The Big Blink?

Wolf Richter's picture

Wolf Richter

Markets soared in Asia, Europe, the US, everywhere. Let the good times roll. The euro jumped to the highest level in a couple of weeks. Yields on Spanish bonds plunged to the lowest level since, well, Monday. A miracle had happened. German Chancellor Angela Merkel had blinked. Um, a little bit.

All eyes were on her at the EU summit in Brussels, the one summit that would once and for all save the Eurozone, THE summit, where she’d be forced to submit to the majority of the Eurozone, and indeed to the majority of the world, and where she’d be forced to come to her senses and give in to the demands set out before the summit.

There was the Grand Plan, issued by European Council President Herman Van Rompuy. It included all the goodies: a European Treasury with power over national budgets and how much countries could borrow; Eurobonds; a banking union that would guarantee deposits; and the ESM that would bail out banks directly.

There was French President François Hollande’s plan, first issued during his campaign, then reiterated many times since. It included Eurobonds and the ability by the European Central Bank to directly buy sovereign bonds of debt sinner countries. He’d formed a triumvirate with Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy to corner Merkel.

Rajoy had been begging for help but didn’t want Spain to take the bitter medicine that the bailout Troika would prescribe if he asked for a full-fledged bailout. Hence his emphasis on bailing out the banks directly, and let Spain run its dismal affairs as it saw fit. Monti had warned last week that the Eurozone would break apart if summit attendees didn’t sign off on his list of items that were “absolutely necessary” to save the Eurozone.

So, here are the summit results on these items:

- Eurobonds? Nein.

- A banking union with tools to prop up banks and with a common deposit insurance fund. Nein.

- Allowing the ECB to buy sovereign bonds directly? Aber nein!

They did agree on a common banking regulator (even Merkel had wanted that). Of course, they already have one, the European Banking Authority (EBA), established in late 2010. It conducted “stress tests” on 91 major European banks. Results came out in July 2011. And in October, the 12th safest bank, the Franco-Belgian megabank Dexia, collapsed.

So now, they want a different regulator. The ECB should play a role, the agreement said, but.... The Federal Association of German Banks and the Federal Association of Public Banks both expressed their opposition to the ECB becoming a regulator. Since the UK declared it wouldn’t have any part of it, German banks were worried that they’d experience pressures from the regulator that UK banks would not experience. And they were worried about the conflict of interest between the ECB’s role in funding states and in supervising banks that were also funding states.

And Merkel did blink. Or at least she redrew the line in the sand: she agreed to the tweaking the European Stability Mechanism (ESM), the permanent bailout fund. The ESM doesn’t exist yet and hasn’t been ratified by a whole slew of countries, and it’s getting scrutinized by the German Constitutional Court, but assuming it will see the light of the day, it would be changed in several ways, including:

- It can bail out banks directly, rather than lending to the government which then recapitalizes the banks. This way, on paper, this new debt to bail out the banks would not raise the indebtedness of the country.

- It can buy sovereign bonds of countries that stick to their commitments to cut budgets and implement structural reforms; thus, no further austerity measures if they ask for aid.

However, funding banks directly won’t be possible until after the Eurozone banking regulator has been established. The Commission will present a proposal in the near future. If all member states pass it by the end of the year, direct aid to banks would be possible at the earliest in 2013.

So, the ESM will be able to bail out Spain and Italy, and their banks, and all the other countries, to which Slovenia may be added by end of July—and do all this with the €700 billion it may in theory have some day. In theory because the €700 billion includes the contributions of Spain and Italy, the very countries that the fund would have to bail out.

Merkel’s switcheroo on the ESM caused some consternation in Germany. “A new breach in the dam,” it was called. Others complained that “the ink isn’t dry and they already announce the next changes,” and that it was one more step towards a “transfer union.” As before, it will pass. The line in the sand has been moved. That's it. None of the fundamental problems have been solved. And the wait for Merkel’s big blink on Eurobonds continues.

In Cyprus, it’s panic time. €1.8 billion is needed by June 30. That’s just the beginning. Its banks have been eviscerated by Greek government bonds, Greek corporate debt, a real estate bubble that collapsed, and a title-deed scandal that they colluded in. It has a communist president and vast deposits of natural gas. Russia and China hover nearby. And now Cyprus points out, unwittingly, why no country should ever transfer even more sovereignty to the EU. Cyprus and the EU: Bitter Medicine.

And here is the hilarious video from down-under comedians Clarke & Dawe that in 2.5 minutes summarizes with superb accuracy the entire Eurozone debt crisis.

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Joebloinvestor's picture

If they bail out a state owned or a bank that has state interests, doesn't that count?

Smoke and mirrors.

Grand Supercycle's picture

More Equity Rally Expected.

Any traders predicting a multi month equity rally apart from me ?

As of today I am.

Last week was the turning point.

Significant equity upside expected this year according to my analysis.

However the SPX big picture remains very bearish and unfortunately this will not change.

ebworthen's picture

A new bailout mechanism means that the smaller nations can keep spending what they don't have because there is now a new bailout mechanism.

Sooner or later it will be Stockton, CA over there.

PulpCutter's picture

Nonsense. (even if Limbaugh chants it endlessly).

Spain and Ireland were running surpluses going into this mess, not "spending money they don't have". Spain was running a lower debt/GDP than Germany.  French personal savings rate is amongst the highest in the world.  Except for Greece, which WAS spending a lot of money they didn't have on social programs, excess social spending had nothing to do with the crisis.

What DID cause the crisis was over-leveraged banks, particularly WRT home mortgages.  THE CAUSE WAS WEAK/ABSENT BANKING REGULATION.

Paul Thomason's picture

Should be all down until at least 2015 according to the 'stars' (astrology):- 'Astro-Technical Analysis: Mars Goes Cardinal, Fast!'

falak pema's picture


The End Of The Euro: A Survivor’s Guide Posted on May 28, 2012 by Simon Johnson | 85 Comments By Peter Boone and Simon Johnson In every economic crisis there comes a moment of clarity.  In Europe soon, millions of people will wake up to realize that the euro-as-we-know-it is gone.  Economic chaos awaits them. To understand why, first strip away your illusions.  Europe’s crisis to date is a series of supposedly “decisive” turning points that each turned out to be just another step down a steep hill.  Greece’s upcoming election on June 17 is another such moment.  While the so-called “pro-bailout” forces may prevail in terms of parliamentary seats, some form of new currency will soon flood the streets of Athens.  It is already nearly impossible to save Greek membership in the euro area: depositors flee banks, taxpayers delay tax payments, and companies postpone paying their suppliers – either because they can’t pay or because they expect soon to be able to pay in cheap drachma. The troika of the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF) has proved unable to restore the prospect of recovery in Greece, and any new lending program would run into the same difficulties.  In apparent frustration, the head of the IMF,Christine Lagarde, remarked last week, “As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time.” Ms. Lagarde’s empathy is wearing thin and this is unfortunate – particularly as the Greek failure mostly demonstrates how wrong a single currency is for Europe.  The Greek backlash reflects the enormous pain and difficulty that comes with trying to arrange “internal devaluations” (a euphemism for big wage and spending cuts) in order to restore competitiveness and repay an excessive debt level. Faced with five years of recession, more than 20 percent unemployment, further cuts to come, and a stream of failed promises from politicians inside and outside the country, a political backlash seems only natural.  With IMF leaders, EC officials, and financial journalists floating the idea of a “Greek exit” from the euro, who can now invest in or sign long-term contracts in Greece?  Greece’s economy can only get worse. Some European politicians are now telling us that an orderly exit for Greece is feasible under current conditions, and Greece will be the only nation that leaves.  They are wrong.  Greece’s exit is simply another step in a chain of events that leads towards a chaotic dissolution of the euro zone. During the next stage of the crisis, Europe’s electorate will be rudely awakened to the large financial risks which have been foisted upon them in failed attempts to keep the single currency alive.  If Greece quits the euro later this year, its government will default on approximately 300 billion euros of external public debt, including roughly 187 billion euros owed to the IMF and European Financial Stability Facility (EFSF). More importantly and currently less obvious to German taxpayers, Greece will likely default on 155 billion euros directly owed to the euro system (comprised of the ECB and the 17 national central banks in the euro zone).  This includes 110 billion euros provided automatically to Greece through the Target2 payments system – which handles settlements between central banks for countries using the euro.   As depositors and lenders flee Greek banks, someone needs to finance that capital flight, otherwise Greek banks would fail.  This role is taken on by other euro area central banks, which have quietly leant large funds, with the balances reported in the Target2 account.  The vast bulk of this lending is, in practice, done by the Bundesbank since capital flight mostly goes to Germany, although all members of the euro system share the losses if there are defaults. The ECB has always vehemently denied that it has taken an excessive amount of risk despite its increasingly relaxed lending policies.  But between Target2 and direct bond purchases alone, the euro system claims on troubled periphery countries are now approximately 1.1 trillion euros (this is our estimate based on available official data).  This amounts to over 200 percent of the (broadly defined) capital of the euro system.  No responsible bank would claim these sums are minor risks to its capital or to taxpayers.  These claims also amount to 43 percent of German Gross Domestic Product, which is now around 2.57 trillion euros.  With Greece proving that all this financing is deeply risky, the euro system will appear far more fragile and dangerous to taxpayers and investors. Jacek Rostowski, the Polish Finance Minister, recently warned that the calamity of a Greek default is likely to result in a flight from banks and sovereign debt across the periphery, and that – to avoid a greater calamity – all remaining member nations need to be provided with unlimited funding for at least 18 months.  Mr. Rostowski expresses concern, however, that the ECB is not prepared to provide such a firewall, and no other entity has the capacity, legitimacy, or will to do so. We agree:  Once it dawns on people that the ECB already has a large amount of credit risk on its books, it seems very unlikely that the ECB would start providing limitless funds to all other governments that face pressure from the bond market.  The Greek trajectory of austerity-backlash-default is likely to be repeated elsewhere – so why would the Germans want the ECB to double- or quadruple-down by suddenly ratcheting up loans to everyone else? The most likely scenario is that the ECB will reluctantly and haltingly provide funds to other nations – an on-again, off-again pattern of support — and that simply won’t be enough to stabilize the situation.  Having seen the destruction of a Greek exit, and knowing that both the ECB and German taxpayers will not tolerate unlimited additional losses, investors and depositors will respond by fleeing banks in other peripheral countries and holding off on investment and spending. Capital flight could last for months, leaving banks in the periphery short of liquidity and forcing them to contract credit – pushing their economies into deeper recessions and their voters towards anger.  Even as the ECB refuses to provide large amounts of visible funding, the automatic mechanics of Europe’s payment system will mean the capital flight from Spain and Italy to German banks is transformed into larger and larger de facto loans by the Bundesbank to Banca d’Italia and Banco de Espana– essentially to the Italian and Spanish states.  German taxpayers will begin to see through this scheme and become afraid of further losses. The end of the euro system looks like this.  The periphery suffers ever deeper recessions — failing to meet targets set by the troika — and their public debt burdens will become more obviously unaffordable. The euro falls significantly against other currencies, but not in a manner that makes Europe more attractive as a place for investment. Instead, there will be recognition that the ECB has lost control of monetary policy, is being forced to create credits to finance capital flight and prop up troubled sovereigns — and that those credits may not get repaid in full.  The world will no longer think of the euro as a safe currency; rather investors will shun bonds from the whole region, and even Germany may have trouble issuing debt at reasonable interest rates.  Finally, German taxpayers will be suffering unacceptable inflation and an apparently uncontrollable looming bill to bail out their euro partners. The simplest solution will be for Germany itself to leave the euro, forcing other nations to scramble and follow suit.  Germany’s guilt over past conflicts and a fear of losing the benefits from 60 years of European integration will no doubt postpone the inevitable.  But here’s the problem with postponing the inevitable – when the dam finally breaks, the consequences will be that much more devastating since the debts will be larger and the antagonism will be more intense. A disorderly break-up of the euro area will be far more damaging to global financial markets than the crisis of 2008.   In fall 2008 the decision was whether or how governments should provide a back-stop to big banks and the creditors to those banks.  Now some European governments face insolvency themselves.  The European economy accounts for almost 1/3 of world GDP.  Total euro sovereign debt outstanding comprises about $11 trillion, of which at least $4 trillion must be regarded as a near term risk for restructuring. Europe’s rich capital markets and banking system, including the market for 185 trillion dollars in outstanding euro-denominated derivative contracts, will be in turmoil and there will be large scale capital flight out of Europe into the United States and Asia.  Who can be confident that our global megabanks are truly ready to withstand the likely losses?  It is almost certain that large numbers of pensioners and households will find their savings are wiped out directly or inflation erodes what they saved all their lives.  The potential for political turmoil and human hardship is staggering. For the last three years Europe’s politicians have promised to “do whatever it takes” to save the euro.  It is now clear that this promise is beyond their capacity to keep – because it requires steps that are unacceptable to their electorates.  No one knows for sure how long they can delay the complete collapse of the euro, perhaps months or even several more years, but we are moving steadily to an ugly end. Whenever nations fail in a crisis, the blame game starts. Some in Europe and the IMF’s leadership are already covering their tracks, implying that corruption and those “Greeks not paying taxes” caused it all to fail.  This is wrong:  the euro system is generating miserable unemployment and deep recessions in Ireland, Italy, Greece, Portugal and Spain also.  Despite Troika-sponsored adjustment programs, conditions continue to worsen in the periphery.  We cannot blame corrupt Greek politicians for all that. It is time for European and IMF officials, with support from the US and others, to work on how to dismantle the euro area.  While no dissolution will be truly orderly, there are means to reduce the chaos.  Many technical, legal, and financial market issues could be worked out in advance.  We need plans to deal with: the introduction of new currencies, multiple sovereign defaults, recapitalization of banks and insurance groups, and divvying up the assets and liabilities of the euro system.  Some nations will soon need foreign reserves to backstop their new currencies.  Most importantly, Europe needs to salvage its great achievements, including free trade and labor mobility across the continent, while extricating itself from this colossal error of a single currency. Unfortunately for all of us, our politicians refuse to go there – they hate to admit their mistakes and past incompetence, and in any case, the job of coordinating those seventeen discordant nations in the wind down of this currency regime is, perhaps, beyond reach. Forget about a rescue in the form of the G20, the G8, the G7, a new European Union Treasury, the issue of Eurobonds, a large scale debt mutualisation scheme, or any other bedtime story.  We are each on our own.  

