To print or not to print, the question for the ECB

To print or not to print, that is the question for the ECB as they meet today and we hear from Trichet. With private demand for European credit waning and no tolerance on the part of all governments for debt restructurings and creditor loss, will the ECB resort to QE and start buying selective sovereign bonds? While they bought covered bonds last year in a small version of QE, buying government bonds will set a new precedence, albeit a dangerous one, particularly from the German perspective. The Germans ceded Bundesbank authority to the ECB when the euro was formed and they fear inflation like no other after the experience of the Weimar Republic where in 1919 it cost 499 Deutshe Marks to buy one ounce of gold and by 1923 it cost 87 Trillion.

Spain sold 2.35b euros of 5 yr paper at a yield of 3.53% with a bid to cover of 2.35. This compares to the March 4th auction of 4.5b euros at a yield of 2.82% and a bid to cover of 1.48. The smaller absolute amount of today’s auction helped the b/c but at a yield that was the highest since ’08. European bonds are down across the board. The Shanghai index got slammed overnight by 4.1% and sends its index to the lowest since Sept ’09. Not only do the Chinese have to deal with the unwinding of their property bubble but Europe is also their biggest trading partner. With the stress overseas and no US home buying tax credit anymore to artificially boost US residential real estate, US banks are beginning to get a bit more risk averse as measured by US$ 3 month LIBOR which today had its biggest % rise since Jan ’09, albeit at a still low level.

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