All The Roads Lead To Default, But Which Will We Take?

Tyler Durden's picture

From Nic Lenoir of ICAP

As a disclaimer to this update, I just want to reiterate once again that I firmly believe that the Euro is not viable, at least certainly not the way it is designed and I think the flaws in its conception are so profound that dissolution makes the most sense.

With this assumption in mind, let us look at what the solutions are to the current woes. The individual bail-out route is not an option. When dominoes fall in panic the speed at which they fall tends to accelerate exponentially. Rewind the tapes to late July 2007: American Home mortgages files. The market goes on to make new highs but in January Bank of America takes over otherwise soon defunct Countrywide and by March Bear Stearns is belly up. The forced hand out to JP Morgan appeases the market temporarily, but by early September Fannie and Freddie are de facto nationalized, and so is AIG, Lehman collapses, Wamu is taken over by JP and at that point the government has no choice but backstop the entire system. Well, this is not unlike what we are witnessing here: We first had Iceland in November 2008, then Greece in the spring of 2010, now Ireland. Make no mistake if you let that fester enough or decide to bail them one by one without attempting a larger scale resolution by January Spain Portugal and possibly Italy will have been downgraded several notches, LCH will have raised the margins on all those bonds, and French and German banks will start dragging their country down the same slope.

This is precisely why Germany is at it trying to push for restructuring, as they fully recognize that if the burden is carried by governments exclusively contagion will be much sharper so they are hell bent on having the private sector share some of the pain and thereby not dilute their balance sheet as much. They also probably recognize that if the ECB, the IMF, and the richer countries in Europe shoulder the load, they give free reign to private investors to load up on stocks and precious metals, and reinvest some of the profits to pay for the cost of long CDS positions against sovereign entities, and unlike the Fed they do mind. It is also probably a good way to make sure governments play ball enforcing austerity. Now whether the market would handle well a default is a separate question. I personally think it would not, and if Irish debt holders take a haircut it could well make Portugese and Spanish bondholders quite uncomfortable, but again as pointed out earlier I don't think there is an easy solution. If debasing the Euro is not an option, the best might well be for the countries in bad shape to simply exit the Euro. That too would have a domino effect but sometimes you have to cut your losses.

So here are the potential solutions:

I/ Bail-out countries individually as has been the case so far: the market rejected Ireland's bail-out so it is extremely unlikely as failure is quite obvious and Germany is opposed to it

II/ Outright monetization by the ECB: so far intervention has been sterilized which has not proven too helpful. Germany is again highly opposed to this type of resolution.

III/ Create a mechanism that involves the private sector and the EFSF: Germany has been pushing for this solution from day one but obviously no solution has been found, and if you start restructuring Irish debt you run the risk of a flight out of other PIIGS's bonds

IV/ Let the PIIGS out of the Euro, or the PIIGS show themselves out / the Euro is disbanded

I cannot stress enough that an entire generation of politicians in Europe view the Euro as their legacy (they already had tried a scheme to control exchange rates which failed in the early 90s). They are extremely unlikely to let go easily as they think Politics should prevail over finance (and reason, gravity, common sense, law, decency etc...). But because deficits are structural, European economies are too different to be managed under the same exchange rate and borrowing rate (Spanish and Irish housing bubbles anyone?) and eventually this will prove too much to overcome and outcome IV will prevail.

In terms of price action US treasuries were dragged lower this morning mainly because Libor rates spiked. We have had heavy volume trading in the front Eurodollar contracts as the market braces for worsening credit. This shall prove an opportunity to buy the front end in US treasuries as seasonals are usually good in December, the uncertainty in the market should provide a decent safe heaven bid, and a lot of longs have been flushed out the past few weeks. I also continue to favor being long schatz. Equities have been well supported as the Fed injects billions of liquidity in the system daily. A break above 1,204/1,212 would be resolutely bearish, but conversely if we start dropping below 1,170/1,172 the market has a solid 40 ticks of further downside in S&P futures. I feel that if liquidity is the main driver and the reason to get long equities, then precious metals make more sense until we see a lot of improvement in data. Watch for a break above 1,390 which is now resistance in Gold.

Good luck trading,


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Fish Gone Bad's picture

The early downturn in the Great Depression was caused by the US stock market popping.  The subsequent legs down were from sovereign defaults.  No one wants to be known as the guy that made people suffer (other than Stalin), so implementing austerity programs are just not going to happen.  The only way out of this mess is for there to be a whole bunch of defaults, just like 80 years ago.

MrSteve's picture

The defaults were called the Rhine Syndrome, wherein all the countries east of the Rhine defaulted. The failure of the KreditAnstalt bank in Austria was the kickoff for the American bank failures and Crash of 1929, following the Florida real estate collapse. See the Marx' brother Cocoanuts, March 1929- "boy, can you get stucko".

chopper read's picture

Fed expanded money supply by 62% in sympathy with Great Britain's recovery from WWI, then contracted the money supply by 31% in order to stave off fleeing capital after the "pop", which vaulted the US further into Depression.  

TheEmperor's picture

I am sending my apprentice, Darth Bernanke, to Brussels.

He will teach you the power of Monetization, he is your new master.

Sudden Debt's picture

Tell him to visit the Cantina!

Good music and entertainment!

BobPaulson's picture

Patience, my friend. In time, he will seek *you* out, and when he does, you must bring him before me. He has grown strong. Only together can we turn him to the Dark Side of the Force.

chopper read's picture

clearly, this is what happened to Greenspan when he demystified their clever ruse. 

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

- Alan Greenspan

Dr. Engali's picture

That wizard is just a crazy old man. Now, tomorrow I want you to take that R2 unit to Anchorhead and have it's memory erased. That'll be the end of it. You belongs to us now.

AnAnonymous's picture

I am sending my apprentice, Darth Bernanke, to Brussels.

He will teach you the power of Monetization, he is your new master.


You made me laugh with your comment. What would Ben Bernanke do? Mr.Bernanke operates  an apparatus known as the FED.

Eurozone does not have a FED. The ECB is by no way a FED. Europeans simply do not possess the facilities to monetize the way the US can. Monetization in Europe is no funny money flushed around the world, knowing fully it will bring back real wealth against it. ECB emissions of credits is much closer to real credits than what the FED usually does.


Why do you think Europeans establish a swap line last time? Because they have no FED like facility on their own. They rent the FED facility to perform the job.

Mr. Bernanke is an exceptional intelligent man. But like anyone, he is limited by the tools and the resources he can use. And this said, in spite of his exceptional intelligence, he takes options that a commonly intelligent person comes up with. Very telling.

RobotTrader's picture

The market may eventually crack.  But for the most part, this has been the first "buy and hold" market since the 1990's in many growth sectors.

I'm looking for weakness, but other than the banks, I can' really find any.

TATA up another 9% today after a huge run already.

-273's picture

Guess none of those investors read the 2010 edition of the World Energy Outlook either where it said production of conventional crude oil peaked in 2006. I stopped trading a couple of years ago, but the higher this market rallies the more I am tempted to hop back in eventually with a massive short as there is no doubt it is eventually going to crash even harder than before. The higher it goes, the further it will fall as there will be no more sustainable growth without cheap abundant oil.

RobotTrader's picture

If Peak Oil was legitimate, you would not see retail and auto stocks outperforming.

Maybe next year we see rotation out of retail and into oil stocks, refiners, etc.

CrashisOptimistic's picture

As I have pointed out, you are likely not qualified to have an opinion on this matter.  Price will not inform your perspective about oil availability when the bulk of oil transactions are no longer public -- and I say this with oil's avg price this year higher than any year in history other than 2008.  Price is not meaningful when you have a small portion of transaction information.

Miles Kendig's picture

you are likely not qualified to have an opinion on this matter

ROFLMAO - Let's see your list of qualification that need to be met before someone can give voice to opinion.  Confirmation bias is no way to grow, let alone foster debate.

chopper read's picture


i hear this statement as it relates to 'qualified' economists all the time. 

CrashisOptimistic's picture

Yeah, well, if a fucking chimpanzee sits in a room where there is discussion of the seismic derived fracture depth probability of caprock in the National Petroleum Reserve segment A in Alaska and he leaps around his cage and points at the price sticker on his diaper, I'm going to announce that he's not qualified to have an opinion on the matter.


So should you.

chopper read's picture

fair enough.  you sound convinced.  why are these individuals not convinced?:

or these?

Three separate internal confidential memos from Mobil, Chevron and Texaco have been obtained by The Foundation for Taxpayer and Consumer Rights.

These memos outline a deliberate agenda to gouge prices and create artificial scarcity by limiting capacities of and outright closing oil refineries. This was a nationwide lobbying effort led by the American Petroleum Institute to encourage refineries to do this.

An internal Chevron memo states; "A senior energy analyst at the recent API convention warned that if the US petroleum industry doesn't reduce its refining capacity it will never see any substantial increase in refinery margins."

The Memos make clear that blockages in refining capacity and opening new refineries did not come from environmental organizations, as the oil industry claimed, but via a deliberate policy of limitation and price gouging at the behest of the oil industry itself.


Of course, I keep an open mind as I believe the jury is still out.  Your camp has not convinced me just yet.  However, I am convinced that an International Banking Cartel is dominating our lives and has all but destroyed liberty and rugged individualism in the West. 

Peak Oil does fit the agenda quite nicely as it relates to regulating us all into submission. 


Miles Kendig's picture

Which zoo or private primate collection did you enjoy meeting Robo at?

Still waiting on your list....

StychoKiller's picture

That would be iChimp, AAPL's innovations know no bounds! :>D

Bill Lumbergh's picture

Thankfully HFT machines apply fundamental logic to their purchases and not other indicators such as momentum.


samsara's picture

If Peak Oil was legitimate, you would not see retail and auto stocks outperforming.

Unless,  Their knowledge of the GEOLOGY of Peak Oil is as extensive as yours I guess.

However,  If they TOO were Marketing and Financial majors in college,  Well,  I guess they would approach the science of Thermodynamics with the same extensive and profound understanding and insight that they normally exhibit when dealing with those topics.


AnAnonymous's picture

Unless,  Their knowledge of the GEOLOGY of Peak Oil is as extensive as yours I guess.


Why? You postulate a kind of rational moral choice. People know something is coming and they will try to prepare it in a way that could avoid the shock.

Yet it is not what is happening.

What is the issue with selling cars that might not be operationnal in a decades for the buyers. That is the buyers' issue.

I dont see how people connect a possible depletion of a resource and prospects of consumption.

On the contrary, the very fact that people rush on a resource is a sign it might go depleted in a near future.

People try to draw as much as possible before the end to move to the upper level.

Look at what happened in the US. There was a frenzy on extracting oil with each actor trying to outcompete the other, this in order to move up to their next level (banking sector) The guy extracting slow was penalizing itself as he would come later on the next level scene. Later newcomer, smaller shares of the pie.

People knew in those days that the oil field would run empty. They never try to limit the consumption. On the contrary, they always supported big consumption as they knew it would run to an end and therefore, it was better to them  to get a maximum out of it before the scheme falls apart.

The first poster provided no rationale to explain why a booming car market should not be compatible with a depletion of oil resources.

On the very contrary, I want to push as much as possible the oil consumption when it nears its end. This way, I take the money off a declining sector, invest it on the next sector of choice, with little concurrence. And when the suckers who think oil peak is fantasy propagated by big oil are hit in the face by reality and want to move to the next sector, my position is already solid. 

tmosley's picture


We do not have functioning markets, period.  All we have is a big, fat Ponzi scheme backed up by infinite paper.

If you read FOFOA, you would see the extreme likelihood that Saudi Arabian oil is being subsidized with gold on the sly.

Further, why would peak oil imply higher prices in refiners?  Peak oil means lower volume for them, which means they would start going bankrupt left and right.  Those who still have oil would get progressively more money for said oil, sure, but not refiners.

dizzyfingers's picture

ho ho ho....

Surely you're not thinking that when I go out to shop for a car I first ponder whether there will be gas?....

'fraid not.

-273's picture

If peak oil was legitimate you would be using more oil than finding and oil fields would show peaking of their rates of production followed by declines.

As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented.


The 1st point is validated by data on (the lack of giant) oilfield discovery and production (decline) rates and the 2nd, ZH validates with pretty much every post.

fuggetaboutit's picture

what in Gods name are you talking about? growth parts of the market had massive runs in 2003, 2005, 2007 - all a result of unsustainably low rates resulting in unsustainably idiotic lending and consumption - that entire move got wiped out in about 3 months

Same stupidity ongoing at present in all the momentum "IBD 100" names (NFLX, FFIV, CRM, etc etc etc)

Always ends the same way, just will end more violently this time since the dopes buying this stuff know its abject manipulation and the music eventually stops in a much more pointed way than we have ever known those facts to be true in the past

merehuman's picture

last fool, the mark who buys this overvalued crap .


etrader's picture

A little different "Headlight" picture than were more used to there Robo :>


doolittlegeorge's picture

Great, "the Harvey Ball-mobile" is coming back to haunt us now.

High Plains Drifter's picture

Pardon me Robo, while I go throw up.

redpill's picture

When I said post tatas, this is not what I meant.

Cdad's picture

And right on schedule, and since the hedge funds have marked up the SPY to the predicted levels in last night's AH manipulation session [mark $120.13], the Euro can now resume its downward plunge...and because you are correct, Nic.  The Euro is an experiment that hasn't just quite yet...failed.

I'd say the Euro/USD cross has about one hour to hit 1.336 and then a nice plunge from there...and down hard from there while our markets are closed tomorrow.



erik's picture

It is perplexing that the EUR-USD has correlated so well with US stocks and yet this time around we're not seeing the weakness like we would in stocks.  Same goes for munis and junk bonds, they are dramatically weaker but stocks are not.

Even more confusing is the upward shot in Spain and Ireland bond spreads today that apparently no one cares about, not even European stock markets.

Today appears to be the usual gap, ramp, and hold.

Quinvarius's picture

It is quite fashionable to short the Euro and have strong opinions on why it must fall apart.    Today the Euro tested its daily uptrend line.  We shall see what is a technical bounce and what is not a technical bounce in the dollar. 

macholatte's picture

But at the moment there isn't much evidence indicating that the currency union is under any serious threat, let alone that it is lurching into a crisis that will ultimately end in the death of the euro.

There are three reasons for believing that this is not the case:


  • Ireland is not a second Greece;
  • Europeans have learned something from their budget calamaties;
  • The euro is actually in a good position compared to the dollar and the yen.


Why the Euro Will Survive the Crisis,1518,730784,00.html


doolittlegeorge's picture

you could simply get "two currencies."  a "transnational Euro" with "each nation deciding whether they want to return to their national currency" or "whether they want the euro and their national one."  since the most important element for commerce is free movement of goods without interference the security aspect through the North Atlantic Treay Organization "free trade zone" is by far more important than the euro.

Lux Fiat's picture

Read the article and didn't find it very convincing.  It came across more as a propaganda fluff piece, ala most of the US financial media in 2007 and 2008.

"A serious threat to the euro would only emerge if the financial markets lost faith in major debtor countries like Spain and Italy. But there is little evidence of that happening right now. Firstly, that is because these countries have all passed austerity measures, and secondly because there is enough money available on the market."  

Seems to me the author is not able to extrapolate current trends into the future, and appreciate that the funding bottom can drop out pretty quickly.  In fact, if things continue to worsen, the bottom could drop out even faster due to prior conditioning of market participants.  There seems to be a lot of complacency and belief that all of these liquidity facilities and bailout funds will be an effective firewall.  I hope so, but I see a financial Maginot Line in their stead.

I could make similar comments on numerous other assumptions in the article, but you get the idea.


ZeroPower's picture


I would like to know what kind of shit that author is smoking.

"There is little evidence" of markets losing faith in Spain. Is he for real? Does he live under a rock and pop his head up only to listen that Ireland's been bailed out?

What about Spain's unemployment rate? What about the core EUs exposure to Spanish banks? What about the Spaniards 3mo auction which went off at almost a double yield due to zero demand?

Piece of junk that was.

terranstyler's picture

Oh yes, the Politbüro  announces quite a lot via Spiegel, e.g.:

- "Bonds: Why Ireland and Co could escape the ruin"

- "Irish welcome foreign rescuers"

- "Analysis: Why the Euro resists the crisis domino"

I hope, what you wrote was not your opinion ;)

Original Titel "Staatsanleihen: Warum Irland und Co. dem Ruin entkommen können"

"Iren begrüßen ausländische Retter"

"Analyse: Warum der Euro dem Krisendomino trotzt"

schadenfreude's picture

It's correct, that most politicians in Europe (not politicians in EU-craptocracy) see EUR as a legacy. But it's clear that Germany can't make the first step to kick the peripherie contries out. Who moves first from the status-quo is lost. That's the game played right now. Investors fully recognize this and that's why Portugal is not the next domino, but Spain, where German and French banks are exposed with big amounts.

Nic draw the right conclusions and compared it perfectly well with the banks scenario in US. In the end it's the question when, not if EUR is going to fail. Until then Germany, the Nordics and France play musical chairs about the price for not being blamed for killing the EUR.

zenon's picture

There is alos solution 5:

V. Keep just the PIIGS in the euro and let the northern countries form a new super-euro. That way he PIIGS can collectively monetize and avoid default while the northern block continues to mimick the D-mark.

goldmiddelfinger's picture

IV.b. Yes, but a two tiered EC with a EURO for the northern guys and a monetizied PIGO for the southern layabouts.

CrashisOptimistic's picture

There will be no defaults.  There can be no defaults.  Swaps prevent them.  As money disappears from the universe via real estate collapse, it will be replaced via printing.  This should not be presumed dilutive.

Only oil can't be replaced by decree.  Never forget that.

doolittlegeorge's picture

how about a sovreign credit rating?  "just print your way back to AAA?"

shortus cynicus's picture they fully recognize that if the burden is carried by governments exclusively contagion will be much sharper so they are hell bent on having the private sector share some of the pain and thereby not dilute their balance sheet as much..

And what about just simplest explanation: private sector bought stuff accepting risk, so now should carry that risk.

Any bail-out is crazy insanity, moral hazard in its purest form.

Cdad's picture

Shhhhh....we're bouncing the Euro into street rioting to exit our manipulated SPY shares.  The Euro is a GREAT IDEA...[for the next 30 minutes or so]...shhhhhh

Cleanclog's picture

The Irish austerity/tax package of 15 Billion euros over the next 4 years has created a frenzy in Europe, now worrying about Portugal and Spain.

Meanwhile, California must come up with a package larger than that, with layoffs of public employees greater than Ireland has proposed, and then . . . Illinois, New Jersey, New York, Nevada, Florida, Texas and on and on.

Debt people.  Debt is not wealth  At a point we passed a while back, debt does not create growth once it becomes unsustainable and unserviceable.  That's where we are.  More debt globally than we can service in our current configurations.  The markets are a medicated manipulated sham now, and corporate profits are not going to look so pretty in 12 months.  Look good today because of comparisons.  Won't hold up.  But we could see consumers spending last wads in coming months.  Then it will be game over.