Europe’s last hope collapses

I watched the ECB announcement press conference last night. You can find it below:

I recommend you watch it in full. The Q&A session at the end contains the most important parts. After watching it,  I am still in shock.

The initial announcements in the form of ECB action were a lowering of the official rate to 1% and also a number of actions to provide banking liquidity:

  • Will conduct two LTROs, with 36 month maturity with option of early repayment. First will be allotted on December 21, 2011, and will replace October 6, 2011 LTRO.
  • ECB will ease collateral criteria for loans to banks. Will reduce rating threshold on ABS collateral
  • National Central banks can accept credit claims such as bank loans
  • Will reduce the reserve ratio from 2% to 1%, which will free up collateral in money markets

These were welcome changes, although mostly expected, and markets rose on the news.

After the scripted announcements it then came time for the Q&A session and this is where it all went wrong. Yesterday, in conclusion to my Europe post, I stated :

As with October’s forum I am starting to sense that the Eurocrats have misunderstood the markets take on the goal of the summit. The letter is completely focussed on implementing policy to move towards a tighter fiscal union but provides no credible framework in which to make that transition. Markets have so far been supportive of the fiscal unification plan but only because they believe it will lead to a relaxing of the reigns on the ECB and it will therefore be allowed “print”. I don’t get the sense that this is the rationale for the Eurocrats, it certainly isn’t present in that letter. It is this divergence of goals that has the potential to lead to a very disappointed market as it did after the last summit.

And this is exactly what we saw in the conference. Mario Draghi was asked specifically at least 10 times whether the ECB would support Quantative Easing, ECB and/or nation bank funding of the IMF or any other non-standard mechanism to provide some form of additional ECB balance sheet support to the markets. His answer was the same every time. He said repeatedly that the ECB is bound by existing European treaties and that in the spirit of those treaties the ECB could not support such actions. I think the media scrum was utterly shocked by what he was saying because they kept rephrasing the same question and asking it again and again. The answer every time was NO, and Mr Draghi appeared surprised by the media’s interpretation of the current situation.

Those statements may have been the thing that triggered the falls in the markets, but they were by no means the most scary thing he said. He was also asked specific questions about how the ECB and national leaders were actually going to address the current crisis. His answers were, in my opinion, utterly delusional.

This is my overview from the notes I took while watching the session about what he said:

  • That the new fiscal “compact” would bring “confidence” to the market and that would help lower bound yields
  • Deposits at the ECB were “Lehman like” and extra liquidity was not circulating, banks were de-leveraging because of pressure from regulation and the market. Lengthening of term lending should provide confidence
  • Banks should re-capitalise but without effecting lending
  • In the 1st qtr of 2012 there are 230 billion euro of bank bonds to roll over so the ECB was lengthening term of ECB funding for provide liquidity
  • That austerity was occurring because there was no other choice. This will bring short term “pain” but is needed. Structural reforms are essential for competitiveness and jobs growth and enhanced competitiveness will kick start exports
  • The short term pain caused by fiscal consolidation ( austerity ) needs to offset. This will be provide by the “confidence effect” of the new fiscal compact
  • It is imprudent to have a plan for the breakup of the Euro as it won’t happen

So, basically, Mr Draghi’s answer to nearly every single question was my worst fear. His answers were completely disconnected from the economic reality of the situation in Europe. It seems he has completely misinterpreted what the markets are interested in and, far more worryingly, believes that a new treaty centred around supra-european austerity will bring confidence in such quantities as to offset the current crisis. He seems to have completely misunderstood the continuing effects of austerity on the periphery claiming that these are “short term” and once “competitiveness is restored” these countries will grow via exports.

I am not sure I have ever witnessed a more disturbingly dangerous display of delusional economic ideology in my life.

It would appear at this stage that there is no credible transition plan for Europe. Unless I see one announced by European nation leaders in the next 24-28 hours then my base case for Europe is something far worse than the current situation.

As I said recently:

Forced austerity across the entire European continent will lead to a global depression. If this does turn out to be the plan, then “go long ammo”.

I struggling at this point to see any other plan.

Latest posts by __ADAM__ (see all)


  1. OMG the Euro is breaking up, the Europe is finished….insert any wild AngloSaxon bias…

    one second I check the charts

    Euro/USD stable & probably quite overvalued from a German/French point of View


    How many shorters are loosing their shirt.

    • +1, “How many shorters are loosing their shirt” all of them, praying for a disaster thats not going to happen.

      “Mr Draghi appeared surprised by the media’s interpretation of the current situation.”

      who in their right mind wouldnt be suprised at the medias intepretation of the current events. its appalling coverage and shows how little they actually know about the subject they are covering..

      • SkoptimistMEMBER

        The media there, like the media here, are inherently lazy. Why bother doing any investigative reporting that tries to get to the crux of the matter when you can rely on information sheets provided by international financial institutions.
        That these financial institutions have a vested interest in what is happening (i.e. they want massive bailouts and are pressuring hard via the media to make the crisis seem more imminent for their own gain) seems to be of no consequence, after all they provide just enough material for the next broadcast, publication, sound bite etc.

        If they sky were really about to fall in, the euro would plummet (as who would want a currency that no one uses), and gold in Euros would be appreciating like a rocket.

        I think the fact the the EU is taking an approach that is different to that taken in most english speaking countries (i.e. the eu looks like it might not go down the wholesale printing path) has some players and commentators spooked.
        Most of the “information” now floating around is targeted at trying to get the EU to follow the same path, so they like to play up the notion of a doomsday scenario to try and make this happen.

          • SkoptimistMEMBER

            I don’t doubt that many of the problems are real. But if you look at individual economies and in particular those that are in trouble, you have to become a bit skeptical about what is going on. On most indicators Italy’s economy is healthier that that of the UK.

            And does anyone really believe that the US will ever repay its debts?. Why else would you buy US T bills otherwise? Apart from military equipment and a few associated industries, there are not that many areas where the US holds a lot comparative advantage anymore. So maybe you would buy US T bills if you think a war is on the horizon.

            I think there is a big push by those holding the parcels (insurance liabilities (CDS)) for printing to occur as a way for them to get out of their extremely dire/terminal predicament should defaults occur.
            It should come as no surprise that both the US and the UK, which are home to many of the “financial engineering” centers have opted to print. The alternative of not printing would have resulted in the decimation of their financial services industries which, along with employing many people, have been the industries in which both nations have historically had a comparative advantage.

            Those holding the liabilities (and in general those in the financial services industry as a whole) are thus very nervous and are keen for the EU to also fire up the printing presses to get them of the hook. They want printing to inflate the debt away. Large scale defaults are their worst nightmare.

            If defaults occur many of the large financial players will go under and it will become blindingly apparent that the product that they were selling (default insurance) was not worth the paper they were written on. So not only will many of they go under, but for the few that don’t it will become apparent that most of what they now selling is worthless, so any chance for their revival will also be shot.

            That is why I believe that the markets are trying to push the EU towards printing (or anything else that avoids default, like EU wide bonds etc). The big players like the status quo, and printing just means that they can keep selling garbage and charge for it, because no one ever needs to default if you keep printing forever.

          • Skoptimist, that is a thorough assessment of the horror, and I do get it, why the markets and US are urging to print without limits. The financial sector would be shattered in the case of default, which would flow through to hurt economies, businesses and individuals. I understand the push to print. However, I believe many now acknowledge, that you cannot reflate the debts of this magnitude away. I believe they are now weighing down various options behind the scenes to prepare for the moment when someone defaults or calls it quits. Aside from the southern nations which could decide to exit due to pure desperation,
            Ireland has its own interests that it can’t compromise. The Dutch are not happy and Finland has to live by its constitution. I believe neither Germany nor Finland will commit to eurobonds either. A small nation of 5 million, taxed up their eyeballs already, cannot foot the bill to rescue the 61 million or so Italians plus the rest! These are among the reasons why I remain of the opinion that default will happen at some point next year.

          • SkoptimistMEMBER

            Goldilocks. I agree. I don’t think they can reflate the debts away and I think some form of defaulting will occur. Defaulting is probably the best outcome for those using the euro and it is what they should do. I suspect some of the defaults will be orderly and some won’t. If they are in a tighter union this is less likely to be a problematic as if they aren’t.
            I think they should resist all urges to print, despite the vested interests pushing them to do so.
            Defaulting should shaft those that deserve it most (the bankers). There will be fallout but that will happen either way. I think I vaguely recall Steve Keen saying that he thought the financial sector needs to shrink by 60% in the US. Defaulting should help accelerate the pace of getting there.

    • That first line makes a good point.

      If things are SO bad in Europe and going to get worse, then why isn’t the EUR/USD reflecting it?

      It’s still above the October and even November lows.

      Maybe that’ll change after the weekend’s shin-dig, but at the moment, the market is not agreeing with the extreme bearish sentiment that is everywhere in the press and blogsphere toward Europe and by extenson the EUR/USD.

      • If things are SO bad in Europe and going to get worse, then why isn’t the EUR/USD reflecting it?

        On the other hand the US dollar went gangbusters when the sky was falling in the USA in late 2008. So short term correlation between a currency and its economic/financial plight is not that evident. The usual reason were flight to safety, liquidation of overseas assets/positions and repatriation of US dollars by US entities. I’ve read punditry that attributes the current Euro strength to the latter. Beats me but seems plausible.

        • Good point. I wonder if the EUR/USD will also go gangbusters at some point, rather than simply holding its own (seemingly against the odds) as it is currently doing.
          I must say the charts are not much help at the moment…. a mess! At some point they’ll clear up.

        • European banks repatriating funds thereby having to buy Euros and sell eg USD, GBP, HKD, etc?? Reduction in offshore assets also helps meet capital ratio compliance.

          Just like Japan after the earthquake. Repatriating funds from overseas by buying JPY to rebuild in Japan causing rise in JPY even though the economy was hard hit.

      • Yesterday the AUD was higher than before the labor data released, not long after. The market also climbed higher briefly. Clearly, people are betting a lot on some resolution in this coming summit. If they fail, then we can see how markets react. And then when S&P, the only rating agency doing its job at the moment, comes out and downgrades Europe, perhaps including Germany, then we shall see what happens.

        I doubt this is shorters losing their shirts. It is those going long not wanting to miss out on the final solution.

        Of course, I am probably underestimating the FED and ECB coming together to print 1 trillion dollars which they can use to recapitalize banks and buy bonds. They answer to no-one in the end.

      • I have no experience as a trader, but as an interested observer of global events it appears obvious to me that movements in markets often do not reflect the actual socio-economic reality on the ground. The situation in Europe is appalling and not improving for many millions who have lost their livelyhoods and are losing hope – yet the markets often appear to see sunshine and roses in all of this and regularly rally on soundbites from deluded technocrats (who are incidently, insulated from the pain they are inflicting on so many others).

    • Perhaps the market’s hyperbole on European sovereign debt is not so much about the risk of the sovereign bonds that they (financial institutions) hold but the synthetic derivative bets that they have made those bonds through rehypothetication? Like other derivatives an unknow, off balance sheet risk? I think rehypothetication has been discussed here before by Deep T?

    • The UK is like Australia, owned and operated by the US!
      If the US wants a week Euro then the UK will veto any vote fix.
      The Europeans need to disband, drop the UK and the PIGS and the fourth Reich and Chindia will rule the rest of this century.

        • only if you’re looking to buy and sell within the next 5 years? Bearish markets means people are more likely to rent than purchase their own property. What better time to buy with the low interest rates? Rental income possibly sufficient to pay off your monthly mortgage? If you’re looking to hold for at least 5 years, this is the time aint it?

  2. Global impact from the recession as well given the EU trade size with China, and that will impact Australia at some point.

