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The ECB is Living in "Weak Town"
I have always watched the Swiss Franc. To me it is the “pure play”
measuring system for how the Euro is fairing. The following long and
short-term charts tell the story. We closed at the low today. We’re just
a few bips away from a new big figure on Euro/CHF.
The following is a chart derived from CIA information on External Debt.
These are just the liabilities. There are assets on the other side of
this ledger in many cases. I put a check next to the big Euro’s. $16
trillion between France, Germany, Netherlands, Italy and Spain. I
exclude Ireland, Belgium and Luxemburg because these liabilities are
tied to assets.
A question to ask is, “How
much of the 16T is owed internally within the Euro Zone?” A lot
of it is. Therefore the bulk of this is “protected” by the EU emergency
measures. A different question to ask is, “How much of the $15T
is owed outside of the Euro Zone?” My answer to that is, At
least 20%, or $3T.
What percentage of this amount is still in weak hands is to be seen in
the coming weeks. Depending on how things work out the ECB could be
looking at Euro 1 Trillion of supply. I can’t imagine that they would
even attempt to monetize this much debt. We would quickly move to "Plan
B" if that were to happen.
A number of European leaders, most notably President Sarkozy believes
that there are a pack of evil wolves after him. His simple solution is
to kill the predators and eliminate the menace. This is misguided. These
wolves are actually of the species called “Global Bond Investors.”
On the whole this is a pretty intelligent lot. They are not predators
at all. For the most part they are risk adverse investors. And damn near
every one of them will vote with their feet if they don’t like what the
see.
One thing the bond crowd is looking at this week is the Euro exchange
rate. And that is not setting up as a pretty chart. The NY close is at a
level where a little bit of Friday pressure could send us to 2010 lows
and possibly pass the low of 1.2475 set in 2009.
Should that happen a few hundred thousand of those bond investors are
going to be crapping in their pants all weekend long. This bunch hates
uncertainty. They are getting 3-4% return on their money. That is too
little reward to take risks.
I can’t imagine a situation where the EU bond markets are stable with
narrowing spreads and at the same time the Euro is weak. That simply
will not work. For there to be a soft landing to this story the Euro has
to be stable. A declining trend, regardless of how gradual, will just
undermine the willingness of those investors to hold 3% bonds.
We may see the ECB in the FX market tomorrow. Friday is always a good
day to make a “splash”. Anything below 1.25 is a level they should
defend. If they don’t, the phones at the ECB bond desk will start
ringing with big offers for bonds.
The boss at the ECB, Mr. Trichet, is a very smart man. He knows as well
as anyone that the EU is in deep trouble unless the Euro is devalued to a
level where it looks attractive to capital. That level is a least 10%
from where we are today. It could be 20%. It is certainly not 1.25.
To me it looks like the ECB is damned either way. If they let the Euro
work lower on a daily basis bond investors will leave. If they try to
hold an artificially high level the Bundesbank/ECB will end up owning
more Euros than they can hold. Either way they are playing a weak hand.
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On the one hand the CHF has tracked the Euro but that is now breaking down. On the other hand the CHF historically was valued because of Switzerland’s gold backing, which is now history.
So, which is it? if the Euro goes down the tubes money will flee to Switzerland for safety. Or the Swiss franc will tank too because its GDP depends mostly on the Eurozone?
In or out of the Franc?
The caption underneath the photo is incorrect. It should read BB and JT - BFD
And now your favorite headline from CNBC posted for the benefit of yahoo finance..pessimism is GREAT for the economy.
http://finance.yahoo.com/news/Why-Pessimism-Right-Now-Is-cnbc-3131107642.html?x=0&sec=topStories&pos=2&asset=&ccode=
Given the direction that governments and central bankers have chosen, why not Ben-d the rules by devaluing the Euro and buying their own bonds? The Euro is now a soft currency anyway, rules are falling by the wayside.
From a single point of origin, Mainz, Germany, printing spread within several decades to over two hundred cities in a dozen European countries.[7] By 1500, printing presses in operation throughout Western Europe had already produced more than twenty million volumes.[7] In the 16th century, with presses spreading further afield, their output rose tenfold to an estimated 150 to 200 million copies.[7] The operation of a press became so synonymous with the enterprise of printing that it lent its name to an entire new branch of media, the press.[8] As early as 1620, the English statesman and philosopher Francis Bacon could write that typographical printing has "changed the whole face and state of things throughout the world".
http://en.wikipedia.org/wiki/Printing_press
Interesting. So perhaps the cleverest startegy for the ECB is to have a quick and sharp move of the EUR/USD down to say 115. Then the bondholders are trapped - not enough time to get out. Then Trichet can defend this lower level and create some confidence that bondholders wont suffer any further losses.
Note that for the Chinese - given they are pegged to the USD - declines in the Euro will look like actual looses - as opposed to declines in the USD which they are quite happy with.
Well yes.
Northen European exporters score versus US and China.
As I said in the piece these numbers are just the liabilities. There are assets against it. The problem is solved if you can shrink the assets and liabilities. But that can't be done in an orderly way.
I exclude Belgium etal because the numbers are clearly banking related and not a true IOU. But even these areas may have issues if the amount of cross border credit contracts.
These are not my numbers. Complain to the CIA....
Bruce,
What about the Pound Sterling vs. Swiss Franc?
The graph speaks for itself. The Pound/CH is about where it was 15 months ago. I don't think this is a good place to look for Euro weakness and vulnerability. The pound is and always will be its own animal. I always hated trading sterling. I don't like it a cross currency trade. Love the country, hate the currency.
Bruce,
your numbers in US$ debt per capita apparently include the debt of the countries' banks; otherwise the numbers are plainly absurd.
The wealthy and low-debt Luxembourg has four MILLION US$ debt per person-no way that is on the state level.