update -- trotsky, 10:16:49 06/20/11 Mon
Playing with Fire
Nostradamus Juncker, head of the euro group, has apocalyptic visions involving Italy and Belgium, while in Germany, there still seems to be no clear line on how to deal with the haircut problem. The latest Schäuble proposal seems at odds with Merkel's climbdown on Friday, in that it attempts to find a way of ensuring post-default ECB funding for the Greek banks. This is to be achieved by adding even more debt atop the existing debt mountain, a tried and true method.
German goverment coalition politicians indeed have a problem - if elections were held today, the left would trounce them with a 58% majority.
Meanwhile, in Greece the vote of confidence debate has begun. Papandreou wants to avert 'sudden death', while the opposition from the far left to the right insists that he has no longer enough popular support to induce them to extend their confidence to his government. The man may soon lose what little is left of his hair.
A closer look at Nostradamus Juncker's dire predicitons makes us think he probably has things wrong. True, on paper, both Italy's and Belgium's government debt to GDP ratios look much worse that Spain's, and yet, Spain is where contagion will likely strike first. That at least is the message of the markets - and current public debt-to-GDP ratios certainly do not tell the whole story. A few charts highlight Spain's predicament.
Meanwhile we take note of the fact that ECB policy has been quite tight lately. The central bank's balance sheet is shrinking, and with it, true money supply growth in the euro area has tapered off so much that is lately actually below even Japan's. This means a reduced level of capital malinvestment, but it also makes things harder for the indebted periphery.
CDS etc. charts updated - note, a massive panic spike last week in CDS on Greek government debt.
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