An Explanation Of What Is Really Going On Behind The Scenes As Rome Burns

Tyler Durden's picture

Unable to keep with the events in Europe which are now literally changing on an hourly basis? Fear not: SocGen's James Nixon has compiled the most succinct explanation for why we are where we are, and why things will get much worse, before they get even remotely better. In a nutshell, everything you know about the existing proposals is finished: what is currently on the table is "a wider strategy which includes lowering the interest rate on lending to Greece and returning to the idea of bond buybacks." Ah, yes, the Goldman proposal. However did we know we may end up precisely here. The problem with this proposal is that all bond buybacks at prices below par are, and always have been, considered by the rating agencies as immediate events of technical default. How this eliminates the ECB liquidity scramble bogeyman we have no idea. At this point we are absolutely certain that the only thing on the Eurozone and ECB's plate is to baffle everyone with steaming pile after pile of bullshit so unbelievable, that people are stunned for days, buying bankers valuable time to convert even more freshly printed paper into hard assets. In the meantime, there is no actual plan to deal with the problems of untenable debt, or at least not one that does not involve the outright monetization of debt and thus, the spurring of hyperinflation, which unfortunately is the last recourse to wipe out the tens of trillions in bad debts dispersed proratedly across Europe's insolvent banking system.

From SocGen:

No easy way out: Europe still considering bond swap for Greece. The fault lies not with the rating agencies; rather it is the inability of European’s political leaders to agree a new financing package for Greece and the insistence of private sector involvement that has pushed Europe’s sovereign debt crisis to new highs. There is now a very real risk that contagion will engulf Italy and Spain. Germany’s Der Spiegel captures the mood when it argues that, “The fears that are turning investors against Italy are vague and are being exacerbated by the failure of euro area finance ministers to agree on a second bailout for Greece.” In the meantime, the argument over how private sector investors should be included in future bailouts is making it difficult for other higher indebted countries to borrow money in the financial markets. Where this leaves us is unclear. It continues to look as if the French proposal to roll over Greek debt has largely been abandoned, not least as it was seen as being far too generous towards the banks. Instead, Finance Ministers are reported to be giving serious consideration to the German government proposal that banks swap their existing Greek bonds for new seven-year Greek debt. Such a move appears to be part of a wider strategy which includes lowering the interest rate on lending to Greece and returning to the idea of bond buybacks. Given the discount at which Greece debt is trading, the latter continues to be an attractive strategy to impose losses on the private sector.

Despite mutterings that the Eurogroup is still exploring a voluntary arrangement, it is hard to see that there can be any common ground with the rating agencies. Although a formal debt swap and duration extension would probably not be a credit event (in the sense of triggering the CDS) it would almost certainly be treated as a “rating event” and see Greece downgraded to SD. Meanwhile, Handelsblatt reported on Monday that the ECB had contacted five financial institutions with a view to seeking advice on how to minimise contagion should Greek bonds be downgraded. In particular, according to the newspaper, the ECB is seeking advice on the refinancing and liquidity of banks, after such a downgrade.

The real problem is now contagion. If the Europeans go ahead and force through a rollover on Greek debt, the markets will rightly anticipate that Portuguese and Irish debt will receive exactly the same treatment should their existing bailout packages have to be extended. Not only does this make it increasingly unlikely that these countries will be able to return to market financing (and therefore making it more likely that Portugal and Ireland will need a new bailout), but it also injects a significant risk premium into the yields paid on Italian and Spanish debt. With Italian ten-year bond spreads heading toward 300bp, the risk is that we are fast approaching the point where neither Italy or Spain will be able to sustainably finance themselves at these levels. This naturally leads into a discussion of whether they can be financed by an enlarged EFSF. Along these lines, the German daily Die Welt reported on Monday an unnamed ECB official suggesting that the EFSF should be increased from its current €440bn to €1.5 trillion.

