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.
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.