Main Items:
- DJ reported that Germany and the ECB is still opposed to the idea of the ECB lending to EU countries via the IMF, but were willing to reconsider.
- A German newspaper reported today claims that the ECB has set a weekly limit on SMP purchases at EU20B (although that number is flexible and updated by officials at ECB meetings)
- Canadian Core CPI declined to 2.1% in Oct vs 1.9% exp and 2.2% prev.
Overseas:
- German PPI declined to 5.3% YoY in Oct as exp vs 5.5% prev
Commentary:
There is not much to say. A large, (1 trn +) unsterilized loan by the ECB to the IMF to support EU countries would do a lot to support the EU bond market, even if the loans are super senior to existing debt. Such a program would effectively take EU governments’ issuance off the table for a time, and help bring the supply/demand dynamic back into balance. Most EU bond markets are facing a liquidity, not solvency problem, as multiple EU entities attempt to delever simultaneously. France is not going to go bust, and 10y Italian CDS are already pricing in a 60% chance of default assuming a 40% recovery rate.
Whether the Germans and the ECB actually agree to such a program is another story. The reason that historically crisis episodes often end with blow out, extreme asset price action is that it usually takes a moment of extreme stress to force the change necessary to solve the problem. One could argue that we are not there yet, and so we have not seen the end of this mess.
Global Macro Trading 