The main driver of the risk off was the denial of the rumor (which I made sure yesterday to call it a rumor) that the EU may let the ESM and EFSF run together rather then the first replacing the second. I was set to write about to idiocy of this rumor being the EFSF is an empty box and the ESM can be funded by creditor nations like Germany and say France, but that would then reduce their "cash on hand" and put them at risk of a credit downgrade. Either way, I'm glad I didn't waste the time as this morning Germany has refuted the rumor.
The FT 3 pm rumor was denied by Germany after a "senior German official" spoke to Reuters and said they are "not sure if summit will reach conclusion on using IMF funds in eurozone crisis" and "can't forsee running EFSF and ESM simultaneously". They have also said they are "more pessimistic than last week on overall summit deal".
However, that was just the start (and all of these rumors, lies and denials are VERY reminiscent of the 2008 break in the markets), today the ECB offered the new (announced last week in coordination between the F_E_D and several other central banks) discounted dollar swap line which was expected to see about $10 billion dollars in usage, the extent of the funding crisis and liquiditiy freeze became VERY clear this morning when the facility offered through the ECB saw 34 banks tap the facility for $52.2 billion or more then 5x what was expected, confirming why the drastic action was taken last week as the liquidity crunch in dollars alone was way worse then even the F_E_D had expected.
This amount is on par with the facility being tapped during the Bear Streans crisis for a similar amount, except, that took months to get to $50 billion, not in a single day as you can see by the chart below.
The comment above by the Senior German Official sounds pessimistic, but what the market really didn't like was the statement about, not sure if summit will reach conclusion on using IMF funds in eurozone crisis. The market doesn't care about treaty changes one bit unless they are a conduit to IMF/ECB money flowing, so the comment wasn't well received by the market.
Other inconsistencies in the Franco-german plan were to apply fines to countries that fell out of step with budgetary rules, so in effect, a country like any of the PIIGS already suffering economically is to be fined and increase the burden. It's not a huge deal in and of itself as no one even knows what the fines could be, it's the logic that is so flawed that has the market really worrying about what they intend to propose and if they really understand the magnitude of what the credit markets expect. Treaties may be something they can easily agree on, especially if those treaties have to be passed later on, (meaning they get an agreement photo op, but nothing has really changed), but the market is looking for the Bazooka, not changes to treaties unless they immediately lead to the ECB or IMF Bazooka.
Furthermore, it now appears that it's not just a southern-facing bailout as Denmark comes in to focus as the next infected northern country, very close to Germany. Denmark is experiencing a housing bubble and it seems like the Central bank in Denmark is going to end up either letting banks fail or bailing them out, putting Denmark in the crosshairs for a credit downgrade and subsequent effects that we have seen in Ireland, Greece, Portugal, Italy and are starting to see in France.
As proof, investors flocked back in to a German 5 year bond offering today seeking a safe haven place to park money, while the credit/bond spreads for Italy and Spain as well as others, reverse this week's earlier course and now are leaking wider again as pessimism abounds about Friday's summit.
I'm going to look at our own credit indicators, but for now, CONTEXT is seeing ES follow the model down in near perfect unison.
More updates coming...
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