Spain wants the EU / ECB and IMF to show their hand first before negotiating further for their rescue , Italy continues to play beggars shall be choosers along with Spain , Germany hopes Finland strides out of the EMU first so they can scamper behind the Finns without guilt , ECB floats interest rate cap trial balloon....

http://www.businessinsider.com/standoff-spain-wants-details-on-the-ecbs-bazooka-before-it-asks-for-a-bailout-2012-8

Spain Wants Details On The ECB's Bazooka Before It Asks For A Bailout

Matthew Boesler | Aug. 19, 2012, 6:01 PM | 1,182 | 

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(Photo by Pablo Blazquez Dominguez/Getty Images)

European markets have been on a tear recently since the latest ECB meeting in which Mario Draghi was seen as giving a clear commitment to supporting eurozone sovereigns as long as government leaders commit to taking proactive measures themselves, like formally requesting a bailout from the eurozone's established bailout funds, the EFSF and ESM.

Spanish stocks have outperformed U.S. stocks by 11.3 percent in the past month. Comments by EU economic minister Olli Rehn that suggested Spain had "an open mind" on requesting a bailout last week have helped fuel the rally.

This caused many to expect Spain to make a formal request for a bailout from the EFSF/ESM, thereby triggering the next step in the process of receiving bond market support from the ECB. The ECB is seen by most to be the only entity with the firepower available to adequately address the crisis in Europe.

However, Spanish finance minister Luis de Guindos said this weekend that the Spanish government won't request a bailout until the ECB gives some specifics on the kind of help it's willing to give Spain once it does so.

The Wall Street Journal reports: 

The ECB earlier this month signaled that it would consider intervening if Spain asks the European Financial Stability Facility, the euro-zone's temporary bailout fund, for aid and enrolls in a formal program. The Spanish government has said it will decide whether to make such a request after the ECB provides more details on the type of support it would offer. This information could come after the central bank's Sept. 6 policy meeting.

Mr. de Guindos's comments to Spain's state-owned news agency EFE, confirmed by a Finance Ministry spokeswoman, gave the most explicit indication to date of what his government is looking for.

The ECB "cannot place limits or say how much it will buy nor for how for how long it will intervene" in secondary sovereign-debt markets, in order to ensure the action is effective, Mr. de Guindos was quoted as saying. Previous ECB bond purchases were widely seen as too timid to be effective in calming market turmoil.

De Guindos is clearly worried that Spain will ask for a bailout and the ECB's policy answer will be seen as less than adequate by markets, which would be very damaging for sentiment in peripheral bond markets, which have already had a pretty tough year.

and....

http://www.telegraph.co.uk/finance/financialcrisis/9486257/Euro-must-not-pit-North-against-South-says-Italian-PM-Mario-Monti.html

6:33PM BST 19 Aug 2012

13 Comments

"The biggest tragedy for Italy and for Europe would be to see the euro become, because of our failures, a break-up factor which awakens the prejudices of the north against the south, and vice-versa," Mr Monti told an audience of young people in Rimini on the Adriatic coast.

"The risk exists," he said.

The European Union and eurozone countries are split over how to solve the financial crisis convulsing various nations, especially in Europe's south.

Former eurocrat Mr Monti has previously warned the rest of the eurozone that Italy must be allowed breathing space on the markets to have any chance of pulling away from the debt crisis brink and resisting contagion from other weaker members such as Spain.

Italy, eurozone's third largest economy, is wallowing in deep recession and Italians have seen a series of austerity packages, tax hikes and reforms to try to tackle the country's debt, AFP reported.

and.....

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9485917/Russian-Bear-stops-Finland-leaving-euro.html

By Ambrose Evans-Pritchard, in Helsinki

3:36PM BST 19 Aug 2012

347 Comments

Once Finns break the taboo, it would be easier for Germany to extricate itself from an escalating national disaster without inviting opprobrium from across Europe, or so goes the argument.

“We can’t start this off, but the Finns can,” said Hans-Olaf Henkel, former head of Germany’s industry federation.

Berlin’s policy elites are constrained by their honourable - if misdirected - feelings of moral duty towards the euro. They cannot bring themselves to plunge the dagger.

