Something must be happening behind the scenes, but clearly more pain is required before the political leaders will commit to a real solution (ECB printing, Eurobonds, Germany leaving or PIIGS leaving). Markets are slowly but surely adding pressure through bond yields and a negative feedback of margin calls, liquidation, bank balance sheet reduction and market’s lack of faith in increasingly meaningless statements is going on.
With some luck, they can muddle through the holiday period, perhaps by canceling bond auctions or using ECB support to give the illusion that the situation is not hopeless. I just do not understand what the hell they expect to change in the coming months. Is the idea that banks can offload their positions in the European sovereign junk bonds to the ECB, and then a real solution is made? Or am I too optimistic in my assessment of the euro leaders’ capabilities, and they are in fact just stunned? This is what I mean with today's headline: for policymakers, the VERY local optimum is not doing anything for now, and that is very, very far away from the global optimum of doing something.
– MoreLiverQuote of the Day: The fact that you do not understand why you are paying for all this means you have not paid enough – MoreLiver on the European Movement, a propaganda- and a hangaround organization for the EU bureaucracy.
News (Thu morning) – BTH
Danske Daily – Danske Bank (pdf)
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT
EURO CRISIS
Of course, if you delve deep enough, the problem is psychological, and is magnified because the Eurozone is made up of independent countries following their own paths. But at the heart of the problem is Germany, the country that has benefited more than any other from the euro and which is now unwilling to accept the consequences of its Faustian pact. For the Germans it’s heads they win, tails we all lose, because they're stuck in a Weimar world.
ECB as LOLR unlikely – economistmeg.com
There are only two real game-changers left in the euro crisis: fiscal union and the ECB stepping in as a lender of last resort (LOLR). The former for now is resolutely off the table, particularly in the time period necessary for it to keep the eurozone together. Very bright people have fallen on both sides of the debate whether the ECB will step in as LOLR. For a number of reasons, even when push comes to shove, I don’t think it will.
Big Bazooka II – economistmeg.com
Given that it is unlikely the ECB will step in as a lender of last resort (LOLR), the next best option for keeping the eurozone intact is to cobble together enough real, hard cash to create a Big Bazooka II.
Hard truths about the euro from Mervyn King – The Guardian
BoE’s King: It is very clear from its origin that lender of last resort by a central bank is intended to be lending to individual banking institutions and to institutions that are clearly regarded as solvent. And it is done against good collateral, and at a penalty rate. That's what lender of last resort means.
In defense of the ECB – Credit Writedowns
Comments the above speech on ECB and adds: If I were at the ECB, I would have moved to interest rate caps, what I call rate easing, already, instead of the sterilised quantitative easing they are conducting right now. It would be cheaper politically and in terms of the ECB’s balance sheet. I would not ‘monetise’ periphery debt by engaging in quantitative easing. Credible lenders of last resort use price, not quantity signals.
FX Update: This can’t continue much longer - something’s got to give – tradingfloor.com
EU authorities are stirring once again and some new forceful action must be forthcoming - but what and when?... So the risk remains very much of the two-way variety (short term further aggravation of the current circumstances extending the move one way, while a kneejerk reaction when “Something, anything!” is finally done to address the problem could give the market whiplash.
Is the euro history? – Edward Hadas / Reuters Blog
The stakes are high. If the member nations retreat on the euro, further disintegration is likely. That owl of wisdom will probably look down on the movement towards European unity as no more than a wrong turn on history’s path.
Euro Zone Tensions Increase And Situation Is Getting Seriously Serious – Close To Or At Capitulation Levels – The Big Picture
OTHER
The Grand Unified Presentation Of Everything – ZH
Outtakes from the Pictet Investment Strategy 2012
Emerging Markets Briefer Nov – Danske Bank (pdf)
The past month has seen these dynamics being propelled further and the markets now look even more fragile as the European debt crisis seems to be even further away from disappearing from the interest horizon. Our new forecasts continue to highlight these particular external risks in emerging markets and as they are reflected in further potential for weaker currencies.