IN WAIT AND SEE MODE ON EUROPE…POSSIBLY FOR 6 WEEKS…
News out of Europe this weekend is all over the place. If anything, this all goes to show that European leaders are having trouble coordinating their efforts. Just yesterday, there were rumors of a Euro TARP plan that would focus its efforts on enlarging the size of the EFSF in order to provide bank recapitalization and stability to the periphery countries. Then today there are comments out of Christian Noyer, head of the Bank of France, saying there is no secret plan to recaptalize banks (via Reuters):
Asked to comment on reports about a plan to recapitalise French banks, Noyer said: “There is no plan, and we don’t need one”.
So, it’s difficult to make any substantive conclusion from all the rumors that are flying. But based on what we’ve heard, we can provide some broad thoughts:
- The Euro TARP rumors and the G20 comment from last week both stated that the plan had to be announced in its entirety (if there really is a plan). This means we have to wait a full 6 weeks until November 4th for the announcement. The way this crisis is developing, I am not so sure we have 6 weeks, but that’s better than rumors from last week about a July 2012 resolution….
- Let’s be frank about a Euro TARP as is rumored – it’s a bank bailout. This is essentially more of the same – the core saves itself from implosion while imposing austerity and pain on the periphery. In a move eerily as misguided as the USA bank bailouts, a Euro TARP would use a leveraged EFSF to recapitalize European banks. We have to remember though that the key to the bailout in the USA was that it was combined with a massive fiscal effort. The crisis in the USA was perceived as a banking crisis, but it was a household crisis. So, in order to sustain the recovery in the banking sector the USA required a household fix. The fiscal package helped provide this while TARP helped stabilize the banks (but it did not save them). And as we’ve seen the household sector weaken as the ARRA effect has waned, we’ve seen signs of stress in the American banking system again. If Europe wants to create a sustainable fix to their own crisis they MUST provide a fiscal package. Instead, their efforts are going to enforce austerity and bailout banks. As we should expect from the brain trust of Tim Geithner – this plan is just a rehashed American bank bailout – it stops bankers from going bankrupt, but it does not fix the economic problem. More importantly, it does not fix the true root of the problem which is the lack of a balancing mechanism within the currency union.
- Enlarging the EFSF is not the answer. The EFSF is a reactive measure to the economic woes. The problem in Europe is not that the EFSF is not large enough or that the ECB is not supplying enough liquidity. The problem in Europe is that there is no balancing mechanism in the currency union. This is clear from the case of Greece where the size of the EFSF has not been a primary concern. In addition, ECB funding has not been the panacea that many assumed it would be. The central bank has stepped in on multiple occasions to stem the bleeding. But the underlying economic trends have persisted. The fix in Europe is not throwing more money at the EFSF or increased bond purchases by the ECB. The fix is going to come in some form of fiscal package that serves to improve the real underlying economic trends.
- Rumors of allowing a Greek default are both troubling and confusing at this juncture. The way they’re arranging this “firebreak” is to avoid contagion to Spain and Italy. But that means Portugal and Greece are thrown to the wolves. Now, again, George Osborne has tried to squash these rumors of a managed Greek default in the last 24 hours, but it’s hard to imagine that Greece won’t require some sort of write-down given the magnitude of their economic problems. The problem with these rumors is that the current plan is calling for “tens of billions” for recapitalization. That’s woefully shy of what would be necessary. French banks alone have $57B in Greek debt so any plan involving a Greek write-down is going to likely require something far larger than “tens of billions” and possibly into the trillions. Is there political will for this? Again, it’s impossible to tell.
The bottom line – a Euro TARP that is not focused on essentially recapitalizing the sovereigns misses the point here. It could certainly be bullish in the near-term, but the rumors out this weekend are more proof that European leaders are misunderstanding the cause of their own crisis. A true fix to the Euro crisis is going to require Europe writing a check to the periphery nations and arranging a balancing mechanism through some form of a central Treasury and/or E-bonds. And no, kicking the can via enlarged EFSF, further ECB funding or bank recapitalization does nothing to fix the crux of the issue. It might push the crisis out and it might even mitigate a broad banking crisis, but it will not resolve the economic imbalance that is inherent in the EMU. If they do decide to implement a recapitalization plan, it will have to be combined with a fiscal package in the same way the American plan was implemented.
