Tuesday, December 20, 2011


This is going to be the last thing I write about Europe until 2012 unless something rather dramatic happens between now and then which I sincerely doubt.

The Spanish sold 6 billion Euros of paper today and the markets and the results were taken by the market to be Tidings of Great Joy.  Demand was brisk and  a result The Dow closed up over 300 points with the talking heads concluding that the pressure was off Europe.  These folks get paid a lot of money for their opinions so in an attempt to present another view here's an opinion for free:  about 4 billion of 3 month paper was sold a yield of 1.735% and approximately 2 billion of 6 month at a yield of 2.435%.  Are you trying to tell me that a 75 bp point gap represents a proper risk premium for 3 months and that is a positive thing?  I don't think so.  I think it's scary as heck but as I said, it's free.

Of interest, however, was that the sale coincided nicely with the first day of the new ECB plan to grant 3 year funding to the banks at just 1%.  Guess who bought the paper?  Betcha they will turn it right over to the ECB as collateral, collect the coupon (or discount), pay the carry and pocket the difference.  Nice work if you can get it.  Of course it also points out, perhaps, the future strategy; monetize the sovereign debt using the banks as intermediaries and hope you can hold on long enough before too many people...particularly Germans...figure out what this Ponzi scheme is all about.  Of course this doesn't do a thing for the banks' own debt which as we pointed out yesterday is not insubstantial.  Can they pull it off?  The difference in yield should provide a clue as to what people think, and while this was going on, the  Italian 10 year was still offered at around 6.55%  I am told that if there was a bid, allotments would be generous.  Finally, the on-lending facility to the IMF closed out at about 160 million Euros absent the U.K.  A drop in the bucket.  Throughout Euroland more and more debt is owed to official institutions which in the past have always been preferred creditors, leaving, as we have said before, the entire private sector in a subordinated position.  One of these days someone is going to figure that out and it's going to be verrrrry interesting how the Euros deal with that.  Despite better Economic numbers from Germany today I can't see any economic growth throughout the region and if Euroland is not already in recession it soon will be given the complete absence of credit.  And that it that for Euroland, 2011.  I am determined not to break my resolution.  I'm also off watermelon for the next six months.  Tomorrow, a quick look at banking 2012.  See you then

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