This page has been archived and commenting is disabled.
The ECB and the Potential Failure of Quantitative Easing, Euro Edition – In the Spotlight!
From the Bloomberg.com front page:
June 8 (Bloomberg) — Jean-Claude
Trichet used a simple chart to convince European leaders the euro
was in grave danger.
It was Friday, May 7. Spanish,
Greek, Portuguese and Irish government bonds were plunging, sending
shudders through world
markets and fueling speculation Europe’s 11-year-old monetary union
could collapse. The European Central Bank’s president traveled to an
emergency Brussels summit of heads of government armed with graphs to
dramatize how bad things were.
“My main message for the governments
was: Some of you have behaved very improperly and have created an
element of vulnerability
for your own country, and by way of consequence for Europe,” Trichet
recalls. “Now the situation calls for taking up responsibilities.”
By 3:15 a.m. the following Monday,
Europe knew the price of that responsibility: an unprecedented 750
billion-euro ($900 billion) aid package to prevent a debt spiral, backed
by a credibility-testing pledge from the ECB to purchase the bonds of
distressed governments, all to keep the $11 trillion, 16-nation economic
and monetary experiment afloat.
This culminates in a big “I told ‘ya so”, documented in explicit
detail via “The Coming (now arrived) Pan-European (soon to be
global) Sovereign Debt Crisis” series.
So Trichet made the biggest gamble of
his career, agreeing to buy government debt to halt the surge in yields
in the hope politicians will respond by fixing their budgets, allowing
the ECB to return to fighting inflation.
The risk is that profligate nations
will renege on the deal, expecting stronger euro-area neighbors such as
Germany and France to save them just as they rescued Greece.
Critics say the ECB has abandoned a
founding principle not to bail out cash-strapped governments and may be
left having to buy more debt, which could ultimately undermine its
primary price-stability mandate.
Oh, that is a virtual guaranteed event. Do we not lean from our
recent history… As excerpted from BoomBustBlog’s Smoking
Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer
Beware!
There are broad indications hinting that
Italy and Greece are not the only countries that have used SWAP
agreements to manipulate its budget and deficit figures. France and
Portugal may be two other European economies which have resorted to
similar manipulations in the past in order to qualify as part of single
currency member nations (Euro Zone). Below is a small subset of the
research that I have been gathering as I construct a global sovereign
default model. This model is very comprehensive and thus far has
indicated that quite a few (as in more than two or three) nations of
significance have an 90% probability of defaulting on their debt in the
near to medium term. More on this later, now let’s dig into what we have
found that looks like gross manipulation of the numbers in order to
hide debt in several European countries…
Back to the Bloomberg article…
The result is a price-stability
record that surpasses even the Bundesbank’s. Inflation
in the euro region has averaged 1.98 percent since the ECB took control
on Jan. 1, 1999, in line with its self-set target of “below but close
to 2 percent.” The ECB’s standing is now in jeopardy. Trichet’s
detractors argue the decision to buy bonds breaches a rule that the
central bank doesn’t rescue governments, undermining the independence it
needs to breed confidence in the euro. They also say that the ECB risks
stoking inflation by increasing the money
supply. To David
Mackie, chief European economist at JPMorgan Chase & Co. in
London, the danger is that a lack of follow-through from governments
will leave the ECB exposed.
ECB in Danger
“If governments don’t deliver on the
fiscal side, will the ECB get sucked into buying more and more amounts
of outstanding debt?” asks Mackie, who predicts the central bank won’t
raise interest rates on Trichet’s watch again. “The ECB has got itself
into a situation where it’s in danger.”
It’s also far from certain that the
asset purchases will work. By June 2, Spanish and Italian
yield premiums over German bonds had exceeded pre-intervention
levels. The Spanish spread was at 203 basis points yesterday, 39 basis
points above its May 7 level. The Italian spread was 177 basis points
and Portugal’s 264 basis points. That may require the ECB to do even
more to ease market strains. Policy makers next meet on June 10 in
Frankfurt. David
Owen, chief European financial economist at Jefferies Group Inc.
in London, says he would not be surprised if the ECB stopped sterilizing
its bond purchases at some point, meaning it would effectively be
printing new money.
My readers have been thoroughly warned of the risks of such actions.
Reference A
Comparison of Our Greek Bond Restructuring Analysis to that of
Argentina:
Price of the bond that went under
restructuring and was exchanged for the Par bond in 2005
Price of the bond that went under
restructuring and was exchanged for the Discount bond
With this quick historical primer
still fresh in our heads, let’s revisit our Greek, Spanish, and Italian banking analyses (the
green sidebar to the right), many of which are trying to push the 400%
mark in terms of returns if one purchased OTM options at the time of the
research release. It may be worthwhile to review the Sovereign debt exposure of Insurers and Reinsurers
as well.
