Fasten Your Seat-Belts….

This post was written by Colm McCarthy

In yesterday’s Sunday Independent, noting that Italian and Spanish ten-year yields had closed Friday at just under 5.30 and 5.70 respectively, I wrote:

‘The sole priority for the Eurozone should be to prevent the spread of bond market contagion to Spain and Italy, launching a new financial crisis on a scale beyond the rescue capability of the EU and IMF. If the crisis affecting Greece, Ireland and Portugal can be confined to those three countries there is a reasonable chance that Spain and Italy will retain access to the markets. If the contagion-spreaders in control of European policy continue the shambolic performance of recent months…… Spain and Italy will be swamped and the costs of resolving the Greek, Irish and Portugese problems will begin to look like a bargain. The Spanish Treasury managed to sell some three- and five-year bonds during the week….. But at some stage solvent-for-now issuers such as Spain must face the music in the ten-year market or their outstanding debt bunches shorter and shorter. If the Spanish ten-year interest rate edges much above 6%, the game will probably be up.’

Spanish ten-year yields breached 6% this morning, with Italian yields approaching 5.7%. EU Finance ministers are meeting this evening and might ponder this comment from Reuters:

‘Gary Jenkins, head of fixed income at Evolution Securities, said that while Italy is still a long way from the tipping point in terms of bond yields — markets have focused on yields of 7 percent as unsustainable — recent experience shows how quickly things can get out of control. Greece, Ireland and Portugal spent an average 43 consecutive days trading over 5.50 percent before they went north of 6.00 percent on a consistent basis, Jenkins said. That fell to an average of 24 consecutive days before rising above 6.50 percent, and just 15 days before the 7.00 percent level was breached on a consistent basis.’

In a low-growth economy like Italy and with an inflation target of 2% I am not confident that the ‘tipping-point’ is as high as 7%. But not to worry, the EU Commission is on the case, this from RTE:

The EU has called for a ban on rating agency decisions on countries under internationally-approved rescue packages. Speaking in Brussels, Internal Markets Commissioner Michel Barnier also said that governments should be fully informed before being downgraded by ratings agencies.

So the agencies would have to quit rating Greece, Ireland and Portugal, but could fire ahead rating Italy and Spain. Jose Manuel Barroso, the EU Commission president, also targeted the agencies last week, alleging market manipulation no less, and anti-European bias. The problem, in the estimation of these two EU luminaries, has been caused by the ratings agencies. With no Plan B apparently, the failure of Plan A needs to be assigned somewhere, and US ratings agencies will do fine. 

What precisely is the proposal of the EU Commission to deal with the contingency that Spain and Italy are forced to exit the bond market over the next few months? 

Meanwhile the Italian authorities have banned short selling of bank stocks, which older readers will recall was the source of the problems at Anglo.

Both Spain and Italy need to tap the markets on a continuing basis. The yields they now face at ten years are about the level that persuaded Ireland to take a holiday from the market last September. Their yield curves are also beginning to flatten ominously, with shorter rates rising more quickly than mediums.   

The bank stress tests Mark II are due on Friday. This could be a long week.

71 Responses to “Fasten Your Seat-Belts….”

  1. grumpy Says:

    Right on Colm.

    Banning short selling really is pathetic after all the toime the imcumbants have had to sort themselves out. Sometimes it seems the whole lot of them are clueless about the markets - they seem to think it can be fed on the same crap that is fed to electorates. You never can tell, but if the market has them for breakfast in the next few weeks they will have had it comming.

  2. The Dork of Cork Says:

    The ECBs plan is almost perfect.
    They and their CDS friends are creating a artificial crisis in a country with low personnel debt levels.
    Once the decision not to liquidate the shadow bank sector was made in 2008 the nation states faith was sealed.
    The real elite have decided to destroy whats left of the Nation state - the petty elites withen the various nation states are confused and disturbed by this turbulence.
    The situation reminds me of the destruction of the Highland clan system by the modern nation state during the 1600 & 1700s
    Germany is the modern version of the Clan Campbell - the favoured anachronism rewarded for its loyality but somewhat distant from the then modern banked interests behind the rising nation state.

  3. Eureka Says:

    Might it be right to think that the object is to get rid of Berlusconi to let his finance minister implement austerity.
    The markets are the Vandaals of our age - they like to bleed the Pig dry before they skewer it on a bailout.
    Berlusconi won’t survive this one…

  4. Eureka Says:

    The other play on Italy is to force Europe to bail out private investors for Greece as well.
    Wouldn’t be surprised if the Italian thing calms down toward the end of this week after a few nice European bailout announcements.
    We’ll see…..

