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As I watched the ECB news conference on Thursday, I kept wondering how the ECB president, Mario Draghi, could have so completely rejected the idea that the ECB will get into the “periphery bond buyer of last resort” business.
Why is this important?
Because many believe it will be impossible for the euro to succeed unless the ECB steps in the breach with a massive quantitative easing program for the euro zone’s periphery countries.
After announcing a quarter of a point rate cut on Thursday, and explaining the ECB would accept lesser quality collateral from euro-zone banks and take up steps to increase liquidity in the system, Drahgi started taking questions from reporters.
Gone was the obfuscation and horse manure usually slung by former ECB chief Trichet. And in its place was an extremely candid Draghi who virtually said:
Those of you out there in the press who expected me to back the idea of me sanctioning some type of bond-buying bazooka with ECB funds can go fly a kite.
On that news, the euro started sliding down from its high and was hammered lower on the day. Take a look at the 30-minute chart of EUR/USD:
[Editor's note: Jack recommended his World Currency Trader members short the euro on October 25. So drops like we saw on Thursday should have really fattened their accounts. Click here to learn how you can join them, RISK FREE.]
It wasn’t just the euro reacting negatively to Mr. Draghi’s comments — bond spreads widened across Europe. And Italian 10-yr bond yields, which represent the canary in the coal mine, surged higher in response:
At this critical stage in the effort to save the euro, Mr. Draghi’s news conference was a disaster of the first order. But the real stake in the heart of the euro likely came earlier in the week when the new technocratic prime minister of Italy, Mario Monti, pushed through a draconian plan, which he named “Save Italy.”
The package hopes to raise 30 billion euros ($41 billion) from spending cuts and new taxes, including: A property tax, a new levy on luxury items like yachts, an increase in the value added tax, a crackdown on tax evasion, and an increase in pension age.
It made Frankfurt and Brussels happy, but will likely destroy the Italian economy.
Greece was forced into a similar budget that was supposed to be the medicine for revival. But instead, it turned into self-induced suicide of an economy.
Italy needs approximately €300 billion in financing in 2012. So it was important for politicos to show the market that Italy is indeed getting their “house in order” with a powerful and disciplined austerity plan that will put the country back on the road to fiscal health and growth. So on top of the €24 billion in austerity measures announced by the former leader, Mr. Berlusconi, we add another €30 billion to the pot last Monday by newly enshrined PM Monti.
All’s good, right?
Wrong!
Let’s use the lesson of Greece as an example …
Greece’s austerity plan back in May 2010, when its 10-year yields stood at around 8 percent, was a mix of tax hikes and wage cuts that represented approximately 3.5 percent of its GDP. At the time, Greece’s debt was about 120 percent of GDP.
We know the Greek economy collapsed as tax revenues plunged. Unemployment soared. Debt jumped to 170 percent of GDP. And the 10-year Greek bond yield rocketed to about 30 percent.
Greek 10-year Bond Yield
I’m not sure why we should expect a different outcome from the new austerity plans the technocrats tell us will solve Italy’s problems. If anything, the liquidity background in Europe and global growth backdrop is even worse now than it was back in May 2010.
What’s more, Greece had similar low bond yields and about the same debt-to-GDP as Italy has now. So if Italy follows down the path of Greece, it means the end of the euro as a single currency. Keep an eye on the canary!
Best wishes,
Jack
{ 11 comments… read them below or add one }
No, it means the start of the REAL printing.
Hi Jack
The people in Washington need to understand the simplicity of this. A family earns say four thousand dollars a month but spends five thousand six hundred dollars a month what does this do to their family. Mr. ‘Yes we can’ just does not understand that we are a nation of families looking for responsible government and a little inspiration a long the way. Everything else is just a big pile of deceptive B.S. No level of mass confidence will return until they stop destroying our way of life and find a fiscal balance and prosecute fraud.
YOU are getting it wrong. How can irresponsible families who elect irresponsible politicians expect a balanced budget? First the families should stop spending more than they earn and save. Then they should elect politicians who promise not to overspend and actually save, And actually expect them to keep those promises. The American people deserve the politicians they elected. Just look at the GOP presidential nomination process. Most of the frontrunners promises something for nothing. Those promising to really cut spending are lagging far behind in the polls.
And you really think the ECB won’t change its mind when faced with a full on meltdown…get real. Trichet was pontificating about inflation worries as recently as last year and now the ECB is in rate cutting mode. Give it some time…wait till the crash starts next year and see if they sing the same tune. That’s why bear markets have massive rallies too; I’m fairly confident that one of those future massive rallies will begin on the backs of an ECB QE scheme.
Yes, The Time to Control Debt is BEFORE Debt Controls You…
Interesting data as always. However, people who look at such data should realize that correlating one event with another isn’t necessarily a good idea. What if NO austerity program had occurred in Greece? The very same thing may have occurred… only worse due to the higher debt, just drawn out longer like we are doing here, allowing govt to steal the peoples’ money to give to the banksters who make the economic numbers “look” better by running those inidicator markers up with our future tax obligations. Actual employment is getting worse here which means no actual economic improvement occurred. The QE monies were wasted and will just add to our burdens i.e. make things worse. Being fiscally responsible should be THE goal at ALL times. This doesn’t mean higher taxes at all, it means massively lower govt spending on all the worthless overkilling agencies.
