Sunday, May 9, 2010

EU readying bailout fund to support the euro!



This news came out yesterday. The EU nations are supposedly planning a $60 bln bailout fund to counter speculation against the euro.

Let me just say this: It is very problematic to support a currency. Central banks and nations can weaken their own currencies to any degree they want, but supporting it is a much harder job. Basically, there are only two ways to do this. One is by raising interest rates to very high levels. However, if they do this it will kill the Eurozone's economy right now.

The other way is by borrowing to buy your own currency in the Forex markets. This ia apparently the route that the EU has decided to take. So now the EU nations are going to borrow to support the euro when they are already facing a soverign debt crisis. Countries in the Eurozone cannot even service existing debt, but now they're gonna have to borrow more???

This is a crazy idea that is bound to fail.

Sell short any rally in the euro that occurs from this on Sunday night or Monday.

The only real solution to this is if the ECB were to say, "We are going to buy all the debt that we need to buy to keep the system intact." (Debt monetization.) Then it would be game over, the whole problem would go away immediately. However, the ECB didn't even discuss the possibility of doing this at their meeting last week and they essentially told states like Greece, you'd better cut your spending and impose austerity measures.

The Fed could do forex swaps again and that is the chatter in the markets, however, that only supplies dollars and does not necessarily fix indebted nations' euro funding problems. Morever, I've read that members of Congress are watching the Fed now and are not happy about the prospect of a reopening of forex swap lines.

Bottom line: I'm still short and will add to my shorts on any rally off of this development.

-Mike

3 comments:

Musgrave said...

If the ECB prints money and buys up debt (presumably PIG debt) that just kicks the can down the road, doesn’t it? The Greek government would go on a spending spree. The riots would stop, then the problem would re-appear in a few years time, seems to me.

Mike Norman said...

If the ECB steps in and monetizes the debt, the crisis is over and the euro would rally big-time, at least in the short term. Then, yes, to your point, the euro would weaken after a while, however, the debt crisis would be over. Good comment!

Bob said...

Tonite on bloomberg news wires
the US Fed is opening up a currency swap with the Euro. Bernanke must be on the stupid bench! Perfect timing with congress already pissed off at the last currency swap, and in the middle of a financial reform bill.
Public opinion will probably force Obama do nothing to fire helicopter Ben, (we can only hope).
I'm going to get my popcorn and a front row seat to watch the fireworks.