ECB Outright MonetaryTransaction Action In the Face of Recession Redux

euro symbolThe ECB, Europe's Central Bank, has launched a sovereign bond buying program, arguing for price stability and to make it clear the Euro is here to stay. ECB President Mario Draghi:

It is against this background that the Governing Council today decided on the modalities for undertaking Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds in the euro area. As we said a month ago, we need to be in the position to safeguard the monetary policy transmission mechanism in all countries of the euro area. We aim to preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the area. OMTs will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro. Hence, under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area. Let me repeat what I said last month: we act strictly within our mandate to maintain price stability over the medium term; we act independently in determining monetary policy; and the euro is irreversible.

This is an unlimited, open ended, short term maturity of one to three years, Euro area governments' bonds buy back program. The details are as warranted, dependent upon market conditions and at market value.

European Sovereign Debt Crisis - How Did This Happen?

piigsWith Spain now getting a bail out all to pump up their insolvent banks, one might wonder how did we get here in the first place?

We actually are on the precipice, with a key critical Geek vote on whether or not they will default on their international bail out. Sitting on the edge of a cliff, a review of the European sovereign debt crisis and how we got here is at hand.

What the hell happened is complicated. Greece is not the same as Ireland, nor is Spain the same as Greece. Ireland's sovereign debt crisis was the direct result of their financial crisis. Greece, on the other hand, had long standing structural problems with their economy. Nor are their economies the same although treating them as such originally was part of the problem.

The St. Louis Federal Reserve Research Director Christopher Waller gave a presentation on the the European Debt Crisis. The entire May 8th, 2012 lecture is below. The focus is on debt to GDP ratios, the European Union and interest rates for sovereign bonds. We learn about the European Union's major financial structural problems versus how exactly the debt happened. There are plenty of specifics and this lecture is concise, accurate in it's scope. If you don't understand European Sovereign Debt fundamentals, watch this lecture in full and you will.

Ay, Caramba! Spain Asks for a Whoppin' Bail Out

eurozoneWell, it's happened as we earlier said it would. Spain is getting a bail out, worth €100 billion. Guess where that money is going - directly to Spanish banks! The loan is purely to recapitalize the banking system and to be given to Spain's FROB, a financial restructuring fund. From the Eurozone press release:

The Eurogroup has been informed that the Spanish authorities will present a formal request shortly and is willing to respond favourably to such a request.

The financial assistance would be provided by the EFSF/ESM for recapitalisation of financial institutions. The loan will be scaled to provide an effective backstop covering for all possible capital requirements estimated by the diagnostic exercise which the Spanish authorities have commissioned to the external evaluators and the international auditors. The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to EUR 100 billion in total.

The Eurogroup considers that the Fund for Orderly Bank Restructuring (F.R.O.B.), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned. The Spanish government will retain the full responsibility of the financial assistance and will sign the MoU.

Europe's Economic Implosion Heats Up

Europe is imploding. Today S&P cut Belgium's credit rating to AA:

S&P projects Belgium will end 2011 with general government debt at around 93% of gross domestic product in net terms, and at around 97% of GDP in gross terms.

italy 2yr bond 11/25/11
Italian bond yields hit 7.8% and that's a 14 year high for borrowing costs and a doubling in a matter of days. Unlike the Fed, Italy cannot print up more Euros either to take care of their problem.

The Italian Treasury paid 6.504 percent to auction 8 billion euros ($10.6 billion) of the debt, almost twice the 3.535 percent a month ago and the highest since August 1997. Italy’s two-year bonds yielded a euro-era record 7.83 percent, almost 50 basis points more than 10-year notes.

Yesterday Moody's cut Hungary to junk status. Junk means not ready for prime time, or investment.

Saturday Reads Around The Internets - Death By 1,000 Euros

Welcome to the weekly roundup of great articles, facts and figures. These are the weekly finds that made our eyes pop.


Fed Chair Bernanke Warns on Europe, Jobs Crisis

It's astounding to me, that even the big banker in chief knows the jobs crisis and what's going on in Europe can bring the U.S. to it's knees, unlike most of the punditry these days: