LONDON—European banks, increasingly concerned about their ability to access funding, are devising complex and potentially risky new deals that enable them to continue borrowing from the European Central Bank…..
They also are a sign that struggling banks across Europe are preparing for a period of prolonged reliance on financial lifelines from the ECB. The Continent’s intensifying financial crisis has made it difficult for many banks to obtain funding from customary market sources.
Markets largely shrugged off the ECB, as long-term investors continued to dump everything but German bonds—considered the market’s safe harbor—and it became increasingly difficult to find private buyers for bonds issued by the large, indebted countries such as Italy and Spain…..The ECB fought a running battle throughout the day, traders said, in an attempt to drive the yield on the 10-year Italian note below 7%. The trading session started with price rally that drove the closely watched rate down to 6.84%. Then, as ECB buying lightened, private sellers took over, driving the yield—which moves in the opposite direction of price—up to 7.22%, according to Tradeweb data. Prices then rallied in the afternoon, with some market participants citing more ECB buying as well as comments from German Chancellor Angela Merkel indicating German support for more fiscal integration in the euro zone.
via ECB Fights to Put Lid on European Bond Yields – WSJ.com.
[St. Louis Fed President James Bullard] notes Keynes’ axiom that governments should borrow to stimulate demand when the private sector falters is being proved false by the way markets are reacting to ballooning deficit spending in Europe.
The [lesson of the] European crisis is “you do not want your country to be reliant on international financial markets to a large degree.”
via Keynes vs. Hayek? Bullard Knows Which One Floats His Boat – Real Time Economics – WSJ.
FT reports:
The president of Germany’s powerful Bundesbank has firmly rebuffed international demands for decisive intervention in the bond markets by the European Central Bank to combat the eurozone debt crisis, warning that such steps would add to instability by violating European law. Bundesbank president Jens Weidmann told the Financial Times that only politicians could resolve the crisis, and he rejected the idea of using the ECB as “lender of last resort” to governments.
We’ve seen this movie before. Higher rates after a severe debt-deflation recession are burdensome, perhaps economically fatal. Hiding behind the excuse that we must fight inflation NOW requires a grand dismissal of economic history. There are times to impose austerity and don the hawkish posture, but there are times when that’s exactly wrong. This is one of those times, particularly for Europe.
via EconoMonitor : EconoMonitor » The Triumph of Austerity (and its Consequences).
Italy is running a primary surplus. The only thing sending her over the edge is the simple fact that the Italian government cannot borrow at low-enough rates. At 4% (where rates were a year ago), they can gradually begin to adjust their debt ratios and still finance their borrowing – it will not be easy, but they, unlike their spendthrift cousins in the Aegean, have one of the highest savings rates in the OECD…..
via Things That Make You Go Hmmm… – Outside the Box Investment Newsletter – John Mauldin.
“Common responsibility for the European currency will also engender a common decision-making instance for the European economy. It is unthinkable to have a European central bank but not a common leadership for the European economy. If there is no counterweight to the ECB in European economy policy, then we will be left with the incomplete construction which we have today… However even if the building is not finished it is still true that monetary union is part of a supranational constitution… It is our task for the future to work with the appropriate means for the transfer of traditional elements of national sovereignty to the European level.”
~ Italian President Carlo Ciampi, Frankfurter Allgemeine Zeitung, February 8, 2000
With thanks to Grant Williams (via John Mauldin)
Italy was forced to pay its highest interest rate since the euro’s creation to sell five-year bonds—a sign of skepticism that new governments in Italy and Greece will be able to simultaneously boost economic growth and reduce high public-debt levels……Industrial production in the euro zone plunged 2% in September from August, the steepest slide since February 2009, according to the European Union’s statistics agency. The decline stretched from the weak periphery of Spain, Italy and Portugal to powerhouses such as Germany, France and the Netherlands. Compared with a year ago, output rose just 2.2%—the weakest gain in nearly two years. The data suggest “the euro-zone will soon fall back into another fairly deep recession,” said Ben May, economist at consultancy Capital Economics.
The FTSE Italian MIB index found support at 15000. Expect an upsurge in response to news that Mario Monti has been asked to form a new government. Breakout above 17000 would signal a rally to 19000. Rising 13-week Twiggs Money Flow indicates consistent buying pressure over the past few weeks.
* Target calculation: 17 + ( 17 – 15 ) = 19
France’s CAC-40 index similarly found support at 3000. Recovery above 3400 would offer a target of 3800, but 63-day Twiggs Momentum, a long way below zero, indicates a primary down-trend.
* Target calculation: 2800 – ( 3400 – 2800 ) = 2200 AND 3400 + ( 3400 – 3000 ) = 3800
The German DAX found support at 5700. Recovery above 6400 would offer a target of 7100, while failure of support would warn of another test of primary support at 5000.
* Target calculation: 6400 + ( 6400 – 5700 ) = 7100
The FTSE 100 is also consolidating above medium-term support — this time at 5350. 13-Week Twiggs Money Flow continues to signal strong buying pressure. Breakout above 5700 would re-test the 2011 highs at 6100. Failure of support is unlikely, but would warn of another test of primary support at 4800.
* Target calculation: 5700 + ( 5700 – 5300 ) = 6100
We need to remember, however, that this is still a bear market. We have seen one or two favorable news headlines but very little substance. And the European economy faces strong headwinds over the next few years.
[Silvio] Berlusconi, who failed to secure a majority in a crucial vote on Tuesday, stepped down as prime minister after parliament passed a package of measures demanded by European partners to restore market confidence in Italy’s strained public finances.
Former European Commissioner Mario Monti is expected to be given the task of trying to form a new administration to face a widening financial crisis which has sent Italy’s borrowing costs to unmanageable levels.
The austerity measures approved by [Italian] Parliament include selling state assets and increasing the retirement age to 67 from 65 by 2026. They would decrease the power of professional guilds, privatize municipal services and offer tax breaks to companies that hire young workers.