In short, this looks like more can kicking (a good sized kick for what it’s worth), but not a true fix. And if implemented (these are ALL rumors right now) incorrectly (for instance, with a Greek default and undersized recapitalization), this could quickly devolve into something closely resembling Lehman Bros. The good news is that European leaders are putting something together and we can expect a plan in the coming 6 weeks. The bad news is that they still don’t seem to understand the root cause of the issue. Further, none of this helps the fact that the European economy is likely to remain weak (as austerity is imposed) and the rest of the global economy (specifically, the BRICs) continues to deteriorate.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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61 Comments
Germany won’t let them print money. That’s the bottom line here Cullen. So we should all get used to the fact that they’ll do the exact minimum to avoid a total collapse without doing enough to revive the Eurozone economies.
Indeed the Germans don’t like ECB’s keystroke money but they will eventually have to give in as the pressure mounts. What we don’t seem to realize at this point about these rumors is that they require huge amounts of agreement between core-nations. Given the speed at which Europeans have worked things out so far and their tendency to delay things, I am very skeptical. As Cullen says, 6 weeks is really not that long.
I couldn’t agree more on the fact that those measures/rumors should be part of a bigger plan to fiscally unite EU members, but unfortunately that is far from being on the table and will require MUCH more pain to be accomplished.
Overall, it is TERRIBLE that at this stage of the crisis we are still talking about RUMORS. That says it all actually…
Problem is, “fiscal union” isn’t so simple to do. It requires either a new EU Constitution, or a coup. Without public support, it will be hard for even the most skillful elite politicians in Europe to pull this off.
1. Ah, but what both France and Germany fear most is Italy and to a lesser extent Spain leaving the Eurozone. That’s why Greece and Portugal are/could be thrown at the wolfes. And that’s why Spain and Italy need to be saved. At least in the eyes of France and Germany.
2. “”Don’t believe the news until it’s officially denied”". So, there’s a plan to recapitalize French (and german) banks.
As long as the root cause of the eurozone crisis (i.e. the lack of fiscal union or other centrally managed fiscal transfer mechanism) remains, throwing any country to the wolves and attempting to stabilize the rest is a doomed battle. In an imaginary scenario where Greece and Portugal exit, then the “GPA” for new leaner and meaner euro would be higher and that will mean that Spain and Italy will perform far below the average and will find it even harder to catch up. Ergo, Greek crisis redux.
The only solution is proper fiscal union. Either that or breakup.
The Euro can be saved in its current form. All is needed to acknowledge that there’s simply too much debt. Then all debt needs to be marked down by 20, 30, 40 or 50%. Then one MAJOR problem is solved or at least A LOT OF time has been bought. That’s step 1.
But humans always want to avoid painful decisions. See what happened to Japan in the last 20 years. If they would written have off those non performing loans in the early 1990s then – IMO – the Japan would have been growing like mad in the 2000s. But instead they played the game called “”extent and pretend”" in the last 20 years.
Step 2 should be to implement federal institutions. Like european federal taxation. But that takes A LOT OF time and that’s precisely what the Eurozone currently doesn’t have.
The weird thing about the Eurozone was that everyone profited. It allowed the PIIGS to borrow at lower rates (thanks to the current account surplusses of especially Germany and the Netherlands) and those lower rates fueled consumption in the PIIGS which in turn benefited especially Germany and to a lesser extent France. Keyword: Exports.
Italy (and Spain to a lesser extent) may be a financial basket case but it’s an industrial & agricultural competitor both France and Germany fear. If Italy would leave the eurozone then the italian currency would go down against the Euro and that would hurt both France and Germany. That could be why – IMO – Germany and France want to keep Italy and Spain in the Euro and throw Greece and Portugal to the wolves.
This brings up a crucial question as to how the EFSF is currently funded. A while back, it was through callable capital. BondGirl did a great post about the correlation risk involved in this strategy here: https://self-evident.org/?p=904 If the EFSF changes, or has already changed, and actually requires countries to pony up the capital in advance, what does this do to their debt/GDP ratios? Have these additional sovereign liabilities already been figured into the debt/GDP figures?
