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ECB Says "Grexit Can No Longer Be Excluded", Hints At More QE

Tyler Durden's picture




 

It seems Goldman Sachs' conspiracy theory was right all along...

  • ECB'S COEURE SAYS ECB IS EVEN READY TO USE NEW INSTRUMENTS, WITHIN ITS MANDATE
  • GREECE COULD EXIT EURO, COEURE SAYS IN LES ECHOS INTERVIEW

This is exactly what The ECB wanted all along (and their leaders overlords) - all they needed was an 'excuse'.

*  *  *

As we noted previously, from Goldman:

As tensions around Greece have mounted, it is something of a puzzle that EUR/$ has shown little reaction. Our explanation, laid out in our last FX Views, is that much of this price action stems from the Bundesbank, which has reduced the maturity of its QE buying, enabling the Bund sell-off and moving longer-dated rate differentials in favor of the Euro. EUR/$ thus hasn’t traded Greece, but instead growing question marks over ECB QE.

Here is Goldman's full take:

From an economic perspective, Greece shows that “internal devaluation” – whereby structural reforms are meant to restore competitiveness and growth –is difficult politically and a poor substitute for outright devaluation. Emerging markets that devalue during crises quickly return to growth, powered by exports, while Greek GDP continues to languish. We emphasize this because – even if a compromise involving a debt haircut is found – this will not do much to return Greece to growth. Only a managed devaluation, with the help of the creditors, can do that. With respect to EUR/$, we think the Bund sell-off increases EUR/$ downside if tensions over Greece escalate further. This is because the ECB, including via the Bundesbank, would almost surely step up QE to prevent contagion. We estimate that the immediate aftermath of a default could see EUR/$ fall three big figures. The ensuing acceleration in QE would then take EUR/$ down another seven big figures in subsequent weeks. We thus see Greece as a catalyst for EUR/$ to go near parity, via stepped up QE that moves rate differentials against the single currency.

 

Incidentally, "internal devaluation" is a very polite way of saying plunging wages, labor costs, and generally benefits, including pensions.

But if this is correct, Goldman essentially says that it is in the ECB's, and Europe's, best interest to have a Greek default - and with limited contagion at that - one which finally does impact the EUR lower, and resumes the "benign" glideslope of the EURUSD exchange rate toward parity, a rate which recall reached as low as 1.05 several months ago before rebounding to its current level of 1.14.  Needless to say, that is a "conspiracy theory" that could make even the biggest "tin foil" blogs blush.

A different way of saying what Goldman just hinted at: "Greece must be destroyed, so it (and the Eurozone) can be saved (with even more QE)."

Or, in the parlance of Rahm Emanuel's times, "Let no Greek default crisis go to QE wastel."

Goldman continues:

Greece, like many emerging markets before it, is suffering a balance of payments crisis, whereby a “sudden stop” in foreign capital inflows caused GDP to fall sharply. In emerging markets, this comes with a large upfront currency devaluation – on average around 30 percent across nine key episodes (Exhibit 1) – that lasts for over four years. This devaluation boosts exports, so that – as unpleasant as this phase of the crisis is – activity rebounds quickly and GDP is significantly above pre-crisis levels five years on (Exhibit 2). In Greece, although unit labor costs have fallen significantly, price competitiveness has improved much less, with the real effective exchange rate down only ten percent (with much of that drop only coming recently). This shows that the process of “internal devaluation” is difficult and, unfortunately, a poor substitute for outright devaluation. The reason we emphasize this is because, even if a compromise is found that includes a debt write-down (as the Greek government is pushing for), this will do little to return Greece to growth. Only a managed devaluation can do that, one where the creditors continue to lend and help manage the transition.

Here, Goldman does something shocking - it tells the truth! "As such, the current stand-off is about something much deeper than the next disbursement. It signals that the concept of “internal devaluation” is deeply troubled."

Bingo - because what Goldman just said in a very polite way, is that a monetary union in which one of the nations is as far behind as Greece is, and recall just how far behind Greece is relative to IMF GDP estimates imposed during the prior two bailouts...

... simply does not work, and for the union to be viable, a stressor needs to emerge so that broad currency devaluation benefits not only the peak performers, i.e., the northern European states, but the weakest links such as Greece.