  5. Robert Browne Says:

    There is no stopping this fire which is completely out of control. They sat down last week and made the witless decision to raise interest rates. Spain which was hanging on by a thread gave up. Spain has given up I have spoken to people on the ground there and they are at the end of their tether. The disconnect between the ECB and the consequences for Spanish is wot done it!

    You don’t utter vainglorious platitudes concerning inflation when the currency union and European Union faces an existential crisis. They have raised interest rates when if anything they should have held them or even lowering them as part of a holding exercise.

  6. The Dork of Cork Says:

    @Robert
    More importantly they have not increased the size of the base recently
    Its quite clear to me the ECB wants this crisis.

    There can be little doubt now - the world is a gigantic theatre.

    They have been waging war against us from the beginning as the inflation first act is just as important a device as the deflation second act.

    We are easy meat.

  7. David O'Donnell Says:

    @Colm McCarthy

    Seatbelt fastened for some time … waiting for the BIG Bang of EuroBonds only or the Big Brick of the Great Collapse ……… better put on the Helmet as well - and lower the visor … and cut more turf …

    “Italy is a banana republic that didn’t depend so much on foreign capital in the past, but now it does, and markets are less forgiving,” said Daniel Gros, the director of the Center for European Policy Studies in Brussels. “Italy is in the danger zone; that is quite clear now.” […] But at the end of the day, “If Italy goes, it’s no longer a domino,” said Mr. Gros, … “It’s a brick.”

    http://www.nytimes.com/2011/07/12/business/global/italy-evolves-into-eus-next-weak-link.html?_r=1&hp

  8. ObsessiveMathsFreak Says:

    Dork of Cork, you are attributing far too much competence to the people running the ECB. They haven’t a clue what they’re doing; if they did, this would never have gone past Portugal.

    But the biggest problem here is not the ECB. The biggest problem is still “The Market”: That hyperactive, hysterical, million monkeys on a million stock-ticker madhouse that an entire continent has entrusted its future to. We’ve all placed our futures in the hands of unmarried 25 year olds and their caffeine fuelled instincts, and well, we’re damned if they didn’t drop them at the first sign of trouble.

    The ECB needs to do two things to save its currency and potentially the EU:

    Firstly, It needs to print at least some new money to cover the debt it has issued.

    Secondly, it must bring the finance men to heel. They must be forced to take 30, 50 and even 100 year bonds on their debt. No negotiation, no consultation, just made to do it.

    If Europe is to be run by bankers, financiers, and markets, then it has become clear that Europe will be run into the ground. If it is to be run properly, then some order must be brought back to the pitch before the game can continue.

  9. shaun byrne Says:

    #1 what are you guys doing up at this hour? ( I am in China and it is 11.24am)
    #2 I agree with you OMF never ascribe to conspiracy what can adaquetly be explained by incompetance.
    However as this incompetence continues I am starting to see more and more sense in what The Dork says. How can they continue on doing something that they must know is wrong. Saving face can only go so far. There are so many ways they can engineer a back track, saying things have changed and so now we will change track.
    It is just seems so senseless that they are causing the very thing they say they are trying to stop.

  10. Ceterisparibus Says:

    Is it any great wonder that the markets react when they see the following….
    “Italy’s premier Silvio Berlusconi has chosen this moment of acute danger to undermine his own finance minister, Giulio Tremonti, the one figure in his cabinet respected by global bond vigilantes. “He’s not a team player, and thinks he’s genius and that everybody else is a cretin,” said Mr Berlusconi.
    Meanwhile, Mr Tremonti is living free in the Rome house of a political ally just arrested on corruption charges. Resignation rumours circulate hourly. You can hear the knifes sharpening.
    “The government ceased to exist months ago,” wrote Massimo Giannini in La Repubblica.
    “What other country would allow itself the suicidal luxury of offering cynical markets such a spectacle of political disintegration and institutional decay at a time when Europe is destabilized by Greece’s sovereign debt and haunted by contagion? We have a band of poltroons dancing under the volcano, and the volcano is about to erupt.” …courtesy of Ambrose ..the telegraph

  11. Peter Stapleton Says:

    Don’t worry about Italy - they have Lorenzo Bini Smaghi to sort them out!

  12. Michael Hennigan - Finfacts Says:

    The Institute of International Finance, which represents about 400 of the world’s biggest banks, last week publicly supported Greek bond buybacks and acknowledged the need for the stock of Greek debt to be reduced.

    Two unhappy looking finance ministers:

    http://www.finfacts.ie/irishfinancenews/article_1022714.shtml

  13. PR Guy Says:

    It’s looking a bit dire alright.

    Now, where’s that short selling button?

