The Financial Times – ECB ‘ready to do whatever it takes’
The European Central Bank’s mandate allows it to fight excessive borrowing costs for eurozone countries, Mario Draghi, its president, said on Thursday, sparking a market rally amid hopes the bank would intervene to buy sovereign bonds. The euro strengthened and the bond prices of debt issued by stressed eurozone countries rallied after Mr Draghi said the ECB was “ready to do whatever it takes” to preserve the single currency. “Believe me, it will be enough,” he told a conference in London. Following days of market turmoil and concern that Spain’s high borrowing costs could force it to seek a full sovereign bailout, Mr Draghi suggested the ECB had a remit to intervene if market interest rates were not “inherent” to borrowers and interfered with the central bank’s implementation of monetary policy – its prime tool for fulfilling its core task of maintaining price stability.
The Wall Street Journal – Europe’s Central Bank Signals Action
Mr. Draghi’s resolute comments on Thursday, which sounded more similar to Fed Chairman Ben Bernanke than to Mr. Draghi’s predecessor, Jean-Claude Trichet, suggest the ECB has chosen to take bold action. Unlike politicians who must navigate parliaments and other euro-zone member nations to get things done, the ECB’s ability to print unlimited euros means it can match words with actions almost immediately, if it chooses. One option is for the ECB to start buying bonds again, but on a much larger scale. A more extreme step would be to set a ceiling on interest-rate spreads between weak and strong countries, though that would require an unlimited commitment that officials so far have been unwilling to make. It could also buy bonds of strong and fragile countries alike to jump-start the bloc’s economy. Spanish and Italian bonds strengthened sharply Thursday, and the euro and the British pound each gained more than 1% against the U.S. dollar. Stocks were positive in nearly all European markets, and the Italian and Spanish indexes each jumped more than 5%.Late Thursday, the Spanish 10-year bond was yielding 6.96%, down nearly half a percentage point from Wednesday. Lower yields mean stronger prices. The 10-year Italian bond was at 6.03%, down a similar amount.Shorter-dated bonds strengthened even more.
Comment
Let us repeat what was stated in our chat window above yesterday:
Below are some examples of politicians promising to do “whatever it takes”:
David Cameron July 2012
Nicholas Sarkozy Sep 2011
Gordon Brown Sep 2008
George Osbourne May 2012
Alistair Darling Oct 2008
Angela Merkel Oct 2011
Barack Obama Jan 2012
And Bernanke said the Fed will do “everything possible” to save the world in Feb 2009. This type of phrase is nothing more than rhetoric. If they really knew what needed to be done, they would just do it instead of promising to do it.
Spain
Click to enlarge:
The Euro Crisis – Spanish panic
THINGS are rapidly getting worse in Spain. Bond yields have risen to over 7.5% today, on the back of a shaky government debt auction last Thursday, and the failure of one of its regions (Valencia) that now needs help from Madrid. In line with this bad news on the state of the government coffers, the cost of buying an insurance policy against Spanish default (credit default swap premia) is up, and is increasingly diverging from Italy’s (see chart). Investors’ views of Spanish companies are just as gloomy as of its government finances. The Spanish stock-market—the IBEX 35—is down 30% this year, as any expectations that company profits will lead to decent dividends anytime soon are thin on the ground. Things could get worse as the week progresses, particularly if preliminary measures of output to be released tomorrow are weak.
USA Today – Spain unemployment edges up to 24.6%
The number of people out of work in Spain shows no sign of dropping, with almost one in four people unemployed and half of those under the age of 25 out of work, the National Statistics Institute said Friday. The recession-hit country’s unemployment rate rose 0.19 percentage points in the second quarter on the previous three months to 24.63%, the institute said. The rate is the highest among the 17 nations using the euro currency. The institute said 53,500 people more joined the ranks of the unemployed between April and June, making for a total of 5.69 million people out of work.For those under 25 years of age, the unemployment rate climbed to 53%, up from 52% in the previous quarter. Spain is battling to avoid having to seek a full-blown financial bailout as it struggles to emerge from its second recession in three years and strives to convince investors it can manage its finances.
Source: Bianco Research
Category: Bailouts
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
Which begs the question, is this the most gullible market in history.
To answer that question, we must first pose another: Is it possible for HFT to be gullible?
What’s really strange is a friend of mine played the Primavera music festival in Barcelona (4-day mega music festival with 7 stages, etc.) in June and he said it was packed. No sign of any kind of recession. Any tickets are not free. Plus, it’s geared toward the <30 crowd.
you are an absolute idiot if you think HFT guys are responsible for this huge bounce in the euro
you are absolutely insane if you truly believe that the HFT guys have caused this huge bounce in the euro
The cup/handle formation on the Spanish CDS targets about 680 BP. The probable outcome is a break to the target regardless of the rhetoric.
In the absence of clear indications of what is working and not working, use Atlas’ razor:
Atlas’ razor: When faced with two painful choices to fix your problems, choose the one you have the most control over. Choose the one that is based on the most sound fiscal morality and has worked in practice the most consistently.
Because choosing the immoral solution means you’ve lost your sense of morality, that is not worth living or dying for.