Incidentally, all of this was previewed long ago in, in December 2012 when we wrote "Next Up For A "Recovering" Europe: A 30-50% Collapse In Wages In Spain, Italy And... France." To Greece's great chagrin, all of this internal devaluation has mostly impacted the impoverished country, which continues to be a shock absorber to broader internal devaluation across the entire Eurozone.

Which brings us back to Goldman's assessment of the current Greek state, and the suggestion that all the smoke and mirrors flooding the headline-scanning algos is nothing but noise, and that in reality the forces are alligned to "push the EUR near parity in fairly short order."

 

Paradoxically, Goldman keeps pushing for a worst-case outcome, and one where the market finally reprices all the risk it has ignored for months:

Even if Greece ultimately stays in the Euro (our base case), the immediate aftermath of such a non-payment will be to push bond yields up across the periphery. This rise in the fiscal risk premium (Exhibit 3) will of course be limited, because the ECB will likely accelerate QE, including via the Bundesbank. That will push rate differentials, especially longer-dated ones (Exhibit 4), against EUR/$. We estimate that the initial fiscal risk premium effect could be three big figures, while the subsequent QE effect could be worth around seven big figures.

The conclusion:

In short, we see mounting tensions over Greece as a catalyst for EUR/$ to move near parity in fairly short order, with much of that move driven by rate differentials. If, instead, a compromise solution is found (including possible debt haircuts), we see the upside to EUR/$ as very limited, i.e. on the order of one big figure at most. The reason for this is that the market is broadly expecting an agreement to be found, even with the possibility of a default in the near term on debt repayments coming due.

And of course, going back to the start of the note, a "favorable" outcome pushing EUR higher will be one that "will do little to return Greece to growth" and as a result will force the insolvent nation back to the negotiating table until such time as the Eurozone finally realizes that it desperately needs EUR much lower, not higher, and will do everything it can to achieve that, even if it means "siloing" Greece in a state of suspended default indefinitely if only to eliminate the "risk on" euphoria in the currency pair.

Indeed, as we said last year, the entire escalation over the Ukraine conflict was merely to push Europe to the verge of a triple-dip recession, which in turn was the catalyst that finally greenlighted the ECB's first episode of QE with Buba's blessing (after all Germany's economy was finally on the brink as well and it had little to lose). Well, the next such "catalyst" will come from none other than Greece as per Goldman's punchline:

We encounter many who argue that mounting tensions over Greece could be Euro positive. The short term angle is that risk reduction will lead to a squeeze of Euro shorts, so that EUR/$ could squeeze higher. The reason we don’t believe this is because we think stepped up ECB QE will dominate any risk-off response. Or, to put this in another way, the ECB will not allow the fiscal risk premium to go all that much higher. The medium-term angle is that the Euro zone might be more cohesive without Greece. That rationale assumes that Greece is a case apart, when of course it isn’t. After all, the Spanish unemployment rate is not far behind that of Greece and populist political pressure is also building. The underlying commonality, in our minds, is that “internal devaluation” is very difficult. As a result, we think mounting tensions around Greece could just as well focus market attention on the sustainability of the adjustment program on the Euro periphery.

Whoever would have thought that none other than Goldman would serve as the source of what may be the biggest "conspiracy theory" gambit of 2015...

One final thought: what Goldman wants, its former employee at the ECB tends to deliver.

 

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Mon, 06/29/2015 - 16:42 | 6251182 Model T
Model T's picture

Oh Noes !!  Not the "New Instruments"---anything but that.

Mon, 06/29/2015 - 16:44 | 6251195 ParkAveFlasher
ParkAveFlasher's picture

Inquisitor Draghi wants only your salvation. 

Mon, 06/29/2015 - 16:49 | 6251220 TahoeBilly2012
TahoeBilly2012's picture

Did you say Goldman IS a conspiracy theory or HAS one, or both? I get confused...

Mon, 06/29/2015 - 16:54 | 6251250 Publicus
Publicus's picture

Switch to Ruble or Yuan already.

Mon, 06/29/2015 - 16:57 | 6251260 pods
pods's picture

"The ECB could even start buying defaulted Greek bonds if the need arises."

pods

Mon, 06/29/2015 - 16:59 | 6251270 Publicus
Publicus's picture

The ECB should buy my trash instead.