The July 2010 EFSF charter stipulated that Germany would be contributing 27.3% of the capital to the EFSF, but that was before Portugal (1.75%) and Ireland (1.11%) went on programs. The same document has Greece down for 1.96%!! Italy is down for 12.5% and Spain 8.3%. Are these countries really going to be able to contribute here? If not, what are the new percentages for Germany and France, and what does that do to their debt/GDP?
I completely agree with your characterization of Geithner’s approach. In his mind, confidence = solvency, and this is just another crisis of confidence causing the underpricing of perfectly solvent debt instruments.
This is the main flaw in the EFSF. The funding comes from the nations themselves. So their debt levels have to worsen. It’s like having Texas pay off California’s debt (it just passes the hot potato from one player to another without really fixing anything). What they need is a supranational entity to come in and print money and create a union in the same manner that the USA has. And we all know from MMT that this supranational entity would have no solvency risk.
There’s your fix right there. It’s that damn simple. But they won’t do it because of national pride. Idiots.
Right. They can eliminate the solvency problem if they want to. But I don’t think they quite understand that creating a central Tsy would achieve that. It could create an inflation risk, but that’s a welcome development at this stage in the EMU crisis (contrary to what the Germans might say)…..
Along these lines: http://www.reuters.com/article/2011/09/25/us-eurozone-ratings-sp-idUSTRE78O30C20110925
Cullen-
In the REVIEW section of the WSJ this weeken was a picture of 4 doctors..titled Gowns ,Germs and Steel.
It showed one holding the foot the other the mid thigh while what appears to be a surgeon is amputating the leg. An old photo.
It reminded me instantly of your post a while back and I smiled innocuously by myself.
It’s a great photo one where you could Photoshop the heads with central bank heads or policymakers.
Look forward to an exciting week of rumors and news.
Cullen,
ZeroHedge also discusses this today.
http://www.zerohedge.com/news/spirit-willing-flesh-weak
…and AbnormalReturns links to this post of yours with the great headline “Six more weeks until a plan that won’t work comes to fruition in Europe.”
I see you everywhere..FT/Alpha, AR, BI, MarketBeat…who’s your publicist?
No publicist. I’ve always been a believer in the idea that by providing good and accurate content I would find this leads to a larger and larger audience. Being right matters (contrary to what so much of Wall St might have us think). I think this website is proving that to be true….And the traffic trends seem to confirm it….
Well, that and the fact you are irresistibly adorable.
(Tickles tummy).
Ritholtz wrote a book. Yves Smith too. Is there a Cullen Roche “The Way Out Of This Mess” kinda book on the way?
Alan…. Cullen will not be doing a radio show…tv…or a book. Be it a childrens book or a picture book.
Cullen is contracted until 2020 to the TPC. Please stop asking Cullen to do anything other than make us money. Even the haters are upset you are trying to take away our golden goose.
I will not warn u again! I am issuing you a TPC temporary restraining order against u.
TRIXIE- get Cullen back to work..I’ll take care of this guy trying to be cullers publicit.
LOL…thanks for the warning. I know we talk a lot about bazookas around here. Still, never thought I’d find one aimed at me!
Of course, if this is what you mean…
http://www.google.com/search?q=girl+bazooka&oe=utf-8&rls=org.mozilla:en-US:official&client=firefox-a&um=1&ie=UTF-8&hl=en&tbm=isch&source=og&sa=N&tab=wi&biw=999&bih=513
Maybe NSF.
Andy…..your funny…Bazooka.
If I had a bazooka I’d blow my head off.
I’m with u about CR I just am enjoying what we have here. As parents always say….” that is the best age”,,,
You read so many of the commentors here and it’s just a great collection of thoughtful people trying to help. Many frustrated at times..with what they see…but there’s always a voice that provides guidance or an explanation. Each time it’s a different commentator.
I’m with u Andy…this is cullens best age.
Amazing, I still hear the same old thing – “the Eurozone financial problems must be solved because the economy will suffer”.
It’s a simple answer: solve the Eurozone problems without upsetting any country’s sovereignity. That’s all you gotta do………………..Amen.