Should the crisis really spread as far as Italy and Belgium, then this figure is not that far wide of the mark. We estimate Spain’s total financing need over the next three years to be around €380bn; Italy’s financing need is considerably larger at €630bn while Belgium’s financing need over the next three years would be around €150bn. Including the €44bn already committed to Ireland and Portugal, and potentially a further €85bn for Greece, the EFSF would need to be roughly doubled to just over €850bn (assuming the IMF would be prepared to provide one third of the official financing). Without the IMF, whose participation cannot be guaranteed, the EFSF would have to be expanded to €1.3 trillion. In order to maximise the lending capacity of the EFSF, this would mean the AAA-rated countries would have to guarantee 172% of the lending which would potentially imply a contingent liability of between 25-45% of GDP – depending on whether the IMF were involved or not. Such numbers are huge and must raise serious questions as to whether practically the EFSF could be adequately dimensioned to cover the financing needs of Italy, Spain and Belgium.

Where this leaves us is unclear. The ECB have made it very clear what the established policy response should be, namely the best practice is to fund countries undertaking fiscal adjustment subject to strict oversight. By continuing to seek “substantial” and “voluntary” private sector involvement, Europe’s political leaders look prepared to break with that global doctrine and override the ECB. Meanwhile, the failure of the strategy of pursuing ever greater austerity is plain for all to see with the latest Greek fiscal numbers suggesting that the public deficit had widened to €12.8bn in the first six months of the year compared to a program target of €10.3bn. Public sector spending was up 8.8% y/y, principally due to higher interest payments and payment of arrears to hospitals. Net revenues dropped 8.3% which the finance ministry attributed to the deeper than expected recession. This would appear to vindicate the Troika’s May assessment that “there is a distinct risk that the performance criterion on primary balance for end June has been missed.” To close the gap, and attempt to bring the program back on track, the Greek government recently announced additional deficit cutting measures amounting to almost 3% of GDP in 2011 at the request of the Troika.

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phungus_mungus's picture

This is like watching a train wreck in slow motion... 

equity_momo's picture

Its like watching a trapped labrat try to escape from a maze without any exits.

You just end up thinking "poor fella , he might aswell just lay down and take a nap"

"poor Europe , they might aswell just do a mass default and kick back"

MrBoompi's picture

The rentier class is scared shitless a country like Spain or Italy will default.

Mactheknife's picture

"Rating agencies? What rating agencies? We don't need no stinkin rating agencies!"

snowball777's picture

Good. I hope they dissolve the lining of their stomach then spit and shit blood.

old naughty's picture

Agreed. We are all trapped labrats trying to escape from this planet-wide crisis. Poor all-of-us.

oogs66's picture

No. It like watching an acella "high speed" train crawl along at 50 miles an hour already 2 hours behind schedule. A good old train wreck makes sense

Michael's picture

The house of Rothschild should take the 1.5 trillion dollar hit to their family portfolio and restructure all Europian PIIGS debt.
I know how banking house families hate seeing the value of their banking empires diminish as it means a loss of real power and influence, but in this case all banister families will lose if something drastic like this isn't done soon.

centerline's picture

Industrial revolution propelled the game to whole new level.  A controlled deflation seems like a difficult trick to pull off.  A hard crash might actually serve them better depending on how they (and others) have repositioned.

dark pools of soros's picture

they'll take the assets first then let the debt die with the dreams of the people

ThirdCoastSurfer's picture

Like a snowball rolling downhill towards a furnace.

Vampyroteuthis infernalis's picture

Let's pretend there is not a problem. Bailouts forever....... until default.

augie's picture

Ashes, Ashes, we all fall down.......

AssFire's picture

Yes, and let the ashes be those who took more than they created which should be the deciding factor in survival. I can't wait!

Mactheknife's picture

Like Maggie Thatcher said,"the problem with socialism is that sooner or later you run out of other people's money."

max2205's picture

Without a doubt something will save the day. Don't fight the FED

trampstamp's picture

In the meantime, I'm long short

LawsofPhysics's picture

Even the Fed won't fight the Fed anymore.

Rahm's picture

They have committed suicide.

centerline's picture

Nah, they put one round in the chamber and handed the gun to congress.

centerline's picture


(Blaming it on my router.  It must be acting up over the Cisco news.  Poor router.)