We may very well get a bear market
rally or two that may pop prices, but from a fundamental perspective, I
do not see how significantly more pain is not to come out of this debt
fiasco. The only question is who’s next. We feel we have answered that
question is sufficient detail through our Sovereign Contagion Model. Thus far, it has
been right on the money for 5 months straight!
Subscribers should either have their positions in, or be in the
process of actively setting them up. The Spanish Actionable Intelligence
Notes regarding banks have been pushing the 700% return mark, to date.
This is the update right before the great ECB QE brigade…
Since then, the positions have surged significantly in profitability (the
last trade printed at $3.75!), showing the stress in the
Spanish banking system was far from mitigated despite the precarious
position that the ECB has placed itself in. I do not feel the equity
markets have fully pried in the fears seen by the Spanish and European
banks who are hoarding capital at levels that best even the Lehman
collapse days.
Courtesy of Zerohedge:
European banks are hitting the ECB for parking their cash (as opposed
to to lending to fellow banks that are killing themselves or are nearly guaranteed suspect counterparties) at a
greater rate that at ANY time during the crisis, ANY TIME! Yes! This
includes the collapse of Bear Stearns and the bankruptcy of Lehman
Brothers – which many considered the harbinger of the apocalypse (of
course, we at the BoomBust simply thought it was the bankruptcy of the
2nd smallest of the bulge bracket banks).
Subscribers, please reference the following paid content downloads:
Spain public finances projections_033010
Italy public finances projection
A Review of the Spanish Banks from a
Sovereign Risk Perspective – retail.pdf
A Review of the Spanish Banks from a
Sovereign Risk Perspective – professional
Spanish Banking Macro Discussion Note
Italian Banking Macro-Fundamental
Discussion Note
Sovereign Contagion Model – Retail (961.43
kB 2010-05-04 12:32:46)
Sovereign Contagion Model – Pro &
Institutional
Professional level haircut
analysis
Introducing
the Not So Stylish Portuguese Haircut Analysis
- advertisements -
"Reggie is a fucking idiot."
Says the moron who sold him all those puts!
Hey NoBull1994: Why don't you expound upon your oh-so-erudite comment.
(But seriously.... I doubt "NoBull1994" was even approved to trade options by his broker!)
LOL! Profit Prophet
Reggie, you should take into account
1) Last week's ECB sovereign bond purchases went
down to 5.5 billion ( see today's FT )
2) The problem is that the ECB only has 70 billion
capital, and the Germans are already rightly
rising eyebrows about the likelihood of
'recapitalizing' the ECB in the event, foreseen
by many analysts, that a few countries will
have to go into 'voluntary debt restructuring
and the related ' haircuts' bondholders will have to
take
3) Overall such Q.E, even countered in its effects
by the ECB's 'sterilization' process, is unlikely
to be big in its size; the bigger problem is
the 'run' from the Eurozone bond markets, yields
and spreads rising, next in line Belgium and France
But just as the ECB curtails purchases, here comes the Eurogroup governments' new European Financial Stability Facility to buy everything.
Reggie is a fucking idiot.
NoBull seems to be a cheery fellow. Tell me NoBull, do you snort the blue Drano or the white?
Mr. NoBull, could you provide some links to the analysis which supports your conclusion.
Thanking you in advance.
Insightful response.
What do you think of his haircut?
I tend to agree. But even more idiotic are 'the subscribers' to the bustblogboom.com
um, NB . . . Reggie writes what his (and other's) research develops, and he presents his "case" with a substantial amount of facts, numbers and references.
But, I guess because you think he is a f'ing idiot, I'll agree with your analysis.
And, nothing like having a display of the F word, right here near the top of the comments.
Keep up the good work, NB!
I want my mommy
http://theautomaticearth.blogspot.com/2010/06/june-6-2010-go-long-euro-at-this-point.html
Ilargi: The cat is out of the bag (or Schrödinger’s box, if you prefer, to add some spice). And if not the whole cat, surely its tail is. Maybe French Prime Minister François Fillon spoke out of line, or maybe it was orchestrated, we’ll probably never know for sure, but the good soul brought the Euro down on Friday while at the same time confirming what The Automatic Earth readers have been able to read from me for a long time now.