    Hard to separate fact from rumour at the moment re the stress tests on Friday - some will spin it one way, some the other - it’s difficult to see it being joyous news at the moment as there are enough intelligent people around outside of politics to dive under the covers of whatever gets presented.

  14. Georg Baumann Says:

    System shut down approaching?

    The NYSE was closed for ten days i 1933 during the Great Depression. In 2001 following the terrorist attacks in the U.S. they shut them down for a week.

    It is not an unlikely scenario and has happened before.

    However, the seven leading countries need to decide this together, by only shutting down one market the business continues off shore of course.

    The only thing about such shut down is that the politicos need to come up with a solution in the downtime, otherwise the problem is just postponed until next opening.

    Back in April 2010 I commented on Constantin’s blog “Merkel/Schaeuble, DSK and Trichet held emergency phone conference this morning… Question is, will the debt Junkies continue to share their needles? The debt spiral/contagion is in full motion!”

    The ingredients of executive levels in the EU and the experience of the past four years with ‘this crew’, well, not exactly a lot of reason for hope.

  15. David O'Donnell Says:

    Notice those incredible spreads on 2-year yields.

    Greece 30.09, Portugal 17.11, Ireland 16.58

    ECB president Jean-Claude Trichet can scream “no defaults” all he wants but the bond market simply will not go along. [...] These numbers likely have Trichet and EU officials ***ting bricks. What are they going to do, up the size of the bailout fund to infinity?

    http://globaleconomicanalysis.blogspot.com/2011/07/european-government-bond-spreads-at.html

  16. Bond. Eoin Bond Says:

    Eurogroup Fail

    Opening CDS levels: 5yr ITALY 324-334 +25 SPAIN 372-382 +24

    Thats around +150bps and +120bps from opening levels Monday last week.

  17. Gavin Kostick Says:

    @ Michael Hennigan, & Peter Stapleton

    Great summary article Michael. It highlights that not only does Italy have Lorenzo Bini Smaghi it has “Mario Draghi, the ECB president-designate and outgoing head of the Bank of Italy” He must be in a challenging position. Judging by his comments though, he seems to be going for those pesky ‘vested interests’ being the problem, but presumably he was being asked about national issues. I wonder if the view from Rome will make an impact on how he sees the actions of the EU/ECB.

    In the meantime I really hope Min Noonan and his team are on sparkling form. Lots of opportunity.

  18. DOCM Says:

    @ All

    In the light of the interview with Michael Noonan just now on RTE, the text of the Eurogroup statement may be of interest.

    http://consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/123601.pdf

    Game set and match to the institutions of the EU, and the ECB in particular, and the countries of the EZ other than Germany (and France with regard to the last sentence which suggests that there will be a move to agree with the Europan Parliament the changes to the SGP).

    What remains to be seen is whether or not it may not now be too late. One way or the other, it is going to be much more expensive than it needed to have been.

    The possibility of Sarkozy, whether supported by Merkel or not, pursuing the Gallic spat against the background outlined by Michael Noonan seems remote.

  19. Gavin Kostick Says:

    @ Mr Bond

    I note The Institute of International Finance coming in with an offer from the private sector from Greece.

    I know it’s a big question, but what do you think the bond markets would like to hear today from the EU Finance Minister and/or the ECB.

    I see the clock is ticking away from the draft statement kindly linked by DOCM above: Is this going to do the trick?

  20. Paul Ryan Says:

    Strong rumours that ECB are in buying Italian bonds in large volumes

  21. DOCM Says:

    @ Gavin Kostick

    This is not a draft statement but the real thing. Michael Noonan drew attention to the key sentence “Ministers stand ready to adopt” i.e. had they the formal proposals before them they would have adopted them, a political commitment the rug from under which even Merkel hardly dare pull, as she has done repeatedly since the beginning of the crisis.

    It also seems likely that the formula for the rates charged by the EFSF will be standardised i.e. be close to that in Annex III to the now signed ESM treaty i.e. 200 basis points of a mark up.

    On PSI, although I am no expert, I ask myself why there should be two routes, that obstinately pushed by Germany against the wishes of almost every other country and bond buybacks when both serve the same purpose. It seems to me that the window-dressing inserted in the statement to hide the change of tack by a German leadership finally accepting that its approach might be wrong and that of others right will remain but be quietly discarded.

  22. Bond. Eoin Bond Says:

    @ Gav K

    at this stage the EU has probably messed around long enough to scare investors off the periphery for a few years, but they at least finally appear to be seeing the reality of the situation. Bond buybacks have long been suggested as a market friendly idea, as well as cheaper bailout rates from the debt sustainability point of view. At the moment the stock of debt for Ireland, Portugal and Greece is getting more expensive via official funding, instead of the less expensive variety that was needed.

