Mario’s Squeezy-B

Having already touched upon the UK’s shaky fiscal position, all that really needs to be added, now that the Chancellor has actually delivered his Autumn Statement, is a quick, ‘I told you so!’

The gloomy prospect is thus one of more borrowing, more spending, stealth tax tinkering, an ill-advised switch to industrial intervention, cost-overrun concrete pouring, and even the setting up of a special credit facility for exporters in a country hardly noted for being under-populated with banks and other lending institutions!

If Mr. Hammond has therefore made his debut by adopting the guise of Gordon Brown minus the sunny disposition, somewhere in Hades, the shades of Edward Heath and Tony Benn are each giving a hearty chuckle, while that of Mrs. Thatcher will have to be content with wishing Monsieur Fillon, à l’autre côté de La Manche, a hearty, ‘Bonne chance!’ instead.

Elsewhere, you may recall that, ever since March of 2015, the ECB has been buying securities to the tune of €80 billion each and every month – not far short of a trillion a year and equivalent to almost 10% of Eurozone GDP.

This intervention has been controversial from the start, not only for the stress it has imposed on pension fund balance sheets and on insurer and savings bank income statements, but because it has fundamentally impaired the market for all such securities.

When a correspondent bank wishes to hedge the risk of temporarily ‘warehousing’ the bonds sold to it by its own customers, it sells short a different, ostensibly more liquid security, then borrows it back in the repo market pending a final sale of the first bond and a return to its owner of the second.

However, the ECB’s greedy accumulation, combined with the enhanced pressure of the recent market sell-off, has made this all so expensive and so difficult to complete that it had actually halted the rout at the long end of the market while paradoxically driving yields on German paper to new, all-time, sub-zero lows at the short.

Or at least it had until the ECB suddenly woke up to the problem and issued a statement saying it was to ‘review’ its own securities lending programme, thus holding out hope that some of the artificial shortage it had created would be alleviated by easing borrowers’ access to its vast stockpile of ill-gotten securities.

Long Bunds, which had been enjoying a brief, dead cat rally, immediately swooned, dropping close to 4 whole points in a trice, while the 2-years quickly surrendered those record lows, backing up 6 basis points to where they had first started the day.

The irony here, of course, is that the ECB, while wearing its financial stability hat, is making it easier for people to push yields yet higher, something which, while wearing its monetary policy hat, it is spending all those trillions trying manfully to resist!

Oh – and for the record – German government bonds today come with yields more or less equal to and those on their Italian equivalents a full 1% point higher than what they each were before the whole, ill-judged, bond-buying bonanza first started.

Somehow, we have never envisaged Mario Draghi in the guise of a latter-day King Canute, but, to mix all sorts of metaphors into the image, it has been a rising tide – not a falling one, this time – which has at last revealed the emperor’s true nakedness.

[This is a lightly edited transcript of a piece first broadcast on WRS radio in Switzerland on November 23rd: Go HERE for a podcast]

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