Ashraf Laidi on CNBC About Football & the Eurozone - June 22, 2012
Jun 25, 2012 3:26
Ashraf draws a few analogies between the Euro2012 Football match between Greece and Germany and their respective roles in the Eurozone.
Barely five years ago, it was unimaginable for Germany's "player of the moment" to be named "Mario Gomez", or have a prolific midfielder named "Mesut Ozil". Just as it has become more "accepted" for Germany's football team to have key players originating from Poland, Spain, Turkey and Tunisia, Chancellor Merkel's government may have no choice but to play by the rules of reality demonstrating flexibility in dealing with its Southern neighbors.
The Bundesbank's staunch opposition to bond purchases was overcome two years ago and will likely do so again this autumn with the inclusion of a third LTRO. Although the LTRO was solely useful for containing bond yields and alleviating banks' liquidity costs by dragging down EUROIS spread, it was beneficial in buying policymakers time. Just as the German central bank succumbed to those demands, it has grown tolerant of a temporary increase in inflation. Now Berlin may need to accept rendering the fiscal rules more flexible, by allowing an extension of fiscal targets for Spain and Greece.
Berlin is also being pressured by France and the IMF to further support recapitalizing banks directly without the involvement of the governments, as is currently proposed for Spain.
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Friday's post showing a possible top in US 10 year yields goes in line with the 10-2 charts. The left-hand chart shows the deterioration in the 10-2 spread, reflecting further flattening in the yield curve. This is usually a sign of the bond market challenging the Fed's rate hike expectations. Retail traders are often advised to NOT to fight the Fed, but this does NOT APPLY for the bond market, which often fights/challenges the Fed and wins. See full explanation inside the charts.