ECB Intervention Unlikely

The euro has rallied about 1% and has spurred talk of ECB intervention.  We are skeptical.  There seems to be little reason to expect the ECB to intervene outside of its time zone in a unilateral fashion.  Convention, we understand, would dictate that the ECB would have to notify (ask permission?) of the Federal Reserve to intervene in the US market.  In addition, the ECB would intervene to drive a message home to the market and to burn the fingers if not more of the speculators.  It would seek to get the biggest bang possible, in which case there would be no doubt whether there was intervention of not.  A more likely explanation is that the Swiss National Bank or one of its agents became more aggressive or shifted tactics.  The move seemed to have been led by the euro-franc cross and dollar-franc.

The market is on edge.  The implied volatility, the premium for euro puts over euro calls, the large positions that have been built up all point to a vulnerable market–vulnerable to a short squeeze.  There have been veiled threats of stronger action.  This will not change sentiment very long.  In fact, what happened earlier this week was that as the euro stabilized, the demand for euro puts increased as if the speculative positions were being rolled out of spot and into options.      With the European debt crisis posing systemic risk and threatening to undermine the fragile economic recovery, European officials are coming under increasing pressure to act decisively.  What is driving the price action now is not value but risk management.  Stop losses are being triggered on the euro against the dollar and on the crosses as well.  The extreme positioning warns of potential sharp price action.  At the same time, these little episodes, like earlier this week, will lose their ability to impact prices in terms of duration and magnitude.


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  1. Element says

    Merkel said on May 14th that the EU has a common currency but no economic or political union and “that had to change”. She warned that the collapse of the euro system could result in failure of European integration.

    “It is an existential test and it must be passed. Failure would entail incalculable consequences for Europe.” – Angela Merkel, DW TV, May 14 2010

    I think the media reporting has generally misunderstood what she’s getting at here. All that’s really happened now is the bond market made it undeniable that Brussels represents a collection of flamboyantly titled ‘Presidents’ who are paper-tigers making promises and agreements they have no real capacity to deliver.

    That’s what’s being “existentially tested”. Instead the media casts this as a crisis of the euro itself.

    The euro’s exchange decline is a symptom of a STRUCTURE that grew around the euro, that pretends to be an economic and political platform.

    Germany’s unilateral actions to limit damage to Germany, is their vote of no-confidence in the effectiveness of the EU Commission structure.

    Germany is doing, and the rest are going to follow, and resent the undermining of a collective but toothless EU political forum.

    This is a direct demonstration of the ineffectualness of the EU. Germany is just highlighting it so it can be renovated or replaced (and if that still does not work – abandoned – thus the euro system would fail).

    Markets and Ratings Agencies simply made totally clear that state debt in the EZ area is high risk, so the floating currency naturally slumped, as did a floating market. … Like, … big deal.

    It’s supposed to go up or down, as conditions vary.

    But some think a slump is why the euro system may fail.


    Too much debt was added to, by even higher debt to GDP in the near future, even as GDP declines, and austere policy revenue plunges, as a recession occurs and the risk actually grows greatly – again.

    So the euro naturally slumped.

    In other words, Brussels ‘rescue’ of EU banks simply pushed debt risks even higher.

    But the EU Commission then blamed market ‘speculation’ for what they themselves did to PIIGS risk profiles, generating a large euro slump.

    All entirely foreseeable.

    But the EU Commission missed the point, that their own actions did this to the euro. EU politicians triggered the speculation caused via continuing the bad loans in a debt induced emergency.

    However, EZ politicians are intent on distracting from the EZ structure itself, which is weak and unstable (and which to their great annoyance Merkel keeps pointing out in various ways).

    The euro is weak because the EU Commission is a paper tiger fabricating ad-hoc plans over a weekend, with little credibility or capacity to follow through, then making media fluff-ups on Monday, which saps its credibility and thus weakens the euro and EU Commission.

    The speculators just watched and said, “oh look, the EU Commission just totally porked the euro and they’re too full of themselves to even realise it.”

    The bond market made it 100% clear last month that this is all occurring because of NET debt to GDP, and deficit to Real GDP.

    But did the EU Commission take this GALACTIC size hint?

    Hell NO!

    The euro is going down because EU bankers made lots of dumb and unrealistic loans which they have not written-down or renegotiated, because Brussels and most EZ Govts insisted they don’t.

    So how then are speculators a core problem?

    And can you say “Too Big Too Fail”, in Spanish or French?

    As a result we get the ‘down-the-rabbit-hole’ bailout narratives, plus very naughty speculators – both tales are entirely beside the point and misleading.