    The short answer is “I dunno”, it’s gone past the point of easy answers (ie writing a cheque for Ireland, Portugal and Greece). I think the one thing the market wants now more than anything, is a feeling that the EU actually has a plan, even if that involves some sort of selective default on Greece. At the moment people feel that whole thing is spinning out of control and no one has the political will to rein it all back in. Politicians and central bankers have been too clever by half thinking they ‘know’ what the market wants with their various schemes and plans. A bit of common sense and Euro-wide solidarity is much needed at this juncture.

  23. Bond. Eoin Bond Says:

    @ Paul Ryan

    strong rumour = spiv rumour sent around by the FX boys by the looks of it. We’ve heard the rumour, but no one has seen any actual buying. Its possible that its been set off by one individual central bank buying Italian bonds, but that could be simply part of their normal reserve investment operations.

  24. seafóid Says:

    The pity of it all.

    There is no leadership anywhere to be seen.

    The markets are nuts. Imagine you could make massive amounts of money setting off a process that would result in the whole system collapsing. Would you do it ? Would you take a massive open goal of a bet that would also result in your legs being amputated ?

    CDS- the only “insurance” I have ever see where a payout is in nobody’s interest. The only insurance that is itself destabilising.
    What sort of insurance is this and why isn’t it regulated? Because it is the profit engine of the investment banks.

  25. Jagdip Singh Says:

    Other than QE, printing more euros to whittle away legacy debt) or federalisation (sharing the indebtedness of the badly indebted countries amongst all EU countries), are there any practical options now open?

    The hope was that economic growth within the EU would haul countries at risk, out of the quicksand, but the growth is not there so far, and worse the evidence is that the finances of the countries at risk are worse than expected.

    Reducing Greece’s interest rate from 5% to 3%, that is, provide the funds at cost, will not solve Greece’s problems. Lenthening the maturing from 7 years to 30 years will help, but any politician that can understand the linkage between debt and society will probably conclude he wouldn’t want to live in a country with such high debt levels for so long a period. The EFSF is at €440bn, which is enough for Greece, Ireland and Portugal but even Spain, ignoring Italy, would touch the limit and perhaps break it.

    Isn’t now time for Europe to grow up and either share the debt or print more euros?

    And as for railing against the ratings agencies, well, the only constructive thing I think we can take from that is that the EU bank “ratings agency”, the European Banking Authority that will report the results of its stress tests on Friday, is what an EU ratings agency would look like. And remembering the EBA has the same members as the CEBS that produced the stress tests last July, you’d have to conclude such a ratings agency would be useless.

  26. Brian Woods II Says:

    I’m finding it really difficult to visualise the end game. Implosion of the Euro seems to be the popular consensus. But that would be Armageddon, so how do we explain that the Euro is doing rather well and German and French yields are falling? If the Euro imploded Germany would be kaput, new D-mark or not.

  27. Rob S Says:

    Italian yields also breached 6% this morning although as of right now are back at around 5.85%.

  28. Brian Woods II Says:

    @ jaqdip

    As I understand it, it is not the purpose of QE to inflate away legacy debt, though that is a possible unwanted outcome. QE is merely another monetary stimulus device when short term open market operations have proved inadequate.

    Broadly speaking, the EZ indebtedness is internal. If by some method or other we forgive the debtors we are screwing the creditors. This will be politically totally unacceptable whilst the debtors are still behaving as fiscal delinquents.

    Of course, if the indebtedness was broadly external, there would be a temptation of the EZ to whittle it away by letting the Euro wither.

    Thankfully, this is not the case and, contrary to Colm’s cheap point, the ECB are dead right to focus on the credibility of the currency. Why should “good” holders of Euro be asked to subsidize the bad ones?

  29. John Foody Says:

    Let us hope that Noonan brings his A game and Enda has minor to no involvement! Any thoughts on the effect of this on our delayed bank recapitalization? Adding lower bank debt burden to longer maturities and a lower interest rate would be nice. Though the only way one can be happy is if the whole EU doesn’t explode.

  30. Bryan G Says:

    The ECB is now isolated on the need to avoid a selective default, as the Eurogroup have reversed their position this and no longer view it as a pre-condition for any plan. The ECB have really painted themselves into a corner on this.

    As usual there was no consensus as to how to proceed as evidenced by Rehn’s “I would not at this stage, exclude any option” comment yesterday. The French are still saying their rollover plan is on the table, the Germans still want their debt exchange, and the Finns now want collateral for any new loans. The IIF are pushing for a debt buyback, and this seems to be the approach that is gaining the most traction.

    There appears to be quite a lot of economics literature (e.g. Rogoff’s “The Buyback Boondoggle”) that says that buybacks are not a good deal for the sovereign, but quite frankly I don’t understand the arguments against them. It seems that there is a net gain to be had for the sovereign, even if the banks can also profit (e.g. the price of all the bonds held on the trading book will go up when the buyback is announced, allowing banks to record a profit as a result). If the IIF are pushing hard for the buyback, then taxpayers have a right to be suspicious, but I would be interested in hearing the views of those that understand the economics of buybacks better to see whether they think there are any downsides to the buyback approach (assuming that the EFSF lends money to Greece to carry out the buybacks).

  31. Eamonn Moran Says:

    @Seafoid

    “CDS- the only “insurance” I have ever see where a payout is in nobody’s interest. The only insurance that is itself destabilising.
    What sort of insurance is this and why isn’t it regulated? Because it is the profit engine of the investment banks.”
    Stop calling it insurance. Its a bet.
    There is no requirement for insurable interest. Its a bet. Massive parts of the shadow/investment banking sector make their money on bets. Not insurance not investments, bets. Surely this is obvious.

    And when you allow people to make bets and also allow them to know that bets will win because of their own activity is linked to the outcome, it is just another example of the insanity of the markets as they currently work.

  32. Michael Hennigan - Finfacts Says:

    On the stress tests, the FT says a letter from the ZKA, a German financial industry lobby group, suggests other market participants could gain insights into banks’ business strategy and risk profile – for example third parties could estimate the value of hedges required by a bank, opening the door to arbitrage and affecting the market price of credit default swaps.

    The ZKA also warned that “On no account should bank-specific information about defaulted exposures [loans and bonds from distressed issuers] broken down by country be made public. Disclosure would undermine restructuring efforts if defaults were above market expectations.”

  33. Christian Says:

    What is the difference between the position of Ireland and Greece, and Germany after WW1 suffering under massive reparation payments that were unrealistic?

    In our case the reparations are for bank loans and the CDs ‘bets’ (thank you EM), none of which are our responsibility.

    Ultimately, the risk must be that the euro will be brought down unless we allow the gamblers to fail? Or must we go through political turmoil and revolution instead?

  34. Overseas commentator Says:

    @DOCM
    “The possibility of Sarkozy, whether supported by Merkel or not, pursuing the Gallic spat against the background outlined by Michael Noonan seems remote.”
    Do you have any fact to support that statement?

  35. seafóid Says:

    The Euro is remarkably robust compared to the other major currencies so the currency markets don’t seem to have priced in a breakdown.
    It is really a question of who pays I think.
    Germany needs the PIIGS because without them the Euro would be suffering like the Swiss Franc.
    It is just a question of getting heads round to the idea that the current approach is broken.
    Longer term there are issues around competitiveness that have to be addressed. Surely the PIG debt can either be bought back or else parked ina vault in Sellafield for 30 years. As a % of EZ GDP it is not massive.
    The markets are hysterical and that doesn’t help. Calm down, dear. It is not really an existential crisis , is it?
    That will come later after oil goes to $300 a barrel ;)

  36. Eamonn Moran Says:

    http://www.bloomberg.com/apps/quote?ticker=GSPG10YR:IND

    http://www.bloomberg.com/apps/quote?ticker=GBTPGR10:IND

    Have the ECB started buying Spanish and Italian bonds now?

  37. Tullmcadoo Says:

    Eamon,
    when/ if the ECB comes in, it will be in a very noisy manner.

  38. Eamonn Moran Says:

    @ tull
    It wasn’t when they first started buying Irish bonds as far as I remember.

  39. Tullmcadoo Says:

    E,
    and that worked well. If & it is a big if, the ECB engages in a form of unsterilzed bond purchases it will have to be big & noisy to be effective. I bet that they will try to get a big EFSF buy back first but there may not be time to get the fund up and running at 3-4x the current firepower. So the ECB holds the fate of the euro in its hands.

  40. Bond. Eoin Bond Says:

    @ Eamonn/Tull

    ECB hasn’t been buying, bit of confusion as a Eurozone central bank appears to have been buying (and selling Germany) as part of its normal reserve operations. Buy the rumour, sell the fact, and all that.

    Also:

    *SCHAEUBLE SEES LOWER INTEREST RATES ON AID, NOT JUST FOR GREECE

  41. Jagdip Singh Says:

    @Eoin,

    Shouldn’t there have been a massive rally of PIG bonds this morning if

    “Ministers have also opened the door for the fund to issue loans to countries for the specific purpose of buying back their sovereign bonds at market rates, thereby easing the weight of their national debt.”

    After all, if the market for any commodity increases, shouldn’t the commodity become more expensive (thatis tightening bond rates).

