The Economissed: To QE or not to QE? That is the question…
What a shambles the EU has become in every way – that surely is will continue to be expressed through currency expression going forward. Against the $ 1.39 is a barrier to losses for us to see 1.28. Is Trichet about to perform the quickest U-turn ever for a Central Banker? He alone is the sole crusader in the fight against inflation when EVERY other central bank is singing off a totally different hymn sheet. Of course you could say that Berlusconi has made of the situation in Italy laughable as one of his companies avoid a 750mln+ tax bill and his FInance Minister, widely praised until now, fell out of favour, but Moody’s are in charge here and they have telegraphed the problems.
Germanʼs banks are now at the point of having to release details of what risk they are housing and we know that there are enormous problems there – we just donʼt yet know the details. Either way, the goal of Contagion Containment is folly with rate rises nudging LIBORs higher and Spain also being dragged in to the debt mire. The raters will not be kind – not after lessons learnt from the crisis mean accountability is a priority for them and knowing, as they do, that the EU wants to set up its own Rating Agency – whatever good that will do…
Italyʼs precarious position comes after Their €40bn austerity package announced on Wednesday by Giulio Tremonti, finance minister, was intended to cement this credibility. But the circumstances surrounding its creation have confounded this objective. Over the weekend, a measure found its way into the bill that would have had the effect of allowing a company belonging to prime minister Silvio Berlusconi to defer a €750m fine. Amid public outcry, the clause was withdrawn.
Yet, bizarrely, Mr Berlusconi has said it might be reinstated. Merkel is pressing Italy to pass the Austerity Budget through Parliament without delay: “Italy must itself send an important signal by agreeing on a budget that meets the need for frugality and consolidation,” she said in Berlin. “I have full confidence that the Italian government will pass exactly this kind of budget.”
As I made clear last week in ʻThe Italian Jobʼ Economissed, it was only a matter of time before Italy, despite a relatively high savings rate in the North and one of the best managed Economies over the Credit Crisis, was targeted by the markets as it was, after all, being targeted by the raters.
The market voted with their feet yesterday trampling all over Italian and Spanish bond markets. the real horror story is just around the corner though as the German Banks squeal louder than many PIIGS haver done over releasing the details of the stress tests in terms of what risk they actually hold. Of course, a full disclosure puts the Landesbanks in an awkward position as the market will be able to price products and securities away from them – but the end game is the same…they are holding an enormous amount of rubbish – and financing that rubbish becomes increasingly difficult in the face of rate rises.
Europe needs a plan B – and quick writes Soros:
If this seemingly inexorable process is to be arrested and reversed, both Greece and the eurozone must urgently adopt a Plan B. A Greek default may be inevitable, but it need not be disorderly. And, while some contagion will be unavoidable – whatever happens to Greece is likely to spread to Portugal, and Irelandʼs financial position, too, could become unsustainable – the rest of the eurozone needs to be ring-fenced. That means strengthening the eurozone, which would probably require wider use of Eurobonds and a eurozone-wide deposit-insurance scheme of some kind.
Harold James notes:
Crises, especially very severe ones, are often learning opportunities. Unfortunately, so far the world seems to have learned very little from the recent financial crisis:
Would not implementing a Plan B mean that Plan A had failed? As the recent admission of Tim Geithnerʼs was quite rightly picked up by Bruce Kasting:
We donʼt have the ability (because of the overhang in housing and the problems in the financial sector) to artificially engineer a stronger recovery.
The latest BIS report on the crisis makes very interesting reading:
Elevated sovereign debt levels in advanced countries may mean that their debt is no longer regarded as having zero credit risk and may not be liquid at all times. As a result, sovereign risk premia could be persistently higher and more volatile in the future than they have been in the past, particularly for less fiscally conservative governments. This will almost certainly have adverse consequences for banks, as evidenced by empirical analyses, and history. Moreover, while this report focuses on the potential spillovers from sovereign risk to bank risk, the consequences of a severe deterioration of the creditworthiness of the sovereign would likely go well beyond banks, affecting the entire financial system.
Rate hikes are tantamount to a Sword of Damacles over Europe here. Trichet thinks the core of Europe can handle the rise – the problem is fiscal policy balance (or lack of it). Will the Authorities now be forced to close markets? Curtail Bond Shorts? QE ?….or what seems to be gathering momentum daily – a huge Eurobond issue – think Treuhand but on a much, much larger scale.
German 2y Bunds:
The Economissed is produced by Paul Wiggins head of Futures & Options at Market Securities in London.
Charts courtesy of Bloomberg
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Link to this article: : http://www.goldmadesimplenews.com/markets/the-economissed-to-qe-or-not-to-qe-that-is-the-question-4538/