The following is an exceprt of Greg Weldon's December 8th edition of his institutional newsletter, Weldon's Money Monitor.
On January 1st of 2002 the 'modern era' Eurocurrency was first 'issued' in the form of banknotes and coins. The European Central Bank is participating in a celebration of this historic event, with a campaign entitled ...
... "Generation Europe"
The question is, will the EUR ... be a one-hit wonder ???
Is Generation Europe to be ... one-decade-and-done ???
This is THE question being asked.
In fact, in a poll published yesterday by Bloomberg, we note the following:
Question: When, if ever, will one or more nations drop out of the euro zone ??
Within the Next Year ... 46%
Within 2-5 Years ........ 32%
Longer than 5-Years .... 4%
Never .................... 14%
Question: When, if ever, will there be a financial melt-down in the European banking sector ??
Within the Next Year ... 43%
Within 2-5 Years ........ 25%
Longer than 5-Years .... 7%
Never .................... 18%
The risk of the latter, a melt-down in the banking sector has become SO TANGIBLE as to induce the Federal Reserve to action, in order to insure adequate liquidity.
Indeed, according to the latest weekly data released on Wednesday, European Central Bank 'demand' for 3-Month USD loans via the Federal Reserve's Dollar Liquidity Swap facility surged in the week since the US Central Bank slashed the interest rate it charges financial institutions for such loans. The ECB said it disbursed $50.7 billion in 84-day loans to a whopping 34 European banks, at a rate of 0.59% ...
... an increase of +1273.5% versus the previous ECB offering on November 9th, when the European Central Bank disbursed a paltry $395 million at the pre-cut rate of 1.09%.
We shine the spotlight on the chart below reflecting the 'dissipation' of SOME of the anxiety linked to European financial institutions and their 'USD funding' needs, as defined by the 'rise' (narrowing) in the 3-Month 'Cross Currency Basis Swap', a function of less-intense pressure on banks to borrow USD. Indeed, coincidentally, or not, the 3-Month EUR-USD Basis Swap has rallied by +49 basis points, a single tic less than the cut to the USD Liquidity Swap facility cost, enacted by the Fed last week.
The market will need to 'prove itself' capable of 'supporting' a further 'narrowing' in the Basis Swap, with the 3-Month Rate needing to clear the med-term trend defining 100-Day EXP-MA (minus 95bp), and the overhead resistance represented by the September lows (minus 60bp), before officialdom can claim a victory over illiquidity.
Moreover, until today, the markets had been chasing the monetary 'carrot' being carried around by the European Central Bank. We note comments made last week by ECB President Mario Draghi ...
... "The ECB's goal is to maintain price stability in either directions. This applies to both the setting of official interest rates and the implementation of non-standard measures."
But, the non-standard measures being considered have become increasingly "standard", with thoughts of 'loosening' collateral requirements for liquidity operations FAILING to qualify as 'quantitative easing'.
Indeed, when if it was possible that the ECB would pursue non-sterilized debt monetization as a policy, following the lead of the US Fed, the ECB President was straight up when he replied, with a hint of a smile ...
... "No".
Further, when asked if the ECB had discussed cutting their official short- term interest rate (2-Week Repo) by MORE than (-) 25 basis points, Draghi replied, simply ...
... "No"
And, when asked if the decision to cut rates was unanimous, he replied ...
.... "No".
In other words ... dissent on the ECB ... skewed towards NO cut in rates.
In fact, I watched the press conference, live, and witnessed Draghi's 'affect', and heard his exact words. Simply stated, the ECB President was smooth and matter-of-a-fact, in his delivery, with the stone-cold persona of an old- school, Generation Europe, Central Banker ...
... "No monetary finance of governments."
Repeatedly, Draghi stated that "the treaty" (referring to the Maastricht Treaty on European Union) represents a 'legal contract', which implicitly and specifically PROHIBITS the "monetary finance of governments".
Draghi threw the crisis right back into the laps of the politicians, calling for a "new contract", one which implements more stringent "hard" limits on debts and deficits, with "harsh penalties" to be imposed on offenders.
Ahem, ummmmm, errrrrr ... don't they already have that ???
Of course they do. The Maastricht Treaty very specifically and consciously laid out "hard caps" on the total sovereign debt (60% of GDP) of individual member nations, and on the annual deficits (3% of GDP), with "harsh penalties" to be imposed on offending nations.
Indeed, 25 of 27 EU-member nations, including Germany, are currently in violation of Maastricht Treaty 'hard caps' on debt, deficits, or both, in a situation that has evolved over YEARS of non-compliance ...
... and not a SINGLE PENALTY has ever been imposed. This Treaty is already ... worthless.
Thinking a new treaty will provide a solution to the CURRENT and IMMEDIATE crisis involving the need for governments (and banks) to meet refunding requirements estimated at near trillion in the next 13 months ...
... does NOT 'compute', time wise.
Sure, a "new contract" might be the answer ...
... for the "Next Generation Europe".
And, yes, a "new contract" might 'allow', and thus facilitate, Central Bank debt monetization, as a support mechanism to help offset the natural deflationary impact yet to be generated via intensified fiscal austerity.
But politically speaking, in terms of the need for ratification by EVERY member nation, and a tectonic shift in the German political stance ...
... let alone the potential for public debate ...
... a "new contract" will take a LONG TIME to 'execute'. TOO LONG, to be looked at as a solution.
The ECB just SLAMMED the door SHUT on a monetary solution ...
... and, threw the ball into the court of "lawyers", in terms of Draghi's repeated mention that implementing ANY debt monetization, whether direct via the ECB, or through the back-door, via member nation Central Banks, borrowing from the IMF. The ECB is implicitly opposed to such a move.
Indeed, if the EU were to pursue a back-door Central Bank solution, the US would be on the 'hook' for 5 billion of the (proposed) 0 billion support package.
In the remainder of this article, Greg Weldon covers:
... the ECB's Balance Sheet
... sterilization of the ECB's bond purchases
... Italy's Industrial Output data, released yesterday
... Italy's Imports from China
... Italy's 5-Year Bond Yield
... the Italian MIB stock index
... French trade data
... the French Sovereign Credit Default Swaps
... the French 5-Year Bond Yield
... the French CAC stock index
... the EU-US short-term interest rate differential
... the Eurocurrency versus the US Dollar
... the Euro STOXX-50 Index
... and ... Gold 'priced-in' EUR
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