I think the Europeans understand things just fine. They are not willing to write a new Federal Constitution to do what is needed. The obstacles are political, not intellectual.
Perhaps a line from the movie, “Lawrence of Arabia” is appropriate, here:
Prince Faisal (to Lawrence): “What we need……is a miracle.”
We could use an Aqaba.
rajan has the only method i have read that might work: http://blogs.ft.com/the-a-list/2011/09/26/only-the-imf-can-solve-the-eurozone-crisis/#axzz1Z2fFuQG6
a massive tarp-like entity financed by the EU in the first loss layer, and the IMF (read the rest of the world) in the senior layer.
to get to this point, a lot of pain will have to be encountered first.
short of this, one might think that the ESFS/ECB link-up will satisfy (seems the market likes this prospect today), but for a good analysis as to why the ESFS/ECB link-up likely won’t work, see http://www.zerohedge.com/news/spirit-willing-flesh-weak
Futures trading down a little bit in the start of trading. Markets are not impressed by any of the rumors. I think the 6 week thing is bad news. The market can’t wait 6 weeks for an answer.
Surging now….+1% or so. Markets seem convinced that a real fix is coming….
After reading the recent media coverage in Germany (I lived there in the 90s), I’m beginning to change my mind about the outcome. I was optimistic given the German reunification experience, that the people, even with government mishandling, would see it through. I’m beginning to get a very bad feeling that this will not be the case, but rather the trajectory will mirror the aftermath of WWI, but with the roles reversed. The next “6 weeks” I’m not looking for a technical solution but a change of political will. This will be the defining moment for Europe to show what they have learned in the last 80 years.
Just read this …. and it shows exactly what I mean … Germany likes all the benefits, but all the problems are due to someone else … the citizens are already incredibly hot and bothered; they don’t need any BBQ starter thrown in to remind them how “right” they are …
http://www.businessweek.com/news/2011-09-25/merkel-says-greece-needs-barrier-erected-to-stave-off-default.html
<>
the excerpt somehow was deleted …
“Maybe Greece leaves, the next country leaves and then the next country after that,” she said. “They would speculate against all the countries.” A small group of euro countries would be left at the end, deprived of the euro’s advantage as the currency appreciates, she said.
…
For all the turmoil, Germans can have confidence in the euro. “We need the euro,” she said. “The euro is good for us. That is why we need to improve on what has gone wrong in the past.” Changing European treaties to make it easier to enforce budget discipline is one solution, she said. “We have to work toward treaty change.”
““We need the euro,” she said. “The euro is good for us.”
Empty statements. Merkel does not even try to explain if and how these arguments are justified.
“Empty statements. Merkel does not even try to explain if and how these arguments are justified.”
Well, our media in Germany explain this as a question of war and peace. They say: without the Euro the struggling of the first half of 20′th century will come back. I think they exaggerate a bit but are basically correct.
For your information: More than 95% of the members of the german parliament support the Euro in general. This Thursday the german parliament will vote about an increase of german guarantees for EFSF. The two largest parties of the opposition signal that they will approve. I expect a majority quite above 67%. With such a majority one could change our constitution.
I’m not so worried about the EFSF, but rather the political posturing. It’s the old joke: “of course this marriage can work, as long as the other person changes”. ;->
My take is they manage to put some can kicking thing together that is effective enough that the EZ remains intact and they all undergo a slow strangulation of Europe and the GOP critters point to them and say “Look socialism, we need even more cuts”.
You can almost predict this stuff on the basis of what will be the most painful path over the longest term for the most people.
Let me just say, you have some great articles, especially for me who is a lowly beancounter. Thanks.
Like Frenchy I have a hard time seeing parliamentary approval of such a thing being co-ordinated across the Eurozone.
To complicate things further S&P have come out and said that leveraging the EFSF would likely lead to downgrades of France and/or Germany and if not that , then the EFSF itself. This would be either due to the leverage itself or the need for Germany and France to recapitalise the ECB.
Crazy hour!
The key point here is that voters care a great deal about “taxpayer money” (fiscal policy) but don’t understand monetary policy or the power of the central bank’s balance sheet combined with independence of action. TARP legislation in the USA produced great political drama and angst, but the Fed created two trillion dollars in keystroke money to bail out (and semi-nationalize) the US mortgage market without legislative approval or much notice by the average voter (financial bloggers are not the average voter).
Based on recent past history, the key central banks (the Fed and the ECB) and their allied institutions (the IMF et al) will find a way to bail out the Eurozone, and legislative approval will not be sought, or a panic will be imminent and the EFSF will be funded by a coalition of the willing (remember how TARP was railroaded through Congress?) and then leveraged by the ECB. Draghi will not let his countrymen down, and Bernanke has a savior complex plus an infinitely elastic checkbook.
Using keystroke money to avoid fundamental reforms necessary in senescent and uncompetitive economies with entitled populations such as Greece, Portugal and Italy will eventually lead to disaster, but eventually is a long way off and politicians (and the average voter) don’t care about “eventually” until it arrives and then cannot be avoided any longer. The day of ultimate reckoning can be avoided for a long time through financial and monetary engineering. The Greeks, for example, have become very adept at buying time and living from day to day without really changing their economy or their beloved bureaucracy. The Italians are now using the Greek playbook.
There will be more terrific trading opportunities created by central bank intervention right up until the time the can they are kicking down the road blows up in their faces instead, and fundamental reform is forced on an unwilling West and its entitled populations. The invisible hand will do the forcing.
2+
The outcome is very clear, ECB will monetise debt to the end.
How can not people see it, is a mystery.
Euro is going to parity versus USD.
Really? Still? You’re still going ot ake comparisons between the USD and the Euro like they’re constructed the same? Like there aren’t glaring inherent differences in the currencies?
In the end, I think you’re probably right. But it’s far from certain.
Like Different Chris said, the US and EU are totally different systems. Imagine if, in order to pass QE1, QE2, or Operation Twist, the Fed had to pass a bill through Congress (or worse, through each faction of Congress). Would you be so confident of inflation in such a scenario? Could you be sure that the Republicans/TP would pass these bills?
This is what it’s like in the EU right now.
http://www.ft.com/intl/cms/s/0/61de3a26-e515-11e0-9aa8-00144feabdc0.html#axzz1Z241DJ4S
banking crisises turn into huge household crisises. i’m glad that they are at least addressing part of the problem. a little bit of prophylaxis for a small price. (We all know that the actual cost of TARP was far less than the size of the program.) the other part of the solution is a capital injection into the peripheral nations and a liquidity injection into their bond markets.
On a broader level, germany doesn’t belong in the eurozone. But the concept of a monetary union is too dear to europeans to drop it now. if they want to stay and make the eurozone work, they’ll need to agree to systemic transfer payments, like NY and CA subsidize the rest of the union via federal taxes, or suffer rampant inflation.
Cullen, I hope now you understand while there will never be any “Fiscal Union” in here (Europe)? At best, there will be “fiscal convergence”, that’s mean harmonisation in tax rates, VAT, fiscal simulis. But a “fiscal union with transfers” is no way.
SS wrote: “Germany won’t let them print money. That’s the bottom line here Cullen. So we should all get used to the fact that they’ll do the exact minimum to avoid a total collapse without doing enough to revive the Eurozone economies.”
Finally someone on this page understands what is going on in europe. There will be NO big bailout/TARP ore whatever, there will be only small steps just sufficiently large to prevent the collapse.
Cullen Roche wrote: “The fix in Europe is not throwing more money at the EFSF or increased bond purchases by the ECB. The fix is going to come in some form of fiscal package that serves to improve the real underlying economic trends.”
I agree concerning the economic trend. Due to austerity labour cost in southern europe dropped dramatically, laying the foundation for the prosperating economy in the future. This way is completely different of the US, where trillions of money ínjections cause global finacial turmoil.
Instead of giving advice to europe, Mr. Geithner should stop banging around in the global economy with USD-trillions and do his own work properly. There is a terrific amount of problems concerning the US debt ceiling. He should be focused on his work and find a solution of his problems before giving advice.
And theirin is the ideological divide between German Europe and the US. The latter thinks it can grow out of it’s debt balance even if that growth implies devaluing the paper it uses to pay for same. German Europe doesn’t want to know about that approach.If it isn;t painful it simply cannot be any good which really appeals to the german sado masochistic streak that’s been in evidence for at least half a century..think Marlena Dietrich in stockings and whip for the imagery.
