That's part of the problem... The size of the EFSF cannot be so large that it leads to the mkt pushing France into the "bad pack". So at the moment EFSF achieves its AAA rating by the good sovereigns "over-guaranteeing" the amount available to lend (in a couple of diffferent ways, but the latest is a 165% commitment). Problem, of course, is that with a EUR 2trln package, the mkt might not look too kindly on Germany and France underwriting a EUR 3.3trn off-balance sheet vehicle. However, this all can work in theory, since it's a matter of signaling strong commitment to the EMU, rather than the specific details. In the end it's a simple choice to either turn EMU into a fiscal union, with everything that entails, or for everyone to go their separate ways.
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Global Macro Trading Journal
- Thread starter Daal
- Start date
Quote from Daal:
I dont know much about German politics but it seems to me that Merkel already knows she is toast, so she has nothing to lose by borrowing more
Thanks for your thoughts Daal, although I'm inclined to disagree regarding Merkel's inclination to borrow a lot more to cover profligate Italy and Spain
Quote from Martinghoul:
That's part of the problem... The size of the EFSF cannot be so large that it leads to the mkt pushing France into the "bad pack". So at the moment EFSF achieves its AAA rating by the good sovereigns "over-guaranteeing" the amount available to lend (in a couple of diffferent ways, but the latest is a 165% commitment). Problem, of course, is that with a EUR 2trln package, the mkt might not look too kindly on Germany and France underwriting a EUR 3.3trn off-balance sheet vehicle. However, this all can work in theory, since it's a matter of signaling strong commitment to the EMU, rather than the specific details. In the end it's a simple choice to either turn EMU into a fiscal union, with everything that entails, or for everyone to go their separate ways.
Thanks for that analysis Martinghoul.
Given that there are significant economic differences between Germany and the PIIGS, I am inclined to think that Germany says "enough is enough" and does not agree to a big increase in EFSF to cover Italy and Spain.
Especially since (like you said) an increase would be tough for France to do given that it's fiscal position is not as good as Germany.
However I'm interested in hearing opposing views of you and Daal and anyone else reading this post.
Quote from m22au:
Thanks for your thoughts Daal, although I'm inclined to disagree regarding Merkel's inclination to borrow a lot more to cover profligate Italy and Spain
I don't know man, I heard all about the 'revolting Germans' and thought fiscal transfers couldn't be made. Yet the last Greek package it seems it contains more in ⬠fiscals transfers than future expected private sector losses
Quote from Daal:
I don't know man, I heard all about the 'revolting Germans' and thought fiscal transfers couldn't be made. Yet the last Greek package it seems it contains more in ⬠fiscals transfers than future expected private sector losses
Yes, I think Germany is going to cover Greece, Ireland and Portugal.
But at some point they have to say "this is getting ridiculous" and decide that they can't afford (both financially and politically) to cover Spain and Italy.
Note that Spain and Italy are trading similarly to each other - so the "solution" for these two countries will be the same (ie, both bailed out by Germany or none bailed out by Germany).
Yeah, but this is not fiscal xfers, Daal. This is peanuts that Germany can afford without a blink and we're already seeing oppostion from pretty much every quarter (see Roesler, Schaeuble and letter from BuBa's Jens Weidmann). The Germans, both the electorate and the politicians, just don't want any sort of a systemic fiscal union solution, which is why they're at pains to stress that the Greece/Ireland/Portugal loans are one offs. So it's all looking mighty difficult here. Obviously, it's entirely possible that the Germans will be dragged into this kicking and screaming, for the sake of the Euro, but I do think that we're gettting closer and closer to a point where someone (either the Germans or the Italians) will decide that it's cheaper to just walk away.Quote from Daal:
I don't know man, I heard all about the 'revolting Germans' and thought fiscal transfers couldn't be made. Yet the last Greek package it seems it contains more in ⬠fiscals transfers than future expected private sector losses
So... how long before Trichet forgets to mention "strong vigilance" and Schatz skyrockets/EURUSD takes a dive?
Quote from Debaser82:
Look at gold.
It will meet with the DOW.
How crazy this may have sounded before and still sounds today but they will come close.
Dow to gold ratio chart from 1901 to 2012
http://home.earthlink.net/~intelligentbear/com-dow-au.htm
Ratio was at about 1.0 in the late 1970s or early 1980s
My core strategy as outlined in my journal
http://www.elitetrader.com/vb/showthread.php?s=&threadid=21451
is long gold and short S&P 500.
More recently I changed the short S&P 500 component to short oil-sensitive stocks, mainly airlines.