Which is: Europe has been building a concerted effort to bring down the value of the Euro since at the very least the beginning of 2010. And the effort has been remarkably successful. While Americans often tout the power of the Federal Reserve, or the US Treasury Secretary, the comparative value of the US dollar has risen hugely in the past half year, which turns President Obama's goal of doubling US exports in the next five years into a red-nosed type comic relief exercise.
Mr. Fillon's "admission" leads some pundits to suggest that France and Germany are on different sides of an imaginary divide, but they haven't been paying attention. Germany’s economy is doing -relative to others- quite well, thank you very much, and many thanks to the falling Euro, and Angela Merkel has no reason to internally contradict Fillon's intentions, even though she may not have liked these to be out in the open. At this point it’s hard to guess when certain parties would like specific details known, even if Merkel looks like a musical director no orchestra member would or should like to clash with.
Mr. Fillon goes as far as saying that the European Central Bank (re: Berlin, Paris, Amsterdam) wants the Euro to achieve or sink below parity with the US dollar. Personally, I doubt that. It may be just a statement designed to speed up the fall of the currency. I’m thinking Merkel et al are aiming for $1.10-1.15 for the Euro. But they may have decided to go for the jugular, it's possible. A strong currency is great in times of strong economies, whereas a weak one fits weak times. It all depends on how Berlin and Paris view the future, which is something they'll never ever let the public in on. Politics, after all, is about looking ahead in silence.
Not that these people have some sort of absolute control, mind you. What's happening is that they have no choice. A very similar thing as applies to currencies in weak vs strong economic times also holds true for the relative value of exports to national economies. And I’ve talked about this before: very few people seem to understand that in bad economic times, where a lot of debt is involved, the relative values of exports rises exponentially.
What you can’t sell, you have to borrow, to put it into an albeit simplified way. We now see even Nouriel Roubini, who's been hiding in a dark humid doom corner over the past year, come out and say that a weaker Euro might save the Eurozone. Which, to wit, is what I’ve been saying all along: in order for Germany to save the union, and to bail out Greece and others, it will have to sell products, it’s really as simple as that, no big major mysteries there.
US Treasury Secretary Timothy Geithner calls for the opposite of all this: more domestic demand in the main Euro countries. Still, is he really that witless, or have the banks he works for in real life made trillion dollar bets on the very outcome we’re seeing develop before our eyes today, the US dollar doing precisely what no US manufacturer wants? That one I can’t answer. Geithner may not be the brightest light of day, but to presume he’s that thick is quite a different matter altogether. Still, yes, that would mean that he is actively trying to strangle US industrial capacity. Not a trivial trifle matter either.
A Euro at $1.40 or even $1.50 as always a threat to many parties, if only because many US products are assembled in 2 cents an hour economies. Parity? Perhaps, if Merkel et al are clear enough on the depth of the -inevitable- coming downfall (we don’t know what and how much they know). There would be a huge psychological advantage to a $1.10 exchange rate, but if Merkel knows what I do, and acts on it despite potential election losses (which I have no worries about), the decision may already have been made to aim for below parity, and the US interests have no choice but to rake in the profits from the resulting short trade.
And as we saw on Friday, Europe has a seemingly endless series of aces up its sleeves to achieve what it desires. Out of the blue, Hungary, which is not even a member of the Eurozone, became a major news item because of its awful economic prospects. That's where you get to think: look, the entire world, all of it bar none, has awful economic prospects. Why Hungary? And then the Euro went to below $1.20 for the first time in over 4 years. And you go: Ahhhh, Hungary, right!!, and next week Bulgaria, Romania, Latvia. By now I’m sure you get the idea.
And Washington will come back with: but we have New Jersey, and California, and Illinois, and they’re worse off than Eastern Europe by a mile, and we want exports too. Yeah, but the US has so far kept up the apperance that its central and centralized government will make good on all debt all over the 50-odd states. And as long as it keeps up that charade, Merkel wins. Whereas once that charade can no longer be maintained, there’ll be as many valid concerns about the survival of the USA as there now are about the European Union.
We're entering the reality phase of the economic downturn. The first party to recognize that has a head start. At the same time, as I indicated earlier, the major banks that own US and -most of- Europe politics and politicians may well have realized that a long time ago, and divvied up the loot well in advance. Still, go long the Euro at this point in time? Not me.
And then again, who's thinking about money when you see an entire and fast expanding (Louisiana, Alabama, Misissippi, Florida, Georgia, Carolina's and more) local ecosystem and economy go up into less than nothingness? What are our prorities, exactly?
You should start your own blog