Summary Of The Biggest Bail Out Ever: Even Keynes Is Spinning In His Grave

Tyler Durden's picture

Europe has now followed the Fed in its all in move to prevent the disintegration of the euro and of Europe. As we expected, the EU was leaking various rumors to gauge market interest, and as speculated earlier, the final cost ended up being just short of one trillion. Here are the key summaries:

In other words, total and unprecedented monetary lunacy, as every cental bank, under the orchestration of the Federal Reserve, will throw money at the problem until it goes away, which it won't. As we have long expected, Bernanke is now willing to sacrifice the dollar at any cost to prevent the euro unwind. This is nothing than a very short-term fix, whose half life will be shorter still than all previous ones. 

The race to the currency devaluation bottom is now in its final lap. And gold is the only alternative to the now imminent collapse of the fiat system: the world had a chance to take writedowns on losses, punish those who took risk and failed, and refused to do so. There is now no risk left, but it only means that eventually all the risk will come back and lead all capital markets to zero. The result will be the end of Keynesian economics as we know it. Do not trade in this broken market, do not hold your money in a bank as they are all now one hour away from a terminal bank run - buy and hold real, FASB mark-to-myth independent assets.

Here is Goldman's take on the reaction:

In reaction to escalating pressures on Euro area government bond markets this past week, and their broader repercussions on financial stability, European policymakers have announced tonight an impressive set of new policy initiatives, as Erik Nielsen flagged earlier this evening as they began to emerge.

The centerpiece is a EUR 500bn conditional mutual financial support scheme for EU sovereign states, boosted by further assistance from the IMF. To put this number into perspective, consider that it is slightly higher than Italy’s 2007-09 average gross issuance of public debt and that it could cover Spain’s and Portugal’s combined gross borrowing requirements for two-three years. These conditional contingent liabilities tying EMU sovereigns will not appear under the Maastricht deficit and debt measures. They require no additional funding-raising, for now.

The fiscal agreement will be subject to closer scrutiny in the days ahead, when more details will be made available. In particular, the EUR 440bn of bilateral loans will be no doubt at the centre of more political discussions. But, together with the promise by euro area governments to ‘take all measures to meet their fiscal targets’, such display of fiscal ‘solidarity’ and the institution of a fast-track EMU/IMF funding backstop have been instrumental in convincing the ECB to step in, invoking a financial stability role. In the coming days, the ECB – presumably through the national central banks - will conduct ‘interventions’ in those ‘public and private’ markets of the euro area it deems ‘dysfunctional’ and therefore impairing the transmission of monetary policy.

We provide more details of the measures below, touching also on some of the issues still pending. Our overall take is positive. The Eurozone fiscal crisis spread beyond Greece to  countries with much better fiscal profiles due to a lack of confidence, in turn amplifying debt roll-over risks and hurting domestic banks. Short of fiscal federalism, the mutual support plan launched tonight goes to the heart of the matter, and fortifies Eurozone institutions, endowing them more flexibility tools to deal with future crises.

But the true ‘circuit-breaker’ when the European markets open tomorrow will no doubt be the ECB’s unprecedented involvement in the secondary markets. Banking on the ‘best practices’ accumulated over the crisis, the ECB is not saying which securities it will buy, and in what size. This makes the ‘announcement effect’ even more powerful. The interventions will be over time sterilized (i.e., the cash injected will be mopped up), limiting the interference with monetary.

In terms of markets, there are clearly a few areas that are more directly linked to tonight’s announcements and others that have been caught in the general cross-fire. We would make the following broad observations.

1. EMU peripheral sovereign spreads should tighten back, particularly at the front-end of yield curves. The move should be reinforced by the further tightening of fiscal policy in Spain and Portugal to be announced later this week, and the ongoing conservative fiscal stance in Italy. At the 2-yr maturity, Portugal closed on Friday at 550bp over Germany, Spain at 237bp and Italy at 181bp.  Our relative preference goes at this juncture for Portugal, because of the higher risk premium. We think spreads should come back to the 250bp area, and quite possibly further. In Italy and Spain, spreads should halve (although we continue to think that Spain will trade weaker than Italy reflecting the two countries’ relative funding requirements). Meanwhile, German 2-yr benchmark bonds closed at 76bp through swaps. This spread is at least 20bp too high (it averaged 50bp up to March), considering that Germany’s contingent liabilities as a result of these actions have increased.

