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What We Know About the Pan European Bailout Thus Far
In continuing my rant of earlier this morning, let’s take a look
at what we know thus far about the Great Pan-European Bailout. Before we
go on, I would like to make clear how dangerous this bailout game is
for those in the confines of the EMU. Suppose…. Just suppose, as with
the Greek Bailout(s) announced just weeks ago, the markets call the
bailers’ bluff? Exactly what ammunition will be left to move forward?
The ECB/EU had better hope that this rally will hold up (and recent
history shows that it will probably have an ever decreasing half-life),
for if it doesn’t the member countries are in a world of hurt.
Unlike many pundits, I am more than willing to offer solutions in
lieu of just bitching about problems. So, what is the solution? Everyone
needs to come clean in regards to the true state of
their economic affairs, as well as the realistic prospects of earning
their way out of their respective problems using realistic numbers. In
this fashion, I would never be able to pen a piece called Lies,
Damn Lies, and Sovereign Truths: Why the Euro is Destined to
Collapse! Once we have an honest, realistic starting point, then we
move forward with very, very stringent contingencies on loan dollars and
specific demands on selling off state assets using realistic valuations
as estimates. As it stands now, the loans are given to counties that
are knowingly attempting to mislead, and have a history of chicanery in
their attempts to join the EMU. This can easily smell like a farce and
the risk of failure is very high. Yes, the promise of massive liquidity
will drive a big rally in risky assets, but if these risky asset prices
diverge from their fundamentals, the snap back will be destructive. It
is my opinion that offering money without a structural solution is a
non-solution of throwing good money after bad. Remember, monetization is
now on the table and in a big way. This means that the REAL value of
the Euro is still looking downward…
A quick rundown of the bailout
EU policy makers have come out with a massive rescue plan worth EUR
750 billion to combat with the unprecedented crisis that threatens not
only the stability but the very survival of the monetary union. The new
EU stabilization mechanism which will be backed by funds of up to €750
billion, of which two thirds will be provided by euro-zone members (€500
billion) and one third by the IMF (€ 250 billion), is by far the
strongest effort by EU and the ECB to avert a regional debt crisis.
- Of the euro-zone’s €500 billion share, €60 billion is readily
available and the remaining €440 billion is to be sourced through an SPV
and is subject to the same approval process as the joint loan to Greece
(thus it is contingent upon approval and not necessarily a done deal). - The loans would be extended according to the same pricing formula as
the loans to Greece (i.e., variable-rate loans will be based on 3-month
Euribor. Fixed-rate loans will be based upon the rates corresponding to
Euribor swap rates for the relevant maturities. A charge of 300 basis
points will be applied. A further 100 basis points are charged for
amounts outstanding for more than 3 years. In conformity with IMF
charges, a one-off service fee of maximum 50 basis points will be
charged to cover operational costs.)
This mechanism is further supported by the ECB’s Securities Markets
Program under which the ECB plans to intervene directly in the ‘euro
area public and private debt securities markets’. The scope of the
intervention is yet to be decided. In order to sterilize the impact of
the above interventions, specific operations will be conducted to
re-absorb the liquidity injected through the Securities Markets Program.
The European Central Bank also announced the reactivation of short-term
loans against government and private debt. Moreover, the ECB also will
reactivate, in coordination with other central banks, the temporary
liquidity swap lines with the Federal Reserve, and resume US dollar
liquidity-providing operations.
Though, it looks likely to succeed in calming markets in the short
term, its probability for long-term success depends on the mechanism’s
implementation as questions on financing and activation of the facility
still remain unanswered. EU members’ willingness to contribute to the
rescue package over the next several years also remains uncertain since
Germany, which is expected to be a major contributor is already facing
public anger on providing support for the Greece bailout package, see Merkel
Suffers Significant Voter Setback After Greece Bailout.
