Now that Jackson hole has come and gone , next stop on the QE Express is Draghi next Thursday and the ECB - will he disappoint once again ? As far as the ECB , how far will Germany and the Bundesbank in particular let Draghi with any bond purchase scheme ? Meanwhile Spain continues to circle the drain....

http://www.telegraph.co.uk/finance/financialcrisis/9513048/Draghi-plan-under-threat-amid-EU-split.html

By Philip Aldrick, Economics Editor

7:44PM BST 31 Aug 2012

13 Comments

Pressure is mounting on the European Central Bank to water down emergency measures to prop up Spain and Italy, after divisions within the eurozone were laid bare by reports that the chief of Germany’s Bundesbank threatened to quit in protest at the plan.

ECB president Mario Draghi was expected next week to unveil a new bond-buying programme to help the two struggling eurozone states go on without a formal bail-out. Analysts now expect the measures to fall short of Mr Draghi’s vow to do “whatever it takes” after the German government had to persuade the influential Jens Weidmann to stay in his post.

Details of the rift emerged as economists prepared to cut their growth forecasts for the single currency bloc once again, following dismal eurozone unemployment figures that saw joblessness rise above 18m for the first time. It also came as Madrid signed up to a vital financial reform package to secure a €100bn (£79bn) eurozone bail-out for its banks.

Mr Draghi appeared to have secured the authority to press ahead with his bond-buying programme after winning the support of the German chancellor, Angela Merkel. With just days to go, he has been confronted with a new problem.

Stepping up the pressure, fellow German ECB policymaker Jörg Asmussen said the ECB should only buy bonds if the International Monetary Fund was involved in setting an economic reform programme in return. Analysts expect Mr Weidmann to be outvoted on the ECB next week, but his threat to quit would put Ms Merkel, the region’s power-broker, in an awkward political position as the Bundesbank is revered in Germany.

“By being so outspoken beforehand, he hopes to limit the extent of the operation,” a senior ECB source told Reuters. “That would constantly put a question mark over how far we could go.”

Berenberg Bank economist Holger Schmieding said: “Opposition from Weidmann and reservations from some other council members will mean that ECB bond purchases could be highly conditional . . . and not bring yields down quite as much as Italy and Spain might like to see.”

Adding to the sense of uncertainty, ECB officials on Friday night said governors would be presented with a list of options for bond purchases the day before they sit down to deliberate the plan. Economists said the process increased the chances of a decision being pushed back.

The crisis has grown so severe that Mr Draghi this week pulled out of the annual central bankers’ gathering at Jackson Hole in the US to address the problem. Ms Merkel is also reported to have asked the Italian prime minister, Mario Monti, not to request aid until the Bundesbank issue is resolved. Mr Weidmann and the German authorities refused to comment on the reports of his threat on Friday.

Austria’s ECB representative, Ewald Nowotny, lent his support to Mr Draghi by stressing the difference between buying bonds directly from governments and purchasing them on the secondary market to get yields down. “I would warn against making an over-simple or even an ideological discussion about it,” he said.

David Lipton, the IMF’s deputy managing director, also backed Mr Draghi. “He’s got the right idea, the right approach and he needs the conditions under which his action can be effective. He needs the countries of the periphery to be doing what they need to do and then he can act,” he told CNBC.

The dispute took centre stage as Spain’s cabinet approved a major financial reform package to qualify for a €100bn rescue package, including the creation of a “bad bank” to buy troubled property assets .

Deputy prime minister, Soraya Sáenz de Santamaria, said the financial sector reform, Spain’s fifth in three years, was necessary “to have banks lending again”. The “bad bank” will last for between 10 to 15 years and will buy bad loans and foreclosed property from lenders that receive eurozone aid.

and...


http://www.zerohedge.com/news/ecb-compromise-cheat-sheet

The ECB 'Compromise' Cheat-Sheet

Submitted by Tyler Durden on 08/31/2012 15:45 -0400

• 5s10s
 
• Ben Bernanke
 
• Bond
 
• Credit Suisse
 
• European Central Bank
 
• Italy

With Bernanke leaving the door open, but not pre-committing, in a check-raise to Draghi next week, market focus remains almost exclusively on the bond-buying program to support Spain. Credit Suisse expects markets to be mildly disappointed by Draghi's words and deeds as they question how far he can go, and in terms of near-term market moves, how much is said at next week's meeting versus said at later occasions or indicated through actions (e.g. once Spain asks for help). Draghi has already started to manage expectations with his Die Zeit comments (pitched at the German populous) but in order to get a handle on what the various scenarios are - and what the implications could be - here is Credit Suisse's matrix of compromise.

