Friday, Jan 16, 2015

Netherlands is the next Eurozone shoe to drop

Uk.investing: Netherlands 2-Year Bond Yield Overview

Reading the FT today, they suggest that the Dutch Euro peg is the next to break with the Guilder breaking out to the upside, with the Czech Koruna breaking afterwards to the downside. Dutch yields are collapsing into negative and as with Switzerland, there comes a point when purchasing Euros to sustain a peg makes the central bank balance sheet unsustainable. These pegs are providing support for the Euro because they involve massive purchases. Once over, the Euro will weaken. This precipitates the yet unforeseen issue of Germany, because a progressively weak Euro makes Germany's membership less sustainable, as German yields collapse into extreme negative territory with beg breaking & ECB QE breaking Germany. This is like the breakdown of Bretton Woods, a cascade.

Posted by libertas @ 12:19 PM (2621 views)
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11 Comments

1. libertas said...

"The SNB’s balance sheet has ballooned to 85pc of GDP. At one point it was buying half the entire sovereign bond issuance of the eurozone."
From the Telegraph: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11348809/World-deflationary-forces-have-swept-away-Switzerlands-defences.html

And that explains why the end of the peg makes ECB QE and Euro weakness almost unavoidable, but I am surprised at the strength of the role of the Swiss in all this.

"It means that the European Central Bank can no longer keep dragging its feet on QE. Whether the ECB announces a €1 trillion blitz next week, or just €500bn, funds are already flooding into Switzerland from the eurozone."

Friday, January 16, 2015 12:40PM Report Comment
 

2. Dazednconfused said...

The Dutch currency is the Euro.

Friday, January 16, 2015 03:37PM Report Comment
 

3. vinrouge said...

I thought all the commentators said that German strength was down to being able to export in a weak euro. Leaving will not help that.

Friday, January 16, 2015 07:36PM Report Comment
 

4. Libertas said...

vinrouge, the consequence of the sequence of events unfolding for Germany is irrelevant because Germany is not in control of the situation. As the Swiss learned the second time in living memory, you can only stand infront of a freight train for so long.

Friday, January 16, 2015 08:10PM Report Comment
 

5. libertas said...

vinrouge, the consequence of the sequence of events unfolding for Germany is irrelevant because Germany is not in control of the situation. As the Swiss learned the second time in living memory, you can only stand infront of a freight train for so long.

Friday, January 16, 2015 08:10PM Report Comment
 

6. libertas said...

Germany can potentially stand in-front of that train for longer and will probably be the last man standing.

So, the first phase of transition for the Eurozone is not Greece, it is the countries outside the Euro.
- The process began in 1992 with Britain's Black Wednesday and ejection from the Exchange Rate Mechanism.
- Step 2: Iceland's collapse and falling away from Eurozone clutches
- Step 3: Switzerland's Euro peg collapse
- Step 4? Bulgaria, Croatia, Czech Republic, Demnar, Hungary, Poland, Romania, Sweden loose their peg and Britain roars away, precipitated by quantitative easing.

Step 5?: One of the strong Eurozone countries, maybe Germany, cannot suffer interest rates that are stupidly low and they exit. At that point, Greece cannot be supported, so go Spain, Italy and a few others.

That is worst case scenario. Most likely we see somewhere in-between, or this process takes 50 to 100yrs.

Friday, January 16, 2015 08:50PM Report Comment
 

7. hpwatcher said...

"It means that the European Central Bank can no longer keep dragging its feet on QE. Whether the ECB announces a €1 trillion blitz next week, or just €500bn, funds are already flooding into Switzerland from the eurozone."

Not necessarily on all above counts - I feel you are counting your chickens. The actions of SNB could well make EU QE *less* likely, as the actions of SNB have severely eroded confidence in the ECB proposal....which in any event, is unlikely to be full blown QE, on the Japanese scale.
Moreover, it doesn't follow that money from the EZ will now be automatically flooding into Zurich, as the horse has - to a significant degree - already bolted.

Friday, January 16, 2015 09:41PM Report Comment
 

8. righttoleech said...

Dutch guilder peg? Netherlands use € the guilder is no more.

Friday, January 16, 2015 10:08PM Report Comment
 

9. libertas said...

hpwatcher, with the Swiss not purchasing Euro bonds, somebody else must step in to backstop the periphery. They do QE now or risk Greek, Italian and Spanish bonds going up like a submerged beach ball.

Friday, January 16, 2015 10:09PM Report Comment
 

10. libertas said...

righttoleech, Well spotted. I meant the Danish Krone.

It was a rushed post done at work.

Friday, January 16, 2015 10:10PM Report Comment
 

11. hpwatcher said...

hpwatcher, with the Swiss not purchasing Euro bonds, somebody else must step in to backstop the periphery. They do QE now or risk Greek, Italian and Spanish bonds going up like a submerged beach ball.

There have already been numerous covert bond purchases taking place by ECB, moreover from the FT, this evening:-

ECB set to bow to German pressure over QE - Announcement of scheme likely to be made by Draghi next Thursday

I am not quite sure what that might mean....we shall know soon enough.

Friday, January 16, 2015 10:30PM Report Comment
 

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