German ECB Power Play
Research for Online Investors

by John Dalt

11/17/11

The market dropped yesterday at the end of trading to support at 1236 on a “report” from Fitch that “unless the euro zone debt crisis is resolved in a timely manner, the broad credit outlook for the U.S. banking industry could worsen.”  This report came out with one hour left in the trading day.  The DJI dropped 160 points in the last hour.

Who didn’t know this before yesterday?  Come on, fess up…where are you?  Forget congress trading on “inside” information.  We have it right here.  We wonder how many Fitch editors bought puts on the market before they released this piece of information.

This is what the market is like right now.  When we say headline driven, it doesn’t even have to be news of some importance.  It can be a repeat of headlines from the last six months.  Dumb.

Germany Wants Control

Germany and France are at odds over the European Central Bank’s (ECB) purchases of sovereign debt.  Germany does not want the ECB to buy sovereign bonds to force interest rates down either at issue or in the secondary market.  France does.  Germany wants the ECB to keep a clean balance sheet.  France wants the ECB to be the “buyer of last resort.”

A little context is in order.  Remember when the European Commission negotiated with Greek bondholders to take a 50% haircut?  The ECB did not take a loss on their bonds.  The ECB will get paid back 100% of their bond’s face value.  Why is this important?

The ECB’s money comes from member states.  Germany has contributed 18% of the ECB’s capital.  The other larger countries contributions are: France 14%, Italy 12%, and Spain 11%.  If they lose money, they lose their sponsor country’s money.

Germany does not want the ECB to lose their money rescuing other countries.  That would be hard to explain to voters.  Germany believes each country should cut their budgets and raise taxes to balance their budget.  These actions will restore confidence in the government with bond buyers and interest rates will return to normal.

The ECB is governed by the 17 presidents of each eurozone country’s bank.  Each has a vote in ECB decisions.  Germany is going to propose a change the 1999 treaty that governs the ECB at the upcoming Dec. 9th meeting.  Germany wants to change the voting structure to a weighted system either based on the size of each country’s economy (GDP) or capital contributed to the ECB.

The International Monetary Fund (IMF) is governed by weighted voting.  The weighting is on the amount of capital (gold) on deposit with the IMF.  The U.S. has the most votes in the IMF at 17% of the total.

Germany wants the most votes on the ECB board.  If done by GDP, out of 100 votes; Germany would have 27 votes, France 21, Italy 16 and Spain 11.  We don’t know how votes would be allocated to the countries with the smallest GDPs.  Malta’s GDP is 1/400th the size of Germany’s.

This voting arraignment would give Germany more control over the ECB.  Their goal would be to organize a coalition of other country’s bank presidents to exert conservative monetary standards at the ECB.

Merkel’s CDU party is preparing to pass a resolution next week to change the Treaty of Berlin that governs the ECB to enable weighted voting.  An anonymous source in the ECB, told the Spanish paper (CincoDias) that carried this story, “The Euro has survived for the last 18 months due to the ECB and its federal structure, if that changes, you can drop the whole shebang.”

The market is trying to rally this morning after yesterday’s late day selloff.  Here is a 60 minute chart of the S&P 500 for the last five weeks.

The S&P has been setting higher lows and lower highs during this time.  I have drawn in a heavy black line for the closing highs and closing lows.  You will notice the S&P is trading below the lower closing line.  It needs to rally today to close above 1240, or we will have violated this technical formation.  If we do not close above 1240, it will become resistance for the market to move higher.  That does not bode well for the bulls.

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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