Troika II: Smooch

The SMP is dead! Long live the SMP!

OMT? Surely they could have just called it SMP2

What am I talking about?

It took the ECB a year of endless behind the scenes Machiavellian scheming to restart the SMP (Securities Markets Program) now OMT (Outright Monetary Transactions) which was conceived by Jean-Claude Trichet in May 2010, concurrent with the first Greek bailout. The markets soared with euphoria that this time will be different, and that the program which is a masterclass in central planning paradox, as it is “unlimited” yet “sterilized”, while based on “conditions” none of which have been disclosed, and will somehow be pari passu for new bond purchases while it retains seniority for previous purchases of Greek and other PIGS bonds, will work – it won’t, and the third time will not be the charm. Yet it has been just 72 hours since the “bailout” announcement and already Europe is being Europe: namely, it turns out that nobody wants the bailout.

On one hand there’s Germany for obvious reasons – not only are they footing the cost, but it is for them that the threat of an inflationary spike as a result of “unlimited” bond buys is most acute. But on the other, all along, are Spain and France, the biggest beneficiaries of the bailout, and whose bonds soared on expectations the ECB may buy them, who overnight have had a change of heart and say they never actually needed the bailout. Why? Because its politicians have suddenly had a change of heart and realize they will be sacked the second they hand over sovereignty over to the Troika or whatever supernational entity is in charge of the country following the submission of the bailout request.

More importantly, and as explained before, as long as the yield on the bonds of insolvent European countries is sub 8%, not one country will demand a bailout. And as long as these countries reap the benefits of cheap rates, the policies of pseudo austerity will continue (as a reminder, nobody in Europe has actually implemented austerity), where nothing changes, where budget deficits continue to pile on, where sovereign debt continues to soar, where politicians continue making the same flawed policy choices, and where the European slow-motion trainwreck continues, only with a brief delay in the final inevitable outcome.

The Euro sky is falling rhetoric is stronger than ever. This type of analysis can be entirely correct from an academic viewpoint but completely meaningless in practice. They’re going to find a way to do what they want regardless of whether it would be feasible in unhindered markets.

Next year when the Euro is still together and no countries have exited, everyone will forget all of this bullshit and go back to being mesmerized by nominal GDP growth and falling unemployment rates. The sword of perceived economic prosperity is the one by which politicians live and die. They all know the consequences of terminating the Euro and if there’s one thing human beings can be counted on to do its to act in their own self interests.

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