Or as ex-Bundesbanker Thilo Sarrazin puts it, they are driven by “the very German reflex that the Holocaust and Second World War will only be atoned for finally when all our interests, including our money, are in Europe's hands".

Finnish exit - or FIXIT, as they say in Helsinki - is certainly a plausible hypothesis. The Finns have no ensnaring duty to a mystical “Europe“. They did not join the EU until 1995, and only then with widespread dissent.

“Sweden and Denmark both held referendums on the euro, and both said no. We were never allowed to vote,” said Timo Soini, leader of the True Finns party. That was a mistake. The nation is not locked into ritual assent.

Finns obeyed the rules of EU membership with scrupulous care, while others gamed the system. “Our Lutheran morality, if you will,” said foreign minister Erkki Tuomioja.

They alone faced the fiscal implications of EMU for small economies out of cyclical alignment. Finland’s budget surplus was 5.3pc of GDP at the top of the boom in 2007. Greece’s was 6.5pc in deficit. There lies the full horror of what has happened.

“In Finland, a handshake is final. We thought we had a deal that every country would look after its own finances, only to find the deal was broken,” said Alexander Stubb, Finland’s Europe minister.

The Finns survived their own gruelling depression without foreign help in the early 1990s when the Soviet Union collapsed and exposed the fragility of the Finnish banking system. The economy shrank by 13pc.

“We had the IMF knocking at our back-door. Unemployment was at 18pc. We said 'never again’ and yet here we are in a fresh crisis because of somebody else’s fault,” said Mr Stubb.

For the True Finns - with 19pc of the vote in the last election - it is an outrage. “We bailed out our own banks, and now after all the lying, dishonesty and malfeasance in Europe, we are being asked to bail out their banks. This is the last straw,” said Mr Soini.

There is no doubt that Finland could go it alone. It is the last unsullied AAA state in the Euroland, with a public debt of just 51pc of GDP. The reason why Moody’s did not place the country on negative watch last month along with Germany and Holland is a lack of banking exposure to Club Med debt and “relative insulation from the euro area” in trade.

More than two-thirds of Finnish exports go outside the euro bloc, chiefly to Russia, Sweden and the US. In other words, Finland lives in a different economic universe from core-EMU, and is deemed better for it by rating agencies. You could not find a more likely candidate for euro exit.

Yet looming over everything else is Vladimir Putin’s Russia, a “19th Century power” - to borrow Robert Kagan’s term - that has overturned the post-war borders of Europe once already by attacking Georgia in 2008 and annexing South Ossetia.

Russian armed forces chief Nikolai Makarov played on the theme in June, attacking Finnish “revanchists” and describing Finland’s military manoeuvres in its own eastern region as akin to those of Georgia in South Ossetia before the war - ie a casus belli. The Russians are playing hardball over Finnish overtures to NATO.

Looming too are memories of the Winter War of 1940 - when they lost the Hanseatic city of Viipuri - and the bitter struggle against Stalin until 1944, and indeed the compromised sovereignty and media self-censorship that lasted for another half century.

“Membership of the EU and the euro is all about getting as far away as possible from Moscow. That has affected how we think for the past 20 years,” said Professor Tapio Raunio from Tampere University. The strategic imperative is to enmesh Finland as deeply as possible into every part of the Western system.

True Finn leader Mr Soini says the euro remains the “state religion” upheld by Finland’s elites. Their governing credibility is inextricably linked to EMU project. Most will die in a ditch to defend it.

Yet the tensions are palpable in the Finnish parliament. “Our liabilities keep rising and the mood is becoming critical,” said the foreign minister.

Each escalation in EU rescue demands - whether to strip the bail-out fund (ESM) of its preferred creditor status, or to recapitalise Spanish banks directly, or to buy Spanish and Italian debt, and on what terms - requires a fresh vote by the Eduskunta.

The Social Democrats - leaking working class votes to the True Finns - are visibly wobbling. Their ministers fire off cannonades against EU rescues almost weekly to shore up their base. The finance minister Jutta Urpilained said Finland would not “hold onto the euro” at any cost, and then seem surprised when the world took note.

Nobody knows where the snapping point lies. Miapetra Kumpula-Natri, chair of the Grand Committee on Europe, said Finland’s political limit on bail-outs is “unwritten”, yet dropped the hint of 10pc of GDP. So we watch the numbers. Does the gun cock once Finland’s guarantees reach €19bn? Are we there already?

