Early last week we presented something rather shocking [15]: a note by Goldman Sachs suggested that as a result of the ECB's QE failure to push the EUR lower and with bond yields having risen instead of falling since the launch of the ECB's QE in March, and perhaps due to a perplexing conflict between the ECB and the Bundesbank when it comes to debt monetization, a Greek default sparking contagion blowout risk, not to mention a "seven big figure" tumble in the EURUSD, may be just what the ECB needs.
On one hand, the Goldman assessment was not surprising: after all the bank's top trade for 2015 has been that the EUR will go much lower from current levels so in many ways it was self-serving. But, what's far more stunning is that Goldman, accurately, assessed the ECB's needs in light of what is increasingly seen by many as a QE program that is faltering just 4 months after its launch, and the direct implication was evident: for all the posturing and bluffing from Greece that it won't be blackmailed, it may have fallen precisely in a trap set by none other than the ECB.
The only hurdle was getting the Greeks to accept the blame for the failure of the negotiations which happened, at least in the perspective of the Eurozone, when Tsipras announced the referendum after midnight on Friday. Merkel herself admitted as much earlier:
- MERKEL SAYS GREECE UNILATERALLY ABANDONED SUCCESSFUL TALKS
In other words, when it comes to Europe, Greece lost the blame game, and just like the Ukraine civil war last year, became an unwitting catalyst greenlighting Germany's concession to ECB QE, this time it may be Greece that launches the next step in the ECB's master plan: not just QE but more QE.
This is precisely what Goldman's Franceso Garzarelli, co-head of macro and markets research, admitted earlier today in an interview on Bloomberg TV, when he said that the ECB "will have to go big" if the situation in Greece worsens and leads to wider peripheral bond yield spreads.
He added that a close call or "no" vote at referendum will cause spread widening which as a result of the complete lack of bond liquidity borne out of the ECB's intervention and soaking up of government bond collateral, "the market is not deep enough to accommodate a rotation in risk at this point in time."
How ironic: what Goldman is saying that the more the ECB intervene, the more it will have to intervene. Which, of course, is very convenient for all those who stand to benefit the most from more ECB - entities such as Goldman Sachs...
In terms of specific markets, Garzarelli said that the 10Y Italian yield at 3% would be a sign ECB may move. He added that the market is currently “frozen” with Italy-Germany spread trading in a range because the direct risk from Greece is low, i.e., "if you have Greek risk on at the moment it’s because you want it"; because there is hope of an agreement and because expectation the ECB will limit contagion. The clear circularity of the last argument is too obvious to even note it.
And perhaps just to emphasize Goldman's point, earlier today another (ex) Goldmanite, this time the one in charge of the Bank of England, Mark Carney, directly refuted Obama who said Greece is not a "major shock" to the US economy [16], admiting this morning that "the outlook for financial stability in the U.K. has deteriorated in recent days as the crisis in Greece intensifies, underscoring how the Mediterranean nation’s debt troubles are reverberating outside the eurozone."
As the WSJ reported [17], when "presenting the BOE’s twice-yearly Financial Stability Report, the central bank’s governor Mark Carney said the risks associated with Greece and its failure so far to reach a deal with its international creditors have grown acute, and threaten to trigger a selloff in financial markets that could ripple through to the wider global economy."
Mr. Carney told reporters that although U.K. banks’ direct exposure to Greece through loans and deposits is minimal, that doesn’t mean the British economy would necessarily be immune to the fallout should Greece exit the eurozone.
“The situation remains fluid, and it is possible that a deepening of the Greek crisis could prompt a broader reassessment of risk in financial markets,” Mr. Carney said. That could ultimately hurt the confidence of businesses and households in Britain, he said.
The BOE has been working with the U.K. Treasury and authorities across Europe to draw up contingency plans to shield the U.K. economy from harm, Mr. Carney said, although he declined to elaborate. He did say regulators have in stepped up their scrutiny and engagement with the U.K. branches of some Greek lenders.
On Wednesday, U.K. Treasury chief George Osborne said Britain is hoping for the best but “preparing for the worst.”
“We stand ready to do whatever is necessary to protect our economic security at this uncertain time.”
Conveniently, if only for all those 0.01% of the economy who benefit directly from QE, so does the ECB: it is, in fact, ready (and would be delighted) to "go big"...
.... in case Greece votes "Oxi" on Sunday which would mean that, for the second time in the 21st century [18], Goldman wins and Greece loses.
