On October 31 current ECB President Jean-Claude Trichet will step down and the head of the Bank of Italy Mario Draghi will take over. Draghi may be the candidate favored by the markets since the current President, Trichet, is calling for austerity instead of money printing.
In a recent speech, Trichet stated that Greece will get their loan but the European crisis has become systemic. His assessment of the current situation is correct since the markets are now taking a much closer look at Italy and Spain, two markets that continue to have significant difficulties. Once the Greek problem is "resolved" eyes will then turn to his homeland Italy where the government has been fighting an austerity package for months and Draghi's successor.
Right now Berlusconi faces 4 criminal trials but no credible opposition has emerged leading to a potential leadership vacuum in Europe's third largest member. S&P recently downgraded Italy citing increased political instability as well as rising borrowing costs. The only solution for Italy's political mess may be a monumental crisis resembling that of Greece requiring the country to get its act together.
As the head of the ECB, Mario Draghi, a dove, will likely embark on immediate rate cuts and money printing utilizing all tools at his disposal to throw money at the problem much the way Bernanke is handling the crisis in the U.S. This, when combined with attempts to leverage the EFSF, will set Europe up for one of the greatest short trades imaginable as European leaders fail to realize that the solution to this problem is not money printing and leverage. The use of leverage for the EFSF will put the credit ratings for France and Germany at risk leading to a selloff and more uncertainty. All of this is in the face of euro-area inflation that came in at 3% for September and 1% growth from Germany, the engine that has been carrying Europe.
Over the next few months I expect the gold (GLD, DGP) and silver (SLV, AGQ) markets to reawaken with a vengeance as the market begins to quantify just how deep down the rabbit hole France and Germany have taken the rest of the EU. As for short trades, all of Europe will become a short candidate with banks at the top of the list. The fact that French banks are pushing Sarkozy to negotiate the debt writeoff down from 50-60% tells me that they must be in worse shape than we imagined.
Specifically, UniCredit SpA (OTCPK:UNCFF), Deutsche Bank (NYSE:DB), and BNP Paribas (OTCQX:BNPQY) seem most at risk. UniCredit, due to a 245 million euro seizure a week ago on a tax evasion probe. Deutsche Bank and BNP on worries that since they will be allowed to write up to debt and avoid raising additional capital it makes their underlying balance sheet even weaker in my eyes.