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Alf Pecca

lines on the record: 71
first: 2022-08-03
most recent: 2022-08-03
sittings or episodes: 1
sources: podcast

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“Means we're going to run for elections at the end of September, and the polls are showing that we are at best going to get a very fragmented government. At worst, we are going to get an outright European critic slash skeptic coalition. And obviously that coalition increases the probability that Italy might decide to apply some pressure and try to get out of the Eurozone. Now, you have seen now this proxy for redenomination, which is the difference between the two CDSs pricing to levels which are basically amongst the highest we have seen over the last 10 years, close to 2018 where we had a government crisis and we really had a government coalition which was outright Eurosceptic back then. So investors are becoming pretty nervous about Italy and I have to say pretty rightly so.”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“has actually spiked up very quickly in 2022. This is the result of a couple of things. It's the result of the ECB attempting a tightening monetary policy. And every time they do, which means precedent, they stop quantitative easing, they even suggest they're going to hike. They did a hike of 50 basis points, the largest since at least a decade in the Eurozone all at once. They obviously apply pressure on countries like Italy. And the more pressure they apply, the more probabilities there are that theoretically Italy could choose at some point to just release the pressure by exiting the Eurozone. It's a very residual small probability, but it goes up in terms of pricing. The second is that Draghi's government just fell in Italy. So we don't have a government anymore. Literally, we don't. We have a situation where we have an energy crisis. The economy is weakening. The European Central Bank is tightening monetary policy, and we do not have a government anymore, which”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Italy re denominating their debt into their own previous domestic currency called Lyra. Now, if you want that double protection, you need to buy another CDS, which is a 2013 or 14 law, one of the two. And this new CDS protects you against that risk as well. Now, why am I mentioning these two CDSs? It's this chart for people who are listening shows the spread between the two CDSs. So if one protects you against red denomination, the other doesn't, you can understand the spread or the difference between the two effectively encapsulates the risk of re-denomination or a proxy that investors are assigning for the risk of re-denomination or how much are they willing to pay more for the other CDS that also protects them against this risk marginally. And the chart shows that the proxy for this redenomination risk, or what I also call the Ital exit risk, so the risk that Italy basically exits the Eurozone.”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“One CDS as a regulation that going top of my head goes back to 2005 before the Great Financial Crisis. And if you buy the CDS on Italian government bonds under the law of 2005, you will be protected against the risk of default, but this CDS will not protect you against the technical default that Italy can actually incur to if they would choose to re-denominate their debt from euro back to Lira. And now you can understand that if you bought some bonds denominated in euro, you might not want to have some bonds denominated in Lira because if Italy goes out of the eurozone, Lira will obviously devalue big times against the residuals in the Eurozone, which will be mostly Northern European countries at that point. So you might actually want to be protected against that event too, right? You want to be protected against Italy defaulting and you also want to be protected against.”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Okay, so Preston, this is a chart I shared on the macrocompass. It's the free newsletter that I post once a week. And we do some deep dives into certain topics. And in this case, we're talking about Europe. And a CDS is a credit default swap. And those contracts became very famous during the great financial crisis for a bunch of reasons. But what they do really, they allow owners of certain risks to have a product that hedges them against the default risk, especially the credit risk. So a risk of the issuer of a certain bond, for example, to default, if you buy a CDS, you're going to be protected against this event. Now, the CDS product became very, very much famous after the Great Financial Crisis. They are still pretty traded in pretty decent size, actually, to the point that if you look at the CDS market in Europe, there are two different CDSs.”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“To that point because Europe is a place where fragmentation is very high and cohesion is very low until problems reach a certain degree where the geopolitical importance of the Eurozone and the Euro in general needs to be preserved and therefore if the heat in the kitchen is becoming really really unbearable at some point they're going to close themselves in the room and try to find a compromise solution is always a temporary band-aid But if you keep adding temporary band aids one across another, then at the end of it, maybe in 20 years you can imagine we'll have some sort of ill-curve control in Europe. It's going to be pretty complicated to engineer though because of this legislative issues and inherent differences in DNA as well. Really a Spanish guy is just a different guy as a different DNA, as a different interpretation of social policies, of economic policies than