ECB may adopt fresh anti-contagion, unorthodox measures & initiate large scale government bond buying programme which could prove to be the ultimate game-changer in the Eurozone Debt Crisis. Some money printing (bond-market interventions) in Europe in addition to Greek issues pushed a couple of years further would probably re-rate European equities quite significantly. The Euro would get the necessary boost which in turn could shoot Gold & other commodities upside.
There is huge optimism in the markets that the Eurozone can bring a sound solution to resolve its crisis in September. European policy makers end August with 15 days to justify bondholder optimism that they can deliver lasting solutions to the debt turmoil. ECB President Mario Draghi has pledged to do what it takes to protect the Eurozone, including launching new systems for buying bonds from the indebted Italy and Spain.
September offers a microcosm of three years of crisis- fighting. The next two weeks may feature fresh anti-contagion measures from the ECB, a possible aid request from Spain and insight into whether creditors will ease Greece’s bailout terms. Since Draghi first floated the idea on July 26, to ease policy further and buy bonds, Spanish and Italian bonds have rallied, though he had no major consensus support. He would like to convince the Bundesbank of the need to do so, and we will find out what is going to happen next week, as the Countdown to Sep 6 begins.
Germany also needs to realize that a collapse of the Euro would mean the German currency value would shoot up through the roof. German economy would shrink by over 10% if the Euro collapsed. The effect of the crazy rise would be disastrous on the heavily export-oriented German economy. A Eurozone support would work out more to the benefit of Germany in the longer run.
Unlimited intervention by the ECB in the bond markets would be the ultimate game-changer in the Eurozone Debt Crisis. Not only would it drive spreads down, it would keep them down, reported Bloomberg, Steven Major, global head of fixed income research at HSBC Holdings Plc said, “Keeping the yields of peripheral nations within a preset range of those of core economies could require the ECB to spend as much as 7 billion euros ($8.8 billion) per week buying bonds.” The gap between two-year German and Spanish bonds could almost halve to 200 basis points from more than 370 currently, he said. Draghi wrote in a commentary, “The ECB “will always act within the limits of its mandate, yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools.” Any support the ECB provides to struggling Eurozone members should not ease the pressure on those countries to get their financial houses in order, Austrian Finance Minister Maria Fekter said on Thursday. The Federal Reserve too is expected to hold on its QE3 announcements to watch & access the intensity of fire fighting the ECB does to contain the Eurozone crisis. For more read: US Federal Reserve at Crossroads
ECB, EU & IMF – Troika to report on Greece:
Pressure remains on Greece to take ownership of the reforms and deliver results. The so-called troika – the ECB, European Commission and IMF – return to Athens early next month to study how much of a funding shortfall Greece faces. While asking for an extension in its fiscal adjustment program by two years to 2016, the government is trying to show its dedication to the troika’s demands by pulling together a new package of spending cuts for the next two years. Samaras told members of his New Democracy party that Greece must avert a return to the Drachma. He said that the 11.5 billion Euro austerity plans will be the country’s last. Greece’s prime minister Antonis Samaras has told his countrymen that Greece would effectively exit the Euro and crumble without the next round of spending cuts, due to be implemented in 2013-14. “Many of these cutbacks are difficult, painful,” Samaras said. “But they are also inevitable. For without them the country would return to zero credibility and effectively leave the euro, which would destroy the country.”
Former Greece Prime Minister George Papandreou has said his country might have avoided a bailout if the economy had not been robbed by funds being funneled to tax havens. “Yet Europe, the G8, G20, the banking system despite my pleas as prime minister, despite token reference in our council of G20 decisions, have done nothing to change this.”Greece’s finance ministry in February said Greeks had legally moved €16bn (£12.7bn) abroad in the past two years, while efforts to clamp down on tax evasion have met limited success. A tax transparency report last month said the world’s wealthiest individuals had stashed $21 trillion worth of assets in offshore tax havens such as Switzerland and the Cayman Islands, which was equivalent to the combined GDPs of the US and Japan.
The ECB President – Europe’s “Super” Mario Draghi:
“Believe me the next action by the ECB will be enough.” Draghi used the pages of German weekly Die Zeit to plead for a more expansive role for the central bank and to say that the crisis-struck currency can be stabilized without sacrificing each country’s independence to a unified European political system.
“The ECB is not a political institution, but it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity.”
In tactical terms, Draghi sought to neutralize protests made by Germany’s top central banker, Jens Weidmann, against ECB proposals to buy Spanish or Italian bonds on the market in order to bring down their borrowing costs and prevent the debt crisis from spreading. Draghi made his appeal in the run-up to the ECB’s Sept. 6 discussion of bond-market interventions for Spain or Italy and a Sept. 12 ruling by Germany’s supreme court on the viability of the planned euro rescue fund.
“A new architecture for the euro area is desirable to create sustained prosperity for all euro-area countries, and especially forGermany,” Draghi wrote. “Yet this new architecture does not require a political union first. Economic integration and political integration can develop in parallel.”
Draghi didn’t mention Weidmann, who last week broke more than a month of silence by telling Spiegel magazine that the bond-buying proposal is a “touchy” matter and the thought of interest-rate targets gives him “stomach pains.” Weidmann, head of the Bundesbank, summed up the idea as “addictive like a drug.” The Bundesbank and its allies also point to provisions prohibiting the ECB from directly financing governments. Draghi took the unusual step of publicly cornering Weidmann on Aug. 2, telling a press conference that the Bundesbank chief was alone in expressing “reservations” about a renewed bond- purchase program that would tie countries such asSpain orItaly to tough conditions.
Wen, Merkel Meet:
Following a meeting between Chinese Premiere Wen and German Chancellor Merkel, Wen said he’s more confident about the Euro and will be investing in European bonds. He said, “China may be willing to buy-up more European debt to support the struggling region.” The two leaders also signed various agreements for trades in Yuan/Euro. Wen’s comments boosted the single currency at the start of the European session. EUR/USD rose twenty points and past 1.2550 following the meeting.
The Merkel and Monti Clash:
Angela Merkel and Mario Monti publicly stated they disagreed over the role of Europe’s new big bazooka bail-out fund. The Italian Prime Minister said the European Stability Mechanism –ESM, should have a bank license to be able to properly bring down Club Med borrowing costs. The German Chancellor said the plan was “incompatible” with EU treaties – and that she was backed by Mario Draghi, president of the ECB. “Some things that aren’t possible today could be possible tomorrow, under certain conditions,” Monti replied. Merkel praisedItaly’s “impressive” reform agenda and pointed to a “hopeful signal” from recent Italian bond auctions, in which the government’s borrowing rates dropped. The small Spanish region of Murcia said it would need to claim €700m from Madrid’s emergency bail-out fund while officials in Valencia said the region would need more than €3.5bn. The forecasts backed fears that Madrid would be swamped by requests for aid from its €18bn fund, after Catalonia said it needed €5bn of support.
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