To Ecb Or Not To Ecb That Is The Only Question

Europe started the day poorly, following up on the weak close and its own poor economic data.

Then the ECB got involved and started buying Spanish and Italian debt aggressively. Rumors is that the ECB will have unlimited buying power for Italian debt once the austerity bill is passed.

The current buying spree is completely expected. They can’t resist intervention and in spite of a massive inventory of unmarked underwater bonds, still believe it does something.

This intervention didn’t do much for a 1-year auction and the price action in the secondary market has become routine. Some quick short covering. Dealers snapping up some paper to offer back to the ECB. A few additional purchased to goose the market higher, tell the ECB how great they are doing and that it is impossible to source paper, sell your inventory at an even higher level, spoof around while trying to figure out when the ECB is done for the day and what targets they have, sell into the last bit of strength and then let the shorts who covered early reset at much higher prices.

Buying on hopes that ECB will have unlimited purchasing power seems risky. Unless Germany has really been convinced that is a smart idea, expect some denials from Germany. Why would Germany agree to that when the inflation picture is unclear, when its partner’s economy seems to be deteriorating and without any clear evidence that Italy will stick to any program for more than a week or two. The market is correct that massive ECB buying and printing is the only solution that maintains the Euro, but I find it hard to believe that Germany has been convinced so easily and that Germany isn’t starting to think about giving up the existing regime. Germany and France are effectively the ECB and will pay the price for any mistakes.

Also, such a plan would seem far too aggressive for an Italian’s first weeks on the job. A rate cut was one thing, but promising unlimited ECB buying of Italian bonds is another.

I would fade the rumors if unlimited ECB buying and European harmony. On the other hand, at these yields and with some real government determination – the Italians might convince investors their bonds are in fact cheap. But why go to that effort when there is a buyer out there whose only price sensitivity is that they want to pay more? Maybe leaving Italy to dangle for a fee more days is exactly what Italy and the EU need; rather than rushing too quickly to the “rescue”. A rescue strategy that has failed and failed and failed and failed and failed.