    Once the reality of EU sinks in, the markets will focus on the US IMO, and probably China.

        • there must be something going on over there to explian the improvemnt in unemployment. initial claims well under 400K for a few weeks now and offical UE lowest since march 09. UE a lagging indicator…

          • Average is not even 10k under 400k. Maybe they are simply running out of jobs to cut. Unemployment is only down because people gave up looking for work en masse. That is not a sign of recovery. One must also remember that employers may be holding workers for the xmas period.

          • What is going on in the US with weekly unemployment claims is a statistical illusion. Prior to seasonal adjustment, new claims in raw number terms soared more than 30% week-on-week. The number reported is likely to be revised.

            The leading indicators are still pointing to recession in the US. The broad weakness in credit creation – even as savings fall – and equally broad weakness in income growth (basically, household incomes are falling on a real, per capita basis), declining profit growth, combined with weakening net exports all point to imminent contraction. The starting point of course is not easy to predict, but the pressures are visible to all who wish to see them.

          • “a statistical illusion”. god almighty briefly. so when the numbers are bad they are corect but when the numbers improve they are a statistical illusion?

            “The leading indicators are still pointing to recession in the US” which ones briefly? list as many as you can.

          • there must be something going on over there to explian the improvemnt in unemployment.

            More people dropped off the rolls than found work. Number of the “unemployed” goes down. Simple, really.

          • so what about the +120K jobs being created every month for the past 6 months M4? they have nothing to do with it? is that waht you are saying

      • I think you said that things don’t always turn out to be a V-recovery….maybe this is one of those moments for you..GB
        Here’s another…
        Cheers JR

  3. In the end I think the ECB will be forced to cap Spanish and Italian yields. The reason they are saying they won’t do it is probably because, even without a lender of last resort, Italy in particular has a big fiscal problem. So trying to cap Italian yields without addressing the fiscal problem will just damage the ECB’s balance sheet and credibility (because the bond market is so big).

  4. I couldn’t be bothered listening.

    Draghi is ex Goldman Sachs. He knows what is going on. As some pundits have said, Goldman will want the collapse of a couple of banks before things are fixed.

  5. Remember all this started when pollies wanted to avoid a recession and bureaucrats said they could.

  6. > He said repeatedly that the ECB is
    > bound by existing European treaties and
    > that in the spirit of those treaties
    > the ECB could not support such actions.

    People do not seem to get it that this is what the constitutional law is about and it was definitely the right decision even if it leads to a break up of EU and serious recession. Once you start breaching the law you can forget about democracy and may as well appoint a fuhrer who will clean up all this mess.

  7. Everyone — even GB — knows that tighter fiscal rules and austerity doesn’t make the debt disappear. The only way to deal with the debt — given that it can’t be repaid — is to default or inflate it away. The market was clearly expecting the new fiscal “compact” to pave the way for the ECB to print, but it ain’t happening.

    Result? Down we go again until the next Eurozone rescue rumour surfaces. I wonder how long this game can go on?

      • Can it? What certainly can’t go on is this weekly rumor-mill and next final solution plan. The only things that would kick the can far down the road are the things that the ECB flatly denied being able to do.

        • “Can it? What certainly can’t go on is this weekly rumor-mill and next final solution plan.”

          Why not?

          They are already conducting QE.

          They have not yet done a US sytle TARP as they will wait for a bank failure first.

          • A US style TARP would ensure the already certain downgrades. Maybe additional ones. I don’t think the EU could survive that. It could suck Italy and/or Spain, if not France, into needing bailouts which would be impossible to fund without printing.

            Printing. It’s the answer to all problems. Mostly because no-one considers the consequences.

  8. I must be a bit “delusional” too DE.

    I don’t share your view that this is the worst possible outcome. There are worse.

    …like if the ECB tried to do a goldilocks QE (not too little, not too much) like everyone is clamouring for them to do. That is just another “kick-and-enlarge-the-can” unless default is permitted in the process.

