Sunday, May 9, 2010

German/EU Air Cover Arrives in Greece



I have to be quick about this as I have to head off to mass. So the rumor is that the EU is coming up with a $500 billion package for use in the event that any other Eurozone governments get into trouble with regard to thier finances. It sounds like EUR60 billion of it is hard cash raised by the EU centrally backed by the member governments and EUR440 billion is in the form of bilateral loans and loan guarantees. There is also talk that the ECB will engage in a program of quantitative easing by buying up the EU government bonds. There is also a possibility that the EU may throw its hat in the ring and there has been talk that Fed will reinstitute its successful swap line program. Much of this is speculative and some of it (the ECB QE part) is directly counter to the last statement made by the relevant person.

Right now the markets are loving this. S&P futures are up 20 points and the Euro is up )$0.135 to $1.2891.

So is that it? Let me tell you I'd like to think so but I don't think the bond vigilantes. Are going to give up that easy. So what do we really have here? The headline number: EUR500 billion is certainly designed to impress but there has to be a lot of fine print in there and once the markets get thier hands around that they'll be probing for weaknesses.

What does a problem debtor have to do to qualify for the guarantees? What conditions are involved? Are they conditions that would likely induce the governments to put off asking for help for as long as possible? Also what kind of domestic approval is required to get this done? Given the circus in Europe this past week with regard to the IMF deal for Greece I am not filled with confidence that the voters in Europe will go for it again. If this mechanism is a gun but requires voter approval for the bullets, it's not really a usable weapon tomorrow at noon is it?

Far and away the most effective thing would be some kind of facility that would enable either the ECB or the EU to just start buying the hell out of Spanish or Portugese bonds and crush the CDS speculators and create a short squeeze there and in the Euro. I understand that there are massive issues with the ECB engaging in that kind of activity. If the EU doesn't do it then there will be continuous pressure on those bonds until the governments are forced to ask for the guarantees. Then we'll know if it worked.

The EU is trying to lead with a strong hand, trouble is, the doubters have a strong hand too. Oh, look here come the bond vigilantes now...

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