Mon, 06/29/2015 - 17:04 | 6251293 Hype Alert
Hype Alert's picture

They will quarantine Greece, then mount the carcass on a pole as a warning to the remaining PIIGS.  The QE will continue until morale improves.

Mon, 06/29/2015 - 17:06 | 6251303 Publicus
Publicus's picture

QE will continue until World World 3 ends it all.

Mon, 06/29/2015 - 17:08 | 6251310 Hype Alert
Hype Alert's picture

Won't let me edit my own post, but

 

Oh yeah, everybody act shocked when the FED can't normalize rates because of this.  And you thought there wasn't a plan.

Mon, 06/29/2015 - 16:59 | 6251276 Timmay
Timmay's picture

It's one big circle jerk. As each participant leaves, the rest say, "we wanted that to happen". Soon, all there will be is Germany playing with itself.

 

Really, if this is a such a "good" thing then I guess Germany is wishing Italy and Spain default as well??

Mon, 06/29/2015 - 17:42 | 6251439 Carpenter1
Carpenter1's picture

"They needed an excuse for QE"

 

You QE addict junkies will believe anyrthing. CB's don't need an excuse for more QE, the market is begging for it and will ask no questions any time CB's want to launch it.

 

There will be no more QE, deal with it.

Mon, 06/29/2015 - 17:20 | 6251362 Model T
Model T's picture

Well, if you're not confused, you're not paying attention; which is probably a pretty good idea.

Mon, 06/29/2015 - 16:59 | 6251272 TBT or not TBT
TBT or not TBT's picture

Oh Central Bank, make us chaste, but not yet.  

Mon, 06/29/2015 - 17:29 | 6251387 piratepiet2
piratepiet2's picture

Augustinus

Mon, 06/29/2015 - 16:43 | 6251189 twh99
twh99's picture

Let Greece go.  

How does that saying go?  If you set them free and they come back to you then they are yours, but if they never return then they never were yours.

Mon, 06/29/2015 - 17:08 | 6251309 WTFUD
WTFUD's picture

You soppy romantic (haha); chain 'em to the kitchen sink and have your way when suits.

Captain Caveman

Mon, 06/29/2015 - 17:17 | 6251215 Bryan
Bryan's picture

Draghi:  Hm... what are we going to do now?

Merkel:  What... you mean about Greece and stuff?  Dunno.  We keep offering them free college here to get an education, but they don't want to work.

Draghi:  Wait, I have an idea... let me just bend over and ... pull... it out of my... there.

Merkel:  ?

Draghi:  Let's print more Euros!

Merkel:  Das ist genial! Warum habe ich nicht daran gedacht?


Mon, 06/29/2015 - 16:51 | 6251234 MarxFelix
MarxFelix's picture

... and EURO is up to the moooooooooon !!!!!

Mon, 06/29/2015 - 16:51 | 6251236 Yen Cross
Yen Cross's picture

   The ECB would love nothing more than to gobble up all that trash they call European bonds.  The Japanification of Europe is just around the corner.

Mon, 06/29/2015 - 16:55 | 6251252 JenkinsLane
JenkinsLane's picture

Better yet, have the entire EU banking system turned into the US banking system, whereby the EU banks' loans are

securitized and bought by the ECB, thereby taking all their NPLs off their books and steathily recapping the entire

EU banking system.

 

"Winner, winner, chicken dinner."

Mon, 06/29/2015 - 17:54 | 6251481 SDShack
SDShack's picture

Cmon, don't just stop with EU Banks. Let's include any TBTF institution that can be "defined" as a financial entity, and get the taxpayers to bail them out. AIG, GE, Govt Motors, Crying Motors, etc. Nevermind we don't have any legal authority to do this, we don't need no stinkin legal authority other then we are TPTB.

Mon, 06/29/2015 - 16:59 | 6251278 Rainman
Rainman's picture

true .... and the Squid will insert its blood funnel right into the middle of it for sure.

Mon, 06/29/2015 - 16:54 | 6251243 Haole
Haole's picture

ECB ready to use "NEW INSTRUMENTS"?

 

Paging WB7 please.