  42. Michael Hennigan - Finfacts Says:

    A Jacques de Larosière from Paris — presumably the former IMF chief (1978-1987) — writes in the FT today:

    Sir, We really are living in strange times.

    As soon as a group of private bankers made a proposal that would result in a voluntary rescheduling of their Greek sovereign bonds, a rating agency declared that such a plan could trigger a default. The rationale put forward by this agency can be summed up as follows: as the plan results in a reduction of debt repayments in the short term, it reveals a “distressed” situation. Therefore a default is called for.

    In the “old times”, the views were quite different. When a country agreed on a programme with the International Monetary Fund and private creditors on a voluntary rescheduling, the quality of both the country’s risk and the private sector exposure was enhanced.

    No longer so. It is precisely when that “collaborative strategy” (as we used to call it) takes place that the event of default is brandished….

  43. Bond. Eoin Bond Says:

    EU LEADERS TO HOLD SPECIAL SUMMIT ON EURO ZONE DEBT CRISIS ON FRIDAY — EU DIPLOMAT

    @ Jagdip

    as i noted above, some of this coming a bit too little and too late. In theory it should help, but also a suggestion by Dutch FM that selective default by Greece not ruled out either. Think we’re looking at a combination of efforts/options.

  44. Jagdip Singh Says:

    @Eoin,

    Thanks, it seems that Italian and Spanish bonds have pulled back and are now below yesterday’s close. Looks like a volatile week in both directions with panicked measures.

  45. The Dork of Cork Says:

    @obsessive maths freak
    Money was once a goverment function - money is now divorced from goverment although still sanctioned by it.
    CDS is a form of money & not a insurance contract. - it would not have come into existence without goverment authorisation via the CBs which are now the effective goverment.
    The ECB are the bankers - they need to search for yield , if that entails the destruction of capital so be it.
    It was always the way.
    Those coke stimulated traders are not the disease they are its symptom.

    What we are witnessing is war on the cheap without expensive armies or air forces.
    Pillage was always a integral part of the western financial & govermental structure.
    Capital building functions of banks was always junior to war.
    The Dutch banks may have given a bit of credit for building windmills & the like but gave far much more credit to the likes of Cromwell as it was more lucrative to take rather then build.

  46. Bond. Eoin Bond Says:

    Big rally in Spain and Italy over the last hour, now positive on the day, but seems like profit taking rather than real money buying in yet. Fun markets though…

  47. Eureka Says:

    “fun….” is one word for it.
    A bunch of greedy adolescent idiots bringing the world economy to it’s knees more like.
    They oversold to panic the old guys into doing a better deal on Greece.
    Good God - when will the people of the world face down this.
    Zero deficits across the world. Trade not save. Stop feeding this thing debt

  48. The Dork of Cork Says:

    @Eureka
    All money is debt although the issuing of more currency can rapidly eliminate debt.
    Indeed Gold is only really useful in a debt based system.
    The closest thing you may imagine as a non debt system is a token system issued by Abraham Lincoln & Adolf Hitler.
    This monetory system requires a defecit - without it you cannot have interest & without interest the currency now would have little value.

  49. Paul Ryan Says:

    And Merkel denies summit for the 15th so we are gapping wider again!

  50. Eureka Says:

    @ DOC
    Meant sovereign deficits - private individuals can do what they like. Sovereigns should only spend from the taxes they earn - no sovereign debt.

    I can only understand money when I think of it as a sophisticated form of barter - where an immediate exchange for a service is deferred for something more useful/desirable.
    The value of that token depends on how much of it is in circulation. The most stable way of ensuring fixed value is to keep the amount in circulation fixed. But this means that people have to be very careful about taking on debt.

    Anyhow - we have the capacity to develop a system of global money now. There is no need for it to be Gold. A properly governed world issuer of world currency would obviate the need. In 100 years from now every country in the world might be using the same currency - issued by one world bank. (not as daft as it might seem).

    The rules on credit would have to be extremely tight then but there would be real moral hazard (which there must be). Gordon Browne’s call for a global governance structure should be listened to.

  51. Eamonn Moran Says:

    @ Tull

    “and that worked well”
    Agreed, awful strategy, still don’t see why that means they are not doing it again? It was an awful strategy from the begining with Ireland but it didnt stop them

    I don’t buy Eoins profit taking theory.

    If it was a result of Confidence restored then Ireland Greece and Portugal should be moving too as jagdip says.

  52. The Dork of Cork Says:

    @Eureka
    There is really no such thing as sovergin debt if a country is a sovergin.
    They just produce money that may or may not have a interest yield on it.