Now Greece...!


Kayman's picture

Wife runs up her credit cards to the limit.  You pay them off.

Wife runs up all her credit cards to the limit again. You pay them off and tell her there are serious consequences if she runs them up again.

Wife runs credit cards up to the limit. The Euro is a credit card.  Over to you Germany.

Is that what you're trying to say?  Eventually divorce is the only option.


i-dog's picture

Good link. Thanks.

This excerpt from another of his writings (here) also rings true:

"Professors Acemoglu and Robinson discern a simple pattern – when elites are held in check, typically by effective legal mechanisms, everyone else in society does much better and sustained economic growth becomes possible. But powerful people – kings, barons, industrialists, bankers [and bishops] – work long and hard to relax the constraints on their actions. And when they succeed, the effects are not just redistribution toward themselves but also an undermining of economic growth and often a tearing at the fabric of society."

falak pema's picture

Reposted  : to get the whole thread go here : 2572515


well, I see you are reluctant to admit what you have said, like here :


The EU Summit To Save The Euro Has Already Failed - Business Insider

And to admit what this analyst says here which is the industry conclusion right now  after this game changer! :

David Zervos: Germany Loses - Business Insider

Its a mile away from your previous conclusions. You have been barking up the wrong tree! 

If the Bundestag (done)  and Karlsruhe ratify the concessions made, according to all it will change the face of Euro zone defense. Until first world, not just Euro zone, comes to the financial boil whenever the FED runs out of bullets. 

Not that I do not agree that this 500 B limit to ESM is stupid. They cannt buy ALL Spanish and Italian bad debt with this amount. They need more like 2T at least! Will they get 2T? No way! So this is virtually band aid to save Eurozone.

In the final analysis only the reserve currency can print to infinity. So the FED has to guaranty the PAx Americana construct of which surrogate Europe/ECB/Eurobanking are a part in this current power structure. There is no decoupling possible.

Only one way out down the line (2013-2017) : Financial armageddon in Eurozone/UK/JAPAN/USA. Dominoes all.

And then will there be real Armageddon?? Now a question to ask the BRICS as well!

Mongol horde and Orda chimes.


Nachdenken's picture

The perception in Germany is that Merkel gave in. Die Welt headline this morning "Merkel folds in Brussel"

The issue is not how to rescue, or how much to rescue. 

