I'm not trying to be a one stop news outlet, but I believe it is imperative to understand the fundamentals of a situation such as what we face tomorrow, it makes the consequences easier to understand if you have a basic base on understanding, in that spirit...
Cue Draghi...
Until then, the usual suspects, Monti, Hollande and others are putting pressure on the ECB to do something to bring down the unsustainable yields in sovereign bond markets. As an aside, Dutch and German officials are slowly acclimating the market to a likely Greek exit, although the conventional thinking is that it will have to wait until after the US elections. Until then, the Troika has demanded that Greece institute a 6 day work week with a whole host of other conditions that on't sit well with organized labor. I'm not sure how 6-day work week does anything for 30% unemployment which is higher than the US Great Depression at 25%.
Germany had a technical failure in a bund auction, some calling it a flight AWAY from safety, some saying there's already too much supply available, in any case, this is a rare event when Germany has to retain nearly a quarter of the issue do to a lack of demand and complete collapse in the internals of the auction. What do I think about this? I really have no idea, it would seem to me one can never have enough bunds.
Considering tomorrow is the ECB/Draghi's press conference, this week has been much less volatile at least from rumor/news flow surrounding the ECB than I would have expected. What has become very clear is not only the North vs. South element that we have been commenting on since Sarkozy was still president and it has only grown worse, but the ECB vs Germany. Both have money, both are realistically needed to hold the Euro together, but they have seemingly never been further apart in their willingness to work together. Ultimately Germany holds the biggest bazooka if they chose to use it, that would be a German exit from the EZ, even though the entire premise of the EZ was to facilitate free-trade for Germany's manufacturing juggernaut, even as 80% of the world is now in a manufacturing recession.
Germany did take a pre-emptive swipe at the ECB this morning pre-market (US) when they said ECB bond buying would stoke inflation, which is a key word right now as manufacturing declines, but input costs rise with gasoline at historical highs and food inflation not far behind. It sounds like a pretty mundane statement, but for the Central banks, this is a KEY issue. The German lawmaker went on to reiterate that Germany is against the ECB bond buying program, whatever it may or may not be. This is not news, however as a message to Spain just as much as to the ECB, Fuchs reminded all that ECB bond buying must be attached to conditionality, like a memorandum of understanding, which is precisely why Spain has not gone ahead and asked for bailout funds as they do not want to be tied to any conditionality.
Furthermore, thus far the understanding is the ECB, if they do buy bonds, will only do it once a request by the particular sovereign is made, a request Spain has been loathe to make. In a way you might ask yourself, "What if the ECB promised to buy everyone's bonds and no one asked?"
Last week we were led to believe that Germany's Weidmann was all alone in his resistance to ECB bond buying, but today we hear a much different story from Germany's Market News which said in an article that not only was the Dutch ECB member (formerly believed to side with Draghi) not with Draghi, he was indeed with Weidmann as were all other solvent countries on the ECB board.
Furthermore not only are the Dutch with the Germans, but Knott who represents the Netherlands on the ECB board is doing everything in his power to tie as many forms of conditionality to any bond purchases and since Spain is the biggest domino and this exercise is mostly for Spain's benefit, you might call this a "Poison Pill" amendment as we have here in the US Congress. Finland and Belgium's ECB members fall along the German/Dutch line while the other side of the camp is Spain, Italy, France-or the countries that need the help, AGAIN, the GREAT NORTH/SOUTH DIVIDE alive and well right inside the ECB.
I'll just throw a silly prediction out there, when the history of the Euro-zone is written, it will end with 2 distinctly different Euro-zones, maybe the Southern Federation and the Northern Commonwealth, by that time the ECB should be insolvent and border controls fully activated like the DMZ on the Korean peninsula.
Just after this and before the US open, Bloomberg dropped a potential bombshell showing who is REALLY in charge of Europe and you may have guessed. Bloomberg seems to have leaked the ECB plan which WILL NOT include yield caps (so the rising 10 year Spanish debt at 8% would not trigger ECB intervention), even though the ECB was aid to be focussed on the short end to about 3 years while selling the long end to sterilize the purchases.
From Bloomberg:
- ECB BOND PLAN SAID TO REFRAIN FROM SETTING PUBLIC YIELD CAPS
- DRAGHI'S BOND PLAN SAID TO PLEDGE UNLIMITED, STERILIZED BUYING
- ECB PLAN SAID TO FOCUS ON GOVT BONDS, MATURITIES UP TO 3 YEARS
- ECB SAID TO CONSIDER SELLING BONDS IF CONDITIONS NOT MET
- ECB PLAN SAID TO STRESS CONDITIONALITY OF ANY BOND PURCHASES
- ECB BOND PLAN SAID TO HAVE BROAD COUNCIL SUPPORT
There are a number of disappointments there is true, no yield caps? 3 Year Maturities? The trouble is in the 10-year. Conditionality? Selling bonds that were bought if conditions aren't met? In CB vernacular, "Sterilized" means any purchases are offset by sales so the net effect is ZERO new money enters the market.
It sounds like Germany wrote this plan, even though we know they didn't as they oppose the plan altogether, but there are enough poison pills there that this becomes little more than the old ECB SMP bond buying program, except with much harsher rules and conditions.
If I had to guess and I don't care what the Euro is doing today as I'm very familiar with "Buy the rumor sell the news", I'd guess that tomorrow will bring a huge upswell of disappointment and the first place you will likely see how bad it is will be in bond yields of Spain and Italy, Bond traders are some of the smartest cookies out there and many a plan has been designed to appease them alone (and a few to rake them over the coals like the Greek haircut).
Ultimately, yields tomorrow will tell the truth and the market won't be far behind.
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