    Effectively, Germany is now unilaterally protecting itself against the stupidity of the EU Commission’s ‘rescue’.

    If Brussels fails to fix bad loans and instead increases them, and reactively blames nebulous external “euro attackers”, and satellite-state deficits, to distract from their actions – yes, something very bad certainly can happen in the Eurozone.

    If the EU Commission can’t be clear and act decisively about the far less complex and immediate problem of bad loans in European Banks at the beginning of a coming economic collapse, with ructions, how are they going to perform in three years time?

    Fix banks or close them, but don’t destroy people and countries merely to preserve massive bad loans that can never be repaid. In the words of the former EU President and Czech PM, “…that’s a road to Hell”, March 31 2009.

    Quote from ABC Lateline May 14th: “I don’t think it’s necessarily stable, It has been ‘stabilised’, for now, but if you look at what’s been put in there, Lee, you’ve got 750 billion euros, about a trillion dollars [$1.07 trill AUD]. A trillion dollars! It sounds like a lot of money, and I think that’s the aim. If we come up with a figure that sounds like a real lot of money then that will reassure the markets, and it has, for now. But the debt of the southern European economies and a couple of eastern European economies that are very shaky is more than $2.1 trillion [much of it short-term] so it doesn’t go close to it. Plus! – this is basically a pledge – the money’s not there. It would have to be raised on the capital markets, and that would basically poison the balance sheets of the core European economies, to save the periphery if push came to shove, so this is still a live-risk situation.” – ABC Lateline, Economics Correspondent Stephen Long, May 14 2010.

    They may as well have pledged $3 trillion for all the credibility this represents.

    Germany is repeatedly signalling it’s demanding major changes to the whole economic and political “stability structure”, of the Eurozone. But the existing structure needs to fail before that can proceed. So Merkel goes along, protects Germany as much as possible, and waits for the crisis.

    Greece will leave the EZ once Papandreou is unseated, so Germany will be off the hook for its part in the e110 billion 3-year plan, and the IMF is on the hook. Only the US Congress is now also saying the IMF must not give USD pledge money to countries that can not repay. i.e. Greece.

    But Merkel realises little or no German money will need to be wasted on propping up the Euro within Papandreou land as Greece will have to leave the euro system in order to recover (i.e. to live within its means).

    The EU Commission can only scare-up massive bailouts a few times before general incredulity emerges, and it has.

    Meanwhile, in the streets of Athens the protests and strikes are relentless. They’re determined to bring the Govt to its knees, and force tax relief and debt elimination. Implicitly they are demanding an end to the euro as the Greek currency, for how else can they get what they’re ideally and culturally demanding without eliminating the euro, and its strings attached?

    The issue that’s constantly ignored in the EU and media bailout narrative, is that the EU ECB, EMF and IMF, see the Greek people and Govt as a problem. But the Greek people see the EU ECB, EMF and IMF (and their Govt) as an enemy pretending to be a saviour, when all they are trying to save are crippled banks full of toxic assets.

    There’s no bailout for actual Greeks here.

    They are incensed to be repeatedly told of their much exaggerated ‘rescue’ by the EU and Germany. Their personal budget tells them the exact opposite. And far worse is still coming.

    You’d be throwing fire-bombs too if it were your family and country were being thus ‘rescued’ (and may be soon).

    So the Monday morning media fluff-up is for bond and derivatives buyers, while ordinary Greeks watch on in disgust and resolve to end this warped EU Commission hypocrisy. This has never been an extend an pretend operation for Greece. The Greeks are determined creditors and politicians who created the situation will all pay for letting it happen at all.

    There’s no basis for regeneration.

    But no one, not Papandreou, not Merkel and not the ECB will admit its just a toxic asset and bad bank bailout, so the Greek bailout narrative and euro ‘speculators’ remain the double-speak, while the creditors and politicians are protected to preserve the paper-tiger.

    The sad thing is, it still solved nothing, it Just devastated the EU Commission’s repute.

    The debt did not get one scintilla less risky.

    On the contrary.

    Even if the Greeks accepted the ‘rescue’ no one believe these ‘loans’ are anything but an instant loss. Or that Athens could possibly stick to such a severe austerity schedule. Or that Papandreou’s Govt will remain in power to the end of the schedule. Or that any follow-on Athens Govt will accept this.

    Everyone at CW knows this.

    It’s superficially understandable the EU is trying such nonsense, but it can only fail, and has. Plus the EU is setting itself up as an enemy. Greeks view this as a soft-war of sorts, for the maintenance of their chosen lifestyle and cultural characteristics, which are worth more to them than an EZ/EMU contraption.

