Monday, May 10, 2010

Trichet in Greek Squad ECB

So the inevitable happened, Trichet punched the nuclear option and went all QE on the problem of Greece.

For those of you who have real jobs and want the "here is what you missed last week", Greece has been living high off the hog for a long time, their tax bases evades, and they are about to default on their sovereign debt, because the cost of rolling over is too high.

You can either default, adopt a fiscal solution (raises taxes spend less) or go for a monetary stimulus. Fiscal solutions are tough politically. On one hand you have germany and my wife who state that it is their own damn fault because they are pigs. And on the other other you have the grownups, like france and myself, that think that losing the euro over 2 bit wishy-washy philosophy show a remarkable lack of understanding of how modern money works. Meanwhile the cameras focus on the burnt cars, the rioting in the streets of greece, the banks on fire to the shout of "thieves", the dead.

The monetary solution went something like this in the US: print money to buy CDO debt. Get markets out of negative feedback loops. In europe this means "buy govt debt". Except if you do you must buy everyone, to not show preference to any one country. My guess is that the package is so big (T size) because you have to buy everyone. Also, if push comes to shove, I think it will be the greek problem that will be targeted at lower cost to the community. A wall of liquidity is stabilizing this market, yet again. The hope from the ECB of course is that "shock and awe" will calm everybody down. By showing a 1T commitment out of the gates, it is saying very clearly "don't fuck with us". And so the vultures back down.

meanwhile the euro gains 2% on the news. Like the USD, it rallied in spite of its QE... it was good for the economy. Go figure...

In the meantime a bunch of "arbitrageurs" have made a killing. A market panic can be an engineered thing and this is how I heard the official communication that they were looking into how the trades were originated. Some equities and debt were trading on the cheap late last week and as of this morning there is a monster rally. Equities are untractable. Bonds however may have been manipulated. A blocade on a sovereign for example is enough to trigger the meltdown we have seen on greece. Who's next? Will there be a next with this intervention...

2 comments:

Emmanuel Bernard said...

So what's going on is that the EU will lend money to EU countries in difficulties. The EU being financed by EU countries, we're essentially saying that all EU countries are borrowing a pile of cash from the market at a better average than what the PIIGS can.

Shouldn't the "price of risk" be pushed to the "consumer" in the end and push the borrowing rate higher for everyone.

I am not clearly understanding why this is making any difference in the grand scheme of things. At least if we execute, we'll be on par with the US wrt T-level cock fighting... and all the future consequences that will bring.

oogifu said...

Hey Marc,

3 interesting links:

http://oogifu.blogspot.com/2010/05/euro-lending-chart.html

http://www.youtube.com/watch?v=AwiH5N_cudo&feature=related

http://www.euronews.net/2010/05/07/economist-jacques-attali-on-the-greek-crisis-and-future-of-europe/