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ECB may have to turn to 'nuclear option' to prevent Southern European debt collapse

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April 28, 2010 – Comments (13)

Quantitative Easing for everybody!!! (crowds cheer and blindly buy everything).

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The European Central Bank may soon have to invoke emergency powers to prevent the disintegration of southern European bond markets, with ominous signs of investor flight from Spain and Italy.
http://www.telegraph.co.uk/finance/economics/7640783/ECB-may-have-to-turn-to-nuclear-option-to-prevent-Southern-European-debt-collapse.html
By Ambrose Evans-Pritchard, International Business Editor
Published: 7:09PM BST 27 Apr 2010


[excerpt]

Greece’s fortunes were dealt yet another blow as Standard & Poor’s slashed its credit rating to junk status - BB+ - the first time that has happened to a euro member since the single currency was created, pushing yields on 10-year Greek bonds up to a record 9.73pc.

The credit-rating agency also cut Portugal’s sovereign debt ratings by two notches to A-, as the swirling storm hit the country with full-force.

“We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day.

“The ECB has been side-lined in the Greek crisis so far but do you allow a bond crash in your region if you are the lender-of-last resort? They may have to act as contagion spreads to larger countries such as Italy. We started to see the first glimpse of that today.”

Mr Cailloux said the ECB should resort to its “nuclear option” of intervening directly in the markets to purchase government bonds.

This is prohibited in normal times under the EU Treaties but the bank can buy a wide range of assets under its “structural operations” mandate in times of systemic crisis, theoretically in unlimited quantities.

13 Comments – Post Your Own

#1) On April 28, 2010 at 9:05 PM, XMFSinchiruna (27.88) wrote:

Holy Cow!

Here we go...

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#2) On April 28, 2010 at 9:20 PM, binve (< 20) wrote:

TMFSinchiruna ,

Yep, the main crisis is Europe is getting underway, but the main world crisis (US sovereign debt) is still on-deck.

Undounbedtly, there will be calls that the ECB intervening will be a "good thing" and more calls of stability and new bull maket will sound. All of it, of course, will be completely incorrect. But we will see how much longer they can keep the game going.

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#3) On April 28, 2010 at 10:03 PM, TMFLomax (27.50) wrote:

Yeah, this stuff is scaring the you-know-what out of me, but I find it interesting a lot of people I know (who don't pay much attention to economic stuff or investing) seem pretty tuned out.

Did you catch Roubini saying there might not even be a euro zone in a couple days? Ha... ugh. Well it is Roubini but... this stuff is scary. And OUR fiscal situation is scary. 

(crowds cheer and blindly buy everything) - Yeah, good grief.

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#4) On April 28, 2010 at 10:30 PM, binve (< 20) wrote:

TMFLomax,

>>Yeah, this stuff is scaring the you-know-what out of me, but I find it interesting a lot of people I know (who don't pay much attention to economic stuff or investing) seem pretty tuned out.

I know, the apathy is deafening.... or it would be if anybody cared.

>>Did you catch Roubini saying there might not even be a euro zone in a couple days? Ha... ugh. Well it is Roubini but... this stuff is scary. And OUR fiscal situation is scary.

Exactly. And the Eurozone is like T-ball in comparision on the coming US Sovereign debt crisis.

>>(crowds cheer and blindly buy everything) - Yeah, good grief.

Yep. That was my snarky comment due to the fact the most people are clueless and interpret propping up of markets as a reason to actually be bullish. There will be a time to be bullish, bad debt will eventually be purged, but that time is not now.

Thanks for the comment!..

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#5) On April 28, 2010 at 10:45 PM, TMFLomax (27.50) wrote:

binve

Thank YOU for the posts! The psychology these days is definitely interesting (I guess that's one word for it, ha), and it's been hard feeling like a heck of a lot of people are just ignoring so much that's going on (and yeah, the bullishness, so strange, Bizarro Rally...). And this topic in particular... whew. Scary, scary stuff. 