a”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“For reference in 2020, the European Central Bank, I calculated, has bought more bonds than all governments across Europe had issued. Try to think of that, Preston, for a second. If you're a private sector entity in Europe and you are a pension fund, you are a bank, you are an asset manager, the central bank is telling you, dude, you want to buy some bonds? I'm sorry, you have to compete with me. I'm going to crowd you out. I'm going to take all the newly issued government bonds this year by all the governments in the Eurozone. I central bank, I'm going to buy them all. And if you want to buy some more, you basically have to compete with other owners of government bonds around there. So you have to bid up the prices to make sure that they can sell them to you. So you're crowding out the private sector completely. If a German would have heard this 10 years ago, that he would be like, what? We're never going to allow that. And in reality, we went to that point.”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Slowly but surely we're going to get there, Preston, in some form of another. It's going to be a very rocky road ahead and it's not going to be simple. But you're seeing that the Germans would have never dreamt of allowing QE in the first place 10 years ago. If you would have asked any German, we are going to get the European Central Bank just print bank reserves and lift all the bonds out there, all of them.”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Understand the legislative issues and the fragmentation within Europe, you also understand that a very extended and effective or spread control or yield curve control in Europe is also very difficult to apply.”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Programs need to be defined in size. They need to be of a certain defined size. You cannot just say, I will indefinitely print as much as possible if you try and hit this threshold. Generally speaking, German regulators and let's say the law in Germany doesn't really allow that. So when you try Ilt Control in Europe, it becomes very complicated because as a central bank, how are you going to defend Italian government bonds saying that you have only a certain amount you can buy, President? How big does that amount need to be? Hedge funds can use leverage. They can also become very, very large in selling this Italian government bonds if they think that you will have to give in at some point as a central bank. They can try to break the ECB if the ECB commitment is not very strong. So while Europe might be the best candidate from a macro perspective and I tend to agree, if you”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Curve control is a smart way to make sure that on a quantitative side, it looks like you are not expanding it to a very large extent because you have this conditionality you just sent as a message to the private sector that as they try to hit that level, you will ultimately expand your balance sheet. And it's a messaging tool. It's a some sort of a forward guidance tool as well to a certain extent that is more qualitative than quantitative necessarily. Now, in Europe, The problem with that is, again, a bureaucratic legislative problem because the German Constitutional Court has somehow greenlighted quantitative easing programs that they always oppose from a domestic perspective in Germany because of the history with the Weimar Republic and inflation getting out of control. They are really not happy with qualitative easing programs. They sort of greenlighted them. And one of the main conditions the German Constitutional Court put was that quantitative”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Issuance anymore, Preston, because there is somebody else who's doing that, who's the central bank. Now, in ill-to-font control, the interesting thing is that, as we have seen in Japan, you don't necessarily need to buy all the bonds out there, but you can effectively signal to the private sector that if they want to sell bonds and make yields higher, because as you sell bonds, prices go down and yields go higher. If yields are going higher than a certain level, they would then basically conditionally to that level being hit by as much bonds as possible to that level to make sure you can never cross that. Because the private sector has a limited balance sheet capacity. We cannot expand it however we want. We need to get credit to expand it, to get credit. You need to have certain features and you need to pay back and to service this newly created credit with cash flows, with salaries, with earnings. For the central bank, it's completely different. I can just expand it however they want.”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so the idea behind ILCRIF control is that you as the monetary policy effectively have an infinite balance sheet that you can expand in your own currency. And as long as your currency is domestic, it's the one you can effectively have jurisdiction on, you can print bank reserves out of nowhere digitally. You can expand your balance sheet on the liability side by having more bank reserves. You just created out of thin air. And you can use these bank reserves to extract bonds from the private sector and effectively exchanging these bonds for bank reserves. So you take these bonds away from the system and you say, guys, don't worry about those bonds. You don't have to buy them. I'll buy them. And you give in exchange to the private sector this newly created bank reserves that you just basically created out of thin air. These bank reserves go into the banking system. They remain stuck there. They can't get out. But effectively, the private sector doesn't need to worry about absorbing.”