Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Thursday, 12 January 2012

Eurozone Snap Comment - 12-Jan-12

After a month-long hiatus from the markets and London winter, I returned full of hopium imbibed during my sojourn in India. But the new year cheer dissipated quickly. Even clips of Merkel-Sarkozy solving the crisis didn't help. (http://www.youtube.com/watch?v=GO4GGizw-fI
While the inability of European politicians to grasp the bull by the horns is not surprising, it makes for boring markets with high correlations and tiresome volatility. The market is still turning on a headline while underlying fundamentals continue to deteriorate.
Today's big news was the "great success" of Italian and Spanish debt auctions. Italy sold EUR12bn worth of short-dated debt (1-year and 136-day bills) at (hold your breath) less than half the yield compared to the Dec-12 auction! The reigning football world champions also saw the goal open and scored brilliantly by doubling the 3-year bond issue size to EUR10bn. This "success" is more ECB largesse rather than investor confidence. The 3-year LTRO against expanded "collateral" (the quotation marks are important to note) extends the Greek T-bill game to other sovereigns and assets. And wanton disregard of Bagehot's rule of lending freely against sound collateral means that the ECB is now the toxic dump of all European credit risk. It is no surprise that President Draghi is adamantly opposed to the precedent of a haircut on ECB Greek holdings. 
Another observation on this "success" is based on this gem from January 2010 (it helps to have memory in a memoryless market): "...officials breathed a collective sigh of relief on Monday evening (25 January) after the country's first bond issuance this year attracted considerable investor interest, a sign that market concerns over the country's public finances have, at least for the moment, partially subsided". Investors had placed EUR25bn of orders for 8bn of debt. Any guesses as to which country is being talked about? Here is the original article from which the excerpt is taken: http://euobserver.com/19/29338.  

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