My own guess is that Spain and Italy - separately or acting in concert - will win the North-South race to revulsion and trigger the final denouement. Tightening fiscal policy by 3pc of GDP each year as unemployment rockets is not compatible with democracy, nor with economic science for that matter.

Yet Finland is a long-neglected part of this complex jigsaw puzzle. Global investors will have to add the Helsingin Sanomat to their morning read, along with Greece‘s Kathimerini, just in case

and bluff / trial balloon of ECB considered at ZH and by Mish....

ECB's Latest Deja Vu Bluff: Rate Caps On Sovereign Bonds

Submitted by Tyler Durden on 08/19/2012 10:17 -0400

• Bond
 
• Credit Line
 
• European Central Bank
 
• Germany
 
• International Monetary Fund
• Italy
 
• Sovereign Debt
 
• The Matrix

Just as Germany was warming its "Nein, Nein, Nein" machine, now that Merkel is solidly back from vacation and has caught up with all the desperation emails in the inbox, as reported yesterday, the ECB, in a furious attempt to preempt the unwind of every innuendo, speculation, "unsourced rumor", and everything else the ex-Goldman controlled printer of European currency (which however now and always is powerless without German support) has done in the past month to keep sovereign rates low, has just resorted to yet another deja vu preemption tactic: rate caps on sovereign bonds.Spiegel reports the based on unsourced data, "The European Central Bank (ECB) is considering to establish in its future bond purchases interest rate levels for each country. Thus, it would buy sovereign debt of the crisis countries whenever interest rates exceed a certain spread to German Bunds... At its next meeting in early September, the Governing Council will decide whether the interest rate target is actually installed." Which of course it won't for one simple reason: the same reason the ECB has done lots of talking in the past 3 months, and implemented absolutely nothing: the Bundesbank's Jens Weidmann, and the fact that as Danske (see below) and everyone else already explained when this idea was floated unsuccessfullythe first few times, it would require an infinite balance sheet, something the ECB does not have, especially not when Germans are 'consulted.'

Furthermore, for the ECB to proceed with rate caps, it would need to trigger the "conditionality" phase of the crisis which as we have explained countless times, would require first Spain, and then Italy, to demand a bailout, which in turn would lead to political turmoil, coupled with a government turnover as well as ceding sovereignty to the Troika (explicitly) and Germany (implicitly).

Finally, to all those who are having a glitch in the matrix moment at this attempt to further jawbone rates lower without actually doing anything, the deja vu is indeed correct. Because as the following note from Danske from November (and countless other unsourced reports and articles from around the same time) confirm, the ECB was indeed considering rate caps at the most acute phase in the Euro crisis last year. And passed. In other words, the ECB very well may go ahead and implement a rate cap solution... after the periphery has demanded a bailout, and after both Spain and Italian 10 year notes are trading well above 8%. Until then, it will simply continue doing what it has been doing for the past 6 months. Talk, lie, and make empty promises.

From Danske, November 22, 2011: "ECB to defend an informal cap on rates"

• The debt crisis is heading towards the end game. Mistrust has spread to Italy, Spain and beyond. In the absence of further policy action, interest rates spreads would probably continue to widen and the whole euro project could come to an end.
• A number of feasible backstops are available, but face resistance. The German government as well as the Bundesbank is rejecting the use of the ECB as the lender of last resorts. It is also rejecting the idea that the ECB lends money to the IMF, which could then provide a temporary credit line for Italy. An increase in IMF quotas is an alternative approach, but this also faces resistance from, e.g. the US.
• • The two models for leveraging the EFSF presented at the euro summit a few weeks ago were designed to alleviate the debt crisis, but have attracted very little investor interest and seem unlikely to work unless they are made more attractive to investors.
  • Eurobonds that would allow government to raise funds up to a ceiling with collective guarantees could provide a much needed pause for governments. However, Eurobonds also face German resistance and would probably not be deployable as quickly as needed to combat the current debt crisis.
  • The ECB could provide a backstop by formally announcing a cap on individual countries’ yield spreads and saying that it stands ready to buy unlimited quantities of government bonds to defend this cap. However, the ECB and not least the Bundesbank, fear that this will remove incentives for structural reform. Therefore, in our opinion, the ECB is not going to make such a formal announcement unless the situation deteriorates significantly.
  • So, with no backstops immediately available will the debt crisis spiral completely out of control causing government defaults and possibly a euro break-up? We do not expect this to be the case. The ECB will not provide any formal guarantees to the market, but that does not mean that it will stop buying.
  • We believe that the ECB will defend an informal cap at possibly 7% interest rates on 10-year Italian and Spanish government bonds. The ECB will be averse to it, but do it nonetheless. This is due to the fact that until austerity measures succeed in  restoring confidence in Italy and Spainthere are not many viable alternatives if the ECB wants the euro to survive.
  • • The ECB has so far used its Securities Market Programme (SMP) to buy peripheral government bonds to the tune of as much as EUR200 bn. We would not be surprised to see them spend half a trillion or more before confidence is restored. It takes a lot of money to defend an informal cap.
    And.... nothing. Why? One word - Germany.... and two more words "unlimited quantities" - good luck.
    Full note below
    