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“which is skyrocketing in Europe as well, they actually could never get there because you would have other issues to face with, which is the fact that Italy is at risk of blowing up if interest rates are effectively brought higher and higher without a backstop facility. So it's nothing else than giving in something which is anti-fragmentation tool to obtain something back, which is a tighter monetary policy for longer and a more sustainably tighter monetary policy to actually fight inflation, which is becoming a domestic policy issues as well for countries like Germany.”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“So right now, the anti-fragmentation tool is effectively what Germany, Austria, Finland, the Netherlands, and all Northern European countries had to give in to obtain something in return. And what they're obtaining in return is the European Central Bank hiking interest rates. You have to think about it, Preston, in a way that if this tool wouldn't exist and it wouldn't be effective at all, every time the European Central Bank would even try to hint that they're trying to raise interest rates, higher interest rates hurt weaker economies, weaker balance sheet economies like Greece or Italy or Cyprus in a disproportionate way. So while Germany, the Netherlands,”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“So there are a bunch of conditions that basically have to be assessed by external bodies. The European Commission, the International Monetary Fund, and all other external bodies from the ECB. Effectively, the ECB is looking for political cover. It's looking for other institutions to tell them they have a green light to come in and backstop the widening of these spreads. But before these countries can effectively convince all the other bodies that they are implementing reforms, that they are on a good path, there is a time inconsistency issue here because investors are not going to wait for all this bureaucratic body to sit and give a verdict and then wait for the central bank to put things in action if they feel that things are getting worse, they lack very fast and put even more pressure on countries like Italy or Greece than we are already seeing right now.”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“make sure that if investors want to sell or short all the Italian government bonds out there, for example, they know they're going to be facing the wall. And the wall is an authority with an infinite, potentially infinite balance sheet, which is the European Central Bank, that can act as a backstop and can say, you can sell as much as you want, we're going to buy all of that. So the idea is to have an unlimited bond buying tool, but only to use it as a backstop if the situation gets worse and worse. Now, the problem is the conditionality that the European Central Bank had to attach to this tool. It's not like, hey guys, if you sell Italian government bonds and the spread against Germany goes to this level, we're just going to buy them all. But they also had to put some conditions in there. And the conditions are that the country doesn't need to have macroeconomic imbalances. The country doesn't need to be in an excessive deficit procedure, the debt sustainability pattern needs to look okay.”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“So the new anti-fragmentation tool is effectively supposed to be a full backstop for country spreads to avoid that they widen to a level where the monetary policy can't be transmitted equally to all jurisdictions. This sounds very complicated, but indeed what it really is, is to make sure that Italy, Greece, Cyprus, Portugal and Spain to a certain extent, their government bonds spreads measured against Germany, which is effectively the benchmark safety net in Europe. This government bond yields the spread against those bonds and the German bonds don't widen to levels that signal the fact that investors have lost confidence in the Eurozone to remain a cohesive project. So you need a backstop for weaker countries to make sure that the monetary policy is spread equally across all jurisdictions. And now they think of that prestigent is they effectively say, all right, we have to”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“And when you start applying pressure towards the cracks, you start to see some problems emerging. And that is where the firefighters normally need to come in. And the firefighter tends to be the central bank at the end of the day.”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“It's a band aid to try and basically close a huge wound. And the wound is the structure of the Eurozone prestige. I mean, the Eurozone, and I'm European, I guess my accent is very clear. I'm Italian. Can't do anything about the accent, guys. The Eurozone is a very fragmented structure. And that's why you need an anti-fragmentation tool. And the fragmentation comes from the fact that we have one monetary policy for 19 different jurisdictions. We have one currency, one monetary policy setting, but 19 different fiscal policies, that in principle you try to harmonize under certain restrictions that are never respected at the end of the day. And also you have 19 different economies that have different structural features from each other. We don't have a banking union as well in Europe, so each bank has its own pros and cons and its own structure. It is really a fragmented structure.”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Preston, I've listened to plenty of your interviews. It's actually fun to be on this side this time, to be the guy you'll be interviewing, looking forward to this.”
2022-08-03 · We Study Billionaires · BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT