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Positive Sentiment Returns To Europe After "Bad CDO Bank" Idea Is Back On The Table

Tyler Durden's picture


Risk is back on in Europe (and thus spilling over to the US), confirmed by both a tightening in PIIGS spreads across the board and a jump in the EURUSD by 100 pips from overnight lows following a rehash of the same old rumor that the EFSF, or Europe's "toxic bank" off the books CDO equivalent, will provide emergency credit for insolvent countries. With the European Parliament summit starting tomorrow at 1pm (moved back by an hour), there is anticipation that Europe will finally present a strong resolution to ongoing problems. The expectations are not lost on Europe itself: as Barroso said "The minimum we must do tomorrow is to provide clarity on the following: measures to ensure the sustainability of Greek public finances; feasibility and limits of private-sector involvement; scope for more flexible action through the European Financial Stability Facility, the EFSF; repair of the banking sector still needed; and measures to ensure the provision of liquidity to our banking system." Unfortunately just like every previous time, Europe will disappoint as there is no holistic resolution that does not involve the default of the PIIGS. In the meantime, as Bloomberg reports, "European officials are considering steps previously rejected by Germany, including the use of precautionary credit lines, to prevent the spread of the region’s debt crisis, a person close to the talks said. Other options up for discussion at tomorrow’s Brussels summit include enabling the main 440 billion euro ($624 billion) rescue fund to lend to recapitalize banks, said the person, who declined to be named because the talks are in progress. Nothing will be decided until leaders convene. Together with a second Greek aid package, the goal is to prove to markets that Europe has the will and the tools to prevent the crisis from engulfing Spain and Italy." With Italy already "engulfed" it shows just how badly behind the curve Europe still is.

From Bloomberg:

That raises the pressure on German Chancellor Angela Merkel, who vetoed proposals to put more weapons in the rescue fund’s arsenal earlier this year amid misplaced optimism that Greece was turning the corner.

U.S. President Barack Obama weighed in yesterday when he discussed with Merkel by phone the need to deal “effectively” with the crisis. Today she hosts French President Nicolas Sarkozy, who has swayed her stance on the debt crisis in the past.

As for the magical CDO which now has more functions than a novely gizmo found in Sharper Image:

As floated by finance ministers on July 11, the leaders will also look at empowering the EFSF to buy bonds in the secondary market and to enable crisis-hit countries to buy back their own debt. Spanish Finance Minister Elena Salgado, who is battling to prevent the crisis from engulfing her country, today said she supported such steps.

With Greek Prime Minister George Papandreou saying in an interview that leaders face a “make-or-break” moment at the summit, success hinges on going beyond a second Greek package, which national officials continue to work on today.

Here is why absolutely nothing will likely be resolved tomorrow:

The main sticking point is how to get bondholders and banks to foot a share of the bill without sparking a new wave of financial turmoil. European Central Bank President Jean- Claude Trichet says any default risks sparking a crisis on a par with the collapse of Lehman Brothers Holdings Inc., while German policy makers have signaled that a restructuring may be unavoidable.

EU officials today aim to narrow down a list of options to be presented to the leaders in Brussels, the person familiar with the talks said.

One approach would see governments taxing financial institutions to fund a new bailout in addition to a voluntary rollover of Greek debt, according to an EU paper obtained by Bloomberg news. The other two options in the document involve either a partial or outright default.

Simply said: Europe continues to be in the same spot it has been since the beginning of the year and when one factors out all the noise, there have been absolutely no big picture changes. Which is why after a few days respite we fully expect the vigilantes to resume chipping away at Italy's facade and making further incursions into UK, France and ultimately Germany, whose CDS has surged over the past two weeks. In the meantime, Europe has finally realized that if you have a $440+ billion off the books monetization machine, use it.


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Wed, 07/20/2011 - 07:29 | 1473141 Popo
Popo's picture

Ah yes...  The old "head-in-the-sand" solution.  How can this possibly not work?

Wed, 07/20/2011 - 07:43 | 1473168 AUD
AUD's picture

The bond speculators seem to love it though. It would be a spectacle to see them pick up pennies in front of an actual steamroller, rather than the seemingly nebulous bad debt version.

Wed, 07/20/2011 - 08:31 | 1473216 bigdumbnugly
bigdumbnugly's picture

everyone knows by now there is no bad idea bad enough to not merit reconsideration.

Wed, 07/20/2011 - 07:30 | 1473143 Internet Tough Guy
Internet Tough Guy's picture

Groundhog day, bitchez.

Wed, 07/20/2011 - 07:30 | 1473144 williambanzai7
williambanzai7's picture

Send Linda Green over there to fix it.

Wed, 07/20/2011 - 07:43 | 1473174 Nate H
Nate H's picture

Linda Blair might be whats needed


Wed, 07/20/2011 - 08:14 | 1473225 gall batter
gall batter's picture

my little bit of money would be on Linda Tripp.

