Houdini Does Frankfurt

We recently had occasion to notice that a structural change has taken place in the universe of Spanish property transactions - at least as they are practiced in this town. Formerly, the cash, black money portion of the payment was made in a side room located on the very premises of the notary before whom one had signed the contract. This is apparently now frowned upon and has to be done in a car, or some other neutral spot. The effect, by the way, that this has had on the spread between official taxable values and real world sale prices - and hence, the size of the shopping bag one has to haul around to such events - has been somewhere between nil and negligible.

But this small change does raise the question of the importance of official structure in economic affairs. Take the case of the eurozone, for example, whilst looking at the instantaneous reaction of credit markets to the announcement that the ECB would begin to engage in the structurally impossible activity of buying up covered bonds. Behind the chart on the left and its generalized decimation of sovereign debt spreads lies an abrubt rise in bund (and other lower risk) yields and a marked decrease in the same for the outliers, only one of which has much to gain from this specific policy, by the way - Portugal, Ireland, Italy and Greece.*

PIIG, if you're texting.

In the face of the many pundits (both pro- and anti-euro) who have, since the beginning of the financial crisis, found irrefutable proof of the imminent demise of the EU in its structurally determined inability to enact adequate policies, this writer has always shouted back that the rule set is determined by local political necessities while the actual policies are ruled by circumstances. If we recall, it was impossible for the ECB to backstop failing banks, Germany would immediately veto EU aid to members at risk of default, and so on. The latest to begin to fall is the impossibility of the ECB bond. How Trichet and company accomplish this without upsetting the ideological apple cart is another matter, but the ECB will be financing the purchase of cédulas, pfandbriefe, and the like with some sort of what will be effectively common debt.

The reader might note that the further down the risk line that a country found itself at the time of the announcement, the more muted was the bond market's reaction to the news. That is called convergence - a euro interest rate in the making.

*Note that Spain falls in the group that saw interest payable rise - the delineator between the European haves and have-nots.

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