You simply can’t have it both ways. You cannot claim “Debt problems cannot be solved by throwing more debt at it” and also claim Greece or Italy’s or Anyone’s economic problems are going to get worse because they are reducing spending via austerity. This the same nonsense Martin has said as well. Austerity or not the same eventual hard times are coming Worldwide due to Govts blowing money on all the nonsense they do as well as the banksters bubble making machine; sucking money out of taxpayers pockets, the Real economy.
The quickest way out of this jam for an individual, a state, a country, the world, is to quit spending money on things that don’t produce sustainable income and jobs. Govts, especially ours, need to adjust laws driving manufacturing back home. Govt should not be in the economic business at all. All they do is make it worse by blowing more money(adding to debt burden) that could have been used wisely by individuals.
Ask someone who lost their job 1-3 years ago, their house, etc. if the “soft landing” of no austerity (QE) has helped them one bit. At least in the Great Depression they were smart enough to put people to work building things (like China has been doing) rather than paying them to sit on their backside. Clearly giving money to govt who is managed by those bought and paid for by banksters is like giving alcohol to alcoholics, just look what they’ve done with it, made matters worse, more debt, more derivatives (leveraged bets), they’ve all doubled down and will lose it all except what the big boys have been skimming for themselves off the top in fees…and the whole purpose of the QEs in the first place, a give away to those who least deserve it.
Fool me once, shame on you, fool me twice, shame on me. If congress allows a QE3 then they are not only part of the problem, they are the problem. When will people stop this give away to the banksters insanity and clean house?
Jobs? Easy. Ethanol can power everything we do cheaper, cleaner, and safer than what we use now. Food vs. Fuel, nonsense, protein is left over = much more food. This is why All gas and oil companies are scared of Ethanol and put bad info out into the media about it. It would transfer all that energy power and money back into the hands of the people rather than the few companies that run it now. Anyone can make it which means the price would become very low. We could fully convert, if we decided to, in two years. Everything, if we wanted. Jobs a plenty. Unfortunately our congress is owned by oil and banks. So we will have to do it ourselves and it will take much longer while they throw away more good money down a sink hole. Now they are trying to export LNG out of Oregon to jack up Natural Gas prices like they have oil. We are allowing ourselves to be screwed from every side. Someone out there please stop voting for weasels!
you are right on! Why don’t you run for president? We sure need someone with common sense.
I recently read an email which said that the problem is not that we have an inexperienced Marxist Muslim running this country but that we have people in this country that are so nieve that they would vote for such a person. And he brought so many people in top positions that are just like him.
Im still baffled by these numbers everybody likes to whine how bad bush was…………lets see …………..in 2008 BUSHES LAST YEAR AS PRESIDENT WE HAD A DEFICIT OF 164 BILLION DOLLARS LETS FAST FORWARD…………………………………….ITS NOW 2009 AND OBAMA BIN LADEN IS PRESIDENT NOW THE DEFICIT IS 1.4 TRILLION ……………OSAMA BIN OBAMA SAYS NOT TO WORRY ITS ONLY A ONE TIME OCCURANCE…………………SO DONT WORRY REALLY DONT WORRY …………………….FAST FORWARD TO 2010 AND WHAT DOES YOMAMA OBAMA GIVE US OH YEA………………ANOTHER 1.3 TRILLION FOR 2010 THANK YOU OBAMA………. AND WHAT ARE WE LOOKING AT FOR 2011 ANOTHER 1.3-1.6 TRILLION DEFICIT AND A POSSIBLE 2.0 TRILLION DEFICIT FOR 2012 WHY THATS ONLY A TOTAL OF 6.0-6.3 TRILLION ADDED TO THE NATIONAL DEBT IN JUST HIS 1ST PRESIDENCY JUST THINK WHAT HE CAN DO WITH ANOTHER 4YRS
The trend is clear. The question is – faced with massive government debts, will the US and ECB do more QE, following the notion that markets crash any time soon, which I fully expect.
It doesn’t matter that the QE programs before failed miserably and they have probably made things worse.
Any amount of bailout is not enough, never works, and only spikes up commodity prices short term.In the end, either hyperinflation if they do QE or deflation if they don’t is the outcome.
The emergency button, ie $6 trillion QE3, wont be pressed though until the Dow sees 6999 again I think. At that point the central banks will be tested. Will the public believe them this time around,fight back and resist under the Occupy banner or will there be a war with Iran as a convenient side distraction. I’m not optimistic that the current leaders can do anything, but rob and lie to its population to keep the status quo. The people won’t be so conned easily this time to go to war to save the current system.
“Save Italy” ????? What happened to, “Save the Planet” ? Isn’t this all about carbon dioxide? Al Gore says so. It must be so! Italy needs to get in line.
Gore is an idiot! Have you seen his big home that takes so much energy! He is a fake.
We need to have the natural gas for all trucks approved and the gas line approved and get our people back to work to save this planet!