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It’s More About Politics Than Economics for Euro

By Hans Parisis
Monday, 06 Dec 2010 06:58 AM Current | Bio | Archive

The U.S. consumer has spent years rushing to the shopping mall buying things no one wanted without heeding to the price.

It has been a mainstay of the global economy. Now, European Central Bank President Jean-Claude Trichet has also revealed himself to be a U.S. consumer at heart.

Thursday, the ECB rushed to the EU central bankers’ equivalent of a huge shopping mall, which is the EU governments’ bond market and bought the things no one wants without heeding to the price.

The ECB’s attempts to rig the EU bond markets aren’t, of course, a bailout.

Trichet said that the extension of both the non-standard monetary measures to provide financial markets with liquidity and the ECB program to purchase government bonds were driven by “acute” tensions in financial markets.

He stated that an “overwhelming majority” (No doubt that Axel Weber, the German Central Bank President disagreed!) of the Governing Council had backed the “ongoing” purchase of EU government bonds while the government bond purchases would continue to be sterilized, and it remains a temporary program.

“It’s not quantitative easing; we’re withdrawing all the liquidity,” he said.

During Trichet's press conference it was confirmed the ECB was on the “bid” for Irish and Portuguese bonds.

Investors should keep in mind the ECB has to purchase EU bonds of the eurozone because it can’t bailout directly eurozone governments.

This, of course, will cure the symptoms of the wider bond spreads, at least for now, but it doesn’t cure the underlying cause that the euro doesn’t work.

We can say Trichet has, for now at least, succeeded in buying time and if the macroeconomic data continue to suggest that the eurozone’s more-stretched economies can grow enough to finance their debts, that time will really be helpful. But, and that’s not impossible (!), if the economy in the stretched peripheral economies disappoints, the market will probably ask for more soon enough.

Nevertheless, the debt crisis has once again double-crossed the ECB “exit” strategy.

In the mean time, Standard and Poor’s has placed Greece's long term BB-plus sovereign credit rating on negative credit watch.

It says: “We are assessing the credit implications of the proposed European Stability Mechanism that may govern EU sovereign bonds beginning in July 2013. Specifically, we believe that assigning ‘preferred creditor’ status to future official lending via the European Stability Mechanism (ESM) could be detrimental to the ability of non-official holders of sovereign debt to be repaid. We are placing our ‘BB-plus’ long-term sovereign credit rating on Greece on CreditWatch with negative implications.”

This means that the decision to make the loans under the ESM senior to private bondholder debt, and the political process to determine illiquidity or solvency, is likely to be extremely problematic.

It is possible that European policymakers might, in the midst of a future crisis, make uncoordinated and even contradictory statements, potentially causing market distortions and jeopardizing funding access of individual sovereigns. To me, it is hard to see how even Italy and Spain can attract market funding at reasonable rates under the rules of the ESM.

There is no doubt in my mind that the resolution of Europe’s crisis will inevitably involve a difficult political debate over apportioning the “cost” of a final and sustainable resolution. I don’t think it’s an exaggeration to say this crisis will first re-emerge in different places in a successive pattern until it is “definitively” resolved.

Before coming to that, the crisis will manifest itself more and more in the political domain of the different sovereign eurozone countries.

For investors it could and probably will become very difficult to understand what will be going on in the eurozone because it will be all about politics, not economics.

I certainly can see the possibility the euro making new lows relative to the October 2008 low of $1.23 and the June 2010 low $1.1875, notwithstanding it probably seems rash, at least for now, to call it much further than these levels.

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The U.S. consumer has spent years rushing to the shopping mall buying things no one wanted without heeding to the price. It has been a mainstay of the global economy. Now, European Central Bank President Jean-Claude Trichet has also revealed himself to be a U.S. consumer...
hans,parisis,Politics,Economics,Eurozone
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2010-58-06
 

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