2. The impact all this should have on the level of rates is unclear. The ECB is in the near term injecting more liquidity, and this should keep rates low over the coming months. Sterilizations will presumably entail a steeper money market than currently is the case. Against the backdrop of falling risk premium and better growth numbers, as we expressed already in our Bond Snapshot last Friday, our inclination would be to fade the bond rally now. Among our recommended exposures is a trade to be long 10-yr UST vs. Bunds, for a target in the 40-50bp area.

3. On currencies, the impact on the trade-weighed EUR of a more restrictive fiscal policy and easy monetary stance is unclear. As the risk premium erodes, the currency may extend gains against the Dollar, returning towards our 1.35 3- and 6-mth forecasts (from Friday’s 1.27 close). Our main focus in coming days will be on several fundamentally sound opportunities that have been rocked by the generalized de-risking. Among these, at this stage we highlight PLN, TRY against the EUR, and MXN against the USD, which we added on Friday already as a tactical recommendation. Asian FX weakened last week on the increasing risk aversion, and should stage a come back. Earlier tonight, we recommended going long a basket of MYR, PHP and IDR against the JPY.

4. The story in equity space is similar: Given the higher co-variance between financial and sovereign risk, the main underperformer of late has been the European banking sector. In the near term, it will probably lead the market bounce. But tighter fiscal policy in the European periphery will in our view continue to weigh on the local financial institutions. Our interest goes more towards opportunities where we judge the macro underpinnings to be stronger. We have been recently stopped out of long positions in US consumer stocks, but that remains an area of interest, for example. And we have highlighted the merit of ‘core Europe’ (through the German DAX index), which we are likely to elaborate on in the coming days. Unlike during the credit crisis of 2008, these policy announcements take place against a much more favorable macro backdrop.

Turning to the measures, these involve:

On the fiscal side, the establishment of a ‘European stabilization mechanism’, under the legal umbrella of article 122.2 of the Maastricht Treaty. This envisages financial assistance from the Union to member states ‘seriously threatened with severe difficulties caused by exceptional occurrences beyond their control’. The overall ‘stabilization mechanism’, which overall will  not require approval by the national parliaments, will revolve around three funding avenues, all operating on a conditional basis (meaning that the sovereign will have to agree to a fiscal adjustment plan to access the funds, ‘on terms and conditions similar to the IMF’s’).

To begin with, the EU Commission will set up and run a permanent ‘rapid-fire’ facility funded by the issuance of Eurobonds guaranteed by the single member states. The framework piggy-backs on the one used for the balance of payment support to non-EU countries, which is also run by the Commission. The new facility should be endowed with around EUR 60bn, and provide for the quick response that was lacking in the case of Greece. It is unclear whether the facility will be pre-funded. The balance-of-payment program is not, and the Commission taps markets upon need. Whether the guarantees will be ‘joint and several’, like is the case of existing EU Commission bonds, is also unclear. If so, the issuance may compete with existing EIB and KFW programs, which is less senior. We plan to flesh out some of these issues when more technical details are available.

Moreover, EMU member states have pledged up to an additional EUR 440bn in bilateral loans to support each other. As in the case of Greece, we think that they will be allocated along the same proportions as those holding for the ECB’s capital shares. The loans will be collected in an SPV ‘expiring after three years’.  It is unclear whether non-EMU countries have signed up (the UK has not). The disbursement of the loans will require parliamentary approval.

Finally, according to European sources, the IMF will contribute to the deal with an amount up to EUR 250bn, presumably providing assistance in the formulation of the fiscal restructuring plan, as has been the case for Greece. We would notice that the higher the amount pledged by the IMF, presumably the greater the influence of its main shareholders over the disbursement.

