The draft plan by the EU will put a squeeze on the credit rating agencies in order to remedy, what these government believe are, “serious mistakes” that “increase market volatility” with injurious downgrades.

Some of the retaliatory squeeze measures on the agencies include

- the ability of investors to sue the agencies for losses contrived from the downgrades,

- agencies must pick 3 specific days in a year when they can issue their ratings instead of issuing them as they desire,

- agencies must get an approval to offer “unsolicited” ratings apart from these 3 days,

- rating is to be  published after the close of business and at least one hour before the opening”,

- no investor can hold more than 5% stake in any rating agency,

- the rating oligopoly now enjoyed by the big-3 will be busted, and

- further retaliatory measures will be concocted in the future including a creation of a “European credit rating agency”.

As usual, every major economic crisis increases the power of the government… and this one is no different than any other.

German economist Hans-Werner Sinn is well known for his argument that the Eurozone clearing system, Target2, is a backdoor bailout of the bankrupt Eurozone countries.

Both ECB and the Fed have come out against this position but Sinn insists that the German deficit in the Target2 system represents a forced method of getting Germany to buy up worthless debt from the bankrupt states.

“So there was supposedly no alternative when the European Central Bank (ECB) granted its TARGET loans, when it forced the German central bank, the Bundesbank, to purchase sovereign bonds from Southern European countries against its will, and when increasingly larger rescue funds were approved,” says Sinn in an interview for Spiegel.

Other quote-worthy stuff from this interview is:

- The Ifo Institute has studied some 70 currency devaluations and found that recovery begins after one to two years. We are, of course, also suggesting just a temporary exit. Greece and Portugal have to become 30 to 40 percent less expensive to be competitive again.

- We should stop proclaiming the end of the world in the event of an exit. Instead, we should shape the exit as an orderly process with relevant aid for the banks of the country in question and for the purchase of sensitive imports. What we are currently witnessing in Greece is a disaster — and it’s not a disaster caused by an exit, but rather by remaining in the euro zone

- [Ireland is] in a position to convince investors. Spain only has to devalue by 20 percent. That’s achievable within the euro zone. Greece and Portugal are in a separate category. These are the only two countries that consume more than they produce.

Eastern European countries could fall prey to a banking problems because some countries have too many loans denominated in foreign currency says the IMF.

“Fueled by rampant credit and asset price booms, their external indebtedness surged during the early 2000s at a rate that was second only to that in the euro area periphery,” says IMF.

Some of these countries have flexible exchange rates that can adjust to the shocks but in some cases this “function is constrained by the high share of bank loans denominated in foreign currency”.

“Comparatively modest official reserve holdings further limit the capacity in central and Eastern Europe to deal with external shocks,” says the IMF.

It was only several months ago that the European banks splurged on cheap 3-year cash ECB was giving away, but now at least one Italian banker warns that the ECB needs to have a rollover plan for these cheap loans known as LTRO.

“If we have to give all that money back in two years’ time there (will be) a credit crunch and growth will be just a dream. Presumably there will be rollovers,” said Alessandro Profumo, chairman of Italy’s third-biggest lender Banca Monte dei Paschi di Siena (MPS).

Profumo said that Italian banks have a too high a loan-to-deposit and parts of it are funded by the LTRO and if those loans are to be repaid there will be no private money to replace it because Italy is “peripheral” country meaning its credit is seen as junk.

“The commercial loan-to-deposit ratio in Italy is 128 percent, with the extra 28 percent currently covered by the ECB loans. Until a few months ago the deficit was plugged by institutional investors.That is no longer the case because we are a peripheral country, so we need to understand how to close that funding gap,” Profumo said.

German Bundesbank is preparing to push for a legal case against the announced ECB bond buying program in hopes that the court would declare it illegal.

“Both the ECB and the Bundesbank are already preparing for the legal battle and are reviewing the legal underpinnings of their respective positions,” writes German Der Spiegel.

