Bond Market 0 - ECB 1?
For the first time in the sacred back channels of of banking history, bond managers hold much less information than their politician and central banking counterparts -- that is both in the private and public kind.
Odd since politicians are usually the most uniformed individuals on next to nothing but the private sector. Have a dinner with a Member for Parliament and you'll instantly be transported to his or her vast knowledge the latest TV hit shows, celeb personalities and latest in-house gossip.
But even the central bankers, who often wear loose, have the general charisma of a damp-rag and the looks of low-grade bank clerks, are totally disconnected to the game. They have no more skin in the game than a prestigious sabbatical from a brick-and-mortar Ivory League tower, a ticket as vaca' from teaching so they can add on to their already very expensive-to-print CV.
But bond managers are still screwed, epic competitive advantage gone, and specifically the idea that they know more than the other two do -- people have become billionaires with less.
In this case they've put their institutions in order. We thought, as the old saying goes, Europeans like the idea of laying down your shovels, sit on your asses, lite up a Camel, and that this, post-war Europe is now the new Promised Land. But this has changed and perhaps because of a higher-rate of collaboration between the different governmental departments.
Institutions within the vast EU infrastructure like the Council of the European Union, which represents the various countries and OKs provisional reforms that are shortly sent to the European Parliament, and the European Central Bank now talk on a weekly if not daily basis during crisis times. Patrick Honohan commented in a recent talk that rather than speaking in their individual silos, it's much more a recent phenomenon where intra-departmental agencies are working closely and collaboratively. The number of leaks and the fallout of using secret, private information has been next to nil, thereby increasing the trust and confidence these institutions have over the need to connect to the bond market.
But economic history has been a war between creditors and debtors, with the nature of bonds as the battleground, and it was not always like this. When third world countries – I mean emerging markets – like Argentina defaulted in 1999, it played by a so-called set of informal “rules”. In the 1990s, when it pegged the peso to the dollar, a recession struck, and the country was left with huge debts denominated in a foreign currency. No capacity to regain its competitiveness could be found beyond exports without devaluing their currency, a familiar problem in Europe today. President Kirchner opened up his country's accounts, and while the IMF watched as each page in their books was turned slowly over, the bond market began trusting Argentina again, albeit with some memory.
Turn again to Europe today, and no such offer has been made to either the bond market or the IMF. We neither know the true state, in either the numbers game nor simply in the form of informal information on each country -- be it Spain, Portugal, Ireland, Greece, France, or Italy -- can repay its debt. How exactly can repayment be achieved and where are the numbers for it? Austerity? Bond sales that will enable some form of stimulus in the near-future?
Yet the bond market continues taking the word of each individual central bank Governor over the lack of information that pervades the Eurozone Credit plight. The ancient philosopher Anacharsis put it best: “rules are like spider webs t gets the little ones but lets the big ones get away”. Argentina was forced to reveal, while the European countries shriek away at the possibility.
Even before other developed countries like the Australian banking crisis of 1893 hit, or’s bailed out the entire U.S. federal government in 1895, in each case the full-scale of the respective government's financial tomfoolery rose beyond the pile of tattered trash and political fool play, and every digit and transaction was eventually found. But now doing any of this frowned upon; using private information for discretionary policy infringes on the very rule bond managers depend upon -- know who you're dealing with.
What's now enacted in every European central bank, the ECB, the European Commission (the EU's regulator), is private information is weighted heavily over public information. Freedom of information act? No, that will never exist here.
We will never see how Eurozone countries like Greece and Ireland, who will refinance their debt in the next two weeks, may or may not be able to repay it, or if the ECB will continue to back-stop them. TARGET 2, the system that enables the Bundesbank to take a large write-down of liabilities and coordinates the transactions and bailouts between the ECB, and the various individual central bank, is so complex no one is sure of how it works.
But it's Europe's central bankers, especially Patrick Honohan, and not bond managers who will be laughing, when they find their "ECB-backed bonds"at 5% when they should by all accounts be at crisis hit-levels 100 to 150 basis points higher.
It makes sense. European institutions have gamed the system for five years now, coordinating constantly information that no one else has or will ever obtain. TARGET 2 conceals the real liabilities, the EFSM may or may not have 60 billion Euros. The ECB could bank roll more bailouts, but unlike the Federal Reserve, we're not entirely sure what line of policy it's following. Is it the Taylor Rule? Is it another rule? Which rule is it Mr. Draghi? We can't be sure.
It's as one ECB paper said on the topic of private information weighted higher by central banks than that of public information. If it's too noisy, then it is the central bank's responsibility to keep it quiet, if and only if it maintains the stability of the financial system over the cull of transparency, and trust that it permeates with the rest of the market (Baeriswyl 2011). If requiring any internal data to not be published for years, despite this data usually going into the fixed-income models that banks usually use, then so be it. Somehow, they believe and have led the bond market to believe that taking their word for it is as good as seeing the data itself.
But in this 21st century coordination problem, a classic economic conundrum that keeps Nobel-prize winners publishing, the ECB doesn't have to tell the world that it has stolen your shovels, taxed the public's asses, raised the price of Camels ever so higher, and mortgaged the Promised Land to pay off record debt, but this is a dime a dozen. It’s as the famed British trade unionist Aneurin Bevan, the man who implemented Atlee's socialist policies, once said when he learned Britain was joining the Council of Europe, “open that pandora’s box and you never will know which Trojan horse will jump out” and in this case the fake horse released an elephant into the room and its name is the Euro.
1. Romain Baeriswyl & Camille Cornand, 2011. "Reducing overreaction to central banks‘ disclosures: theory and experiment," Working Papers 1141, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.