1. Stop printing money, it is guaranteed to create inflation and erode saver’s wealth, thereby destroying incentive to save. That exacerbates the gov’t benefits problem.
2. Stop borrowing money – giving the cost of solving today’s problems to the next generation will relieve us from solving our own issues AND will enrage them when they figure out they were the shills in the shell game.
3. Stop trying get the federal gov’t to do both benefits and regulation – they are highly conflicting mandates. return benefits to the state level, where citizens can tightly regulate them, and let Washington focus ONLY on healthy commerce regulations, like they did highly successfully for 200 years.
Choosing to control what we CAN control, and maintain morality, a system of law, is the best we can do.
We have to stop believing federal policy can cure every downturn. Sometimes humanity is just not going to invent enough productivity improvements to keep everyone healthy and earning great income.
We can’t promise wealth for everyone, health for everyone, food, housing, college etc., through a network of crooked politicians in Washington. Every critical benefit program they’ve been handed is massively mismanaged now, and the regulatory system is broken too. Obama, letting the Bush-era crimes behind the fiscal crisis go unpunished, is just a massive proof of the corruption between Washington, the banks, real estate, loan oversite, and appraissals. Letting kids who are totally immature, mentally, to realize a $70,000 loan for an art degree is gigantically stupid, this just certifies the madness the politicians are perpetuating on us all.
“Amen” to the author’s comment above:
“And Bernanke said the Fed will do “everything possible” to save the world in Feb 2009. This type of phrase is nothing more than rhetoric. If they really knew what needed to be done, they would just do it instead of promising to do it.”
The chorus of Profligate Priests (Now Penitent?) vowing to save the Euro at all costs is scary IMO.
Did the “unsinkable” Titanic sink or did it not?
Have a good weekend.
Euro bounce is elegant tag of the 200 monthly almost to the “penny” just like it did in June 2010. 140-145 is next stop. Equities will play along…blah blah everything is great. Then big down we go.
can’t forget the original from back in the 1930s and Prime minister Chamberlain of England
You are an absolutely insane idiot if you believe the markets don’t climb a wall of worry.
Does this mean they didn’t fix the Euro?
Kudos to AtlasRocked for a fantastic commentary.
not sure why we think we have much control over the economy. we don’t. that what we mean by a free market. and it also means that unless you control some of the animal spirits, you will always end up with some who will game the market, cause it doesn’t care if its moral or not. the states were never very good at regulating any thing, they were just as easily corrupted (if not much easier to do so) than the Feds turned out to be. and whether its ‘moral’ to borrow, is as it always been in the eye of the beholder. but without borrowing in the economy it will collapse to less than 1/2 it is today. and we will be a much smaller country too. and we will put every one out of work. we aren’t the world that was here in the 1800s. where 70-85% of Americans lived on the farm, and that was what it took to feed us. and that world wasn’t better, more moral, or any thing better than today’s
and borrowing has been going on for 1000s of years. its not new
its just that in recent times, we ended up having to borrow more, to keep the standard of living up. and to keep the country going. but that was all just a smoke screen for the fact that the top 1% had 20% OF ALL INCOME in the US. and the bottom 75% had less than that. that is the problem we have, consumers are the customers of all companies, without whom there are no jobs at all. but companies got into the exporting of jobs, collapsing of wages, and banks and wall street pushed them into it, and they used that to fund their bug scam of pushing easy credit. what you see today, is what we would have looked like since 2000, if not for the easy credit scam from wall street
In this country we produce about $100,000 per full time worker. Off course we can deliver “wealth, health, food, housing and education” for everybody. It is just an issue of having the will to distribute the wealth that is produced. Most of western Europe ensure a comfortable living with high quality health care and education as the natural rights of all citizens – but they don’t have many billionaires over there.
If the ECB does print enough it will;
1/ Lower interest rates
2/ Lower the currency value
3/ Act as a fiscal union
What will not work?
The resistance will be of course political. Germans do not want to directly subsidize the South even though they already have done and continue to do so. Perhaps the bonhomie generated by the Olympics will be enough to get things that need to be done enacted. Who Knows.
It worth remembering that just like in Europe the Northern States of Americas subsidize the Southern states. This is on going. It is the price of the Union. Additionally when the Fed prints money or lowers interest rates it distributes wealth arbitrarily as it sees fit. More often than not taking from savers and giving to industry and other borrowers and of course THE BANKS.
What Simon said.
It is clear austerity policies are not working and the ECB is rationally responding by changing what it has most control over in that regard. Transfers do not have to work the way they do in the USA but work somehow they must or trade imbalances will tear the European union apart.
NB: Austerity is not only having a negative impact on European recovery but the social reaction to austerity policies is enhancing the political power of extremists, nationalists and authoritarians in particular; e.g., Austerity Driving European Politics to Chilling Extremes.
The economy is not a morality play but it does have implications for the strength of democracy.
Austerity never works and it is amazing that anybody with half a brain would think it could. Lets throw 10 million people into unemployment status so that the economy can lose the 1 Trillion in GDP/year those people could have produced (instead of sitting on their hands). What could possibly be wrong with a plan to reduce the deficit by reducing the productivity that ultimately is the thing that makes debt reduction possible. These clowns are supposed to be experts, not kitchen table economists.