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Time to Monetize European Peripheral Sovereigns


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#1 Russ Winter

Russ Winter

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Posted 26 June 2012 - 01:05 AM

“Spain is not Uganda.” – Spanish PM Rajoy“Uganda does not want to be Spain.” – Uganda Foreign MinisterThe ECB has settled no sovereign bond purchases under its SMP last week, the program is now nearing 5-months of inactivity. Pressures are building on Germans to allow monetizing and/or backstopping of peripheral bonds [George Soros]. In an interview with Der Spiegel,  German MoF Schauble seemed to echo Soros. Sounds like the ball is back in Italy, Spain and Portugal’s court. This seems like very fundamental to the fiscal union approach but begs the question: what about all the excess existing debt?

SPIEGEL: What would a fiscal union have to look like so that Germany could accept euro bonds?Schäuble: In an optimal scenario, there would be a European finance minister, who would have a veto against national budgets and would have to approve levels of new borrowing. It would be up the individual countries to decide how to spend the approved funds, that is, how to answer the question: “Should we spend more money on families or on road construction?”

Bottom line is that the markets are already restoring some discipline to European sovereign debt (minus Greece).  The “safe haven” United States on the other hand is running amok. The specs are loaded to bear on long term Treasuries, one of the more crowded trades ever.Posted ImageDespite all the fanfare,  the peripheral sovereign bonds really haven’t been trading that badly of late, indicating that the markets may already baking in ECB debt monetization or reflecting more discipline.  Portuguese 10 years are under 10%, not sustainable, but much better than one might think. Italian bonds are keeping in the 6% range, and Spain is back to 6.63% after spiking over 7%.  German 10-year bonds on the other hand have seen a jump in yields to 1.578% from a record low of 1.12% on June 1.Posted ImageThe rally in the Euro and the Swiss Franc brought out heavy short covering, and rather suggests these are primarily trades at this point, as opposed to big moves.Posted ImageOn uranium watch, Japan plans to turn its nuclear power back on this weekend, as Osaka-based Kansai Electric Power (KAEPY.PK) will restart the first reactor to come online since the nation’s nuclear hiatus began in May.The rentry into the CCJ naked puts is 19.78.

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