Wed, 07/20/2011 - 09:10 | 1473345 snowball777
snowball777's picture


Wed, 07/20/2011 - 07:36 | 1473157 GeneMarchbanks
GeneMarchbanks's picture

The finest of MAD. Euro Monetary Union looks like a suicide cult. Oh well, Rome riots shortly...

Wed, 07/20/2011 - 07:35 | 1473158 HITMAN56
HITMAN56's picture

Watch SOV CDS spreads...appear wider

Wed, 07/20/2011 - 07:38 | 1473163 Cassandra Syndrome
Cassandra Syndrome's picture

Are they dumb and making this up as they go along? Or, is it a very twisted Machiavellian plot to incrementally implement a fascist dictatorship using the old problem, reaction, solution paradigm?

Maybe its a bit of both as Hayek illustrated in 1944 in his book The Road To Serfdom, as even the most ideological well meaning central planners in the initial period will inevitably end up dictators over time.

Wed, 07/20/2011 - 07:48 | 1473184 GeneMarchbanks
GeneMarchbanks's picture

A book I own.

Nice questions, reference to a good book, generally accurate assessment of present day events, who junkt this guy?


Wed, 07/20/2011 - 08:33 | 1473263 spanish inquisition
spanish inquisition's picture

We are chimpanzees with opposable thumbs with a gift for mimicry. We have the beginnings of theoretical thought that may allow us to be something more than our base programming. I would guess the financial locusts have a general playbook. When something unscripted happens, you allow it to enhance your reputation, ignore it or blame someone else. Group fortunes rise and fall as members switch troops based on opportunity for advancement and access to chicks (or dudes if you are into Bilderberg).

Wed, 07/20/2011 - 07:39 | 1473167 youngman
youngman's picture

Being a PM holder..I sit and watch this play out...its quite funny because absolutly no economics is being used..nor are the facts being used....its how one country can save its banks while the other country wants to save their banks...not thinking that there is really no way to save them...and if they think saving them is to add debt to an already broke country...that is where I start laughing..or drinking..

Wed, 07/20/2011 - 07:46 | 1473179 oogs66
oogs66's picture

the EFSF thing is a joke.  Who will sell to the EFSF?  not the banks because they won't take the losses and once the hedge funds figure it out, they will jack up the prices, efsf will buy, funds will be out and then what?  and how long can EFSF keep a AAA rating, as doctored up as it might be, if they buy assets and turn them into worse assets?

Wed, 07/20/2011 - 07:49 | 1473186 kaiten
kaiten's picture

Little off-topic. Or not.

From RANsquawk.

Iran says it shot down a US spy plane over its Fordu nuclear site, citing state agency


06:04 20-07-2011
Wed, 07/20/2011 - 08:01 | 1473200 PaperBear
PaperBear's picture

"provide emergency credit for insolvent countries".

Giving someone who is drowning in debt more debt will lead to a bigger default when the inevitable finally happens.

Wed, 07/20/2011 - 08:05 | 1473201 speconomist
speconomist's picture

Any way to profit from the upcoming rise of the CDS of the UK?


Short GBP/CHF or maybe short it against AUD, NZD?

The first trade hasn't been precisely a winner this week, but the other two are outstanding.

Wed, 07/20/2011 - 08:31 | 1473253 chump666
chump666's picture

eur is still a short...just not yet.  they will all print in europe, a completely fubar for the EZ.  wait till the chaos after that eu summit, on rating agency revenge after that french butnut claimed that rating agencies have no place in europe.  EZ is gonna get smoked...GBP/UK too.  what a bunch of idoits over there.

Wed, 07/20/2011 - 08:31 | 1473254 chump666
chump666's picture

eur is still a short...just not yet.  they will all print in europe, a completely fubar for the EZ.  wait till the chaos after that eu summit, on rating agency revenge after that french butnut claimed that rating agencies have no place in europe.  EZ is gonna get smoked...GBP/UK too.  what a bunch of idoits over there.

Wed, 07/20/2011 - 08:25 | 1473239 chump666
chump666's picture

ha the ECB is the 'toxic' bank of Europe!  Old Europe returns with a vengeance...will they ever learn?

Wed, 07/20/2011 - 08:43 | 1473277 Sudden Debt
Sudden Debt's picture


And who gets to own the BAD bank?



Now hang them.



Wed, 07/20/2011 - 09:56 | 1473481 falak pema
falak pema's picture

u can't hang those who make the law and eat all the gravy. That's the real world upside down.

Wed, 07/20/2011 - 12:16 | 1474104 Yardfarmer
Yardfarmer's picture

Greek debt at some $460 billion with $160 billion CDOs in US bank issuance and Italy at 120% GDP is probably enough by itself to bring down the whole house of cards. the transparent and meretricious charade provided by the ECB, itself leveraged at 25/1 is about to evaporate like the vacuous black hole of the EU itself.

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