MarketTruth's picture


----> F.U.C.K...T.H.E...F.E.D.!.!.! <----

CompassionateFascist's picture

Same old. These socialist pols and capitalist banksters are all PERSONALLY invested in the Universal Ponzi. So one bizarre scheme succeeds another as they attempt to postpone System Collapse from today to tomorrow. Thereby making the inevitable collapse and cascade of defaults that much worse. Hard to predict which leg of the pyramid will go first, but looking now like EU first, then US, then China.   

mynhair's picture

Kudos on your dup catches, btw.

CompassionateFascist's picture

Still, 3 mushroom clouds are better than one.

CompassionateFascist's picture

-2, +1...whatever. Sort of like Europe.

francis_sawyer's picture

...sort of like the math question needed to get this post thru...

InvalidID's picture

I think it goes EU, China, then US. Only because if either the US or the EU fall, China goes with them.

Boston's picture

Let's not forget Japan.

bakken's picture

The Chinese situation in Europe is not readily understandable to Americans.  Yes, the Chinese are losing some in the European trade, in general.  They figure, so what?  It is cheap at the price.  They can not dump  ALL their shit onto the US, they need the large European market to keep the machines pumping, and to maintain low marginal costs of production for their economy.  Profit comes from shit eating chumps in the USA who buy Chinese crap no matter what it is or how bad it is as long as it is cheap(NOT the case in Europe).

I agree, a blowout in Europe could lead to a Chinese blow out if it were severe enough.  Maybe China is stuck supporting the Euro at all costs!  hahahaha.


mynhair's picture

This is bullish for the EUR - after Chinee intervenes.

Heavy's picture

You are being robbed, defend yourselves.

Rainman's picture

Dammit....USA coulda bought all the PIIGS and more if it hadn't pissed away $14 trillion. The United Socialist Republiks....has a nice ring to it.

Cheesy Bastard's picture

I think we still can, if only we can find a comprehensive, compromising, compassionate way to raise the debt ceiling...

Rainman's picture

The Obama Plan to rescue Europe...?? Now there's a plan. Outstanding... First Windbag needs to start thinking outside the box. Hope he reads ZH.

Cheesy Bastard's picture

Right.  Not the Marshall plan, the Michelle plan because we will get thinner and thinner as it grows with no end in sight.

stant's picture

my edgar cayce moment.on the sides of jet fighters will be kill markings that look like corp jets on the way to paraguy

magis00's picture

wouldn't that be something?

janus's picture

it boggles...if boggles is the word i want.  yes, it's decidedly boggling. 

blindman's picture

@ ""..strategy..""
i just had to laugh.
the dick cheney boo ...blues
what "we" need, (we in quotes for the fuckery of it) is
a new tranche of derivative to absolve or resolve metaphysical
future losses that may be elevated to gains in the ethereal realm
of shadow life. it is just that simple. we need a saint or
somewhat like this, and a proper prayer to said, yet to be announced,
personage who would be saint-ed. i would go with r. murdoch, he seems
to be connected at the uppermost levels regarding the intersection
of royal and techno-sacred cultism worship. many middle men would
bleed for him, why not? bleeding is fun once you get the hang of it....
A Change Is Gonna Come- Aaron Neville
on this one i even have to apologize to myself. all around,
apologies,. mostly to my brothers .....

francis_sawyer's picture

Fuck that... Nero 'torched' Rome ON PURPOSE so he'd have a site to build a bnigger palace for himself...

Use of Weapons's picture

As for that fire, well, here legend may have been a little harsh. It is true, acknowledges the exhibition, that Nero was down in Anzio when the fire broke out and that it had been blazing for four days (it lasted from July 18th to July 26th in AD 64) before he returned to Rome to do something about it. It is unlikely, though, that he started it, even if he did make the most of the devastation by clearing the way for some ambitious urban planning. Romans, then as now – even bad, bad ones such as Nero – loved nothing better than to build.



[for maximum snark value, please note source / date / cause of said countries' crash, and think on a larger scale: re'branding'/building the EU - properly, this time, without national governments having any real voice at all]

nmewn's picture

Does anyone get the feeling that the real powers that be are slinking toward the door leaving just a few servants as a covering force?

NuckingFuts's picture

All we need to know is where the air vents are for their underground bunkers and we can finish this thing and get a beer. 

Agreed nmewn, they are gone or going.  Rats leaving the ship. Some stay behind to keep the fiddle playing..........or is that just a recording?