McDonald points out that the various liquidity facilities created by the Fed after the bailout — that had JP Morgan buying Bear at a discount with the Fed on the hook for nearly all the toxic assets held by Bear — had the effect of allowing Lehman Brothers to carry on its irresponsible ways. “It gave Lehman access to credit,” McDonald says.
Fast forward four-and-a-half years and Draghi unveils a bond buying program that effectively lowered the rate of Spain’s 10-year notes from 7.56% to 5.68% according to McDonald. But now that the rates have dropped Spain is balking on the bailout because they say don’t need it and do not want to come under the supervision of the European authorities the way that Greece is.
McDonald fears a similar fate but expects that if Spain does not accept the bailout, their rates will return to previous levels. “Spain is being cocky,” McDonald says.
More disturbing to McDonald is just how much our markets are being affected by the various Eurozone machinations.
He notes that Spain has not even completed stress tests, comparing it unfavorably to the way Ireland — who last month reentered the bond market — has worked through its debt crisis.
“Ireland [is] coming back to the capital markets as Spain is heading for the exits,” McDonald notes. “Somebody took the pain, while somebody else has put it off.”
McDonald is not as sure are other analysts are that QE3 is coming and he distinguishes what the U.S. Fed has done with efforts in Europe. “Quantitative easing for the last two years [is about] allowing the Fed to impact employment when interest rate levels are exhausted — in Europe it is about buying Spanish bonds when the market won’t.”
He adds, “This is a classic moral hazard moment.”
As for the Fed, McDonald concluded, “I say no QE3 for now. They'll keep the powder dry; it looks like they're very close to table max.”