Thursday, April 2, 2009

The Debts of the Spenders: Trichet Confirms Eurozone Bond Fears w/Lower Rate Cut

The ever cautious ECB cut rates by 25 basis points. This is a clear signal that Trichet and other Eurozone central bankers are fearful of the bond beast. As I have said many times before, the ECB has less room to maneuver w/quantitative easing than other nations such as the USA, Japan, or even the UK. These 3 nations are giant vacuum cleaners that threaten to suck out all the demand from the sovereign savers (the Debts of the Lenders which I call here).

Sovereign savers such as China, Japan, and S. Korea are more economically wed to America and the dollar than they are to the Euro. Why? For one thing, their economic co-dependency has been over 50 years in the making - an outgrowth of Pacific trade policy. The same cannot be said of the Socialist Europeans which don't produce anything signficant except overpriced luxury exports - which are hardly in demand at this economic juncture - and a bloated public sector.

As for the UK, their quantitative easing support derives strongly from the Middle East oil exporters which maintain significant financial outlets in the City of London (not to mention in psuedo-tax shelters such as the Isle of Man). Gulf Arabs have a love/hate cultural co-dependency w/the UK that extends beyond the financial realm to cultural and social affairs. This is a colonial era legacy that continues to cloud the minds of the ruling elite of Saudi Arabia, Kuwait, etc. w/delusions of British grandeur.

While the sun may have already set for the British Empire in terms of real politik, the same cannot be said of the colonial mentality that continues to instill a subdued environment of cultural inferiority among the Arab elite. If you think I am joking then take the expat culture for example - Western (e.g. Caucasian) managers remain preferred hires in many business circles as they are perceived to add a veil of "legitimacy" to business dealings. To be fair the same thing can be said of Asian businesses.

But I digress. Trichet issued vague assurances that the ECB would issue more substantive details in the future about quantitative easing. What he really meant is that the Eurozone has yet to get its financial house in order. In fact, some savvy traders have already capitalized on the structural imbalances of the Maastricht Treaty to short the sovereign bonds of peripheral member EU states (e.g. in anticipation of higher yields) b/c there is no such thing as a "Eurobond".


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