Credit Suisse: Analysing the ECB scenarios

Exhibit 6 below shows the main scenarios we consider possible. Ourcentral scenario is the Compromise Scenario where the ECB cuts the Repo Rate to 50bp, keeps the Deposit Rate at 0% and revises the collateral framework. We expect little new material information on the front end SMP bond buying program. To us, this will underwhelm market expectations and will lead to a modest rally in core markets.

But the fact that the ECB meeting may well disappoint on bond purchases at this meeting does not change our constructive view on 1y Spain and Italy. In fact, any disappointment-led widening in 1y Spain would ultimately provide an opportunity to add to longs in 1y (and longer if it is clear that there will be buying) bonds; i.e., the commitment to do something is clear enough, it’s just a question of timing.

In developing these scenarios, there are three main axes to consider. We delve into these in more detail below:

• Front-end bond buying: the degree of detail we get next week will determine the tone of the market in the near term. The question of seniority remains key.
• Revision to the collateral framework: we are expecting changes to the collateral framework. Reducing haircuts will effectively act as a Repo rate cut.
• Policy rate cuts: we do not expect negative Deposit Rate in the near future. We expect the ECB to cut the Repo rate by 25bp to 0.5%.

Disappointment. Under this scenario, the ECB does not provide any new material information on the front-end bond buying program. The ECB does not cut the Repo Rate but only announces the revised collateral framework. We expect the lack of detail on the bond buying to support a rally led by the Bund. The front end can sell off (5-10bp) as the market readjusts expectations for a Repo Rate cut. Spain and Italy 2-3y are likely to underperform in this scenario.

Compromise. Our most likely scenario. We expect little or no new information on bond buying. We expect a modest rally in core markets and wider peripheral spreads. To us any sell off in the front ends of Italy and Spain are a buying opportunity as we expect the ECB to reinforce their willingness and ability to address current market fragmentation.

Positive. In this scenario, we expect a meaningful revision to the collateral framework, and specific details on the maturity and countries that will be included in the front-end bond buying program. We would also expect the ECB to convincingly address the issue of seniority of bond purchases. To us that would be positive for the periphery. We expect tighter soft core and peripheral spreads. German yields would shift higher. We would position for this scenario by being short core yields.

Extremely positive. The least likely outcome. This scenario involves revision to the collateral framework that is immediately positive to the periphery (e.g. reducing haircuts on government bonds to a flat structure). The ECB cuts the Repo rate to 50bp and keeps the Deposit rate unchanged at 0%. Additionally, the ECB announces yield caps on the SMP program and addresses the seniority question convincingly. The immediate reaction is expected to be bearish steepening of the German 5s10s curve and tighter ASW, soft core and peripheral spreads.

and......

http://www.zerohedge.com/news/mission-intractable-ecb-bond-buying-plan-plan-will-self-destruct-24-hours

Mission Intractable: ECB Bond-Buying Plan-For-A-Plan Will Self-Destruct In 24 Hours

Submitted by Tyler Durden on 08/31/2012 13:06 -0400

• Bond
 
• Central Banks
 
• European Central Bank

Have no fear; Europe closed and equities leaked so a quick series of European comments are more than required... Bankia, check! Bank backstops, check! ECB Bond-Buying Plan...

• *ECB SAID TO PLAN TO GIVE GOVERNORS BOND PROPOSALS ON SEPT. 4
• *ECB SAID TO HAVE NO PREFERRED OPTION FOR BOND PURCHASE PLAN YET

So no real idea what they are actually going to do. However!

• *ECB SAID TO GIVE CENTRAL BANKS 24 HOURS TO DIGEST BOND PLAN

Nothing new here - and that is why the market is entirely unimpressed...

Bear in mind Morgan Stanley's view of the ECB's meeting next week:

We don’t believe that the conditions for the ECB to start buying government bonds are likely to be met already at the upcoming Governing Council meeting on September 6.

Clearly, the ECB will aim to decide on the parameters of the bond purchase programme at the meeting – even though we doubt that the ECB would start buying on the day or that it will be sharing the full details of the programme with us and the markets at the press conference. Instead, we would expect Mario Draghi to stay vague on the exact shape of the purchase programme for several reasons:

• First, the ECB tends to never pre-commit to any specific policy action and will like to keep its discretion.
• Second, the nature of the programme itself is likely to be controversial on the Council where there is likely to be a significant minority of skeptical members.
• Third, the technical difficulties in determining the exact dose of what is likely to be a powerful, albeit also highly addictive, drug are a serious obstacle to speedy action.

Hence, Eurosystem staff might need more time to prepare and Council members more time to seek a compromise that ideally all (or at least almost all) Council members can support. At the same time, we would expect ECB President Draghi to stress the ECB’s determination “to do all it takes”. Any indication that the purchase programme is capped in size from the start would likely be viewed negatively by markets, we think.

and quietly Spain's ten year bond moves back closer to 7 percent .....

Bankia Gets 'Pre-Bailout' Bailout "Immediately" As Bad Loans Jump 44%

Submitted by Tyler Durden on 08/31/2012 12:52 -0400

With Spain's new-found belief in its own incompetenceomnipotence, they are now throwing bad money after bad in advance of the European bailout by pre-bailing out (bridge recap?) Bankia via the FROB (and it seems like they are in a hurry):

• *SPAIN'S FROB SAYS TO INJECT CAPITAL IN BFA-BANKIA IMMEDIATELY

which makes sense given that:

• *BANKIA GROUP BAD LOANS RATIO 11% IN JUNE VS 7.63% IN DEC. (a 44% rise!!)
• *BANKIA 1H NET LOSS EU4.45 BLN VS EU201 MLN PROFIT A YR AGO

The bottomless pit will all be 'fixed' though by October (just like Dexia was?)

• *BANKIA CHAIRMAN SAYS SPAIN, EU COMMENTS ARE `GREAT SUPPORT'

and just as jawboning helps:

• *EUROGROUP WELCOMES BRIDGE RECAPITALIZATION OF BFA-BANKIA
• *EUROGROUP SAYS BANKS BACKSTOP IN PLACE IF INTERVENTIONS NEEDED
• Sublime to ridiculous... Is this just another move in the negotiation as now Spain has 'more' vested interest and therefore 'more' mutual destructive power if a banking union or mutualized benefit is not realized...
  The Tragedy of the Euros - he who "prints most, deficit spends most, crashes" first wins...

and more from Spain...

http://www.zerohedge.com/news/european-stocks-explode-higher-spanish-bonds-implode

European Stocks Explode Higher As Spanish Bonds Implode

Submitted by Tyler Durden on 08/31/2012 12:03 -0400

• 2s10s
 
• 2s10s
 
• Ben Bernanke
 
• Bond
 
• European Central Bank
 
• Italy

Sigh. Spain's IBEX gained over 3%; Italy's MIB gained over 2%; and all but the UK's FTSE equity index ended very nicely green today (all jerked higher by Spain's comments on their bad-bank and then Bernanke's cover). However, European Government Bonds (EGBs) failed dismally. Spain's 10Y spread to bunds ended the week 46bps wider and Italy 15bps wider and while some point to the short-end as evidence that all is well, Spain saw modest weakness in the 2Y today post Bernanke (though Italy rallied). The curve steepening was dramatic to say the least as the market appearsd to be increasingly assuming the ECB will monetize short-dated govvies - our own view - consider what the implied forward financing costs are given these steep curves as clearly noone trusts this as a solution and will merely subordinate the entire market. Spain 2s10s curve is now at its steepest on record at 328bps! and this is not helping:

*SPAIN’S CATALONIA REGION CUT TO JUNK BY S&P, OUTLOOK NEGATIVE

But buy stocks...

Spain 10Y spreads now wider than when Draghi 'promised'...

leaving the Spain 2s10s curve at all-time record steeps... sustainable? consider what forward funding costs are implied by this...

and credit did not follow stocks higher in the late-day...

and maybe this correlation will re-assert... (Spanish Bond risk - red - inverted against US equities (green)