All is calm in the EZ…or is it?

November 5, 2012 2 Comments

All is relatively quiet in the eurozone these days – or at least that is what you might think, speaking to portfolio managers over the past few months. German chancellor Angela Merkel has visited Greece, Ireland has re-entered the bond markets and the ECB’s balance sheet is in play for Spain and Italy, so what is there to worry about?

Plenty. While the most disastrous possible risk – a complete, disorderly disintegration of the eurozone – has been greatly reduced by the ECB’s new bond-buying programme, Outright Monetary Transactions (OMT), the worst of the eurozone crisis is by no means behind us. Read more of this post

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What might debunk OMT euphoria?

October 9, 2012 Leave a comment

Last week rumors emerged that eurozone (EZ) policymakers were considering using the ESM to provide a first loss guarantee on Spanish government debt.  This news was leaked the same day that Mario Draghi reiterated at the ECB governing council meeting that the ECB would activate its shiny new Outright Monetary Transactions (OMT) program only once a country has submitted to EFSF/ESM conditionality. What struck me as puzzling was that EU policymakers seem to be trying to come up with plans to bolster the so-called firewall of official support they have built just as they are also insisting the firewall will be sufficient. While this certainly does not inspire confidence, are policymakers wise to be making contingency plans in case the OMT is insufficient? I think the OMT will absolutely help to buy some time for Spain (indeed it already has), but there are a lot of reasons to worry OMT euphoria will wear off and investors will shun Spanish and Italian debt once again. The following are a few potential triggers for investors to lose faith in policymakers’ abilities to stop the crisis before it completely engulfs Spain and Italy. Read more of this post

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OSI likely, but not to give Greece a new lease on life in the EZ

October 4, 2012 2 Comments

Ever since the introduction of PSI (private sector involvement) in Greece, there has been talk of OSI (official sector involvement) occurring down the line. Mention of OSI in Greece has only intensified since the IMF openly advocated it last week. This was not the first time the IMF had spoken in favor of Greek OSI, but the fact that it was mentioned against a backdrop of protracted negotiations between the Greek government and the troika (the ECB, IMF and European Commission) made some wonder if OSI is imminent. I do think we will see OSI in Greece, but I expect it to accompany Greece’s exit from the Eurozone rather than returning Greece to public debt sustainability within the common currency area. Read more of this post

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German Constitutional Court Ruling Market Positive…Or Is It?

September 14, 2012 10 Comments

On September 12th, the German Constitutional Court deemed European Stability Mechanism (ESM) legal, paving the way for Spain and potentially Italy to request official support in the bond markets. The Constitutional Court’s ruling was not a carte blanche approval of the ESM’s original legislation, but rather the court demanded a few key changes to the ESM legislation, which could prove extremely important down the line. Read more of this post

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September Will be a Doozy Again this Year

August 8, 2012 4 Comments

Before you take off for your August holiday, you should probably be aware of what you’ll be coming back to in the eurozone (EZ) in September (warning: the following may make you decide not to come back). For the second September in a row, developments in the EZ have the potential to be highly dramatic, and this time not just in the weaker, peripheral countries. Read more of this post

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ECB Will Build a Bridge…But to Where?

August 2, 2012 1 Comment

All eyes are on the ECB governing council meeting on August 2nd to see exactly what Mario Draghi meant last week when he pledged that the ECB would preserve the euro. The way the markets have rallied off the back of this statement, it seems that investors think that the ECB is poised to intervene aggressively. Will they be disappointed? EZ policymakers have practically made an Olympic sport out of under-delivering throughout this crisis. Still, I think the ECB will succeed in sustaining the current market rally. The big question is whether EZ policymakers use the time lent to them by the ECB wisely, and on this I am highly skeptical. Read more of this post

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Spanish bailout inevitable, but not necessarily imminent

July 25, 2012 4 Comments

It is a rule of thumb among eurozone crisis observers that the more something is denied by officials, the more likely it is to happen. With Spain’s borrowing costs at euro-area record highs, its officials insist it will not need a full bailout programme. To most of us, however, it seems no longer a question of if, but when a bailout will come. Market panic this week seems to suggest it is imminent, but I think it will be put off as long as possible. Read more of this post

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EU Summit: Some Good Progress, But Any Game Changers?

July 1, 2012 6 Comments

This EU summit marked many firsts for eurozone crisis era EU summits: it was the first time Greece hasn’t been discussed in years, it was the first time Italy and Spain bonded together and it was the first time President Hollande attended an EU summit. By dinner time on Thursday, the EU summit seemed a colossal failure, with Spain and Italy refusing to sign off on a growth initiative without some short term measures to alleviate pressure on those two countries in the bond markets. EZ leaders went back to the negotiating chambers and emerged around 4am on Friday morning with a deal. The measures agreed exceeded market expectations, though based on Merkel’s pre-summit assertion that Germany would not be signing up to anything significant, expectations were not difficult to beat. The markets rallied, but was investor euphoria justified, or was this just another EU summit fudge? Some important steps were taken at this summit, but none of them game changers and a number of details have yet to be hashed out. Read more of this post

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EFSF/ESM bond buying in primary market not much better

June 28, 2012 2 Comments

I’ve already explained why EFSF/ESM secondary market bond purchases wouldn’t really help. One of the ideas floating around the EU summit is that the EFSF/ESM can buy bonds in the primary markets. While this would be more effective in terms of reducing borrowing costs and buying time, it is unlikely to buy enough time to draw a line under the eurozone crisis for three reasons. Read more of this post

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EFSF/ESM 2ndary market bond purchases wouldn’t bring much relief

June 28, 2012 3 Comments

A number of ideas have been mooted over the past two weeks for steps towards a banking and fiscal union in the eurozone. Of all of these options to be discussed today at the EU summit in Brussels, it seems that the idea of having the EFSF/ESM purchase bonds in the secondary market to suppress peripheral bond yields has the most momentum behind it. Mario Monti seems determined to force agreement on such bond purchases, threatening to keep EU leaders at the summit up until markets open on Monday unless this measure is agreed. EFSF/ESM bond purchases in the secondary market is by no means a new idea; the EFSF/ESM were meant to take over intervention in the secondary markets from the ECB’s Securities Markets Programme (SMP). However, I seriously question both the efficacy and the efficiency of EFSF/ESM secondary market bond purchases for two main reasons. Read more of this post

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