the recent g20 meeting there was no indication, at all, that member states were willing to increase the IMF’s SDRs. An alternative method which is being looked at is for the ECB to create money (print) and lend this directly to the IMF which could then lend directly to troubled states. This routes does not break the ECB convensions of debt monetization as it would not directly be buying debt but lending this new money to the IMF. Yet another route is for the national central banks like the Bundesbank etc to increase their balance sheets by lending money to the IMF. http://uk.reuters.com/article/2011/12/03/uk-eurozone-imf-resources-idUKTRE7B20F420111203
I would think such a measure would be breaking some european treay convensions as national european central banks should not be able to increase money supply via their own balance sheets although this is being examined as the above article discusses. And here in the German News paper Speigel:
http://www.spiegel.de/international/europe/0,1518,801715,00.html
There is much more to say but im out of time right now.. i will come back later today to update this report.
All the best for now
Rich
(4 votes, average: 5.00 out of 5)
Loading...