So I thought I'd take a minute to work out some thoughts in my head about the EU summit Friday and all of the goings on of late (especially this week). Sunday night I mentioned the rumor floated by German Newspaper Die Welt that the House Republicans in their effort to block the IMF from bailing out the EU with US taxpayer dollars, could effectively be side-stepped by the "Independent" F_E_D loaning the money to the IMF, this of course (as I mentioned yesterday) seems like a slap in the face to the EU/ECB as that is what the entire world, led by the US have been pressuring the ECB to do, loan to the IMF to bailout Europe, something the ECB in recent statements has not been keen on, so this "rumor" as I said yesterday, seemed like a very sarcastic attempt by the US to humiliate the ECB in to action. I believe I was right, as I published yesterday, an ECB member (Jens Nowotny) came out with several comments that in a round about way addressed the rumor, such as:
NOWOTNY SAYS EUROPE CAN SOLVE CRISIS ITSELF
NOWOTNY SAYS NOT NECESSARY THAT USA `HELP OUT' EUROPE
NOWOTNY SAYS SMP CAN'T BE COMPARED TO FED, BOE PROGRAMS
These quotes were all from yesterday after the F_E_D rumor came out, so it seems the US hit the nerve they were looking to hit and now as of today, the main US agent provocateur, is making his rounds with ECB members and EU leaders, which is ironic because the last time he was there, he didn't really receive a very warm welcome and more of a, "Who invited you? Keep your opinions to yourself" type of welcome (I do believe a few quotes were nearly verbatim). So I find the F_E_D liquidity line a little ironic in its timing, it certainly did nothing to regain the confidence on the banking sector as they continue to park record amounts of cash at the EB, while weaker banks are borrowing near record amounts due to a liquidity freeze in both $USD and Euros.
Now, I know that the S&P really ticked the administration off when the lowered the US credit rating and soon after, there was a congressional investigation of the S&P and their calls way back in 2007, seems kind of childish. In any case, it would be hard to make the case that the S&P is acting as an agent of the US, but the Credit Watch issued yesterday on 15 of 17 Euro zone member nations, including Germany and a possible 2 notch downgrade for France, couldn't come at a more appropriate time or perhaps inappropriate as the S&P is virtually driving policy in the EU rather then issuing credit ratings after the fact, they are in a way, very directly effecting the outcome of the summit on Friday with the threat of these downgrades. I don't see that as an appropriate role for a credit rating agency, after the summit if they were to chime in, that would be perfectly legitimate, but putting a dagger to the collective EU member nation's throats seems to be a role that is out of line for a credit rating agency.
It makes me wonder really how independent they are in this action?
Draghi has been a little unclear about what the ECB would do if the EU came up with the new tightly consolidated fiscal union that would give the EU or some branch of it, the ability to tell a sovereign nation that their budget is not only vetoed, but to punish them with punitive fines for breaking the new rules. I don't know how this will turn out, who will be willing to give up their sovereignty to an increasingly German and to a lesser degree, French EU, the days of 1 nation 1 vote are over.
In any case, the pressure has instantly been turned up on the ECB. It "seems" from the S&P warning, that the ECB no longer has the luxury of standing by and waiting to see what fiscal union is created on Friday and then decide what their appropriate role would be, but it seems more like the S&P is forcing the ECB to become part of the solution as of Friday's summit, which of course endangers the independence they seek to maintain.
It just strikes me as beyond ironic that all of these events have played out in the last few days, actually 24 hours as of Sunday. Talk about introducing volatility on top of volatility.
Even Luxembourg PM and EU Finance minister leader, Jean Claude Juncker said today,
“I have to wonder that this news reaches us out of the clear blue sky at the time of the European summit -- this can’t be a coincidence,”
And this is exactly what I was thinking about yesterday when I said I wanted to clarify my thoughts about this. It is still baffling. Was the S&P put in a corner by the US government and is now acting as an agent to increase the pressure that the US is obviously exerting and in a somewhat humiliating or degrading way?
It would be hard to imagine, but the more I think about it, maybe it's not all that hard to imagine when the US government already has you on their %*^% list?
I will say that it is very likely that we will see extraordinary volatility and you may want to prepare yourself in any way you need to because whichever way this goes and it's likely to go one way for a short period and then flip flop, just like the EFSF leveraging did, it's going to be a defining moment for volatility in an already insanely volatile market.
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