Additionally, there are concerns on how much debt will the ECB buy,
since ECB policymakers have been extremely reluctant to take this step
in the past, believing it would compromise their conservative monetary
principles.
Moreover, the new mechanism is only a safety net which will only buy
three years for the troubled PIIGS countries, and would not solve
countries’ fundamental problems. Thus, the real success of the plan will
depend on how well the troubled countries are able to repair their
finances and reform their uncompetitive economies. This was the primary
problem before the announcement of the bailout, and this is the same
primary problem after the announcement of the bailout.
Market reaction – The reaction to the news in the
markets is summarized below
CDS market – The announcement of the concerted
effort to salvage the drowning PIIGS had a tremendously positive
reaction in the CDS market. The sovereign CDS spread of Greece shrunk
sharply to 561 from the previous close of 1000. CDS spread for other
troubled PIIGS countries also contracted sharply. For Spain, the CDS
spread came down to 144 from previous close of 228 while Portugal CDS
spread came down to 426 from 236. Italy’s spread came down to 151 from
228 and Ireland’s CDS spread fell to 207 from the previous close of 255.
Equity markets – The STOXX Europe 600 surged
5.8% (and as high as 9.6%). Broad market indices in Greece and Spain
sprung 9.4% and 12.0%. The market indices in France and Germany jumped
4.3% and 8.1%, respectively.
Bond market – The Greek 10 yr bench mark
government bond yield slipped to 7.46% from Friday’s close of 12.5%. The
difference between the Greek 10 yr benchmark yield and German 10 yr
benchmark yield contracted to 4.5% against the Friday’s gap of 9.6%.
Government Bond yields in other PIIGs also fell sharply. Portugal
10 yr benchmark yield dipped to 5.0% against the Friday’s close of 6.3%
while the Spain 10 yr benchmark yield was down to 3.95% against the
Friday’s close of 4.4%.
Forex market – Euro surged 2.0% against the previous
close of 1.28 dollars per euro. The EU’s announcement of complete
sterilization of the quantitative easing (QE) will lend some support to
the Euro. However, questions still remain over the amount of liquidity
support and QE that EU will undertake and the ability to sterilize the
entire intervention
See the complete Sovereign
Debt Crisis free and available to the public.
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Brown down
Merkel down
No one talks about Iceland (maybe their secret weapon, Ash of Forgetfulness, really works)
Debt preservation fantasies will be pulverized like the Charge of the Light Brigade. I would ask how much they are willing to destroy before they lose and the debt is repudiated, but here it is: ALL IN
So now we get deflationary collapse as a failed attempt to dodge default on inherently bad debt. Pip pip.
Folks - think Shock and Awe...this plan was to scare the bejessus out of shorts and inspire confidence in lenders and markets. My guess is they never intended to really loan anything beyond the first 60 billion euro (if that much). It was simply the threat that they could that is supposed to inspire. I've a feeling given there is no structural fix associated, market is gonna call for the ECB to produce that Howitzer and show us it has plenty of ammo. If market demands it, they will be damed if they don't fire it (CDS, rates blow wide again) and damned if they do (monetization will drive Euro to it's knee's).
An associated issue with the austerity measures is simply economic contraction. This is the elephant in the room. If public spending is propping your economy, and public spending goes down, guess where your economy and resultant tax revenue is going?
I saw an earlier post that Greece was going to cut their pensions by 20%. What will be the resultant economic damage to Greek businesses, and how is that going to affect tax revenue?
This whole thing just seems like a complete fantasy to me.
I hope it works. That it will work I doubt very much. As Leo writes: " they had no choice but to stop the hemorrhaging.", i.e., their elites initially failed to even understand the scale, scope and implications of the problem. Why should we believe they get it now?
Sounds sorta like a Euro-TARP. All of it will never be disbursed. They'll hold the bazooka just out of sight. Other measures will be taken once the threat of the bazooka has lost its influence. Look to the U. S. since Hank threatened Congress for the playbook.
