Death Star Economics



Central bank center stage: pre-ECB meeting freakout


The US is back from Labor Day weekend, right in time to see the FT claiming that the European Central Bank is losing its grip on interest rates as borrowing costs continue to diverge further and further. This is by no means news, but it gives us a reason to talk about/anticipate/dread the meeting of the ECB’s governing council this Thursday. Fitch says, further fragmentation of the eurozone, i.e. divergence between the northern and southern nations in terms of interest rates, could make the breakup of the euro easier in the end, creating a breaking point. Meanwhile, Moody’s changed the EU’s rating outlook to negativeread article

But the story got interesting last night, when a European official said that Draghi said he would be comfortable [and in fact not breaking the law] with buying European government bonds with maturities of up to three years. His reasoning was along the lines of this: as “monetizing debt with a maturity up to three years is not really monetization but is instead within the arena of ‘money market management’.” Everything above this three-year cut-off point would violate the EU treaty. Uhm. Okay. Personally, I’d like some more qualification for this statement, but that’s just me. read article

The main issue with this process is that the ECB is not legally entitled to provide government financing in the bond-purchasing-i-e-quantitative-easing kind of way the Bank of England or the Fed can.

Speaking of which, Spain confirmed that its latest cash injection into Bankia, sourced from government-backed bailout fund FROB, was worth €4.6bn. But just now via ZeroHedge:

Instead of cash, Spain will inject Treasury debt into overlevered Bankia. Europe is back to abnormal.

On this note, some investment advice to buy real estate in Germany and stay clear of Spain. view chart

In midst of all this, Switzerland committed to keeping its currency down against the euro (CHF1.20, as implemented in September 2011), mostly due to its export-dependency (and making we wonder which European country is not export dependent…). According to the FT, Thomas Jordan, head of the Swiss National Bank, said

In the current situation, a further appreciation of the Swiss franc would constitute a very substantial threat to the Swiss economy and would carry with it the risk of deflationary developments. With this in mind, we will continue to enforce the minimum exchange rate with the utmost determination.”


Otherwise, today is the day of the Democratic convention in Charlotte, North Carolina, where Obama will make his case for re-election in November.

This afternoon will bring nauseating Spanish unemployment numbers and US manufacturing data, expected to have risen from July,

So long.



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