With a “defiant” Syriza determined to hold onto any shred of dignity and legitimacy that may remain in the wake of months of painful negotiations with its creditors and with a €5 billion advance from Russia (a large chunk of which will promptly be paid to the IMF which use it to bailout Ukraine which will hand it right back to Russia) shaping up to be the last lifeline for Greece before Athens is reduced to issuing IOUs to pay pensions and salaries, the focus is beginning to shift away from Grexit and towards contagion risk.
The worry is that once Greece goes, both the credit market and periphery depositors will suddenly realize that the EMU is not “indissoluble,” but is in fact nothing more than a confederation of fixed exchange rates. This realization could (and to a certain extent already has) cause credit investors to begin pricing redenomination risk back into sovereign spreads and, far more importantly (because as UBS recently noted, bonds don’t cause breakups, bank runs do), may lead depositors to question the wisdom of holding their euros in bank accounts where they’re earning next to no interest and where, should some “accident” occur, they are subject to conversion into a national currency that would swiftly collapse against the euro once introduced.
And so, with every sell side European credit strategist trying to figure out what happens when €60 billion in monthly asset purchases by a central bank collide head on with an unprecedented sovereign default and with speculators’ net short position on the EUR now at levels last seen in 2012, it’s time to bring out the big guns with Mario Draghi staging a sequel to his now famous “whatever it takes” speech which came in the summer of 2012, when spreads were blowing out across the periphery and when euro net shorts looked a lot like they do today.
While conceding that a Greek exit from the euro would put everyone in “uncharted waters,” Draghi says he has the tools to combat contagion and as for shorting the euro, well, perhaps the best way to sum up Draghi’s position is to quote Clint Eastwood: “go ahead, make my day.”
Here’s more via FT:
Mario Draghi said the euro area was better equipped than it had been in the past to deal with a new Greek crisis but warned of “uncharted waters” if the situation were to deteriorate badly.
The European Central Bank president called for the resumption of detailed discussions aimed at resolving the country’s debt woes and urged the Greek authorities to bring forward proposals that ensured fairness, growth, fiscal stability, financial stability.
Asked about the risks of contagion from a new flare-up in Greece, he said: “we have enough instruments at this point in time . . . which although they have been designed for other purposes would certainly be used at a crisis time if needed”...
However Mr Draghi added: “Having said that, we are certainly entering into uncharted waters if the crisis were to precipitate, and it is very premature to make any speculation about it.”
The ECB president was speaking following meetings in Washington that have been overshadowed by renewed fears about the risk of a Greek debt default and possible exit from the euro…
Expressing confidence in the euro’s continued stability, Mr Draghi said on Saturday it was “pointless” to go short on the single currency — challenging anyone who disagreed to do it.
So with the challenge thus issued, the question now is whether or not Draghi’s jawboning has a similar effect on the EUR this time around as it did back in 2012 when “whatever it takes” sent the single currency from 1.23 to 1.36 over the ensuing five months, something which isn’t necessarily desirable when you’re in the midst of global currency war and when you’re explicitly trying — as central bankers are prone to do — to stoke inflation.
Of course, in a world where more QE cowbell is the answer to everything we suppose having an excuse to print still more euros would be just fine with everyone and as we outlined last week, it’s perfectly ok if the ECB runs out of EGBs and SSA debt to buy because the lower limit problem is just as good an excuse as any to jump into corporate credit and if that turns out to be insufficient, Draghi can always go full-Kuroda and throw the ECB balance sheet behind the DAX, the CAC, and the IBEX.
Here's a look at the positioning around Draghi's "pointless" bet: