Macro Brief: Governments need to have both shepherds and butchers.

Governments need to have both shepherds and butchers.
Voltaire

 

This week is all about whether Germany will or will not fully commit to fire-wall. Clearly this weekend's press have the compromise ready: Chancellor Merkel will allow ESM and EFSF to run simultaneously, but only for one year while the EU led for Olli Rehn is looking for a more permanent size.

 

The math is as follows:

 

440 billion EFSF (200 billion committed to Greece, Ireland and Portugal) + 500 ESM = 940 billion EUR-200 billion EUR=  740 billion EUR.

 

In the German version this only run until July 1^st 2013, while EU Commission and Club Med wants it to be permanent: Whatever happens I think the below chart from Bloomberg Brief indicate the real size needed in to make the fire-wall attack free: (The numbers are only bonds maturing up-and-to 2013). Market is looking for 1.5-2.0 trillion as the magic number – a number big enough to buy time for reforms.

 

Maturing debt from now to end of 2013:

 

As always it is all eyes on Germany – will they or will they not – that's the only question we need to ask. What all other countries do or think is irrelevant – get used to the new Europe – one master, one decision maker – no wonder the fathers of Europe is concerned!

 

Meanwhile in Spain where the title race is still relatively open between Real Madrid and Barcelona J, things are going from bad to worse – this weekends local election in Andalucia, where Spain's centre right People's Party failed to secure an outright majority, leaving Prime Minister Rajoy without a mandate to carry on with tough austerity – was a bad start to week where we on Thursday will see a major general strike aimed at… Yes, you guessed it: Austerity measures.

 

 

The European story remains one of major promises and no actual reforms. A low interest rate and an extreme sense of "security" created by the illusion of easy money and low interest rates forever, but as I wrote  in the piece: Interest rates: the market has it all wrong  this weekend, we could be on route to an exit strategy from central banks which at a bare minimum will be a goodbye to "unconventional measures" and if so, the low in interest rate cycle is in place – and the interest rates will continue on down-ward projection in 10-30 years, but increase in the very short-term (0-2 years) as the focus needs to be on reforms. The only way central banks creates a proper exit from unconventional is to hand over the torch to reforms from governments and politicians. Unlikely,yes, needed? Absolutely, otherwise we are doomed to 30 years of Japanisation.

 

 

Otherwise we have a busy week with plenty of data  - note how US data has been disappointing keeping the "mean-reversion" we firmly believe in: (Market goes from expecting too little improvement to believing in too much growth):