Mon, 06/29/2015 - 16:53 | 6251244 Pheonyte
Pheonyte's picture

According to intercepts of , gave up on Greece in 2012

https://twitter.com/wikileaks/status/615617489435799552

Mon, 06/29/2015 - 17:13 | 6251334 rlouis
rlouis's picture

So Merkel was as realistic as anyone in 2012 but bent the Greeks over for the bankers?  I shouldn't be surprised, neither should the people of Portugal, S-pain and Italy.  When bankers have the power to print money, and then buy politicians with the money, is it any surprise a corrupt system results. 

Mon, 06/29/2015 - 16:53 | 6251245 JenkinsLane
JenkinsLane's picture

So the ECB's gonna start buying Japanese ETFs then?

Mon, 06/29/2015 - 16:56 | 6251247 backasswards
backasswards's picture

Looking at the EUR/USD, it kind da looks like maybe the Fed was buying euro assets, like, uh, how about Greek bonds? Or maybe just Deutsche Bank?

Mon, 06/29/2015 - 16:58 | 6251269 sudzee
sudzee's picture

EU will be pissed if Greece leaves and they have to rely on gas from them in the near future. 

Mon, 06/29/2015 - 16:59 | 6251271 Kaiser Sousa
Kaiser Sousa's picture

new instruments my ass...

like what...a Ukulele....

 

Mon, 06/29/2015 - 17:15 | 6251343 market le pew
market le pew's picture

yop, plugged in to an amp which goes to 11!!!

https://www.youtube.com/watch?v=KOO5S4vxi0o

Mon, 06/29/2015 - 17:16 | 6251346 Model T
Model T's picture

If Greece doesn't behave, the French will threaten to Surrender !!

Mon, 06/29/2015 - 17:17 | 6251348 Model T
Model T's picture

LOL.

Mon, 06/29/2015 - 17:09 | 6251317 gra_msi
gra_msi's picture

This is what happens when a Comunist Party rules a country ¡!

Mon, 06/29/2015 - 17:10 | 6251319 WTFUD
WTFUD's picture

. . . and all that i knew was the hole in my shoe was letting in water.

Mon, 06/29/2015 - 17:12 | 6251332 B2u
B2u's picture

so QE doesn't work....

Mon, 06/29/2015 - 17:13 | 6251336 gra_msi
gra_msi's picture

ECB rules European markets, we can only see the show ¡!

Mon, 06/29/2015 - 17:17 | 6251349 Soul Glow
Soul Glow's picture

MOAR QE!!!!

Mon, 06/29/2015 - 17:21 | 6251366 i_call_you_my_base
i_call_you_my_base's picture

Then why prop up the Euro like they supposedly did today?

Mon, 06/29/2015 - 17:35 | 6251413 Bill of Rights
Bill of Rights's picture

Central bank destruction live and In HD , this is awesomeness .

Mon, 06/29/2015 - 18:49 | 6251704 ramgold2206
ramgold2206's picture

The whole project is ego driven... no different to every war (hot, cold or financial) that has ever been fought... what amazes me is how the bullshit continues on in this Fiat currency, nothing is as it seems, upside down world.. Maybe the whole thing is a game/matrix of deception and the people are in a deeper sleep that we on ZH realise.

Regardless, I believe I woke from that sleep a year ago, got an alternative education on ZH and consequently got into gold bullion and now I want to give something back.

 

For those of you not actually in the physical metal .. I can highly recommend it.. because no matter what goes on in the EU Punch and Judy show... my stress levels reduced 90% knowing I have some bullion.

 

You might think I'm just spamming, but I'm not... I'm deadly serious!  I got involved in a German company called Karatbars International who produce Gold Bullion in small weights and boy am I glad on so many levels.

 

They developed an incredibly lucrative affiliate marketing system to get their product to market... Its free to join at the basic level although if you decided to go all in to earn the highest commissions the buy in price is essentially peanuts... FFS my day job Personal Indemnity insurance costs more per month!!

 

The downside is it's more a mass education programme than marketing,,, because aside from ZeroHedgers the financial IQ out there is well down the trickle down economic cascade and those people need to be educated to get some AU!

Mon, 06/29/2015 - 20:36 | 6252024 the question
the question's picture

Tyler, sorry if someone beat me to this, but you have to re-post this article:

 

http://www.zerohedge.com/news/2013-04-04/mario-draghi-responds-zero-hedge-there-no-plan-b

Do NOT follow this link or you will be banned from the site!