On the monetary side, the ECB has announced it will conduct interventions in the euro area public and private debt securities markets ‘to ensure depth and liquidity in those market segments which are dysfunctional’. The ECB plans to sterilize these purchases. Further, to support banks, the ECB will conduct 3-mth fixed rate tenders around the end of this month, when the first 1-yr LTRO expires, and a 6-mth operation this Wednesday. And finally, the ECB will reactivate together with other major central banks temporary but unlimited Dollar swap lines with the Federal Reserve.

Last, but not least:

  • The first tranche of the joint EMU/IMF 110bn package for Greece will be disbursed in the coming days. Earlier today, the IMF Board has approved the EUR 30bn Stand-by arrangement with Greece. Both these news were widely expected.
  • On May 12, the European Commission will present proposals on how to improve the governance of the Euro area, including ‘strengthening’ the Stability and Growth Pact (involving a discussion on the introduction of more effective sanctions). This is the natural and necessary complement to a system of fiscal relationships involving greater risk-sharing, and will be the focus of many discussions in the weeks and months to come.

Francesco U. Garzarelli


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Miles Kendig's picture

There will need to be another trillion or two handed out over the next month.  As folks dig deeper into these proposals I am sure we will find many of the common threads of action we have seen since February.  It is full blown Loony Tunes and That's All Folks.  The wild fire has been freshened with ample fuel.  Fools.

Adam Neira's picture

This is all leading to another paradigm...

nuinut's picture

Fingers crossed that will be a good thing...

erik's picture

everything depends on the Euro right now.  it opened high and has steadily sold off.  no surprise the stock market weakened as a result.  right now the Euro is in a bottoming process on the daily chart.

the Euro has given back HALF of its gains today.  that is a warning sign.

Pamela Anderson's picture

AMANDA DRURY!!!!!!!!! Yes, I don't need Viagra today!!!!!!!!

Her breast in white!!!!!!!!! Just superb!!!!  Best of CNBC by far

Miles Kendig's picture

GO Dawgs!  Can still see yaz from North Queen Anne


B9K9's picture

Life's but a walking shadow, a poor player

That struts and frets his hour upon the stage

And then is heard no more: it is a tale

Told by an idiot, full of sound and fury,

Signifying nothing.

Keynes wasn't kidding when he stated that we're all dead in the long-term. Clearly, central bankers live & breathe this philosophy. Who cares if the system crashes in 1 or two years? Today we live, so eat, drink & be merry.

I'm really curious as to why anyone is surprised - what's up with all the vitriol & anger? The PTB are essentially admitting what many have known for some time now: the economy died back in 2007-2008. There weren't any green shoots - that was last year's propaganda message to keep the illusion going.

But it has obviously grown stale. This year's theme will be akin to the tradition of breaking open the liquor cabinet when a ship is doomed: all discipline is abandoned as the crew gets blindingly drunk. So, party on mates.

Perhaps some may survive and wash up on shore. They might eve get a chance to create a new society. Nah, it'll just devolve to the same one we have today.

tj3's picture

no sh*t, what's changed...some times I feel that this blog has devolved into CNBC's evil twin...shessh...and you right, live it up for today, fore tomorrow will come...

Miles Kendig's picture

Or that it will at least work better than that shave would have in High Plains Drifter.


tip e. canoe's picture

exactly...overloading the left-brain until it cracks open and floods into the right via the pineal gland.

we are all autistic now.

Ophiuchus's picture

Perhaps the Catholics were on to somthun when they created the Court of the Pinecone.

...then there was Heinrich Himmler's spear of destiny.

Turd Ferguson's picture

Ich bin ein Berliner.

Spoken June 26, 1963. Then, just a metaphor.

Today, May 10, 2010, it has become truth. 

ZerOhead's picture

You're a jelly donut?

