Tuesday, November 15, 2011

Today's Major Market Move: Spanish CDS Rise 35% Since Nov 1

As European CDS continue to rise higher, two of the worst performers (higher price = increased default risk) have been Austrian (which we discussed here) and Spanish swaps.

Click here to go to the live table.

Despite apparent 'progress' in dealing with the European economic crisis (G-Pap and Silivo stepping down, reaffirmation of commitment to austerity measures, EFSF expanision, continued ECB bond buying) many European CDS prices have climbed higher.

Click here to go to the live chart.
The most ominous line in that chart is red (France). The market is slowly coming to the realization that between the bailout-ors and the bailout-ees, the only valid member of the bailout-or group is Germany. Furthermore, Germany is mathematically incapable of backstopping the entirety of the rest of the Eurozone. As a result of this realization, we have companies like Deutsche Bank pleading with the ECB to go all-in on money printing. Zerohedge obtained a copy of a recent presentation made by DB analysts in which it was stated:

And here is what DB thinks has to be done right now.
  • More progress on credible fiscal austerity (especially Italy)
  • Rapid resolution of the EMU's original sin - lack of fiscal integration (Dec 9 EU Summit meeting)
  • Restore confidence to re-open bank funding markets
  • Time to expedite the "Grand Plan"
    • Larger Greece debt restructuring
    • Bank capital raises and debt guarantees
    • Additional bail-out funds for Greece
  • Time to call the ECB
    • Investor reluctance on EFSF € 1 trillion leverage plan
    • Ineffectiveness of ECB monetary policy transmission mechanism to keep bond yields low
    • Adjustment away from current bond purchase program needed (away from temporary, limited and sterilized)
    • ECB should announce large, targeted buying plan (i.e. € 200 bn over 12 months)

The 2 key items are in bold. This is just another example of attempting to avoid near term pain for what in all probability will end up being a larger crisis down the road. Does this fundamentally alter what is the equivalent value in oil of a lifetime salary, including pension, of a Greek hairdresser? Can the European technocrats engineer a solution where the annual labor of all the Italian bureaucrats when valued in gold, is sustained? I believe there are primal, fundamental economic forces currently at work that no amount of central bank asset purchases or interest rate massaging will be able to bring to a halt.

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