Archive - Sep 4, 2012

Yesterday we dedicated significant space to the most recent piece of perfectly ludicrous propaganda out of the ECB, namely that monetizing debt with a maturity up to three years is not really monetization but is instead within the arena of "money market management" (images of Todd Akin defining when something is 'legitimate' and when it isn't swimming our heads). The implication of course is that debt under 3 years is not really debt, but some mystical piece of paper that nobody should be held accountable for. Hopefully all those consumers who have short-maturity credit card debt which nonetheless yields 29.95% APR are made aware of this distinction and decide to follow through with Mario Draghi's logic, which is about to take the war of words between Germany and the ECB to the next level. Sure enough, this is precisely the news item that is dominating bond risk markets this morning, if not so much futures, and sending Spanish and Italian 2s10s spreads to record wides on hopes Draghi will definitely announce some sub 3 year monetization program for the PIIGS. Bloomberg summarized this best last night when it commented on the move in the EURUSD, since retraced, that we now have speculation Draghi's move will bolster confidence.  In other words: the market is now hoping there is hope. Sure enough, even if Draghi follows through, for the ECB to monetize Spanish bonds, Spain still has to demand a bailout, which however is now absolutely out of the question as mere jawboning has moved the entire highly illiquid curve so steep Rajoy (and Monti) have absolutely no reason to hand over their resignations (i.e., request a bailout). And so we go back to square one. But logic no longer matters in these markets.