Tuesday, 16 August 2011

Another week, another Sarky Merkel eurozone crisis meeting

It must have dawned by now  on the Eurocrats that the markets are not buying any stop gap sticking plaster solutions. The only organisation buying right now is the ECB, that supposedly independent central bank, acting on the orders of its political masters bought €22 bn. of PIGS bonds last week to add to the previous weeks purchase of €16.5 bn. As Dubya used to say a billion here a billion there and soon you are talking real money.

Has this reduced PIGS bond yields? Yes it has. I update my little table below with today's yields.

              8th July                11th July             15th July             18th July               16th August

Greece  17.04% (14.20) 17.19% (14.52)  17.71% (15.02) 18.23% (15.57)   15.51 (13.18)

Ireland   13.13% (10.29) 13.62% (10.96)  14.27% (11.58) 14.45% (11.79)   10.18 (7.85)

Portugal 13.05% (10.21) 13.28% (10.61)  12.93% (10.24) 12.84% (10.18)  10.90 (8.57) 

Spain         5.69% (2.85)      6.08% (3.41)     6.07% (3.38)      6.32% (3.67)      5.02 (2.69)     

Italy           5.28% (2.45)      5.72% (3.05)      5.77% (3.09)    5.99% (3.34)       5.04 (2.70)

So PIGS 10 year bond yield have dropped by 1% for Italy to 4.5% for Ireland. This of course means the price of these bonds have all risen and the ECB has been paying this increased price. Very nice for banks with large holdings of PIGS paper like say French banks. A nominal 100€ bond that would have been marked to market on their books at say 90€ they can now sell to the ECB for say 93€  a huge change for long dated bonds held on carry trades. The banks are shot of these dodgy  mainly long dated bonds and have lots more Euros to waste on their next whizzo investment idea. The banks will have shortened the maturity of their Euro sovereign portfolio and will I bet be reducing maturities over two years to as close to zero as they can manage.

Now if you listen to the BBC economists this has reduced the financing cost to the PIGS. This is not true. The financing cost to the PIGS was set when the bond was issued so the real test will be when the PIGS go back to the market to refinance their maturing paper. Now if the ECB then still is happily buying PIG bonds at the rate of €20 bn a week, no problemo as Barroso says. The snag is the ECB will have to stop sometime if only when inflation rockets and then I opine the PIGS bond yields will also rocket once more. Still the French banks will have their money and the risk and losses will have been transferred to those who finance the ECB, that's right the Germans! Its the old privatise profits and nationalise losses political trick which only a return to the gold standard will ever stop. Thanks Gordon for selling our gold at $275 per ounce, current price circa $1800 per ounce. Pure genius as the Guiness advert says.

Many good pieces have been written this last week about how the world ended up in this mess Bretton Woods and all. The French of course sabotaged this during the sixties by de Gaulle presenting every French dollar to the US Treasury for one ounce of gold at $35 per ounce. This forced Nixon off the dollar gold standard in 1971. A great triumph for the French over the hated Anglo Saxons but a strategic catastrophe for the world.

I look forward to reading what Merkel and Sarkozy will announce with great splendour and then watching it unravel on Thursday in the money markets. Incidentally the press communique will already have been written. before Merkel sets foot in France. The visit is only for the snappers front page pics!

It is as I opined some time ago the collision between politicians desire and need to be relected domestically and the EU crats desire for a United States of Europe that will bring the whole Eurozone edifice crashing down. Merkel is in deep political trouble in Germany. Her coalition is unravelling. The EU and the Euro are very unpopular in Germany. Sarky also has an election to win in France next year but following DSK's litte trouser problem le petit Napoleon should triumph at the polls once more. A good communique today on the lines Sarky saves Europe once more would of course help.

PS French and UK bonds used to trade at roughly the same spread to bunds. Now the French spread has blown out to 64 basis points with the UK coming in to 20 basis points. The French costs of the bail out plus public sector pension liabilities are starting to hit the French credit rating. Interesting. 

1 comment:

Anonymous said...

So its all going to plan then.

It seems they will stop at nowt.

Interesting program on Radio 4 Sun 21 Aug.8.50am. John Gray 'Greece and the Meaning of Folly'