    For example the American congress produces the money & its called the defecit.
    They do not depend on China buying the stuff - Congress produces it first - then and only then can China hold this money as if it were a deposit account.
    When the Fed monetizes this “debt” it only sticks a interest rate on this debt so as to prevent inflation or deflation - the Fed is junior to the US congress and in reality the US treasuary - this chain of command is a legacy of the FDR years.
    Where the flaw lies is that the Dollar is the world reserve currency - this ultimate power creates ultimate corruption especially via the petrodollar system - so that if America creates extra dollars for its consumption it deprives the remaining bits of the world of its oil ration.
    Taxes do not create money only money can be used for money and you need a base money supply - taxes are a irrelevance - their only use in a free floating currency regeime is to prevent inflation or deflation
    America must increase its money so as to replace the lost credit from its corrupt banking system - this deprives the rest of the planet of its resourses.
    This creates a depression.
    Also how do you define a properly governed international world issuer of money ?
    They will have ultimate power & that power will corrupt absolutely and also these Gods will be completly outside Goverment sanction.
    The role of Gold in the past was to equalise trade defecits & surpluses in a currency that goverments or organisations could not print.
    This relied on honest bankers unfortunetly.
    Ditching Gold from a standardised system denies all the ability for ultimate payment settlement.
    This leads to global chaos.

  53. Bond. Eoin Bond Says:

    @ Eamonn

    “Don’t buy it”? Fair enough. No one has been able to confirm any ECB buying, and people are always eventually able to confirm ECB buying in even the relatively small amounts that would be required to push Greek or Irish yields around. If you want to push Italian or Spanish yields around, you gotta take out a bazooka. As Tull noted, bazooka’s get heard. A large part of the rally also took place right after the US guys hit their desks, suggesting hedge funds and US banks profit taking on the recent moves.

  54. Eureka Says:

    @ DOC
    Thanks for the reply. It’s complicated.
    The system doesn’t make sense really - does it? And it’s broken.
    If there was one world currency then there would be no money to be made from currency trading and if sovereign debt was banned then the bondmarkets would become much less profitable too. Once you take the money making potential out of money - it become less corrupt.
    Debt should only be exchanged between individuals or companies - never elected governments.
    All public expenditure would be done via PPP’s - the state undertakes to pay a contractor x for y years but it’s the private contractor who takes on the debt.

  55. Bond. Eoin Bond Says:

    @ Eureka

    whats the difference between a long term PPP obligation on the state, vs long term debt obligations. Both are liabilities that need to be paid into the future, and both may end up with a government who is unable to pay. YOu might have some collateralisation issues with the PPP’s, but other than that they are the same. And at least bond/loans are on balance sheets, as it were, PPP’s would likely be engineered in such a way as to remain off balance sheet so to speak.

    Also - what happens after a severe economic event like a banking crisis, or an act of God like an earthquake, floods etc? Doesn’t it make sense for a govt to step into the breach in those situations?

  56. ObsessiveMathsFreak Says:

    Dork, this isn’t about “Money as Debt” or a word government conspiracy. This is about appointed officials sticking to an ideological line which is sinking a continent. This is about people in decision making positions being unable to make decisions. This is about a monetary system with no leadership and which is no longer working.

    Italy is not shaky because Ireland, Greece, and Portugal have been unable to meet their austerity targets. Italy is shaky because its foundations rest on an international currency system that isn’t working and probably never worked, despite how much everyone might have wanted it to.

    Hard decisions and decisive action are all that can save the Euro now. But the people in charge are probably just going to drop the ball again and the whole continent will implode in slow motion over the next two years.

  57. DOCM Says:

    @ Overseas commentator

    Frankly, no! But my assessment is based on the French habit of electing every five years a Napoleon, the talents varying between each incumbent, but the decisive characteristic of the system being that advisers are hesitant about questioning set positions as this involves waking up the Emperor, often at inconvenient times.

    The party now apparently being organised for Friday is one from which noone can go home emptyhanded. If Sarkozy inisists on persisting with a bilateral punitive position against another - and very much smaller - country, outside any recognised EU negotiating context, this will simply show up what an inadequate political leader he is at this time of existential crisis for the euro.

    Of course, I may be wrong.

