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Thursday, August 25, 2011

Beware the Nones of September

Germany is indicating a potential disinclination to play the Fed game:
“I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence,” [German President Christian Wulff] said....

The blistering attack follows equally harsh words by the Bundesbank in its monthly report. The bank slammed the ECB’s bond purchases and also warned that the EU’s broader bail-out machinery violates EU treaties and lacks “democratic legitimacy”.

The combined attacks come just two weeks before the German constitutional court rules on the legality of the various bailout policies. The verdict is expected on September 7.
It's hard to imagine that the German court won't just rubber stamp the blatantly unconstitutional, overtly illegal actions of the EU and ECB in the same way that the U.S. Supreme Court has seen no evil in the illegal actions of the U.S. Congress and the Federal Reserve.

However, the Germans aren't always predictable, they do tend to be sticklers for the letter of the law, and there is no question that if the letter of the law is respected, the bailouts will be pronounced illegal. The possibility the court will do so may explain this recent market development:
Insurance on the debt of several major European banks has now hit historic levels, higher even than those recorded during financial crisis caused by the US financial group's implosion nearly three years ago. Credit default swaps on the bonds of Royal Bank of Scotland, BNP Paribas, Deutsche Bank and Intesa Sanpaolo, among others, flashed warning signals on Wednesday.
Interesting times, interesting times....

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