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The ECB Has Two "Hail Mary" Options... Could Either of Them Work?
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Mario Draghi claims he can save the Euro.
I don’t buy it… even for one second. As far as I can see the ECB has one of two “Bail Mary” options. They are:
- Massive money printing and buying of sovereign debt
- The issuance of Euro-bonds along with across the board banking backstops.
As I noted in a recent article, #1 is impossible. If the ECB does this it will implode the bond market, which means GAME OVER for all intervention. Look at the impact QE had on Treasuries and you’ll see what I mean. And that’s Treasuries we’re talking about… not PIIGS debt.
Now let’s consider the ECB’s second “Hail Mary” option: the issuance of Euro-bonds and across the board backstopping of EU banking deposits.
For starters, Angela Merkel has said that there will not be Euro-bonds for “as long as [she] live[s].” This is not a bluff. The issuance of Euro-bonds goes against the German constitution. If Merkel were to even consider this option she would likely be kicked out of office (remember she’s up for re-election next year).
This would also result in Germany losing its AAA credit status. Germany is already approaching the dreaded Debt to GDP level of 90%. And thanks to nearly €1 trillion in back-door bailouts to Europe, the country is already on the hook for potentially tens if not hundreds of billions of Euros worth of losses: money Germany doesn’t have.
As for backstopping EU deposits… no entity on earth has the capital to do this. Total Eurozone deposits stand at €15 trillion. Even deposits at the current EU “problem” countries (Spain, Italy, Portugal and Ireland) are €5.5 trillion. That’s nearly TWO TIMES the size of the ECB’s balance sheet and over FOUR TIMES the size of the various EU bailout funds (the EFSF and ESM, the former of which only has €65 billion in capital left by the way).
Again, in very plain terms, NO ENTITY on planet earth has the money needed to backstop banking deposits for the PIIGS, let alone the entire EU. So scratch that idea off the list.
What does this leave?
It leaves us precisely where we are today. Where is that?
|
Bailout Entity |
Remaining Firepower |
|
EFSF bailout fund |
€65 billion |
|
ESM |
€700 billion assuming Germany and Italy ratify it (they haven’t yet) |
|
IMF |
€38 billion (maybe) |
|
ECB |
Technically, the ECB could print a couple hundred billion Euros, but doing so would have severe political and monetary ramifications so this option is questionable. |
|
Germany |
If it ratifies the ESM it’s on the hook for €190 billion Euros as well as the nearly €1 trillion it’s committed to EU bailouts already. German GDP is only €2. 89 trillion. So the country is already getting close to its own solvency crisis. |
The above is not opinion or idle conjecture; these are all verifiable facts, which is why I believe Mario Draghi is bluffing when he says the ECB can act and that its actions be “enough.”
Indeed, as a merely philosophical inquiry, ask yourself, when has a Central Banker said “believe me,” and proven to be correct about anything in the last five years?
With that in mind, I’m helping individual investors prepare for the inevitable EU fall-out with a FREE one time Special Report titled How to Play the Collapse of the European Banking System. It’s 10 pages in length and covers in great detail the systemic risks posed by the EU to the financial markets. I also outline a number of investment strategies that will prove quite profitable as Europe crumbles.
You can access this report here.
Best Regards,
Graham Summers
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Graham, I think you are right about the facts, but let's face it: how many market participants have the same view or knowledge/awareness as you do? What about the robots/mechanical systems? What about the constant treats of some "propping up" measure? What about the lack of references of real value? What about how long it might take for all of this "collapse" to unfold? What about the old trading maxim that all the information you need is price action itself? Is it not valid anymore? If you are right, recent market action is abnormal (decoupled from reality). Yet, all we have is price action itself, no matter what you or all analysts on earth think it should do. You might be right, But timing can be very very tricky. That's the problem of fundamental analysis. And yet, there might be some unexpected event. So, we're back to price action again...
Hearing you think is getting old
Mari o full of grace at the ECB has allowed printing at national level, and the issue of short term bonds. The two option chant has been re written.
Graham has 2 Hail Mary options
(1) bugger off and never return
(2) see (1)
They dont have any fire power left at all, their only option is more debt to kick the can a moment longer and I wouldnt count on that Germany seems dead set against it.