    
    and...

http://globaleconomicanalysis.blogspot.com/2012/08/ecb-considers-interest-rate-caps-can.html

Sunday, August 19, 2012 10:49 AM

ECB Considers Interest Rate Caps; Can Such a Scheme Possibly Work?

Economic Times reports European Central Bank mulls caps on borrowing costs

 The European Central Bank is considering buying the bonds of crisis-wracked eurozone countries to ensure borrowing costs do not rise beyond a pre-determined level, German newsweekly Der Spiegel said Sunday.

The bank will define an upper limit for borrowing costs in countries such as Spain and Italy and intervene in the markets to ensure it is not breached, Spiegel said, without citing its sources.

At the end of trade on Friday, Spain was paying 6.39 per cent to borrow for 10 years and Italy 5.76 per cent. In contrast, Germany was paying 1.49 per cent, as investors trust Europe's top economy to repay them.

The so-called spread, or difference, between benchmark German bonds and the debt-wracked countries would be decisive for the proposed rate cap, Spiegel said.

ECB President Mario Draghi announced earlier in August that his institution "may" buy bonds of struggling countries if they first apply for EU bailout funds and accept tough conditions in return.

He said the details would be worked out before the next meeting of the ECB, scheduled for September 6. Spiegel said that ECB governors would decide then whether to implement the proposed borrowing cost cap.

Here is a link to a translated article in Der Spiegel: ECB is planning to challenge interest rate speculation

 The European Central Bank (ECB) is considering to establish in its future bond purchases interest rate levels for each country. Thus, they would state papers of the crisis countries always buy when interest rates exceed a certain impact on their yields German Bunds. Sun investors would get a signal that interest rates, the ECB considers appropriate.

Because the Fed has unlimited funds - they can even print the money eventually - it would not succeed even more speculators to drive the returns of the targeted rate also. Thus, the ECB wants to keep not only the financial costs of ailing countries in check, but also to ensure that the general level of interest rates in the euro zone is not too much drifting apart.

At its next meeting in early September, the Governing Council will decide whether the interest rate target is actually installed. One thing is certain, that the ECB will continue to practice their bond purchases more transparent. In the future, they will announce each country, in which capacity she has taken the bonds from the market. This information should be released immediately after the purchases. So far, the ECB had only ever made known Monday how much money she spent on purchases in the previous week as a whole.

Can This Work?

It depends on the definition of "work". In general, if central planners (and it is important to understand that is what we are talking about here) set prices too high there will be unlimited supply.

Likewise, if central planners set prices too low, there will be shortages.

When it comes to money, recall that Switzerland capped the rate of the Swiss Franc vs. the euro. To defend that cap the Swiss National Bank has to offer unlimited money at the target exchange rate.

When it comes to interest rates, the ECB must be willing to buy an unlimited number of bonds (up to the total supply of all bonds).

Theory vs. Practice 

So yes, the ECB can "in theory" defend a price target on bonds, but only at the risk of owning every bond.

What about an exit mechanism? How will the ECB get rid of all those bonds down the road? To who, at what price?

Will Germany go along with this ridiculous scheme? For how long?

As is always the case, interference in the free market by central planning fools always fails in the long run.

Mike "Mish" Shedlock