The issue is not to rescue, and allow the financial sector to reorganise itself.  The costs in time and economic dislocation have been presented, some drastic, some dramatic, but the costs should be paid, not postponed .  We will pay more for this delay and mounting of debt and derivatives to minimise that debt.

Van Rompuy will have more Eurocracy, minimal democracy, Hollande will have more control of Europe (read Germany), which was the original intent of the Euro/zone.

Your analysis is always refreshing, thought provoking.  What can one do ?  That is the grit in this fine dough.

BigDuke6's picture

The Germans will pay for the 25 million they gassed.
I learned that in school.
Hollywood will do a movie directed by Tarantino

JOYFUL's picture

Never mind the's the biggest, boldest fabulist of a scriptwriter that is the most important element to the pending EURO-E-PIC, and there's none so fabulistic as our "Wolf" - bad enough that all MSM reportage is a scripted pastiche of lies, half-truths, and distortions - now the alternative media has it's own false prophets.

The actors to whom our author assigns roles with such hyperbolic excess of purple prose["Because nothing less than the future of the Eurozone and the euro is at stake. And by extension, the world economy. Only she can save it. And she'd have only 48 hours!"] are but hollow puppets placed upon the stage by the shadowy masters of this shadow-puppet play...

the Merkels, Rompuys, Draghis et al, have no more importance or credibility than the constitutionally illegal BRD itself...a puppet state of the moneychangers who have controlled Germans for almost 100 years now...and who employ scriptwriters such as Mr. R. to augment the work performed by the Verfassungsschutz on behalf of their Mossad and Kidon controllers - eliminate dissent, close debate, and provide false narratives to mislead the attention of the dupe citizenry.

Just as the offshore riches of failed state Cyprus are a target of the Rus Mafiya[headquartered NY\TelAviv]so the other rump states of the soft European underbelly are being readied for the slaughterhouse with the same Kosher Imprint to be tattooed upon the fresh, never frozen carcasses...

all of the rest of the spewed verbiage is just window-dressing and operatic noise played over and over here to hide the screams of the Euromeric inmates as they are prodded closer and closer to the chutes!

otto skorzeny's picture

every day this finale is put off only makes the end result that much worse

shovelhead's picture

A very disappointing Euro-Summit.

No one got stabbed in the neck.

Maybe next month.

Peter Pan's picture

So the Europeans now have a blueprint for getting out of the mess?

That would be about right. They have had more than one blue between themselves and now they will soon proceed to print.

Anomalous Howard's picture

OK...good to go then...if nothing on the brink of implosion does indeed implode in the next 7 to 10 months...

and if the ESM does indeed materialize...

and if a new "agreeable" regulator does indeed materialize...

and if hell does indeed freeze over.


oldgasII's picture

The German economy is good only in comparison to the rest of Europe.  They don't have the resources to carry the rest for very long.  They've had companies move to Eastern Europe, their banks have bad paper, and their Water melons have put them into an energy death spiral. They''ll gave to buy out of country energy this fall and winter.  

granolageek's picture

>> Water melons have put them into an energy death spiral. They''ll gave to buy out of country energy this fall and winter. 


Hey, one clause is true. Germany has no uranium, not enough natural gas and their coal mines are old and tired. Watermelons or not, they would have to buy energy.

Now that the below cost plutonium from recycled Soviet bombs is running out, imported natgas is their best bet to keep their toilets flushing this winter.

Kastorsky's picture

I am In Love with These Times

Phys will be so hard to come by.

Spastica Rex's picture

'Cept that was 1978.

+1 anyway for The Cars.

Roger Knights's picture

The next time that can gets kicked, it'll burst ... and all the death-worms inside -- mad as hell from their hard knocks -- will pour out, hungry for revenge.

km4's picture

Clarke and Dawe - European Debt Crisis was excellent !

otto skorzeny's picture

you'll never see that on CNBC

mjcOH1's picture

More taxpayer funded catering / hookers / coke.   More market movement based on news that isn't of actions that will never be.

It's a fine time to be an EU bureaucrat on the summit circuit though.   There should be time to squeeze a couple into the riviera before the markets catch on and the taxpayers start complaining.

The Big Ching-aso's picture



3-Card Monti has now evolved into 17-Card Monti.  Uber-phucked uber alles.