Wouldn't it be effin' hilarious if we wound up closing flat for the week?
Plainly, the euro trading back to 1.27 gives the lie to any notion that this was about defending the currency. I am guessing euro shorts were the ones they were out to crush? Or do "speculators" only use exotic shadowy cabailistic vehicles to implement their mad plans for world destruction?
http://www.cnbc.com/id/37063646
Yeah, even CNBC isn't terribly bullish about this, and they're bullish about basically everything.
If I'm following the convoluted logic chain here, does whether this work essentially rest on non-EU/US countries buying EU/US bonds/t-bills? Or is it something where they basically just buy eachother's debt and daisy-chain a devaluation spiral, and hope that the non-EU/US countries don't bail and sell their existing sovereign debt positions?
This all just seems incredibly tenuous to me.
RM....Here it is ....
This is all about "socializing somebody else's losses"....
This is a tad more tainted than the US style Facist Bailout of those who control the house....
Just ask the Germans....
None of these governments are going to move forward until the tax revenue underpinnings are rebuilt by more favorable tax legislation.
What should be happening is a world wide all out tax structure war in order to replentish and replace the tax revenue producers.
Debt alone...which is the exact choice that has been made only adds more debt to overcome.
This is like doubling the debt to a slave and telling them to speed it up.
Which situation would be better ?
Telling the slaves that they must increase their sales but with much higher prices that the buyers cannot afford....
Or to tell the slaves that they will be able to offer much better prices such that their buyers can buy more ?
Both the US and Europe drink from the same cup of stupidity.
My best guesstimate is that the EURO will trade less than 100 versus the dollar because of its varied composition. At least the US is paying for its own internal problems....but here again ...What is the IMF ? (USA)
And just where is the money coming from ?
The money comes from a guy at the Fed who can push a button and make the balance sheet go from:
Assets 2 trillion
Liabilities 2 trillion to:
Assets 3 trillion
Liabilities 3 trillion
Then he punches out, goes home and watches Cramer.
Nice work Reggie. It's ironic that in an effort to defend the Euro, the actions taken by the eurozone are actually going to torch the Euro. Welcome to the delusional loser's club PePe Lepieu!
"Exactly what ammunition will be left to move forward?"
Reggie,
Are you kidding me? You, Bruce, Tyler and many others better realize that this announcement was a game changer. They had no choice but to stop the hemorrhaging with a package that leaves speculators in the dust. I'm warning all of you on ZH: get ready for parabolic moves up following QE 2.0, and keep buying the dips going forward, especially those dips in the rock & roll solar sector.
Leo,
Germany will have to pay a lot of the bailout. Even if it is in Germany's best interest to do so (what I question) the bailout is hugely unpopular and will be tried in the German Supreme court (Bundesverfassungsgericht.)
If more then a few hard-core-gold "bugs" sell euros for gold that will be the end of the bailout.
I think you underestimate the inflation fear in Germany; imagine your grandma having experienced money loosing all value, business going down due to inflation and a breakup of social order.
@leo
You're advising people to buy into "parabolic" moves? Forget the solars, you've been out in the sun without a hat for too long.
Really dusted those euro-speculators, put them in a pup-tent of pain for, lo about 6 hours.
Immortals... they fail our king's test. And a man who fancies himself a god feels a very human chill crawl up his spine.
Leo, anybody who went short the SPX, SPY or any of the European banks that I covered in my analysis this morning made money. One had better hope that this trend doesn't continue, for if it does, that will probably be the quickest blown trillion dollars ever spent!
Leo,
Blood transfusions only can work if the doctors can fix the cause of the bleeding.
What is the enforcement mechanism to implement systemic change in the PIIGS? Strong leadership, with popular support is needed but rather hard to find. How much longer will the current Greek government stay in power and will their replacement continue harsh policies or bow to those now rioting.
Leo, even if the Germans, Dutch and the French agree to pay - for now, will real reform be put in place in time to stop the bleeding? The game just got more complicated as the big Euro banks will begin a mad scramble to unwind their positions in the sovereign debt market. The game continues but at this point the light at the end of the tunnel still looks like a train to me.
Arthur, John,
Greece and other European nations got a massive wake-up call. Trust me, it will not be business as usual. The days of expanding the public sector are over. There is no turning back now. Either they get with the program or they risk thirld world poverty.
It's tough for culture to change so fast. It rarely happens that you get the "oh, you caught on and busted us, we'll be responsible now." More often its even more extend/pretend and "I'm gonna get me mine while I still can" mentality. I'm thinking there will be even more corruption and deception going forward.
Third world poverty but with solar stocks and equity markets headed for the moon right?
Do I hear someone calling "It's different this time!?"
Yes, this is and Greece already announced 20 percent retirement payment cuts. So at least the first moves are positive and "not business as usual". I'd bet Germans demanded more than a few pounds of flesh from the Club Med before agreeing. What I have been reading, bailout nations will not be so "sovereign" any more and will be subjected to IMF bailout like supervision. IMF bailout with Germans watching like hawks will be no picnic.
Sounds like a kinder, gentler Third Reich 2.0 to me...
But how are they going to get with the program. The current austerity programs are built upon lies. Even if the programs work as penned with the aid of this latest bailout, there will still be large deficits because the plans were based upon pie in the sky optimism. See Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! and tell me, first, how do you overcome the large gaps in the numbers presented. Promises of trillion dollar loan packages won't do it.
Now that the ECB has been effecively reduced to a political arm of the EU, banks will start to unload their underwater sovereign instruments directly into the ECB coffers, funded by the same nations who needed the money to begin with due to indebtedness, lead by Germany - the most fiscally stout and the one most likely to opt out of this game.
I think I've seen this movie before. The ending never came. I'm still trying to find my way out of the theater. It's a nightmarish maze....
I dont think cutting deficits in eurozone will be any more difficult than cutting 10+ % deficits in UK/US.
Leo, I agree short term we could see new highs, perhaps within a month or even a week, but this will end very badly. The crisis will simply move to the core and as you have seen in Greece, austerity has its limitations.
Clueless Keynesian idiots like Leo are NEVER concerned about anything more than the short term --- don't you realize that by now?
Why this bankster shill Leo is even allowed to post his pro-establishment propaganda here on ZeroHedge is beyond my understanding. I find virtually every one of his posts to be vacuous and contemptible in their implicit if not explicit support for the wildly corrupt financial and political establishments.
Diversity of opinion is actually a strength not a weakness I think... too bad there is little in the Fed or Obama administration...
And since this is a Fight Club... if we get rid of the macro dissenting views who is there left to fight (or educate) but ourselves? Inflationistas vs. deflationistas anyone?
Hey... Has anyone seen Harry yet? I have a new avatar for him... damn I miss that Wanker!
(Warning... Image may contain partial nudity...)
http://www.nobozosmc.com/HeadUpAss-Naked.jpg
Oh, I wasn't saying that Leo should be banned --- I just don't understand why his inanities are considered worthy by Tyler et al. of the space provided them, and headlined as they are. But you are correct, he does serve as a foil against which to expose the contradictions and absurdities of the pro-establishment, "mainstream" view.
Personally, I would prefer HarryWanger instead --- at least we get some good laughs along with the mainstream blathering!
you're just a tad emotionally invested into those crappy solars aren't you?
Solar stocks will mimic what the fiber optic stocks did in the late 90's
To the moon, then impact the face of the sun. As long as you know when to get out...........
The consensus next big thing becomes a crowded trade (already) and technology always come up with something better that obsoletes what "established" companies are selling.
oh, I agree. it's just that they already did that in 2008. Leo's currently experiencing the latter half of that trade unfortunately.