No one’s right ,but I sincerely doubt you will get a German economist to even contemplate that possibility. This is why any real road forward will have to be an even bigger whip getting laid across German arse telling it to get in line.
Has anyone noticed that every discussion about Europe ends in a closed loop debate, like the children’s song “There’s a hole in the bucket, dear Liza, dear Liza”. It’s becomes dizzying, and seems to discount an orderly default process.
Be prepared for more pain from europe: A spokesman of Olli Rehn said that the decision for the next tranche of EFSF money for Greece will be delayed behind the schedueled meetinng of 3rd of October. Without this money Greece is bancrupt.
I mean it is up to the poeple in the US to comment all these negotiations in europe with doom-gloom-talks on the Euro currency. But even if Greece gets this tranche the negotiation game continues for the next tranche and the overnext … o lisa, o lisa
.
“Without this money Greece is bancrupt”
Isn’t Greece bankrupt since long? Only the steady transfer of money keeps it (barely) afloat.
Serious Sam wrote: “Isn’t Greece bankrupt since long? Only the steady transfer of money keeps it (barely) afloat.”
Exactly. I should have expressed this better.
Discussion of ‘solutions’ is dissonant. This problem is beyond the tools of the politicians being quoted. Nevertheless, the kabuki theater goes on: politicians are pressed for quotes as if they could actually solve this, and the quotes are reported as if they mean something. When the quotes sound contradictory, there is head-scratching. The politicians are flattered to be questioned, because they need this illusion of authority implied by the questions, the press is happy because it justifies their role, and much of the public is hypnotized by the acting.
Imagine that as summer fades, journalists ask politicians what they are going to do about providing the warmer summer temperatures we were used to having. Not wanting to look as impotent as they really are, pols declare that it won’t get any colder, that the next thing they do will stop the cooling, that the cooling is really someone else’s fault, etc.. Meanwhile, there will be ice.
Agreeing with you on the likelihood we don’t have six weeks Cullen.
My short and brief thoughts on the leadership crisis in the Western World.
“A true fix to the Euro crisis is going to require Europe writing a check to the periphery nations and arranging a balancing mechanism through some form of a central Treasury and/or E-bonds”?
Nope. We were there before. The GIPSIs did not only accrue debt during the de-facto Eurobond years (between summer 2001 and autumn 2008, the spreads were between 0.1 and 0.4 percent), and there is no reason to believe they would not restart this bad habit if they get too cheap money again.
They also did not manage to make their economies competitive. They had trade imbalances of
1,3% (Italy)
1,8% (Ireland)
5,8% (Spain)
8,4% (Greece)
9,4% (Portugal)
from 2000 to 2007, in average per year. As long as this is not changed, any additional Euro given them for bail-outs makes the situation worse. The silly principle of ‘more of the same’ (pumping even more money into the system) did so far not only not solve the crisis. Quite the contrary, it increased it’s size and momentum.
As for re-fincancing of the large European banks, they could easily do this themselves w/o stealing again from the taxpayers. For instance: Deutsche Bank had in 2009 ~ 77.000 employees, with an average salary of ~147.000€. No joke. If it reduced the average salary to a still rather high 60.000€ (of course by cutting more for top earners and less from the lower ranks), this would free ~5 billion Euro per year to bolster its core capital. The same principle would of course be applicable for all the other investment banks.
Yawn…another quarter end that is met with plenty of bullish rumors. This melt up barring real action out of Europe or an excellent GDP number this week will be met with selling next week just like the last 2 quarters.
Surprise,Denial, Recognition, Stabilization, Capitulation.
I think we’ve moving from denial to recognition quickly.
Chad M- has an interesting view…I can say that the last week before quarter end is a challenge. I feel exactly what he says…We are once again having an excellant quarter and if the market moves up from here into Oct. 1 we are affected due to our 47% cash weighting as I write. For what ever reason the Bull has been able to throw a hail marry at the end the past couple of quarters.
Trading Range will resume… I said on another post, I find myself torn between ECRI’s recession call and Mosler’s/TPC’s soft patch. Mosler’s/TPC’s optimism is all that keeps me from buying into mass hysteria.
