Eurozone Maneuvering
Research for Online Investors

12/19/11

Eurozone Finance Ministers had a three-hour conference call this morning.  They want members to pledge an aggregate $260 billion dollars to the International Monetary Fund (IMF).  This money would be earmarked for eurozone countries that were under credit duress.

The European Finance Stability Facility (EFSF) is not gaining traction to assuage credit markets.  Managers have met tepid interest from bond buyers to leverage the fund.  Britain is not a member of the eurozone, and has said they would not participate in boosting the IMF balance sheet aimed at helping the eurozone.

The U.S. Treasury is not able to pledge money to the IMF without specific approval from Congress.  The $260 billion boost to the IMF was agreed to at the European Leaders Summit on Dec. 9th, but the cracks are showing.  Sweden said they would take part, but with some conditions.

Finland is concerned about the new European Stability Mechanism (ESM).  France and Germany want to start its operation as soon as mid 2012, and operate with majority rule rather than the present unanimous voting requirement.  Germany’s Bundesbank is not enthusiastic about increasing the IMF’s role in eurozone debt problems either.  Because Britain does not support the IMF plan, the funding goal has been dropped to $195 billion dollars.

Germany believes the future of the euro is tied to fiscal responsibility.  Eurozone leaders agreed to write balanced budget rules into national constitutions.  If annual budgets were not “structurally” balanced, automatic sanctions would kick-in.

A structurally balanced budget means the country would still be able to run a deficit, but only by the amount of annual interest payments on the national debt. Investors want the European Central Bank (ECB) to commit to a program of buying bonds in unlimited quantities to drive interest rates down for Greece, Italy, Portugal and Ireland as a stop gap measure. Germany believes confidence will return to markets once budgets are structurally balanced.

The ECB cannot legally commit to unlimited bond purchases. One eurozone official told Reuters this would probably break EU law and would take pressure off politicians to reform their economies. The unnamed official said “The ECB simply can’t and won’t say that, and it’s very unreasonable to even expect it.”

The ECB is following the policy we have outlined in the last week, buying bonds to suppress the yield on bonds…as long as the politicians make progress on austerity plans.

Mario Draghi, President of the European Central Bank, was interviewed by Financial Times and broached the subject of countries leaving the eurozone for the first time.  He said countries leaving the eurozone would face still even greater economic pain than if they had stayed in the economic union.  He expressed concern about the remaining countries in the eurozone as laws would have been broken, saying “you never know how that ends really.”

The ECB is to start making three year loans to banks on Wednesday.  The ECB has stated their interest is to help the banks.  The wink-wink on this is the banks are buying the sovereign debt from the country of their domicile.

The market looks like it wants to rally today, but we fear will fall back as it did last week.  Watch the last hour for buying pressure.   We believe there should be a rally into the end of the year.  The contrarian in us doesn’t like the fact this is a widely held view.

John

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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