Judgment Day Near For European Sovereign Debt, Euro

Euros (source: aranjuez on flickr)
There's a huge chunk of European sovereign debt principal and interest due in the next few months (and year). Bloomberg.com has a table of the debt payment schedule for Greece, Italy, Spain and Portugal. There could be a hard Greek default in Q1.

*WSJ: Greek PM Says Country Faces Risk Of Disorderly Default In March (WSJ)
*ECB's Knot: Euro May Collapse If Greece Pushed Out (Dow Jones Newswires)
*EU Crisis Road Map: Key Milestones Ahead (WSJ)
*Spain, Italy Debt Insurance Costs Rise On Euro-Zone Worries (Dow Jones Newswires)
*French Debt Costs Rise at Bond Sale as AAA Decision Looms (BusinessWeek)
*France Likely to Lose AAA Rating: UBS European Economist (CNBC Video)
*Zero Hedge: The Can Kicking Is Ending, Key Upcoming Dates For Europe's Patient Zero (Zero Hedge)
*Collapse of euro will hit EU, global financial system: Soros (BusinessLine)
*Greece: If we can’t finalise second bailout, we’ll have to leave the euro (thejournal.ie)
*Banking sector trembles as UniCredit shares plunge (Reuters)
*High ECB reserves are not evidence of bank "hoarding" (Alea)
*Japan buys 300 mln euros of EFSF bonds -MOF official (Reuters) - where's China?
*Germany is Biggest Obstacle to Emergency Fund: Knot (Bloomberg)
*Slowing Inflation May Give ECB Room to Maneuver on Interest Rates: Economy (Bloomberg)

The goal behind the scenes is to have an orderly sovereign default and/or contained banking crisis to prevent a strong "euro quake" that ripples through markets. The euro will probably move on whatever the ECB and Federal Reserve decide to do. If the ECB does "large-scale unsterilized monetization" (purchases) of distressed European sovereign debt, the euro will probably sell-off hard like the U.S. dollar did during the Fed's quantitative easing programs (QE1-2). However, there are EU Treaties in place that prevent this from happening (John Hussman: Why the ECB Won't (and Shouldn't) Just Print). If the Fed does QE3, that will affect the dollar, and there is also a chance the ECB could lower rates below 1% because of lower inflation. If there's a recession, money will probably flow back into the dollar as well. So, a lot of moving parts and behind the scenes deals going on.

On December 8, 2011, the ECB announced it would provide 3-year loans to the banking system via an LTRO (longer-term refinancing operation) to support bank lending and liquidity. The move could also be backdoor QE for banks to buy distressed european sovereign debt (or not, read below). It is interesting to watch Europe try to maneuver around their sovereign debt and financial crisis. Here are articles on the LTRO.

*Evidence the ECB Could Be Running Backdoor QE After All (WSJ),
*Q&A: The ECB’s three-year loans (FT Alphaville),
*LTRO Will Help Short-Term Funding, But Backdoor QE It Probably Is Not (WSJ Market Beat)
*Why ECB's LTRO Won't Stop Collateral Contagion (by Gordon Long at Zero Hedge)
*On 12/21/2011, PIMCO tweeted: "Gross: What does #LTRO stand for? 1. A shell game; 2. Cash for trash; 3. Three-card “monti;” or 4. All of the above" (Twitter) -damn
*Backdoor QE, Fractional Reserve Banking, and Insolvency (Financial Sense) h/t toni
*ECB 3-yr liquidity helping EU bond sales -Noyer (Reuters)

The ECB's balance sheet hit a record 2.73 trillion euros last week. It seems like Europe is getting desperate at this point, with the planned leveraged EFSF (European Financial Stability Facility) a few months back, and now this. Here's a quote from Hussman's most recent weekly market comment on 1/3/2011 on what he thinks will happen.

"I expect that we will see some further progress toward a "fiscal union" among European member states, but without explicit changes to the EU Treaties ratified by all of its members, we will not see any move toward unlimited ECB buying of European debt. At best, the ECB will act as a collateral-taking intermediary in an attempt to ease increasingly frequent liquidity strains in the banking system. On fiscal union, the real issue is credibility - how do you really impose fines and other penalties against countries who are already unable to pay their bills? In the end, hopefully sooner than later, it would be best for European member states to begin adding convertibility clauses into their debt, giving them the option to convert the debt from the euro into their legacy currencies. This would substitute credible market discipline for ineffective political sticks, and given that the average maturity of European debt is only about 7 years, much of it front-loaded, it would also remove the specter of massive sovereign defaults within a fairly short period of time." (source: HussmanFunds.com)

EUR/USD is currently trading at 1.2777 and actually formed a new intermediate channel support level on the chart (see previous post), but recently failed to break out of a steep downtrend line that it must destroy for at least a relief rally. The employment data today will be an interesting catalyst.