No
$1605.7 as of the moment, how things change......NOT!!!
Can't we just put Europe on hold for about six months and come back to it then? It'll be in about the same as it is today, six months ago, one year ago,.................
They can pull a rabbit out of the hat by buying US debt and the US buying EU debt.
This will be a big boost as it seems they then get reclassified as 'assets".
Then we can all go to hell together.
We already are..
BTW, the Road to Hell Remains Unpaved
Actually I think one side is paved with debts and the other side is assets.
It just doesn't matter which side of the street one refers to as it is still HELL.
Why I'm watching $1586 on gold: (chart included)
http://wp.me/p2CT0a-3g
Let's get back on topic (and off of spamming), shall we...
Here is what will happen:
The EUR will devalue. But it won't disappear, or lose utility.
Ghordius so far has said it best (link to the comment below http://www.zerohedge.com/news/feds-gold-being-audited-us-treasury#commen... )
"it is well known that the bulk of Europe's sovereign gold is also contained deep under downtown Manhattan: we wish them all the best when they attempt to repatriate the physical when they need it, such as the day after the EUR finally collapses".
This is the other way round. First Nixon forbade repatriation on August 1971. Then europe had think through where all this was heading and concocted the EUR as a response to the situation, present and future.
This included expectations of future currency wars and great rounds of "competitive devaluations" in an environment that would make small currencies very, very fragile in view of huge waves of hot, speculative fiat looking for something to break for a quick profit. The CHF is already hiding under the EUR skirt, if this goes on we'll soon see other small currencies in some kind of trouble (the GBP's fate will also be very interesting). No financial pundit is currently ever thinking through (in the way of Bastiat) how this mess since 2008 would have looked like with 17 eu currencies all biting each other...
Ironically, the best way to get rid of the EUR would be the repatriation of the european gold, same as in 1971.
Fat chance. As long as the US Treasury/FED goes the fiat way and the USD is the global reserve currency (the two facts reinforce each other), I don't see how this "EUR collapse" could happen with an eurozone that is a net exporter, an ECB that values it's gold at market value and the European Fiscal Compact that is going to at least try to institutionalize nearly-balanced-budgets in the eurozone's future.
For all near-blind hate against all central banks that some here have, anybody looking seriously at the current situation should realize a few of those facts, that make btw the search for "understanding where the EURUSD is going" quite irrelevant, a mere short-term distraction. By now, we all have some proof that the ECB is really guided by the compromise between 17 national interests (yeah, call them mercantile, if you wish).
Parts of the gold markets are "getting it", eventually we'll talk here about "eurogold vs. usdgold", and more about "central banks FX reserves", etc.
And for all those that are expecting a "marriage of convenience" between the USD and the EUR - or even think this is a "grand plan": please remember East Asia's policies, expectations, demands (including SDRs), past currency manipulations and plans for the future. And how the current global trade flows function.
All I can think to add to what Ghordius wrote above (for now) is that the EUR is a supra-national currency, with no single nation in control of the issuance of currency (BIG difference between the ECB and the Fed, although it's clear the Fed is in collusion with the big banks).
Also, it uses the market price of gold to calculate it's reserves, with which it lends against. This gives it an enormous advantage over both a debt-based and a gold-redeemable currency.
This also has the effect of limiting the ability of any one Eurozone member from issuing unsustainable debt (Greece, Spain, et. al. are running up against this market limit right now).
This has the effect of in the long run, making the EUR the most stable of all transactional currencies in the world.
The USD could do the same, but to try and adopt the EUR model, it would create a price shock in gold (and the USD) that TPTB are clearly trying to avoid.
This IMO will result in the EUR becoming (at least in the West) the transactional currency of choice. Not a great store of value (unless you buy stable EU nation bonds, depending on the larger environment), but a superior medium of exchange than other currencies (owing to it's wide acceptance and greater stability).
Gold, bitchez.
Oh, and http://screwtapefiles.blogspot.de/2012/08/niceto-know-that-euro-is-in-su...
Cheers,
LowProfile