The paper says that Germany’s Federal Constitutional Court could be of an opinion that the ECB is using “arguments surrounding monetary policy… merely [as] a pretext” to launch the bond buying. The paper believes that the court leans towards such outlook because in its recent ruling on ESM the court expressed skepticism in bond buying.

The court could also clean its hands off the issue by moving the case to the European Court of Justice.

German member at the ECB recently said that bond buying is work of the devil and engaged in verbal pot-shots with the ECB chief in an attempt to undermine bond buying.

Considered Eurozone core, both France and Germany are rapidly “slowing down” posing daunting questions as to what is the rescue plan and can any growth measures emerge amid bickering over ECB buying, leveraging or not the bailout facility…

France is, most worryingly, decelerating very rapidly with the PMI registering 44.1 in September from 48 in August, a 7th consecutive month of negative growth.

In Germany, the business sentiment is dropping with the index for September at 101.4 from 102.3 in August. A poll of economists expected the sentiment number to be 102.5.

In its monthly report, German Bundesbank says that employment is decelerating but it paints a rosy and perhaps an unlikely long-term scenario that it expects the economy to keep growing.

Last week, Bundesbank’s chief Jens Weidmann brought in a touch of the occult to central banking accusing ECB of doing the devils work.

Any growth policies ..?

An essay by Richmond Fed says EUs Target2 accounting system is not a stealth bailout of bankrupt members as some in Germany argue but just an accounting method that records ECBs efforts at a bailout.

“Even if the ECB had to be recapitalized following a hypothetical Greek default, TARGET2 would not be the cause. It is merely a scorecard that reflects the long-term outcomes of the lending and collateral policies of the ECB. Those policies… may indeed represent a bailout, but TARGET2 does not obscure those actions. Quite the opposite, TARGET2 keeps a running account,” says the Fed.

The obvious purpose of this essay is to clarify the widespread claims that the Target2 clearing system distorts capital flows in Europe by transferring mainly German money to bankrupt nations such s Greece so that if these countries are to exit Germany would be saddled with close to a trillion in euros of debt. In particular, the paper singles out German economist Hans-Werner Sinn who has been whipping up fervor that Target2 system is a backdoor looting of German wealth.

“Even if Greece exited from the EMU and defaulted on all its obligations to the ECB, the Bundesbank’s exposure would increase only slightly,” say the Fed.

Currently, Germany is tasked with 27% of the ECB capital, so at 3%, the Greek share, after being divided up among the remaining members, would increase Germany’s burden to 28%.

Each country in the Eurozone has its own local “national” central bank branch and Target2 facilitates clearing of claims between entities that may transact between each of these branches.

Imbalances inside these central bank branches is not an unusual phenomena and just because one branch is the negative and another in the positive does not mean that they one is leaching off the other, says the Fed.

“Rebalancing in April 2012 brought the accounts at the Richmond Fed and the New York Fed close to zero (briefly), but the fact remains that in early 2012, the Richmond Fed was ‘borrowing’ $149 billion from the Federal Reserve System, and the New York Fed was ‘lending’ $368 billion to the System. These large positive and negative balances did not represent a ‘;stealth bailout’ of the Richmond Fed and its member banks in the Fifth District, nor did they impede the New York Fed’s ability to lend money to fi nancial institutions in its district,” says the Fed.

Essay available here.

All EU members should default on the portion of its national debt that is above the 60% debt to GDP ratio while, at the same time, states should inject capital into their banks to support intermediation while wiping out swaths of investment banking sector.

“The EU member states should resolve that all sovereign debt above a certain level will not be paid back,” writes Sahra Wagenknecht, deputy floor leader for the Left Party in the Bundestag.

Her plan also sees many banks and insurance companies going bankrupt so as a result, she says, states should also guarantee up to 1 million euros per person in savings and life insurance.

Since a sovereign defaults precludes those states from market borrowing, she also says that the ECB should directly fund these states but up to a point – capped at 4% of GDP annually.

“At the moment, the ECB is pouring money into the banks in the hope that they will invest a small percentage of it in sovereign bonds. It would be much more efficient to give this small percentage directly to the states,” she says.