  58. The Dork of Cork Says:

    @Eureka
    The FED does not make much money as most of its interest income is directed back to the treasuary - however its shareholders hold very considerable power.
    Power & money while related are sometimes seperate.
    I am in favour of sovergin money power withen a poltical juristiction but Gold must be used so that one sovergin does not have a call on the worlds resourses such as oil.
    I greatly fear “Benevolent” international organisations of all stripes as there is always no clear chain of command.
    @Obsessive maths freak
    The euro trajectory is going as planned - a nation with a low private debt ratio is being taken out.
    As I have said already this turbulence is similar to the previous destruction of the clan system to facilitate the introduction of the then new nation state - (Dutch bankers financed Cromwell).
    A interesting view of the current events………
    fofoa.blogspot.com/2011/07/euro-gold.html

  59. Overseas commentator Says:

    @DOCM
    I do not know anymore than you do what will happen in the next few days. But I do know that your explanation for Sarkozy’s position is mistaken. The harmonization of corporate tax policy is a long term goal of the French Ministry of Finance (the civil servants much more than the politicians). There are numerous papers on the subject going back many years. I suspect that it is also true of the Germans and of the Bruxelles technocrats .Who is going to win the next presidential election in France is hardly important on this matter .

  60. Jules Says:

    That’s the answer. Shoot the messenger, the rating agencies. Everybody and their dog knows not to put any of their money into Greece, but apparently the EU wants to ban the rating agencies. Good idea then we can put all our trust into the great EU, they seem to know what they are doing.

    Come to think of it if the EU was in the US we would never have had any financial crash in the first place. They would have banned any negative comment on Lehmann’s and forced us all to put our pensions in Unemployed Alabama home bonds.

    My God these guys are so clever. Pity the old Soviet Union was not still in place and they could get a job fudging the tractor production in the Ukraine.

  61. Brian Woods II Says:

    @ B_E_B

    “Big rally in Spain and Italy over the last hour, now positive on the day, but seems like profit taking rather than real money buying in yet.”

    You know the markets far better than me. However, usually this dismissal of a reversal in price trends refers to natural longs cashing in on a recent bull run. Here we are referring to short speculators cashing in their bets, to me that is less a case for dismissal of the trend reversal.

  62. hoganmahew Says:

    @BWII
    I too know little, but what you say was what struck me - that this is shorts cashing in. Perhaps the short selling disclosure rules and the profits made are leading to a rush for the exits. I seem to recall a similar move in Irish bonds at some stage - a rally followed by a decline…

  63. colm mccarthy Says:

    Ireland down a notch, to junk, according to Moody’s. Bonzer Wheeze: why not regulate ratings agencies? Can I have a job as an EU Commissioner?

  64. PR Guy Says:

    …and with a negative outlook :-(

  65. Eureka Says:

    The whole thing just stinks.

  66. ObsessiveMathsFreak Says:

    Ireland down a notch, to junk, according to Moody’s.

    We didn’t polish their crystal ball hard enough.

  67. DOCM Says:

    @ Overseas commentator

    The world and his wife know that the harmonisation of corporation tax is a long term goal of the Fremch finance ministry. By all means, let it pursue this goal but through appropriate EU channels and not as a form of blatant arm-twisting (there is a less polite word) in a bilateral context when the country in question is in major economic difficulty.

    Sarkozy would not recognise the concept of Community solidarity if it fell on him and it is for this reason that it is sincerly to be hoped in the interests of France that he is not re-elected.

  68. Eureka Says:

    @BEB
    thing about the PPPs is that your hospitals and schools don’t get put up as effective collateral. The issues around collateral would be the same/similar as for any contract.
    The natural disaster argument is intersting. Haven’t quite figured the way around that other than thinking in terms of international insurance funds - each country contributes a fixed amount per year - but not sure.
    Municipal debt markets (in other countries) should go too (oddly that’s probably China’s weakness but it must owe that money to itself (ah I dunno..)

  69. Eamonn Moran Says:

    @ Eoin bond
    Looking at the Spanish and Italian 10 yr today (1 day chart) reminds me a lot of the kind of attack defend situation we saw when the ECB were trying (and ultimately failing) to prevent bond yields going over 6% in Ireland. It looks a lot to me like the markets are selling these bonds off and someone else is buying. If its not the ECB directly I recon its someone acting on their behalf.

  70. Eamonn Moran Says:

    @ tull and eoin
    ““Don’t buy it”? Fair enough. No one has been able to confirm any ECB buying, and people are always eventually able to confirm ECB buying in even the relatively small amounts that would be required to push Greek or Irish yields around. If you want to push Italian or Spanish yields around, you gotta take out a bazooka. As Tull noted, bazooka’s get heard. A large part of the rally also took place right after the US guys hit their desks, suggesting hedge funds and US banks profit taking on the recent moves.”
    Guys i just read Brendan Keenan’s article from Wednesdays Indo.
    Seems I was not alone in thinking that the ECB stepped in to buy bonds.
    Brendan heard China were doing it too.

    As willy nelson would say ‘We’re on the road again’

  71. Eureka Says:

    All this panic induction is having the desired effect:
    http://m.spiegel.de/international/europe/a-774407.html

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