Fateful Weekend for Europe?

[oddlots]

From Yves Smith:

"After telling readers that the Eurozone leader look to be suffering from “dulled reaction times…so out of line with market events that even if they were to snap our of their stupor now, it would be too late,” news reports suggest that they have finally roused themselves.

Or have they?

Ed Harrison has translated a report in Die Welt that describes what on the surface looks like a meaningful change in the Bundesbank’s position (and make no bones about it, the Bundesbank has been and presumably will continue to determine ECB behaviour)."

Rest here: http://www.nakedcapitalism.com/2011/...he-corner.html

[jk]

Re: Fateful Weekend for Europe?

what weidmann is quoted as saying is no different than what merkel has already said: first fiscal integration, THEN eurobonds.

s&p futures are up about 2% as i write. we'll see how long the party lasts.

[mmr]

Re: Fateful Weekend for Europe?

It's probably too late - the entire class of debt investors who only invest in "risk-free" assets (whether due to risk aversion, or because their investment mandate restricts them to highly-rated assets) are beginning to abandon Italy and Spain.

For those investors to purchase peripheral sovereign debt at any price, you would have to convince them to:

(i) take career risk, since I'm sure that their investors are calling on a daily basis to ask if they have any peripheral exposure, and

(ii) do a fundamental credit analysis of the countries; typically, these investors are able to just focus on AAA or AA rated debt and don't have to think. Once they have to actually think about credit risk, the odds are that they won't be taking on any more exposure.

Much like the US money market funds did with French banks, at best, those investors will just take their principal payments when (if?) the bonds mature and invest the proceeds elsewhere. At worst, they'll continue dumping their holdings as long as there's a dumb buyer willing to step into their position (ECB).

The peripheral countries are stuck issuing debt to (i) captive domestic investors like banks (ii) more speculative investors, like hedge funds (iii) the ECB. Only (iii) can buy enough to hold rates anywhere near current levels, which may not be good enough for those countries to remain solvent for any length of time.

[oddlots]

Re: Fateful Weekend for Europe?

Good call JK:

http://www.macrobusiness.com.au/2011...sses-the-mark/