(It's the 'ein' that gave you away... :)

Miles Kendig's picture

Perhaps this may be just a reflection that the matters at hand are rapidly becoming everyone's donut...  (Spans of control, influence and all that)

tip e. canoe's picture

definitely, but both were obsessed with looking outside in instead of inside out.

speaking of pinecones, guess what grows under them?

bugs_'s picture

Brother can you spare a pair-o-dimes?

Miles Kendig's picture

just don't drop one.. 

scepticus's picture

"This is all leading to another paradigm..."

like a pure credit economy (ala knut wicksell, circa 1898)

Reflexivity's picture

Most assuredly.

This statement reminds me of (Plato's) Republic:


...Most assuredly.

And is not the love of learning the love of wisdom, which is philosophy?

They are the same, he replied.
And may we not say confidently of man also, that he who is likely to be gentle to his friends and acquaintances, must by nature be a lover of wisdom and knowledge?

That we may safely affirm.
Then he who is to be a really good and noble guardian of the State will require to unite in himself philosophy and spirit and swiftness and strength?


Miles Kendig's picture

... within the warm embrace of assurance that is born from living rather than dying.  In total, what it means to represent the whole by example.

john_connor's picture

All cards are basically out now, pending details of this lunacy of course. Riots should spread to Spain and  Italy within 3 months, with war to break out in Europe in 6-12 months as the ECB attempts to legislate various countries with competing interests.

BTW, call your senators and representatives and start complaining about the Fed's swap lines.

Assetman's picture

I really agree on the last point.

If indeed, these swap lines represent "loans" to other central banks, why in God's creation are we accepting loans in Euros?  Are we so awfully sure we will even be close to being paid back on a currency adjusted basis?

The Fed's involvement is akin to plugging a dam leak with your finger, while 10,000 more leaks are sprouting out.  Not only will it NOT change the course of events, it may eventually do more harm than good.

Ripped Chunk's picture

And when Ben tesifies again on "The Hill" they will ask the same question: "What banks was this additional trillion lent to?"

Ben: " I don't really know"


Popo's picture

For years I've been unclear how wars could actually get started... Now it seems so utterly clear: Exactly like this.

First economies are utterly destroyed for the foreseeable future.

Next social unrest topples governments.

And then the great leader appears to unifies his people by rallying them around a foreign enemy.

Step 1: Check

Step 2: In progress.

Step 3: 2 years.

moneymutt's picture

good point, no one seems to want to talk about the European folks reaction to this, they tend to vote in the street more than US people...the biggest bailout ever only works if the people roll over for it...will they? right now I don't think they are that desperate, so maybe it will be quiet, wish I knew how angry Europeans are right now...

DaveyJones's picture

a trillion here, a trillion there, pretty soon we're talkin real money

FEDbuster's picture

a trillion here, a trillion there, pretty soon we're talkin worthless money.

Gold bitches (food and ammo,too).

DaveyJones's picture

sarcasm is one of the most elusive financial indicators.     

Miles Kendig's picture

Ya, and the "s" on my chest is to indicate super slowness.

BlackBeard's picture

We've just witnessed history:  One of the largest nominal amounts of money tossed into a burning fire.  Bernanke and Geithner have penis envy right about now.

gridlock's picture

What do you want them to do, dismantle the euro and everybody starts owning debt in fluctuating currencies - that would be an even bigger mess! Honestly I thought Trichet will flood the market with liquidity last week and that naive belief in EU speed under pressure cost a fortune to my calls in financials, which should recover nicely now.

OOne question still remains to be answered though - can you pay debt with more debt, or will the system be dismantled gradually over time - looking forward to 2030 :-)

chumbawamba's picture

2030?  You'll be lucky if we make it to 2013 at this point.

I am Chumbawamba.

Mentaliusanything's picture

Fuck me old chum, June -July 2011 is all the legs this lame ducks got. Wake up the World is full of people who believe an earthquake is a remote possibility. This is the most inane idea I have had the pleasure (or pain) of hearing. Tell me should I save my ass soiled toilet paper to sell for a profit or should I flush it. Not a snow balls chance in Hell of this thing working. Its the Debt (now increased) that needs to be addressed.

