In yet another attempt to blur the fine line between sterilization and quantitative easing, the ECB has announced it will carry out a one week variable rate liquidity operation on Tuesday to absorb the €16.5 billion in cash that was spent on bond purchases (don't you dare suggest this is QE) until last Friday. This will be followed with another liquidity extraction procedure the following week. From the press release: "As decided by the Governing Council on 10 May, the ECB will conduct specific operations in order to re-absorb the liquidity injected through the Securities Market Programme." The amount of the extraction takes "into account transactions with settlement at or before Friday 14 May." The logic of immediately extracting rescue liquidity for a continent that is still on the verge of a liquidity crisis eludes us. Market News solidifies the point: "The ECB has not disclosed the total volume it intends to spend on the programme but had promised repeatedly before today that it would drain all additional liquidity injected." Zero Hedge contributor Bruce Krasting points out "To me this an AWACs. The ECB is not playing ball. They are doing some lip service on tv but no fx intervention and no QE tells me they want a much lower Euro and an ultimate blow up that lets them kick out a few members and create a two tiered Euro. Deutschland Uber Alas." We do not disagree. And across the Atlantic Evans-Pritchard agrees that only full blown QE can, paradoxically, do anything to restore confidence in the euro.
From the Telegraph:
There is a way out of this crisis, but it is not the policy of wage deflation imposed on Ireland, Greece, Portugal, and Spain, with Italy now also mulling an austerity package. This can only lead to a debt-deflation spiral. The IMF admits that Greece’s public debt will rise to 150pc of GDP even after its squeeze, and that Spain’s budget deficit will still be 7.7pc of GDP in 2015.
The only viable policies – short of breaking up EMU or imposing capital controls – is to offset fiscal cuts with monetary stimulus for as long it takes. Will it happen, given the conflicting ideologies of Germany and Club Med? Probably not. The ECB denies that it is engaged in Fed-style quantitative easing, vowing to sterilise its bond purchases “euro for euro”. If they mean it, they must doom southern Europe to depression. No democracy will immolate itself on the altar of monetary union for long.
Which means that the EURUSD is likely going not only to parity, but much lower. Unless, of course, Bernanke finally comes up with some mechanism to put the final stake throough the heart of the dollar. Because, as Doug Kass points out, "the eurozone accounts for about 15% of S&P profits. A declining euro could lead to negative foreign-exchange translation and lower imports. The lower euro should shave about 3% to 3.5% off of this year's and about 4% off of next year's S&P profits." 3% off the estimated ~$80 in 2010 EPS is equivalent to 45 points in the S&P at a 15x multiple. Our estimate is that this will be a wildy optimistic estimate as the underlying 80 EPS in the S&P will very likely be a one time pick and once the stimulus, both monetary and fiscal, benefits run out, S&P earnings will plunge by about 40%.
Place your bets.