In Between Days: Au Revoir Trichet

by CC October 5, 2011 6:50 pm • Commentary

WSJ- Tomorrow’s Tape: Rate Expectations


  • 7:45 a.m. ET: ECB rate announcement. Will Jean-Claude Trichet’s last splash include a rate cut? It might not, but it should.
  • 8:00 a.m.: The Bank of England rate announcement is due.
  • 8:30 a.m.: Weekly jobless claims are due. Economists think they jumped back above 400,000 after dipping below that mark for technical reasons last week.


  • Constellation Brands


  • 11:00 a.m.: Dallas Fed President Richard Fisher says something hawkish.


Anybody hoping for an ECB rate cut tomorrow might be disappointed.

Sounds like this is a view that’s gaining traction ahead of Jean-Claude Trichet’s swan song Thursday.

Marc Burgheim, head of foreign exchange at Bayerische Landesbank, says Mr. Trichet will keep the ECB’s key interest rate unchanged because the markets haven’t yet been in panic mode.

Rather, Mr. Trichet is likely to pass the baton to his successor, Mario Draghi, to decide on the next move on rates when the Italian central banker heads the ECB in its November meeting.

One tool Mr. Trichet might unveil tomorrow is expanding the ECB’s emergency lending to banks to ease funding stress, reintroducing 12-month repo operations for banks to borrow relatively cheap cash with collateral. Some analysts say the ECB could even increase the maturity to 18 months or more.


Europe’s top banking regulator has started to re-examine the strength of the region’s banks, modelling a big writedown of all peripheral eurozone sovereign debt.

The exercise, conducted by the European Banking Authority, could potentially identify capital shortfalls across the banking system of as much as €200bn ($266bn).


You may be wondering what is going on with the major firms in the financial sector. While each of these firms have different problems — vampire squids to Countrywide acquisitions — they all have something in common: Their balance sheets are opaque.

This is no accident. Indeed, it was by design that execs in the banking sector, and their outside accountants, hatched a scheme in 2008 to hide their balance sheets from public view. The bankers had been lobbying the Financial Accounting Standards Board to change the rules that governed “Fair Value Measurements” also known as FAS157 (September 2006)…

The bottom line is this: Investors do not really have a clear idea of how healthy any of these banks truly are. We do not know the state of their balance sheets. We do not know what their exposures are to mortgages, to Europe, to Greece, etc. They could all be technically insolvent, as far as any investor can tell.

And that is exactly how the bankers wanted it.

But given the trouble in Europe, and the likely problems in housing if the US goes into a recession, Investors have decided they cannot take the risk of a holding an opaque, possibly under-capitalized probably over-leveraged financial firm blindly. They are telling the banks no thanks, we are not interested, we are going to be prudent and we have to assume the worst. Hence, for the second half of 2011, they have been selling off their holdings in these opaque, potentially insolvent too big to succeed entities.

Bankers, enjoy your beds. You made them, now lay in them .

Calculated Risk

The Greek 2 year yield is up to 66%. The Greek 1 year yield is at 140%. (Obviously expecting a large haircut)

The Portuguese 2 year yield is down to 17.5% and the Irish 2 year yield is at 7.1%.

The Spanish 10 year yield is at 5.1% and the Italian 10 year yield is at 5.5%.


BRUSSELS—The International Monetary Fund could create a special financing tool to buy bonds in private markets as a way to help stem the euro zone’s debt crisis, a senior IMF official said Wednesday.

However, Antonio Borges, head of the IMF’s Europe Department, said the idea hadn’t yet been vetted by the fund’s membership and there have been no formal requests from euro-zone members for additional financing.

Such a plan could aid countries such as Spain and Italy, which face rising costs for financing in capital markets. Mr. Borges said these countries have a problem of market confidence rather than solvency.