The eurocrat’s off balance sheet final solution mIII is rapidly unraveling before our eyes. The implications are unimaginable. There is no off balance sheet financial repression solution without the ECB monetizing debt. The implications of the Chinese offer to lend only yuan to the troubled euro area (EFSF) is clear.. Ie translated ‘we don’t want to lend you money in euros as we are concerned you will do as the Americans have done and print to pay us back in worthless euros. We would prefer to lend you a currency you cannot print.. ie our own’. This is serious. As no external support means no new capital.

Monetizing debt via the ECB printing presses is the only viable solution therefore. Unfortunately the German constitution forbids such a move due to Germany’s 1920s hyper inflationary experience to escape her excessive debts from WWI. The UK and USA have no such experience of hyper inflation and so it is that their central banks are so quick to monetize their debts as inflation continues to rise.  Tomorrow is another day but the central issue of the ECB monetization is rapidly moving into the cross hairs of asset markets. This central issue needs to be answered. More debt as a solution within a fiat currency framework works until the debt burden goes beyond all realms of confidence. Fiat currencies only exist through confidence of its users. As the euro teeters on the brink this confidence is coming under severe question. The tipping not far away now.. The ECB owns a printing press use it or the euro must surely be dissolved.

http://www.bloomberg.com/news/2011-10-31/papandreou-says-new-greek-loan-plans-must-be-put-to-referendum.html

http://uk.reuters.com/article/2011/11/01/uk-france-germany-greece-idUKTRE7A02QA20111101

http://www.ft.com/intl/cms/s/0/cc377942-0472-11e1-ac2a-00144feabdc0.html?ftcamp=rss#axzz1cTHLn6HE

These are monetarily historic times indeed. We cannot know how events will unfold but we can be sure the pressure on the new president of the ECB (Draghi) will be immense to monetize at will.

http://www.ft.com/intl/cms/s/0/7dc4ecc8-03e5-11e1-864e-00144feabdc0.html#axzz1cTHLn6HE

Rich

p.s. I’ve looked at a few of the indicators for euro insolvency inc the piig spread to bund yields.. these are indeed soaring upwards today though have not broken to new highs as yet.

Here Portugal’s spread at 1000 basis points to German 10yr yields.

http://www.bloomberg.com/apps/quote?ticker=.PORGER10:IND

Here Spain’s spread at nearly 400 basis points ie spain’s primary dealer new issuance of 10yr debt would require a yield of around 6% p.a. vs Germany’s 2% p.a.

http://www.bloomberg.com/apps/quote?ticker=.SPAGER10:IND

Here Italy breaking out to a new euro high of 450 basis point spread.

http://www.bloomberg.com/apps/quote?ticker=.ITAGER10:IND

Here France close to breakout but still at 120 basis points over Germany.

http://www.bloomberg.com/apps/quote?ticker=.FRAGER10:IND

Remember this at a time when ‘safe’ assets like bonds are generally have a good day.

Interestingly the CDS market is not showing the same issues and are no where near breakouts.. is this a clear indication that cds as in instrument is being questioned here ie due to authorities forcing financial cos to accept voluntary hair cuts rendering the cds insurances worthless. Here the Portuguese cds rates which, as you can see, are basically unchanged in spite of the euro problems.

http://www.bloomberg.com/apps/quote?ticker=CPGB1U5:IND

As i say, this is more a reflection of the problems with cds as effective instruments rather than anything else. The german bund spread is a better indicator therefore, imo.

 

 

 

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