On the basis of new information, this piece replaces last night’s post
Is the Bundesbank planning to rain on Mario’s parade?
As Mario Draghi’s QE suicide mission limbers up, there are signs that the German Bundesbank still has other ideas…as do the Swiss – and the Chinese. The Slog outlines why all this is too little far too late.
If you’ve been keeping an eye on the euro over the first two days of this week of enormous upheaval, you’ll have noticed that, against Sterling and the Dollar, it is rock-steady. Once again we are forced to deal with a situation that is completely counter-intuitive – aka, manipulated.
Think for a second: all last week, “fears” of Syriza being the largest Party in Greece drive the single currency 5% down against the Quid and the Buck; then Syriza wins a stunning victory – just 3 seats short of an overall majority – and teams up with the only other Party openly committed to debt relief…and the currency miraculously firms.
In the four weeks prior to getting the QE go-ahead, the European Central Bank’s holdings of US dollars and Sterling remained steady as she goes. The Bundesbank, on the other hand, did something quite startling during December. The full data for that month are as yet unavailable – such as we have goes up to December 19th.
In November, the BB foreign currency reserves were steady at €4.4bn. In the 19 days of December so far audited, however, this had increased sevenfold to €30.7bn.
It will be interesting to see what those reserves were (1) at the start of January 2015, and (2) following the Greek election result.
Given the ECB’s adoption of a €1.2 trillion QE splurge, one would expect most ex-euro central banks to buy up excess euros…rather than let the eurozone gain advantage in trade and capital markets world-wide. But what this Bundesbank move feels like to me is the stockpiling of other currencies in order to stop them rising against the single currency by selling them hard.
In Jens Weidemann’s mind, this is I suspect a matter of currency credibility. It might also, of course, be an attempt to spike Dragula’s guns. As for the credibility aspect, his move makes sense; but reading around Europe over the last 18 hours, it seems to me increasingly obvious that leadership opinion is writing off the euro.
Antonio Fatas at Stockanalysts.com says, “…the elections in Greece have made it even more clear that the [euro] consensus is gone….that the model that worked well until 2008 is being challenged by several countries. And without a minimum level of consensus, EMU cannot work….either [Germany] refuses to be flexible in the negotiations with Greece, and the ECB holds its promises that liquidity will stop unless there is an agreement, which will push Greece out of the Euro. Or Germany decides to leave the Euro and leaves the other countries to manage what is left. Both of these scenarios are likely to cause a crisis.”
That seems to me a good synopsis of the inevitability of eurodeath. I also think this comment from Tom Velk at the Financial Post is very shrewd:
“Investors are not just running towards the Swiss Franc, but away from the euro. So-called “generational accounting” shows that governments have over-extended every variety of future spending promises. Economists measure true debt by asking two questions. What is the present value of future committed spending (pensions, welfare, housing, medicine) and what is the present value of future revenues (tax, excise, license fees)? Subtract excess spending from inadequate revenue and the resulting negative number measures true debt. Thus measured, [eurozone] debts are gigantic, and unsustainable.”
In the light of that comment, I’m also on the record as believing that the Swiss National Bank is far from done yet with its currency dealings. Confirming this in a German newspaper interview yesterday, SNB director Jean-Pierre Danthin said the Swiss central bank was still prepared to intervene to keep his currency relatively weak. The euro jumped to over 1.03 against the franc on the news, later settling at around 1.02.
Finally, the one country I fancy won’t be buying euros is China. Infinitely more likely is that they will (literally) capitalise on a weak euro by buying eurozone assets – as they have done extensively already – especially in Greece. Beijing has a cash surplus of Himalayan proportions, and is all debt-purchased out. There’s something deep in the Chinese mentality that remains suspicious about bits of fiat paper. They’re also learning fast that it doesn’t do to trust bankers: if past crimes come home to roost in their banking system, then every outlook around the world will change.
But were they to go on a buying spree in Europe, it will throw a deadly spanner into the workings of the Washington mindset: there’s no way the eurozone area can become a US Dollar colony if the Chinese own the means of production and physical wealth there. Quite where that leaves Putin’s Russia is difficult to determine: he’d very much like the Rublenimbi to get off the ground, but the only thing to have emerged from Beijing thus far is didactic hot air. As per their view of fiat paper, the Russian President obviously wants the ‘Anti-Dollar’ to be backed by gold…or something. We await further moves if any: but the Chinese need to get a move on if Russia isn’t to turn into a basket case before anything takes shape.
“It’s all ‘appenin’, innit?” as they used to say in Liverpool.
The Slog 