In Between Days

by CC November 30, 2011 12:36 am • Commentary


The European Central Bank must act sooner rather than later in order to avoid a grave outcome for the euro area and possibly the euro itself, according to Credit Suisse Economist Yiagos Alexopoulos.

“The deterioration in liquidity and pricing in euro area government bond markets means an aggressive policy response is urgently needed,” Alexopoulos wrote in a research note.

Liquidity needs to be in place by the time major euro zone governments begin heavy issuance in early 2012 according to Alexopoulos, who believes only the ECB can achieve this outcome via “a large-scale asset purchase program of quantitative easing.”

This would mean the ECB buying up huge amounts of euro zone debt in the secondary market, something Alexopoulos thinks would be justifiable under the current “Treaty if it was undertaken for monetary policy purposes.”

1 trillion euros ($1.33 trillion) would be needed for the program to achieve the required results according to Alexopoulos who believes those with lower debt to gross domestic product ratios would be the biggest winners.

“An ECB QE program would reduce the safe haven premium in bunds. Thus, we expect a bold move from the ECB to result in higher German yields and core curve steepening,” he wrote.


According to El-Erian’s analysis, there are three potential scenarios:

1) “Fragmentation of the euro zone,” in which the 17 member nations would go their own way, which he said would be “incredibly disruptive not just for Europe but also for the global economy.”

2) “Full fiscal union,” in which the nations adopt uniform financial reforms that would be more political in nature.

3) A “middle ground” in which a “smaller but stronger euro zone” emerges where as many as three countries default on their debt and exit the EU.

“We are no longer looking at what we call a traditional bell curve where there is one dominant outcome,” he said. “We’re looking at a curve that is much flatter and has much fatter tails. Investors have to test different exposures to that new distribution. That’s what happens when you put sovereign risk at play.”

The key to a positive outcome, he said, is negotiating a majority agreement among EU nations and then getting the European Central Bank to go “all in” in terms of committing the requisite amount to backstop the bad sovereign debt.

That all needs to happen in advance of the ECB’s Dec. 9 summit to address the debt issue.

“That will absolutely turn the market and that’s the key issue right now,” El-Erian said. “I will tell you (the chance of an agreement happening) is less than 50 percent. A lot more has to happen in the next few days.”


Standard & Poor’s reduced its credit ratings on 15 big banking companies, mostly in the Europe and United States, on Tuesday as the result of a sweeping overhaul of its ratings criteria.

JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs Group, Morgan Stanley, Barclays, HSBC Holdings and UBS, were among the banks that had their ratings reduced by one notch each. A notch is one third of a letter rating.


The S&P 500 rallied during the opening 30 minutes and accelerated after surprisingly good consumer confidence report. But the rally turned into a prolonged and tentative dance with the 1200 point level. The last thirty minutes saw a significant increase in sell volume, and the index closed with a modest gain of 0.22% at the 1195.19 closing level.

The index has cut its year-to-date loss to 4.97% and is now 12.35% off the interim high of April 29. It is now only about 10 points below its 50-day moving average of 1205.51.

From an intermediate perspective, the index is 76.7% above the March 2009 closing low and 23.6% below the nominal all-time high of October 2007.

Tomorrow’s Tape- WSJ


  • 3:00 a.m. ET: European Union finance ministers continue to meet.
  • 3:00 a.m.: ECB chief Mario Draghi speaks.
  • 7:00 a.m.: MBA weekly mortgage applications survey
  • 8:15 a.m.: ADP employment survey for November. Economists expect 130,000 new private-sector jobs, up from 110,000 in October.
  • 8:30 a.m.: Third-quarter productivity revisions. Economists expect productivity to be revised down to 3% from an initial reading of 3.1%.
  • 9:45 a.m.: Chicago ISM for November. Economists expect this to rise to 58.5 from 58.4 in October.
  • 10:00 a.m.: Pending home sales index for October.
  • 2:00 p.m.: Fed’s latest Beige Book.