Stop the (printing) press! If only we could…February 9th 2012

Hands up anyone who is surprised that the Bank of England has added another £50 billion to the quantitative easing pot? The same hands will also believe that the Greeks have agreed terms for the next bail out tranche with the Troika (the European Union, the IMF and the European Central Bank). This ongoing epic odyssey of the voyage to nowhere has grabbed the headlines, but the BoE’s quiet announcement is equally significant to us Brits.

 Central banks never utter the words quantitative easing, so the Bank calls it an addition to its “asset purchase programme”, which was only hiked to £275 billion back in October. The accompanying rhetoric states that inflation is on the way back down and may fall below their target of 2%, mainly as a result of the VAT increase last January falling out of the equation and lower energy prices, (despite Brent crude being over 10% higher Y-o-Y in sterling terms..); a convenient excuse perhaps.

 The ECB has been shovelling money out to the European banks with indecent haste and their cunning plan is that those banks will then use that cash to buy junk bonds (Club Med sovereign debt) at much higher yields than the cost of borrowing. So far it hasn’t worked that way as the banks have just parked the money back with the ECB, but it has put a floor under the short end of the bond market.

 This makes the likelihood of successful bond issuances by the PIGS marginally more likely, but left the BoE wondering when the markets will wake up to the fact that our “emperor” is wearing little else than a very ragged pair of shorts. If they can keep up the illusion that the flight to safety “wings” he has tattooed on his chest will keep us airborne, they may postpone the inevitable for a time whilst attention is focussed on the rest of Europe. Technically the UK is part of Europe but then politics has rarely had any truck with mere geography…

 And so to Greece. Like many European nations the Greek government is a coalition party, but with a minority, making national unity on the issue next to impossible. Already a two day strike has been called and frankly the projections for GDP “growth” and debt repayment are utter nonsense; a point not missed by the IMF and the German Finance ministry who, let’s face it, are running the show.

 The markets meanwhile are in a sanguine mood, but why wouldn’t they be with all this central bank money sloshing around the system? If Greece was the only problem in Europe a solution would have been found ages ago, but it isn’t and we are back again to moral hazard, which I banged away about yesterday. If the Greeks get a deal then Portugal et al will be in the queue faster than the central banks can electronically print the money to pay them.

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