    EU bankers do foresee where this is headed and are being more direct, “I have my doubts as to whether Greece can muster the necessary economic strength” – Josef Ackermann, CEO Deutsche Bank, May 13 2010.

    The longer Brussels tries to delay and disguise this process the worse will be the damage to the very idea of a Federated European Govt.

    Merkel does want Federal EU economic and political integration.

    But Germany needs to guide the process to make sure it’s actually going to be functional (on quasi Austrian-economics terms) if they are to be a core economic component of it and willing to finally sacrifice its nation-state autonomy and status for this.

    Note that what’s being called for here, is anything but and MMT-friendly EU economic and political structure.

    Its all balanced-budgets, and euros backed by sound banks and a real economy, rather than rampant money printing. Germany knows what money printing can do you see – it can make a Depression far, far worse.

    No Central Bank backed Hedgefunds and Hedgefund-based economies, i.e. unlike the UK and USA.

    So this is what it comes down to;
    Merkel intends to let the EU Commission weaken and fall apart from its mistakes, and general unreality, then rebuild it (if reform simply isn’t enough) in order to commit Germany to a new super-federation.

    If that process does not yield satisfactory results and mechanisms, Germany will be forced to go it alone, and the euro and EU Federation plan will be surplus to requirements.

    If Germany does decide the structure is feasible, and commits, and France is also made relatively happy, then Federation can occur. We are at the beginning of a big change, not at the end of the little change in Europe.

    A major issue is the euro itself, which has (weirdly) become a focal-point of EU Commission political blather. As much a political symbol, as an economic exchange agent, due to it being the only form of super-state integration, thus far. This constant and very unbalanced focus on the Euro is in fact very counterproductive. It suggests the EU is really just a central bank, preoccupied with a mere currency, and pushing clearly doomed banks ahead of actual European people. (as alternative to a 21st century construct for mutual Governance, economic prosperity, peace, stability and good causes, etc.)

    The focus on the euro must stop, so there’s room for what needs to take place. The euro should be an almost irrelevant side-issue so there’s room for what everyone can see is worth sacrificing centuries of nation-state status, to be a part of.


    It’s an irrelevant unit of exchange at the ‘effing shop for God’s sake! What other major Federated state obsesses to this neurotic level about its unit of value exchange?

    Anyway a lower currency benefits are numerous and compelling – hardly any sort of currency ‘failure’.

    And these things are why I’ve come the view that the EU Commission is extraordinarily confused and incapable. They don’t understand, or just avoid, that bad banks full of toxic assets is why its all going sour.

    Deficits, speculators and euro slumps are all manifestations of bad loans.

    Thus the Eurozone is an international investment no-go zone, and that’s inherently unstable.

    Which means cleaning out the banks.

    If your toilet backs up do you just sanitise the floor and hope no one notices the toilet is broken? Or do you get dirty and fix the blockage, then clean the floor etc?

    This is what Germany knows must be faced, for the EU to be worth Federating with, and it’s not looking good.

    “I have made it clear that what is important for our Govt in taking these extraordinary steps is to assure as far as possible OUR IDEA of a STABILITY STRUCTURE for our currency” – Angela Merkel, May 17 2010 (my emphasis CAPS)

    It’s the structure Germany is concerned with. The EU don’t seem to be getting the message. As long as there’s no structural economic and political reform, Germany can not and will not support Federation. And that is what will destroy the euro system, not mere falls in a floating exchange rate.

    So Germany must and will let them fail, then demand conditions for a comprehensive bank clean-up, and an economically and politically acceptable and workable “stability structure”, to move to Federation.

    If the EU collective won’t accept this, then Germany will indeed withdraw and the euro will indeed face “existential crisis” in the form of being surplus to requirement.

    Finally, the ECB Head should be seen and not heard, and it would be best if he were not even seen. ECB central bankers should not act like federalist politicians or make comments to media scrums at political meetings. The ECB Head won’t shut it and go away.

    This is part of why the euro is such an obstacle to moving on to more weighty and fruitful economic and structurally significant matters.

    I don’t believe you can wait for the next ‘recovery’ to sort out such busted banks. Their debt is why massive stimulus spending doesn’t lead to more than +1% of EU GDP recovery.

    But if the EU had half the debt load and lower tax and most bad debts gone … a trillion dollars of spending and ZIRP would get you stimulated fast.

    The continent or countries that do it first and best will recover first and best, and Germany intends to be first – whether with the EU and EMU or without.

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