Monday, May 10, 2010

It looks formidable...

(My apologies, dear reader, but I had to continue the Star Wars theme...indulge me)

...but the measures taken by the ECB and Euro Area countries don't address the various Euro funding needs by the PIIGS. Today's melt-up in global stock indices will be tested in the next two days as the ramifications from this "Euro-Tarp" are parsed out from the rhetoric.

Thus far, the provisions announced simply fund the peripheral governments from the core EU governments. This increases deflationary pressure (something the EU desperately needs to avoid as the presumed goal of these measures is buying time for exports to increase) as the funding pressures increase. At its core, this is swapping debt for more debt without correcting the core problems.

Meanwhile, ominously, the 10-year seems ambivalent to this. Bond markets in my experience are the "smartest guys in the room" and this does not portend well. A challenge to these EU actions seems imminent to me.

Also, notice the fissures in political rule-sets. These bail-out measures (which are expressly "verboten" in the EU treaties) must be approved by various parliaments, which is by no means guaranteed. Germany in particular appears particularly agitated as a Supreme Court challenge looms.

Again, its obvious this scenario was never contemplated, or if it was, the architects of the system counted on the fact political pressure would give them license to do whatever they wished and to work out any troublesome "details" (such as the measures being against EU treaties and against the law in the several countries). I am not sure which is more disconcerting.

No comments: