According to the ECB,
"On 21 November 2008 the Governing Council adopted a Guideline on temporary changes to the rules relating to eligibility of collateral (ECB/2008/18). The Guideline will be published shortly in the Official Journal of the EU and on the ECB’s website."This sparse bit of information may have added to today's explosive $50 move in gold. So far the public is left in the dark what kind of illiquid crap, ahem collateral, the ECB will "temporarily" accept. It certainly does not instill confidence in a crumbling financial system that is hollering along with more than one TRILLION Euros in bank credit while credit markets have essentially been ceasing to work for 15 months by now.
The monetary inflation, now aimed to salvage Eurozone cross-border banks, will soon begin to trickle into the real economy, creating a situation that will resemble the Weimar Republic or Zimbabwe if everything goes wrong, politically as economically. Give it a delay of 6 to 12 months until the effects will be felt.
Leaving the world in the dark about the changes in the collateral guidelines, one is left to speculations. Maybe the upcoming financial stability review will offer more clues on the real state of affairs within the Eurozone.
On 20 November 2008 the Governing Council authorised the publication of the “Financial Stability Review – December 2008”. The review provides a comprehensive assessment of the capacity of the euro area financial system to absorb adverse disturbances and examines the main sources of risks and vulnerability to financial system stability. The review will be published on the ECB’s website on 15 December 2008.The sudden move on collateral guidelines may be the canary in the coal mine.
Given the dire outlook for overleveraged European banks still bleeding from gigantic derivatives losses I am most pessimistic that this financial crisis will find a happy end with a strong Euro.
The ECB has tripled its balance sheet since the inception of the common currency, leaving economic growth far behind.
A decade of monetary expansion will most likely end as it did in all comparable periods of panic before. Hyper inflation will help sovereigns to escape a default of nations, but all savings and investments will still be wiped out.
There will be no other cover than gold for what was last experienced by the now deceased generation of my grand parents. The system of floating currencies gets unmasked for what it truly is: A system of fiat currencies sinking at different speeds.
UPDATE: Find the new guidelines here.