In his latest note, Nomura’s famously bearish strategist Bob Janjuah pours cold water on the idea that the ECB can just snap up all the debt and make the eurozone crisis go away.
First, he doubts it will happen, thanks to the Germans.
Second, if it does happen, he argues it won’t fix anything, and he’ll just use any relief rally as another opportunity to short.
Eurozone solutions: With the late October “deal‟ now in tatters, and with subsequent developments in Italy, in Greece, and in the market pricing of French risk, the future for the eurozone now seems to be all about the ECB and outright monetisation. It seems amazing that the same folks who insisted that Greece would not default, that the eurozone was solvent and was just going through a CDS-trader-driven liquidity squeeze, that kicking the can down the road was a viable plan, and who trumpeted the late-October deal, now think ECB monetisation is the solution. I would urge extreme caution, again. In my view, the eurozone can either go down the path of full political and fiscal integration, which clearly means a smaller neue-eurozone and default by the nations that don‟t fit in with this hard-money Germanic ideal or it can take the soft-money Latin/UK/US-style soft-money route, where the ECB agrees to unlimited monetisation. It is clearly a case of “either, or‟, but not both. These are two divergent policy paths.
Germany appears to be adamant that full political and fiscal integration over the next decade (nothing substantive will happen over the short term, in my view) is the only option, and ECB monetisation is no longer possible. I really think it is that clear and simple. And if I am wrong, and the ECB does a U-turn and agrees to unlimited monetisation, I will simply wait for the inevitable knee-jerk rally to fade before reloading my short risk positions. Even if Germany and the ECB somehow agree to unlimited monetisation I believe it will do nothing to fix the insolvency and lack of growth in the eurozone. It will just result in a major destruction of the ECB‟s balance sheet which will force an ECB recap. At that point, I think Germany and its northern partners would walk away. Markets always want short, sharp, simple solutions. This is why the begging bowl is out for ECB unlimited monetisation. But, as in the immortal words of Messrs Jagger and Richards, „you can‟t always get want you want‟.
There’s only one thing that would be worse in Janjuah’s view…
I firmly believe that any conditional or finite monetisation would actually be the worst idea (most of the downside, very little of the upside, of infinite monetisation), but probably the most likely „compromise‟ if Germany were ever to “give‟ on this issue.