INITIAL THOUGHTS ON THE EUROPEAN BAILOUT
It’s amazing how this has all progressed over the last few years. Excessive consumer debt was rolled up into excessive corporate debt and now governments are taking on the private sector debt at the very highest levels. Charles Ponzi would be quite proud.
I don’t want to get into too many details here as the full details of the Eurozone bailout are not released, but we can come to some conclusions based on the early framework of the plan. A few thoughts:
1) Let me start by saying that this plan has teeth. Sharp ones. Early reports are totaling the plan at $962B! Much of this is likely to have little long-term impact, however, the message the EU is sending in the near-term is is strong and markets will respond accordingly. When we covered shorts late last week it was due to this sort of risk. S&P futures are up 3% as I type at 2AM EST. The markets wanted this kind of shock and awe response. That is a near-term positive.
2) The Fed’s move to open swap lines should do a great deal to calm credit markets and provide liquidity. This is another near-term positive.
3) This plan breaks the Maastricht Treaty. I don’t care what loophole we refer to. The rules have been thrown out the window. The ECB will buy bonds on the secondary market and in my opinion this totally undermines the purpose of the EMU. The Germans must be furious over this whole situation (though they’re putting on a happy face and saying all the right things in public). In my opinion, the move to bond purchases is an admittal that the Euro is a broken currency even though most of the Eurozone leaders likely haven’t realized it. The currency now has one foot in the grave. The inherent imbalances caused by the single currency system will not be resolved by this plan and will therefore continue to exist. That is not good. This plan does not address the inherent flaws in the Euro as a currency.
4) The potential use of $285B in IMF funding is a gross misuse of U.S. taxpayer dollars.
5) There are rumors of further austerity measures in Portugal, Spain and Italy. Ultimately, this is the end game. If this plan does not result in lowering deficits then the plan is a failure. Unfortunately, I am having a hard time seeing how this will be anything more than a short-term fix for a long-term problem. We have a recent precedent for the current scenario in Ireland. Last week we wrote:
“Ireland implemented harsh austerity measures in 2008 and these programs have done nothing to help matters. In fact, their deficit continues to go backwards. Since the government implemented austerity measures in 2008 their government debt as a % of GDP has actually INCREASED to 64% from 43.9%. Government deficit as a % of GDP has almost doubled. This is exactly what will occur in Greece as tax receipts will fall off a cliff and austerity measures will result in decreased aggregate demand and recession. “
Without robust growth it’s highly unlikely that Greece and the surrounding nations have the time to grow their way out of this debacle. Particularly now that the sharks have circled. Deficits are likely to INCREASE in Portugal, Greece and Spain over the coming year as tax receipts will decline, spending cuts will reduce aggregate demand and debt levels will remain high. This is exactly what we’ve seen in Ireland and I would put a very high probability of a similar outcome in the PIIGS.
In sum, this plan does a great deal to reduce the near-term strains in the markets, but without attacking the structural imbalances within the Eurozone or altering the current flaws in the EMU this is nothing more than a very solid Pele-like kick of the can down the road. Whether this results in a multi-month or multi-year rally is the trillion dollar question, but I am quite confident that this plan will not be the last we hear about Greek debt woes.
I wish government could just intervene every time we had a recession and makes things all better. Unfortunately, it doesn’t work that way. The market will punish us all for this continuing belief in bailing everyone out. It will ultimately end up in grand failure. The key here is whether the market attacks Greece tomorrow or attacks them in 6 months. We all know a second wave is coming. The voters and the market have voted against this with their protests. When will we learn? Better yet, when did failure and punishing people for bad decisions becomes such a bad thing?
Next bailout: UK? California? Japan??
UK and Japan don’t need a bailout, they have total control over their respective currency, like the US. They will press the ‘magic’ button and that’s it…
yes, yeti, the piper will be paid down the road……printing presses or not
“a Pele-like kick of the can down the road” that was a good one
“The potential use of $285B in IMF funding is a gross misuse of U.S. taxpayer dollars.”
why should they use the IMF when the central bank is printing money? In my view, they have been sitting around and were thinking “What can we use to show that we’re going all in?” and found out that the IMF is a possible source of money.
It seems the IMF only lends as preferred creditor and typically runs at a profit. Isn’t it a little hyperbolic to dwell on the US contribution through the IMF?
Not that I don’t agree this is likely to end badly, someday…
The ST fix has worked well , the European Union has blown away the “speculators” with the $971 billion bazooka. Madrid up 12% , CAC up 8% , other European indicies up 5%. Hail the printing press.Print money and we will all live happily ever after.
It looks like all the shorts have been squeezed on that one…
Problem is, if they’ve squeezed everyone in 1 day…they’ll just come back.
After all, remember the market reaction to in the first few days, then the market performance over the next few months…
Agreed over the medium/long term, but in the short term, I think that lots of short sellers lost their shirt yesterday, it was a massive upside move and they will probably be on the sidelines for a little while. I would not be surprised to see the markets creeping up for the next few weeks with renewed euphoria until the next leg down during the summer.
Plan will work if people salaries will grow in same pace (I doubt it)
You can’t solve the a debt problem with more debt, it’s that simple.
US taxpayers aren’t paying for anything; US dollar holders are, … but if EU is printing it’s all a relative Monopoly money valuation game, except for hard assets. The end game of all debt scenarios is strict default or implicit devaluation. At some time there will be a rush into hard assets and defensives.
I think this was a waste of taxpayer money…but had to be done for a show of public support.The recent EU bailout is not going to solve anything. It seems everything has been delayed rather solved. If I was French or German…why would I want to pay for this… what do I get out of this… this debt has to be repaid. Who will bailout the Govts who attempt to bailout? btw want to share a site in which can state your opinions and win great prizes.http://opinion.ezwingame.com/topics/Will-the-One-Trillion-Dollars-Save-Europe
Well, being that they were already the two biggest creditors to start with – France and Germany are essentially being bailed out by the ECB as a proxy….which in turn is using the US Fed as the actual source of funds….
may 9th, 2010. the day Capitalism officially died.
i agree kid, but we are usually on same page
TPC….Great summary you have written….thank you.
You wrote this around 2 am est? Where are you located? That is the middle
of the night!
I must also say, I think you have the one of the very best, informative, fast
release of thoughts as things are unfolding sites on there….
Keep up the great work.
Ken
I noticed some odd things that still keep me very hesitant from going long (though not necessarily going short again just yet).
1. The ECB stepped back slightly from openly admitting they will be doing QE on EU bonds. The moves in yields today was based on speculation as much as it was central bank intervention.
2. Germany’s most important state just sent the same message that Massachusetts sent by electing Brown in the most democratic state of the union. Basically, Merkel’s center right part lost the majority hold of parliament. This is a key point: this is the people saying – you went with a bailout on terms we don’t approve of. Once again, this signals a populist political shift (and what’s ironic is it was the shift from liberal to conservative here, while it was nearly the opposite over there).
3. There was a bit of a gloss over of the reinstatement of swap lines between ECB and the Fed. This means there’s a frozen credit market and that liquidity is in tight supply. This is NOT a positive thing as it means that central banks are short on the funds they need to actually perform this bailout. The markets are still incredibly expensive to go to for financing and the EMU hasn’t mentioned any change in their monetary policy, despite this going directly against their stated rules. Now, I saw this coming thurs/fri. As bonds soared, it was obvious that liquidity concerns were going to become an issue. I have a hypothesis that the only way the ECB is pulling off this massive magic trick will be via short term central bank swap funding. This is repo 105 on a massive level. To put it in simpler terms – Europe still hasn’t admitted the failure of their monetary policy (somewhere between fiat and gold standard) and instead is using OUR monetary policy to fund THEIR debts. WTF????? Are we bailing out Europe now????
4. IMF contribution is insane. I can’t even believe this is allowed to happen. We are becoming lenders to creditors who don’t have nearly the same setup to actually generate the returns necessary to pay off loans – except we have nearly no vote on this matter. This is a farce and I’m sickened that the tight lipped politicians haven’t seized this opportunity to chastise the EU as they did to us in the same situation a mere 1.5 years ago.
5. Someone mentioned it here but the Fannie/Freddie story was completely disregarded in the fray of European debt news. It was actually very significant and very alarming (and probably why it wasn’t even mentioned). Essentially, both have blown through $130bln in Government bailout money and are now asking for another $10.6bln! But even more ludicrous is the fact that they’re supposed to be paying a 6% dividend to Uncle Sam for his generous bailout – except 6% exceeds their historical earnings for most periods!!!! Why is this not mentioned???? Where is the scarlet letter here? Why was the government giving tax credits to buy new homes when defaults are rising??? This is atrocious. Read a little more here:
http://finance.yahoo.com/news/Ignoring-the-Elephant-in-the-nytimes-3670078648.html;_ylt=AgOvCjkaztbRUJ6EXMWaENq7YWsA;_ylu=X3oDMTE2a2s0YnBsBHBvcwMxMQRzZWMDdG9wU3RvcmllcwRzbGsDaWdub3Jpbmd0aGVl?x=0&sec=topStories&pos=9&asset=&ccode=
Anyway, these sort of government interventions are so classic its not even funny. They happen pre-market and are aimed at crushing shorts (despite the real sell-off coming from longs). As Chris rock put it “That train is never late!”
Glad I’m on the sidelines watching this circus….
The bankers have set the foundation for a global depression by executing the final stage of contagion led by Ben Bernanke the so called ‘student’ of the great depression.
In the 80′s the US suffered regional ‘rolling’ recessions and the impacts were faint and regional until investment bankers decided that it was time to leverage companies through ESOP’s backed by inflated DCF models and stocks collapsed in 1987, the Fed encouraged the investment houses to buy up dow futures, this stock collapse did not deter the investment bankers as they leveraged up UAL, the Japanese pulled out and stocks staggered, bankers in their greed to find markets then spread leverage in the 90′s with the holy grail of the internet and removal of financial regulation but this plan was interrupted by 911 when stocks fell, leverage remained in vogue so bankers began leveraging the American consumer through predatory revolving credit agreements then set their sights on the last bastion of American savings…the home equity market. To leverage the vast resource of homes in the US they needed the savings of Europe and the Far East. They did this by fraudulently misrepresenting the credit worthiness of asset backed securities, this was followed by the 2007 debacle.
Now that the current savings of the world have been sucked dry the bankers have set their sights on future generations (sovereign guarantees). These future generations have no voice but through that spoken by today’s citizens who themselves are trembling in fear of their economic lives as bankers remind them that economic order will be devoured if bankers choose to stop supporting global markets…so bankers continue their hunt.
When we are in the midst of the coming depression the times will define what the delusion and the madness of global crowds will do to bankers.
In Banking:
re: 1: I think the ECB was being cagey because they didn’t want to piss off the German public even more, and also, not to say we are beginning a competitive devaluation.
re: 3: What’s scary, is this is all they can announce. There are no more bullets at the Fed/USGov, other than, literally, bullets. The last asset the US (gov) has is being the last remaining superpower.
But, really, what are all the creditors and USD/Euro holders going to do? I think they are daring us to be bond and currency vigilantes, they think we’ll blink, and they are probably right. Gold has performed modestly, no rotation into defensives, and only recently has high yield seen a bit of a hiccup. EM currencies are saying they will be vigilant to hot money inflows, so the Fed/ECB just laughs at us.
Mr. Market got his next fix (or at least the promise of it); of course the addict was high today.
One trillion Euros out of thin air have brought back European (and global) stock markets to last Tuesday’s levels. Necessary, maybe; scary, yes. My hope today is that a few years from now we will be able to tell our children and grandchildren that this generation paid off its own debts (sadly, I dont believe we will).