"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it"
- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Monday, December 6, 2010

ECB, EU Bailouts, and EUR-USD Spread

European Central Bank     

     Today Reuter's reported "The European Central Bank will offer one-month and one-week funding on Tuesday in the first refinancing opportunity since elevated tension in sovereign debt markets pushed it to say it would keep unlimited funding available until next April."  The ECB has stated it will continue to monitor markets and calculate the best time to exit from the liquidity injections and efforts to maintain below average Eonia rates.

EUR/USD 1 Year Daily Chart
(Click to enlarge)
     In Euro's, the cost of 1 US Dollar has been trending higher with large swings from the ongoing crisis overseas from the PIIGS and Belgium.  Spain is under the same speculative trading pressure as Ireland.  Traders have been betting, among other ways, that Spain's ability to cover its debt is has a shrinking probabilty.  Spain's Credit Default Swap Rate has tripled since March of this year.  Ireland's CDS Rate has witnessed a 6-fold increase.   Across much of Europe, 10 Year Government Debt prices have been rising.  (See Chart Below)

Bloomberg Spreads
(Click to enlarge)
     As Europe becomes more risky, flights to safety will ensue.  Gold has been ripping through the charts and the volume has been supporting it.  As contagion worries expand, look to see Gold prices continue with semi-annual double digits gains. (See Chart Below) 

     Ireland is "contributing" €17.5bn and receiving external support  of €67.5bn.  The IMF is splitting the bill three ways with the European Financial Stability Mechanism and with the European Financial Stability Fund and bilateral loans from the UK, Sweden and Denmark.  

Rates and Sources
1.  IMF
Interest Rate of 5.7% per annum
Unit of Account is SDRs (Basket of Euro, Sterling, US Dollar and Yen)
ForEx rate is equivalent rate when funds are swapped
Duration Period In Years: 7.5 
2.  EFSM
Interest Rate similar to that of IMF, i.e. 5.7% per annum
3.  EFSF
Interest Rate of 6.05% per annum
The bilateral loans will be on the same terms as the funds from the EFSF.

     All EU funds are borrowed directly on the open markets.  This large demand is what can create volatile shifts in currency spreads, triggering conservative investors to run to "stronger" government bonds, hence the drop in the US and Canadian bond yields.  This sovereign debt issue, coupled with incorrectly calibrated stock valuations, have been boosting the markets here at home and the prices of the Treasury Notes, Bills & Bonds. 

Bailout Recap
Greece has €110bn @ 5.2%
Ireland has €89bn @ an average of 5.8%
Portugal, Italy, Spain and Belgium are on the watch
Gold Futures
(Click to enlarge)