Overnight and In to the Open

German Finance Minister Schaeble has denied rumors that Spain has requested a full on soveriegn bailout of $300 bn Euros, something we first predicted here the day the $100 bn lifeline for the banks was announced by the Finance Ministers as it subordinated Spanish bond holders and not wanting to get caught in a Greek-like "haircut" on their holdings, they sold them, sending the Spanish 10-year up and over 7.5%, a level that is no where near sustainable. THIS IS the EU's solution causing an even greater problem, the hallmark of almost all EU solutions.

The short selling ban on Italian Financials from last week which was due to expire this Friday has been extended until the 14th of September. For those that remember the last time EU countries put a short selling ban in place, their market tanked despite the ban. Spain's short selling ban from last week is still in place for the next 3 months.

The German Economic Minister warned about large scale bond buying on the back of Draghi's comments of bond buying and talks of a possible rate cut at the ECB. There will be an ECB press conference Thursday so expect a lot of speculation and volatility regarding a potential announcement of the reactivation of the ECB's SMP Bond buying program. We also have the F_E_D / F_O_M_C starting Wednesday and the Bank of England this week.

Escalating the German/ECB divide, a German Coalition member suggested that the German government take legal action against the ECB over the bond buying proposals. The population of Germany is not happy either, especially after comments from Spain that Germany ought to be grateful as they were bailed out after World War 2.

From Reuters:

"The European treaties allow member states to sue the ECB," Hahn, a member of the ruling centre-right coalition in the state of Hesse, told Monday's edition of Die Welt newspaper, adding that Berlin should consider opening a lawsuit against the bank via the European Court of Justice.

"It's time to open the toolbox of the (EU's) Lisbon Treaty and see how one can ensure that the ECB is brought into line to focus on its original task: monetary stability," he said, acknowledging that this would be "an unusual step".

Hahn's comments were in response to a pledge last week by ECB President Mario Draghi that the ECB was ready to fight to save the euro. "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro," Draghi said.

In addition this morning we are seeing the "safe haven" countries see their bonds being bought up (Swiss, Dutch, Finnish and German), while the Italian and Spanish bonds are slipping, apparently not everyone is so convinced the ECB can deliver.

Among them, Moody's:

Alistair Wilson, Moody's: Draghi Reaffirms ECB’s Willingness to Buy Time, but ECB Cannot Resolve Debt Crisis

Last Thursday, Mario Draghi, the President of the European Central Bank (ECB), said that “within [its] mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” The statement lifted market sentiment and sent Spain’s 10-year government bond yields back below 7%.

Media and market commentators have interpreted Mr. Draghi’s remarks as an indication that the ECB is willing to do more to support pressurized euro area sovereigns, for example by expanding the securities markets program (SMP) with further government bond purchases.

In fact, the statement was a supportive but very general one that contained no specific proposals and offered no firmer prospect of the crisis being resolved quickly. It reaffirms our view that the ECB will ultimately do all it can to support policy makers’ efforts to resolve the crisis. However, that is a necessary but not a sufficient condition for the euro area authorities’ current strategy to succeed.

However, the ECB can do no more than buy time: its actions alone will not resolve the debt crisis. Resolution will ultimately rest on achievement of fundamental changes to member states’ budgetary positions and debt stocks, on structural economic changes required to stimulate growth, and on institutional reform to the economic and fiscal governance of the euro area. Each change will take years to accomplish, and support from the ECB will be essential to the preservation of the euro in the meantime.

The timing of Mr. Draghi’s statement is significant. With the July Summit having failed to reassure euro area sovereign investors, and Spanish and Italian government bond yields having risen substantially over recent days, Mr. Draghi’s statement indicates the level of concern among euro area policymakers. It illustrates the extent to which current financial market conditions are credit negative for issuers across the euro area.

Spanish GDP came in at expectations, showing contraction and Euro-zone Confidence numbers have been mixed, there hasn't been much reaction to either.


In Italy...

Italy Auctioned off 3, 5 and 10 year debt, they raised close to the top of the target range, but as would be expected, weaker internals and higher yields

The bottom line, we have a real nasty situation developing between the Northern and Southern EU countries and the ECB, this will be an interesting week and as of right now, the market isn't sure what to do with it.