The Global Initiative and ECB to the Rescue

Quotable

Feste: I was one, sir, in this enterlude–one Sir Topas, sir, but that’s all one. "By the Lord, fool, I am not mad." But do you remember? "Madam, why laugh you at such a barren rascal? And you smile not, he’s gagg’d." And thus the

Malvolio: I’ll be reveng’d on the whole pack of you.

                                                                        Shakespeare, Twelfth Night Act 5, scene 1, 372-378

Commentary & Analysis
The Global Initiative and ECB to the Rescue

You have to love the irony here:

Reuters: Italy to vote on cuts, US applies pressure: Italy’s Senate is set to vote on austerity measures demanded by the European Union to avert a euro zone meltdown, after U.S. President Barack Obama ratcheted up pressure for more dramatic action from the currency bloc.

Talk about chutzpah!

President Obama now has added Europe to his blame list, which is already quite vast indeed. Let me see if I can put this another way: Spend like a drunken sailor at home in order to pay off your constituency and expand the role of government at every turn and then turn around and blame Europeans for “out of control spending” when your own economy arguably teeters on the edge of the abyss because of reckless spending in your administration. (In fairness, despite historical revisionism by “born again conservatives,” the prior spender-in-chief, “W”, was a man who never met a spending bill he didn’t like as he stumbled and bumbled along his way “saving” the world from itself.)

And we wonder why the world is sick and tired of the US meddling into everyone else’s business! How about all US politicians just open up a can of shut-the-hell-up about everyone else’s problems until they get our house in order. That is my new campaign platform for 2012. And as soon as I can figure out what a “Cabinet” is, I’ll be making some serious cuts too.

Italian bonds have rallied over the past couple of days (yield has fallen) and the yield is back under the much vaunted 7% level, which according to analysts would spell d-i-s-a-s-t-e-r if breached.

Italian 10-yr Government Bonds:

Well, breached it was and now back below–no disaster. It did help usher in a new government leader, but how could that be a bad thing for Italy given the eye-popping performance of their last womanizer-in-chief?

Silvio, don’t give up. Here’s a thought. The Berlusconi Global Initiative! It will free you up to meet attractive young policy wonks who want extra credit. And the beauty of it is that you get dupes who actually think you care to pay for all your “good work’ staying up late at night grading those extra-credit assignments. It’s working so well for the former US’s past womanizer-in-chief, Bobcat Bill Clinton. A man who never met a woman he didn’t like. Go for it!

But we do know there is a woman you don’t like Silvio. I think her name starts with Angela and ends with Merkel. No policy wonk is she. If she would have lightened up a bit, heck, you may never have stumbled into your new institute idea.

German Chancellor Merkel is no fan of using the European Central Bank as a tool to bailout inept politicians (as the US Fed does regularly). For now the ECB has become more active than German economists would like, but the bank is still restricted to a pea shooter thanks to German resistance. But there is real pressure for that to change.

Any thoughts on why Italian bond auctions performed so well of late? Multiple choice:
A) Silvio gone.
B) European Central Bank (ECB) bond buying.
C) Wonderboy Jon Corzine back in the market again snapping up those deals is number three.

I’m going with B — the ECB, even though my respect for Jon’s deft hand has not wavered.

As we watch events unfold in Europe, or watch each attempt at financial engineering be shredded by the market, the Eurozone may be inching closer and closer to exactly what George Soros suggested a long time ago– let the ECB become the real buyer of last resort and expand its activities tremendously.

From Reuters this morning [my emphasis]:

BUDAPEST, Nov 10 (Reuters) – Europeans could use a little cheering up this week. One man who is trying to do that is George Soros. He knows his way around a currency crisis, of course, and he isn’t usually accused of being a Pollyanna. Soros thinks it is not too late to save Europe and the euro — but he warns that time is running out and that Europe’s leaders must fundamentally change their strategy to succeed.

So far, so dire. But Soros has two ideas that should perk you up. One is about the bazooka, and one is about the most important woman in the world. [Perked up indeed–bazooka and woman is all you needed to say, Bill and Silvio are already peening invitations to Soros as their next World Initiative speaker.]

Soros disagrees [Europe does not have enough fire power]: "It actually has the bazooka in its hand, provided it uses it in the right way."

To do that, Soros said, Europe must first acknowledge what its bazooka is too small to achieve: rescue Europe’s faltering members directly. The bailout fund, he said, "was designed as a way of providing guarantees on government bonds, but for that purpose it is clearly inadequate. It cannot be stretched to cover Italy and Spain."

But the bailout fund is big enough, Soros thinks, to save Europe in a different way. "It needs to be used to guarantee the banking system," he said. "That would create a lender of last resort, which is currently lacking."

The bailout fund, he continued, could take the solvency risk, which is beyond the legal mandate of the European Central Bank. "And for that," he said, "there is plenty of money." Thus shored up, the banks would be able to buy the high-yielding government debt of the European countries that are currently struggling to find lenders.

Banks would be encouraged to hold their liquidity in government bonds, Soros said, which they could sell to the European Central Bank at any moment. "So, it is the equivalent of cash, and it would yield more than cash, therefore they would hold it," Soros said. "That would allow countries like Italy and Spain during this crisis period to borrow at negligible cost."

His plan, Soros said, would make Italy’s debt "sustainable, because the ECB has any amount of money for the purpose of providing liquidity. At the same time, it would not violate the law against the ECB directly financing the governments."

Not sure if Mr. Soros’ ideas will be adopted, but price action in risk assets and the euro seem to suggest expectations are rising. Mr. Soros makes it clear who ultimately will decide–Angela Merkel.

"It is entirely in the hands of Germany," Soros said. "Angela Merkel’s attitude has changed. She recognizes that the euro is in mortal danger and she is willing to risk her political future to save it. I think she recognizes that Germany has caused the crisis to get out of control, and she is now determined to correct that."

Hope springs eternal for the single currency experiment. And as much as I hate to say it; never say never; Silvio and Bobcat Bill never do!