    The main thing they currently get wrong, IMHO, is this ridiculous aversion to default. Default is necessary in order to rebuild the system.

    Their reasons for being so averse to default appears to be quite straightforward – they fear it will usher in Armageddon. The bankers are responsible for this fallacy. It will be very, very tough, but not Armageddon.

    Regardless of the (correct) assertion that the EMU is fundamentally flawed, had national governments not turned a blind eye to their sovereign debt levels my guess is we probably would not be facing anything much worse than a European recession right now. Instead we’re staring down the barrel of depression.

    • +1

      Their decision not to print is a very good one. The austerity is also required. If it wasn’t there, higher bond yields would force default and austerity anyway.

      Anyway, It seems Finland, Netherlands and Ireland are rebelling in this latest summit. The fact that Merkozy agreed was somehow seen by the market to hand over ts as every country agreeing to give up its voting and fiscal powers. I’m surprised more countries aren’t fighting back. Tyrants…

      • Agree.

        I guess it is correct to say that they are already conducting some degree of covert printing by virtue of accepting incorrectly marked collateral. This is made more obvious by recent moves to accept even crappier collateral.

        But it’s currently a drop in the ocean.

      • Phroneo:

        Please explain how austerity solves the problem? To my mind it just drives the PIIGS deeper into recession, crushing taxation revenue, blowing an even bigger hole in out budget deficits.

        The only viable solutions are money printing or default-and-exit-the-Euro. Both are very bad options admittedly, but they’re better than grinding austerity which achieves nothing.

        My bet is they’ll eventually print, but default-and-breakup would be a far better option in the long term.

        • My bet is there will be printing alright,but in more than one currency, some time next year. The amounts to be printed will vary. Countries in need of the most printing will be dealing with the consequences rather than the whole zone going into the chaos & social unrest that trillions of printing would cause within the next decade.
          I acknowledge I may be wrong.
          Nobody knows what will happen.
          Everyone knows the situation is dreadful and all solutions on offer are terrible.

        • Lorax, agree that default is necessary.

          Austerity comes after the default (printing is just a roundabout way of defaulting anyway). At some point these governments need to stop spending more than they bring in from tax revenue. Default helps this along as it (should) restrict the ability to fund deficit spending in the debt markets.

          Otherwise there is no point, they just start the whole circus again but from a weaker base.

        • I should be more clear. I agree with austerity, but only as a way to ease a country into a primary surplus. Having achieved this, they can default and then have a surplus from which they can start to recover.

          I would never condone austerity the way it is practiced now. Debt slavery and tyranny.

        • My bet is they’ll eventually print, but default-and-breakup would be a far better option in the long term.

          Except that printing does not deal with already existing deficits. All it does is set up Europe for an almighty disaster some time down the road.

          Default will come. It cannot be avoided.

      • God help us all with this new abomination of a short-sighted socialised losses, misdirected risks market that no thinking person could reasonably term a “free market”.

        The “free market” has never been completely free (nor should it ever be), but what we have now is so distorted by the very people claiming to be it’s protectors that it’s one enormous ticking timebomb.

      • Agree. Printing to bail out sovereigns isn’t a solution. There needs to be a structural change; Either reduce sovereign debt/GDP ratios through austerity, commit to high inflation over say 5 years, or call off the Euro.

        • Either reduce sovereign debt/GDP ratios through austerity

          Austerity doesn’t reduce debt-to-GDP ratios, it increases it. All austerity delivers is a deeper recession and consequent crash in taxation revenues, blowing out budget deficits even further.

          There has to be some debt-forgiveness or massive money-printing and inflation. Austerity might work in a high-growth world where governments have been profligate, but its not going to work in Europe where growth is anemic at best, and the global economy is fragile.

          • The reason for this is that government spending is subject to a multiplier effect. $1 of government spending can increase GDP by say $3. If you take the dollar away, it causes GDP to shrink by more than the cut in spending. Additionally, tax revenue also falls, erasing the saving. It’s hard but clever cutting can be successful, but never enough to solve the problem the way they are trying. Especially if export partners are cutting spending as well and there are no forex mechanisms to equalize imbalances.

  9. The Yen is still mightily overvalued in spite of Japan being an economic basket case. The value of a currency would seem to have little correlation to the health of the nation it represents. So while Europe is going down the gurgler don’t be fooled into thinking things must be OK because the Euro’s still strong.

  10. I’m just gonna hang back and wait to see how it all develops over the next couple of years. Over-reacting to every single press conference and news article is not really my thing.

    There will not be a solution tomorrow, neither will Europe break-up overnight because people all of a sudden hit a brick wall and figure it’s the only thing they can do (In fact, if you understand how integrated the Union is you would now it’s probably the only thing they can’t do).

    Keep panicking guys.

    • I’m not panicking.

      I see a debt mountain that is unfixable except by default.

      Because I see it, I know what’s coming. I warn others and make my own preparations to deal with it as best I can.

      I doubt many people on this board are truly panicking in any real sense. They are calling this train wreck for what it is.

      That it won’t happen overnight is a given, but the Berlin wall wasn’t felled really felled in a day either. But would you camp out underneath the wall when you saw how things were progressing?

      • +1. Agreed. As for panicking, I reckon it will be those panicking, who have gone all in for the print till dawn scenario and/or hold massive mortgages/ leverage of any sort. Particularly European individuals and institutions that have Euro nominated debt would be panicking when contemplating paying the debts down in devalued currency in the future.

        I am not panicking, just sad. I was never anti euro either until recently when I understood why it was doomed from the start and how the system has been rorted over the years to make things worse.
        IMO Eurozone is unlikely to break today, but highly likely to disappoint the expectations, and likely to disintegrate within the next year, one way or other.

  11. The finance-news broadcasters have all been carrying comments about trading volumes in the markets. The gist seems to be that there have been sustained reductions in the volume of retail broking business – that the investing public have fled the market. Silence rules in the broking houses.

    This means the trade we observe each day must be little more than the ephemera of program trading – trade in which computers try to mimic or predict each other in a quasi-vacuum.

    The whole world is waiting, watching and wondering.

    • Never underestimate the power of a good revolution to overturn bankers and bondholders smug plans of fiscal concentration and austerity without end.

  12. “GB
    December 9, 2011 at 11:12 am

    “a statistical illusion”. god almighty briefly. so when the numbers are bad they are corect but when the numbers improve they are a statistical illusion?”

    The weekly numbers are subject to seasonal revision. A few months ago, raw claims were down around 300,000 per week, while the adjusted reports ran out around 400,000. Last week, the raw number was well above 500,000. So the appearance of relative stability in the claims number is a statistical artifact. Considering labour force participation in the US has been shrinking (now at a 30-year low), and the labour market is clearly not behaving as it usually does, there is good reason to treat the weekly claims number with some caution.

    Afterall, how likely is it that an economy the size of the US would produce a data series in which weekly claims vary by only a few thousand each week? The US labour force is massive. The series is constructed to erase volatility, which helps make trends easier to identify and interpret, but must mean the week-by-week number is not particularly meaningful.

  13. Talks have failed. Downgrades are coming. Next summit in March? lol, they will move it closer soon.

    The only thing they agreed on is a ceiling for the ESM, which is meaningless if they can’t raise it with their AA+ or lower ratings…

  14. so what about the +120K jobs being created every month for the past 6 months M4? they have nothing to do with it? is that waht you are saying

    GB, you mentioned that there must be something going on to explain the improvement in unemployment – not in job creation.

    These are not the same thing. You can have nominal jobs growth and still not make an impact on the unemployment rate if this growth is insufficient to address both new entrants into the workforce and the already unemployed/underemployed and despondent.

    Lately more and more Americans have been joining the ranks of the despondent, lowering the participation rate and seemingly making the unemployment situation look much better than it actually is.

  15. “europes Last Hope Collapses”

    ummmmm, someone better tell the Euro currency and Euro stock markets about this collapse….they re all higher?