Sorry but this is a butt fuck (now) for the whole World.


Yes I'm just cranky at the short term stupid nature of people who should lead instead of being pushed to slaughter. No offence meant - I just want to see reality and truth make a decision  

Observer's picture

I think you could have made your point without being so potty mouthed. Foul language can devalue the point we try to make

MsCreant's picture

Deleted hysterical rant at people who are too sensitive to strong language.

Miles Kendig's picture

MsCreant, THIS IS A FIRST.  The deployment of potty mouthed in a non sarcastic mode of delivery at ZH!  Even the gold standard of propriety, MN Nice never went here!  Wow Chumba, I stand in reverence and awe of your continuing capabilities to capture the very best in us all.

Miles Kendig's picture

You have been here for 31 weeks and you still cling to the propriety crap in the use of language here at ZH?  I would hope you would have garnered a bit more about all of this given the time you have studied it.  Just so ya know, Observer, I am just another fucking observer (shamelessly plagiarized from the movie, Blue Thunder).  So, it's JAFO to you. 

Be Well

I wouldn't go back now for any amount of money (or anything else) - Miles Kendig

tj3's picture

"What do you want them to do, dismantle the euro and everybody starts owning debt in fluctuating currencies - that would be an even bigger mess!"


Yes and no. The bigger mess is the one we (humans) keep creating. Start by kicking out the countries that should not have been in the Euro Zone in the first say...Greece?

JonTurk's picture

I wonder WTF will happen when UST 10 yr break out %4

AUD's picture

So the Fed, ECB etc are buying unfinished real estate & empty matchboxes? (Melchior Palyi 1937)

It's not as if this story hasn't already been told.


Postal's picture

But this time it's different...


AD70's picture

It seems like this could be positive for the EU.  At least the credit is coupled with fiscal austerity measures and a committment not to permit it to expand the monetary base.  This is deflationary but at least introduces the necessary medicine for longterm stability.  The EU in the long run will be much better off than the U.S., which still believes it can borrow without fiscal discipline.

Loan Gunman's picture

The PIIGS say they will commit to austerity measures.  They'll say anything to get the money.  Bernanke just bought the Brooklyn Bridge.  He got a good price though.

Assetman's picture

The EU established debt limits for their members a long time ago.  They have been so roundly ignored that even Germany figured out that running a deficit over 3% of GDP was in their best interests.

If the IMF doesn't have a military to back it up, Greece and the rest of the PIIGS can spend away.  The EU would have been much better off in the long run by forcing Greece to restructure its debts and making bondholders take at least a partial haircut.

But nope.  This is just the European version of American QE.  But somehow, the UK was able to skirt by with no commitment, and the ECB was able to get Ben Bernenke to provide loans in dollars.

This is going to encourage even more bad behavior, I'm afraid.

AD70's picture

I have no idea whether the austerity measures will be honored.  But there is a difference in this EU QE (which will only become QE if the credit is not sanitized as promised): no one can tell the Fed what it's limits are or, it seems, even should be.  The ECB is, however, ultimately subject to its component sovereigns and now the IMF will also have a say.  Given German history, its people are already predisposed to flavor deflation over inflation (whether or not wise).  So over the short term, while more pressure will be put on Europe and the Euro until they prove that they can get their finances under control, I like the Euro v. U.S. dollar over the long term.  Europe is blessed to have passed through the debt vigilantes before the United States.  I have a feeling that one day they will be bailing out our butts with the help of the IMF.  Unfortunately there is little either of us can do to stop it. 


moneymutt's picture

you know I keep thinking about Weimar Republic....and Zimbabwe...would Zimbabwe be better off if they had been IMF'd...I don't think so, they declared jubilee by printing.

The other thing about Weimar...I read somewhere that they did not print enough to cause that but instead it was massive shorting by foreigners that did them in....

Once debt bubble formed...what is best way out for regular folks? (I guess the answer is the opposite of whatever our leaders do)