Reply #42: Europe's Feint

[Ghost Dog]

The euro has been sold hard across the board in recent days, taking numerous investors and observers by surprise. After all, the European sovereign debt crisis that was so threatening earlier this year had been resolved, the fiscal austerity measures announced had re-earned the market’s confidence, and the economies had strengthened in Q2 after nearly stagnating in Q1. No less an authority that the ECB President himself suggested that Q3 was off to a fine start.

At the same time, we are told that US policy makers have no sound fiscal strategy and under the weight of structural problems. Additionally the world’s biggest economy slowed down sharply in Q2 after above trend growth in Q4 09 and Q1 10. So what happened that sparked a nearly 5% drop in the euro over the past few days?

The most compelling explanation requires returning to the European crisis. There was a liquidity dimension to the crisis and a solvency component. Officials addressed the first by increasing the liquidity facilities and provisions by the ECB, altering collateral rules for borrowing from it, and purchasing covered and sovereign bonds in the secondary market.

Europe bluffed its way through the solvency issue. Besides a direct EU-IMF package for Greece, European officials claimed to have put together a 750 bln euro facility. They did no such thing.

/Read on... http://seekingalpha.com/article/220425-europe-s-feint?source=yahoo

"The money will be there if, where and when needed", it is said.