Oil and most other markets are also down significantly. This comes on the heels of major downside action in European stock markets. I suspect European traders fear the European Central Bank will not do enough to prop up eurozone government debt and in the panic traders are liquidating commodities as well as stocks.
However, I am not sure traders are interpreting the ECB correctly. Germany is reactivating its financial sector rescue fund. The fund closed to new applications at the end of 2010. These funds will the source from where European banks will obtain capital that they will then be able to leverage up to buy eurozone sovereign debt.
Medium to long term the ECB is likely to go on a major money printing binge. It is just putting the pieces in place, in stealth fashion. The ECB in trying to hide the steps they are taking to inflate have done a good job, but the stealth money printing is on the way. I explained how it is going down in this mornings EPJ Daily Alert:
Nearly 26 billion euros of Italian bonds mature on Feb.1, with 91 billion euros of bonds falling due by the end of April. Banksters are not going to re-up on this stuff, they are trying to get out of it. This is where things start to get complicated.Bottom line, the Germans, French and Brits will be back buying gold and other commodities in no time.
Last week Thursday the ECB’s Governing Council announced a plan to offer 36-month loans to European banks at full allotment and at fixed interest rates. The ECB also loosened up the eligibility requirements for collateral. This creates the opportunity for EU banks to buy sovereign debt, use it for collateral and lay it off on the ECB and earn the huge spread. This is going to be very profitable for the banksters and will result in the banksters looking like pigs buying up PIIGS paper.
There is one problem with this plan, however. Banks in the eyes of EU regulators are over-leveraged and need more capital, so under current rules it is going to be difficult for banks to leverage up their balance sheets. But as Tim Geithner might say, getting around this problem is not rocket science. That's why a wrote in a comment to an EPJ post:
The fact that the reserve requirement was lowered suggests that the "capital requirement" will also be monkeyed with so that it won't apply relative to sovereign debt purchases.
Lo and behold, we have this announcement today from Germany.
Germany is reactivating its financial sector rescue fund as the eurozone debt crisis raises increasing questions about how banks can cover their capital needs.
Chancellor Angela Merkel's spokesman, Steffen Seibert, said the Cabinet decided Wednesday to reopen the euro360 billion ($474 billion)fund, first established at the height of the 2008 financial crisis.
The fund closed to new applications at the end of 2010. But much of the money—which totaled euro60 billion for potential capital injections and euro300 billion for loan guarantees—remains untapped.
European authorities have determined that German banks require a total of euro13.1 billion in new capital to comply with tougher new requirements. The country's second-biggest bank, Commerzbank AG, has been told it needs euro5.3 billion.
Got that? Germany has reopened its rescue fund which can supply the capital banks need, which will then allow them to buy the sovereign debt paper that can be discounted to the ECB.
Folks, the plan is in place. The eurozone inflation is coming.