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#6) On April 28, 2010 at 11:10 PM, ChrisGraley (30.06) wrote:

If you're not scared, you're not paying attention.

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#7) On April 29, 2010 at 12:06 AM, binve (< 20) wrote:

TMFLomax ,

Absolutely!! I am just trying to call things like I see them and when I see articles that try to make sense of the situation and see past the BS (literally) I like to share them. I agree, this is Bizarro land.

ChrisGraley ,

Amen to that..

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#8) On April 29, 2010 at 1:54 AM, uclayoda87 (29.35) wrote:

I doubt that the Germans and French will sacrifice their own prosperity in order to bail out their dysfunctional euro partners.  Unfortunately for these two countries they will take a loss on the Greek debt that they already own, but it looks like this may be a better option than delaying the problem with a substantial bail out.  Since these small troubled countries do not have the natural resources to sustain themselves, they will need to trade in a non-fiat currency (real gold) or the US dollar in order to purchase anything from other countries.  Any new Greek currency will not be trusted outside of that country and may be relatively worthless even within Greece.  In order for Greece to gain adequate US dollar and gold reserves, they will have to sell hard assets, which may finally be the wake up call that the Greek people need.  Their country will be effectively repossessed in order to maintain an adequate currency supply for items, which they need but cannot produce.

 

If a bailout does happen, Germany and France will see their savings spent on a futile effort to prop up a failed euro experiment.  This would lead to social unrest in these two countries and the eventual collapse of the all the euro zone partners.

 

Although the US dollar may gain a short term benefit from the collapse of the euro, it is also likely that people will start seeing similarities between failing countries like Greece and failing states like CA.  Trust in the US dollar may not last long as quantitative easing in the US triggers a further flight to the hard asset currency, gold.

 

If China is finally ready, it may begin to offer the Yuan as an alternative world currency, which is not backed by the US dollar but by gold.  At that point the next country to fall would be the US, since the world would start sending their hard assets to China in order to obtain the Yuan for trading.  Those hard assets had been coming to the US to support our standard of living, but since the world won’t need the US dollar any more, the US bond interest rates will spike up and existing US bond holders will get crushed.  Although China would be hurt by their US bond losses, this would be more than made up by the assets that they would acquire from being the holder of the new world reserve currency.

 

The obvious investment play would be PM and miners, which I suspect will continue to do well.

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#9) On April 29, 2010 at 9:31 AM, DiceMagic (< 20) wrote:

I had a few more thoughts on this a while ago, basically the Euro governments have been lying to each other for years and now the bond markets are about to find them out have a look at this

 

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#10) On April 29, 2010 at 2:10 PM, Tastylunch (29.39) wrote:

I think this may be the hidden driving pushing US equities higher actually.

Euro capital feeling the continent as European investors what to get their Euros the heck out of dodge.

 

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#11) On April 29, 2010 at 2:18 PM, binve (< 20) wrote:

uclayoda87 ,

Excellent analysis! You and I are definitely thinking along the same lines.

DiceMagic ,

Thanks DiceMagic!

Tastylunch,

Hey Tasty!

>>I think this may be the hidden driving pushing US equities higher actually.

Yep, I can buy that. Still doesn't make me bullish, but I can buy that :)..

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#12) On April 29, 2010 at 6:08 PM, miteycasey (32.22) wrote:

Yep, the main crisis is Europe is getting underway, but the main world crisis (US sovereign debt) is still on-deck.

The difference is the US has a prinitng press in the back room....Greece does not.

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#13) On May 02, 2010 at 6:27 PM, elnidodelaguila (33.84) wrote:

Hi Fools:

In my humble opinion South Eurocountries will survive to debt mess, indeed S&P calification agency is doing a bad work pounding at bottom line countries like Greece, Portugal, Spain, and so on... € region won´t let fail any country in € area...

http://www.reuters.com/article/idUSTRE6400PJ20100502?feedType=RSS&feedName=businessNews&rpc=408

So sorry € shorters...

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