Aamer Ghaffar's Blog

What in the name of all that is pure and holy was the ECB thinking? This was a golden opportunity to buy back debt and increase investor confidence. It seems like the ECB has a plan that does not include loading up their balance sheet (like their UK and US counterparts did). As expected the ECB did not alter rates (and maintained the record low 1%). However, the surprise came with the decision to refrain from buying back debt. Though I do not have enough knowledge to deem the move a mistake, a lot more clarity is needed to understand what the ECB plans to do in order to control the crisis. Seeing the behavior of Europe collectively as well as the ECB begs the question: is Europe really a union or just separate countries?

Germany will get to answer this question first hand today when it votes on the aid package for Greece. Unfortunately it is not as simple as giving money and all will be fine and dandy. Even if Greece gets the aid package it seems like it is a small band-aid on a gash that needs multiple stitches. On the other hand, if Greece does not get the package things can get even worse. This would not be good for anyone, especially Germany whose rates are already being affected. Keeping this point in mind I feel Germany will give the package. The question is how much and with what conditions?

Greece has other problems aside from the aid package.  A decline in aggregate demand due to a cut in spending resulting in exports becoming more expensive, 10% unemployment, a stimulus based on borrowed money and the uncertainty related to whether or not the protests are going to continue or if they are going to get worse is making the matter a lot more complicated.

The US had its own drama with the Dow  losing 700 points in 15 minutes and the turning around and gaining 600 points in the next 20 minutes supposedly due to human error. The story right now is that a trader typed B for billion instead of M for million – sounds ludicrous and frankly speaking, I don’t buy it. There has to be more to this story.

The error did not help consumer confidence as the Vix jumped 60% punting it above the 40%  mark for the first time in a year. Even though these trades (e.g.) Accenture for a penny or P & G for thirty five dollars will not stand, its negative impact is going to linger. In the short run traders who made money legitimately will now have their trades scratched, which in turn hurts confidence. In the long term it is going to make price discovery (a process where one determines the price of an asset through supply and demand in the market place for said asset) a heck of a lot harder.

Note: The UK has a lot more to look forward to since its Debt which is 13% of GDP is going to force rating agencies to revisit it’s credit rating – even though the conservatives have promised to raise taxes and aggressively fight the deficit.

The Economy