The market is essentially frozen ahead of yet another Merkozy press conference. I have lost count of how many of these press conferences they have had. I haven’t lost count of how many resulted in anything particularly useful – zero is an easy number to remember.
So what are we going to get?
Renewed commitment to minimal budget deficits?
That was part of the original deal of the Euro. That was part of the “compact” that was released late last year. It seems so long ago, but just last year, the Merkozy had a conference and said a lot of good things that they couldn’t get the full summit to agree to. Maybe they will promise budget surpluses by 2035? These “budget” solutions are all so far away that they don’t make a difference to the near term solution, or are so unachievable in the near term that they don’t take pressure off either.
Letting the ECB go ahead with quantitative easing?
That is possible, though it appears that the ECB skipped QE and went straight to QGG (Quantitative Gift Giving). They aren’t buying too much sovereign debt, but they are willing to lend to banks using any collateral they can scrape up. They are fully encouraging banks to issue bonds to themselves, get a government guarantee, and post it at the ECB for some fresh money. I think that while many investors have been staring at the SMP (Secondary Market Programme) and whining that full QE isn’t being applied, the ECB has gone beyond that with other programs. I remain somewhat confused by why the ECB won’t lend to banks directly and are requiring banks to get government guarantees. Is it to put added pressure on the sovereign not to default, since a sovereign default would drag the banks down with 100% certainty now? Is it to put pressure on sovereigns to continue to support banks, since now a bank default could drag down a sovereign? I’m not sure why they are doing it and why these steps are necessary, but it does seem to ensure contagion within a country, rather than preventing it.
Between SMP and all these weird collateralized lending programs, the ECB has been pumping money into the system, and a big portion of their purchases, and lending, is against assets that are highly likely to default! Quantitative Easing implies some ability to get paid back or to stop easing by selling assets back to the market. Quantitative Gift Giving is simply throwing money at assets that will never be repaid. How did Greece come up with €1 billion to buy preferred shares of NBG?
Creating a worse bank?
Maybe the Germans will finally relent and agree to some form of banking license for the EFSF? If the ECB is now the bad bank (and any quick look at their balance sheet show it is), then this would become the worse bank. It would be a depository for anything and everything that has no real value? Maybe something like this is announced. That would provide the biggest pop to risk assets, which should be immediately sold, since it doesn’t fix any of the problems with EFSF, it just shifts them around.
Time to be chastised?
I think there is a chance that Merkozy come out of this meeting swinging. They use threats to scare the rest of the Eurozone into doing what they are told. After months of minimal follow through on any of the Grand Plans maybe they are going to try scare the rest of Europe into playing nice. No one seems to be expecting this, but it may be the only thing that makes sense. Maybe it is finally time for Merkozy to point out that Europe needs them as much as they need the rest of Europe.