Brace Yourself , Europe Central Bank Goes Italian and Just How Bad Will the S&P Downgrade Be?

Just when you think you've had enough, here comes Italy. The European Central Bank is buying Italian and Spanish government bonds on a massive scale. From the ECB press statement:

  1. The Governing Council of the European Central Bank (ECB) welcomes the announcements made by the governments of Italy and Spain concerning new measures and reforms in the areas of fiscal and structural policies. The Governing Council considers a decisive and swift implementation by both governments as essential in order to substantially enhance the competitiveness and flexibility of their economies, and to rapidly reduce public deficits.
  2. The Governing Council underlines the importance of the commitment of all Heads of State or Government to adhere strictly to the agreed fiscal targets, as reaffirmed at the euro area summit of 21 July 2011. A key element is also the enhancement of the growth potential of the economy.
  3. The Governing Council considers essential the prompt implementation of all the decisions taken at the euro area summit. In this perspective, the Governing Council welcomes the joint commitment expressed by Germany and France today.
  4. The Governing Council attaches decisive importance to the declaration of the Heads of State or Government of the euro area in the inflexible determination to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole.
  5. It equally considers fundamental that governments stand ready to activate the European Financial Stability Facility (EFSF) in the secondary market, on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability, once the EFSF is operational.
  6. It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Programme. This programme has been designed to help restoring a better transmission of our monetary policy decisions – taking account of dysfunctional market segments – and therefore to ensure price stability in the euro area.

What this means is the ECB will massively intervene in markets. This is all to stop contagion and avoid Economic Armageddon, Phase II. Glad we live in such an financialized, global derived world where one credit rating agency can affect the lives of so many? Really glad derivatives reform was blocked by banking lobbyists?

The Securities Markets Programme is Eurospeak for a massive market intervention and bail out by buying up sovereign bonds. Below is the ECB muddled definition, yet note they use the word dysfunctional. Debt securities means bonds.

Interventions by the Eurosystem in public and private debt securities markets in the euro area to ensure depth and liquidity in those market segments that are dysfunctional. The objective is to restore an appropriate monetary policy transmission mechanism, and thus the effective conduct of monetary policy oriented towards price stability in the medium term. The impact of these interventions is sterilised through specific operations to re-absorb the liquidity injected and thereby ensure that the monetary policy stance is not affected.

The ECB refers to the joint press release from Germany and France, with a G7 statement sure to follow.

President Sarkozy and Chancellor Merkel reiterate their commitment to fully implement the decisions taken by the heads of state and government of the euro area and the EU institutions on July 21st 2011.

In particular, they stress the importance that parliamentary approval will be obtained swiftly by the end of September in their two countries.

They welcome the recent measures announced by Italy and Spain with regard to faster fiscal consolidation and improved competitiveness. Especially the Italian authorities' goal to achieve a balanced budget a year earlier than previously envisaged is of fundamental importance. They stress that complete and speedy implementation of the announced measures is key to restore market confidence.

As decided on July 21st, the effectiveness of the EFSF will be improved and its flexibility increased linked to appropriate conditionality, in particular through the following instruments: precautionary program, finance recapitalization of financial institutions and to intervene in secondary markets on the basis of an ECB analysis recognizing the existence of exceptional financial market circumstances and risks to financial stability and on the basis of a decision by mutual agreement of the member states, in order to avoid contagion.

After a week that saw $2.5 trillion wiped off world stock markets, political leaders are under searing pressure to reassure investors that Western governments have both the will and ability to reduce their huge and growing public debt loads.

It seems Italy has a massive number of bonds out on the market, with many European banks holding way too many of them.

Add the S&P downgrade and we have market disaster in the making.

“Europe is in an incredibly dangerous situation,” Nick Kounis, head of macroeconomic research at ABN Amro in Amsterdam, said in an interview by telephone yesterday. “The risk is that the U.S. downgrade is just going to unsettle everyone even more. It’s a unique situation in that we are essentially in the heart of a European sovereign debt crisis, which has reached its meltdown phase.”

Meanwhile the dollar is falling and a flurry of press releases are coming, all crafted to head off the increasingly obvious onslaught in markets starting today.

We also have various agencies around the globe holding emergency meetings to try to calm the markets. To make matters worse, S&P has said there is a 33% chance of a further U.S. credit rating downgrade in the next 6 months to 2 years.

Middle East markets, which are open for trading on Sunday, lost ground, with Israel's main exchange dropping by about 7% and Egypt's by about 4%.

The headlines from the Asia market open are grim. Remember, China manipulates it's currency and a host of Asian currencies peg their value to the U.S. dollar. So regardless of their budget surpluses, because they don't float their currencies, in particular China, we're in for a bumpy ride.

Dow futures are down about 300 points at the time of this article.

For all of the absurd, empty U.S. political rhetoric shouting any practical, economically sound policy is socialist, guess what? France is now kicking the U.S.A ass on credit ratings. France has a AAA credit rating with no downgrade in sight. How's that, Mr. Freedom Fries who need a calculator to shop at Walmart?

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BloodBath on the Markets

It's looking bad. Dow futures are climbing back down.

Rice in Japan was just shut down, but this is due to reports radiation is destroying the Japanese food supply.

Gold futures soared 52.90 to break 1700 an ounce.

Commodities generally are soaring as safe havens and that's really, really bad for inflation and for food inflation.

Gloom and Doomers

Just another example of what Bonddad calls "Gloom and Doom".

Just today NDD has given us seven reasons why we should be positive. The king of 'Green Shoots" still argues that you shouldn't feel bad about dying as long as your not dead there's hope.

by the numbers we are

So much emotion and labeling. By the numbers it all points to a stagnant economy that due to potential events and I think putting our crazy Congress in that list, could throw the economy into another recession. By itself, I don't think it will happen, more just general economic malaise and the job crisis will continue to roar.

But we sure do have a lot of factions none too interested in the United States and that includes many of these crazy Congress critters with their concrete brains trying to rip asunder the United States social safety nets per their agendas.

Reminds me of those ants who eat entire towns in S. America.

Ya all need to get out more and we have a list, on the right, of some very good economics blog sites. Calculated Risk, especially, I've had discussions with him and it's pretty rare for him to make a data error. But you will be thrilled to know, we're checking! (this site too, we will correct immediately any mistake made).

Wages of fear

"You shouldn't feel bad about dying as long as you're not dead there's hope."

I think markets even if they couldn't be called 'bullish' overall, were driven by greed earlier this year. Now, fear is running the show.

"The wages of fear are death."