Kyle F
Cullen will keep you centered….I think in the end that is the best chance of success.
Fear does save you from big losses…but as Coach Dunn our D- Line coach used to say during he’ll week… always said…” you can’t make the club in the tub”
Don’t let fear decide your fate…listen to TPC
So to bail out banks or countries basically requires printing of money which will get the inflationistas hyperventilating. But it seems to me that since it’s debt, i.e. loaned money, the money has already circulated through the economy, so shoring up balance sheets is only after-the-fact and the inflationary impact would already have been felt from the initial spending of the loans????
latest news that is moving the markets is that the efsf will become a support tranche for a SIV which will sell senior notes to finance the purchase of just about anything that needs to be purchased in europe.
just one question who is buying the senior notes? germany/france? gee, i don’t think that will help their credit rating much. the brics and uncle sam? not likely.
seems press releases move the markets up, then harsh reality moves the market down. guess i’ll stick with hard reality.
latest release says that the european banks would sell their PIIGS bonds to the SIV in exchange for senior debt of the SIV, then the banks would pledge the senior SIV debt with the ECB for ECB loans, thereby providing liquidity for the banks. the junior tranche of the SIV would be held by the EFSF.
this is a structured finance solution to a toxic asset problem…trying to put lipstick on a PIIG by a little structured finance 101. why the ECB would want to take levered up PIIG debt (even the senior tranche) is uncertain, but i have a feeling that the germans will not like it.
So my take away from all of the above is that no one knows what will be done or how it will pan out in reality. Meanwhile the elefant (German spelling) in the room goes unnoticed – that Germany is strangling itself to death by forcing its customers into austerity. I think people should concentrate on working out what will happen when the pfennig finally drops. Looking into mine own xtal ball: Maybe Germany has a wake up call after growth stagnates and the costs of short time working and unemployment shoot up – there is a change of coalition and Eurobonds are suddenly very attractive since Dbund yields have shot up and S&P is now downgrading Germany – for the sake of Europe Germany must be protected etc etc – in times of crisis the SGP can be suspended and keystroke money is Ok – we can always pay it back cos we are Germany and we are an export power house etc etc. oh and no one else can rebuild the smoldering ruins of Athens and Madrid.
“If Europe wants to create a sustainable fix to their own crisis they MUST provide a fiscal package. Instead, their efforts are going to enforce austerity and bailout banks.”
not only austerity, but reduced bank lending as banks delever; from wsj:
“After months without debt issuance, “the banks will be struggling to catch up,” Mr. Adamson said. “Banks will have to be looking at reducing balance-sheet positions.” Already, banks in countries such as France have unveiled deleveraging plans that include reductions in certain types of lending.”
While all eyes are correctly trained on the evolving situation in the EU, things are not getting much better elsewhere – especially in the US.
The middle class is getting stretched tighter every day and our political leaders are doing all the wrong things.
The long bond is predicting an absolute collapse of the economy.
Are any of our political “Geniuses” paying attention? Afraid they are all focused on the next election – that is the long term for them.
Good Luck!
WSJ said that one aspect of the Eurozone bailout being considered (and pushed by Geithner?) will be to give the EFSF a banking license so that it can buy sovereign debt, pledge it as collateral to the ECB so as to borrow more keystroke euros so as to buy more sovereign debt, pledge it as collateral so as to borrow more keystroke euros etc. This gets around the messy details of treaties, voters etc. with a tidy pyramid scheme.
The powers that be will find a way to a bailout, because in Western economies pain is unthinkable. Remember the Asian crisis in 1998? The West told the Asians to take the pain; they did; and they were thriving again within a year or two of sharp and painful adjustments. Instead of taking that route and bailing out Main Street to help dull the pain during reform, the USA bailed out Wall Street instead to avoid the pain. It was a strategic mistake and a gross misallocation of keystroke capital.
Germans want the Greeks, Italians etc. to take the pain of reform, and they don’t want to. Once the Germans themselves get a taste of pain and see their mercantilist advantage disappearing, we will see if they remain adamant about painful reforms that are deflationary in the short run and hurt Germany.