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ECB Tries to Avoid a Sovereign Debt Contagion


Just as the US government waited until they were pinned down by cumulative contagion, it appears Europeans are taking a page from the same war plan.

"War does not determine who is right - only who is left."
- Bertrand Russell

Late yesterday on the Minyanville Buzz & Banter, we chewed through the view that the underlying bid in the late-day tape was in-part related to anticipation of the ECB meeting. While mainstay expectations were that rates would remain unchanged at 1%, speculation was rampant that additional and aggressive actions would be taken with hopes of containing the contagion. For more, see Will Europe Order a Code Red?

As Kevin Depew shared on Tuesday, various investment banks sent notes to clients suggesting the ECB might cut the benchmark rate or slash refi-rates, or perhaps announce a quantitative easing operation similar to what we saw from the Federal Reserve. It's as if the European Central Bank was sifting through their arsenal, hoping to find the necessary munitions to scare the bears into hibernation.

We offered an analogy a few years ago in the 'Ville, one that wasn't particularly Minyanesque, but apt nonetheless. As the Fed scrambled to snuff out the fuse during the first phase of the financial crisis, we wrote that there were only so many bullets left in the gun and the last one would likely be pointed inward.

That proved true until we were on the brink of cataclysmic failure; then the government, in a last-ditch effort to win the battle of capitalism, pushed the button. KA-BOOM!

War is Hell, we wrote in real-time as we absorbed the fallout with Shock & Awe.

Please understand that I'm a tree-hugger at heart and don't enjoy discussing things like societal acrimony, social unrest or geopolitical conflicts; the tricky trifecta we together face.

There were no victory laps or back-pats after forecasting "a prolonged period of socioeconomic malaise entirely more depressing than a recession," as we did in 2006.

Indeed, we've shared various assertions throughout the last decade, some of which seemed downright silly and many of which proved true.

The Invisible Hand? Pah-leeze -- get your tin foil hat and get on the grassy knoll, that's just plain conspiracy theory…until it's not.

Questioning the credibility of -- and faith in -- the entire system? That's the populist rally cry these days, but it was heresy in the summer of 2007.

A Witch-Hunt on Wall Street? It's front-page news now, but not so much in 2007 while financials were trading near all-time highs.

Heck, I remember when we dared to share that the financial industry was technically insolvent long before it was on any media -- or financial institution management -- radar. We even lost Washington Mutual (JPM) as an advertiser after they demanded we take down Bennet Sedacca's Dead Banks Walking article, which fitted WaMu for a toe-tag. A few weeks later, they were laid to rest.

What's my point? Glad you asked.

I hope I'm wrong about what many Minyanville professors currently foresee, but the more likely scenario is that we're early. Corporate credit markets continue to imply higher prices still -- the S&P can rally another 30% plus, by some estimates, before equilibrium is achieved -- so please don't read this as a call to arms, so to speak. It's a call for awareness; a call for consciousness. We like to say "see both sides" in the 'Ville, but that's easier said than done when you're surrounded by motivated agendas.

Back to the matter at hand. After this morning's announcement that rates were left unchanged, ECB President Jean-Claude Trichet offered sound-bites such as, "Current rates remain appropriate," "The economic recovery in the euro area is continuing," and "Risks to the outlook are broadly balanced." He even went so far as to say "we didn't discuss the matter," when asked if the ECB considered buying government bonds to help alleviate stress in the system. In short, he spoke a lot but said very little.

He failed to address the percolating concerns -- and dare I say, the inevitable reality -- that the Greek tragedy will tour through the rest of the euro zone if drastic measures aren't taken in a timely manner. Just as the US government waited until they were pinned down by cumulative contagion -- flanked by Goldman (GS) and Morgan (MS) on the left, Bank America (BAC) and Citigroup (C) on the right -- it appears the Europeans are taking a page from that same war plan.

Still, just as the US had a bunker-buster in their back-pocket, the generals on the European front have one as well. We spoke about it in March and I'll remind you of it today; it's a game-changer from a structural standpoint and one the bears are scared to death of. If and when that trigger is pulled, there will most certainly be unintended consequences -- such as counter-party contagion -- but casualties of war are par for the course when you're fighting for your financial life.

Make no mistake; this vernacular is not an accident. In a finance-based, derivative-laced global economy, the stability and virility of the capital markets is a matter of national security. Our mission in Minyanville is to make sure we're armed with the necessary financial intelligence to find our way through the fray to a stable a sustainable armistice.

Good luck today.

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