This page has been archived and commenting is disabled.

The EU Summit: Europe Needs Capital, NOT Political Posturing

Phoenix Capital Research's picture




 

 

Everyone in the media is viewing the latest announcements out of the EU Summit as game-changers.

 

They are not.

 

One facet of the deal is that ESM/ EFSF loans to troubled countries will not subordinate private bondholders holdings. While this does serve the purpose of allowing private bondholders to feel that should a country default, they might get their money back sooner (as opposed to what happened in Greece)… it doesn’t change the more critical issue of stopping defaults from happening.

 

Indeed, if Spain were to default, the fact that I as a potential private bondholder would be further up the line to collect my funds doesn’t do me a whole lot of good, does it? My money’s gone, at least most of it. So the benefits of this move are of borderline significance.

 

Moreover, none of the measures address the most critical issue pertaining to Europe: where is the money going to come from?

 

As I have noted before, the European Stability Mechanism, which everyone sees as the ultimate savior for the EU, does NOT exist yet. Only four out of the required 17 countries have ratified its legislation.

 

And the due date for ratification? July 9th.

 

So we have less than two weeks for 14 EU members to ratify the ESM.

 

Another interesting fact about the ESM… Spain and Italy will contribute 30% of its funding. So… the mega-bailout fund which is going to save Spain and Italy is receiving nearly one third of its funds from the very same countries it’s going to bail out!?!

 

You couldn’t make this stuff up if you tried.

 

Another topic worth discussing is the fact that EU leaders didn’t agree to increase the EFSF or the ESM. The simple and obvious reason for this is no one has the funds to do this.

 

I’ve been saying this for months. No one seems to be listening: Europe is out of buyers. End of story. There simply isn’t €500 billion lying around to be put to use. That’s why the ESM and EFSF aren’t being increased in size. They couldn’t be.

 

Another point, and perhaps the most key one is that the ECB will now be using bailout funds to help recapitalize EU banks. This move will ultimately end up hurting the banks that seek funding from the ECB much as those firms which drew on the ECB’s LTRO1 and LTRO 2 schemes found themselves severely punished in the credit and bond markets.

 

After all, requesting aid is essentially a public admission that one’s bank is in major trouble. In this end this hurts the bank seeking aid as everyone now knows that it’s on the ropes.

 

Indeed, as we saw with LTRO 2 (which provided over €500 billion to EU banks), those banks that drew on the ECB saw, at most, one month’s worth of gains before they were right back to where they started in terms of share price and funding needs.

 

Oh, and none of this will go into effect until December. Let’s hope Spain and Italy and others don’t need the funds before then!

 

My take on this whole mess?

 

  1. The benefits of the announcements (lower yields on sovereign bonds and higher share prices in EU banks) will be short-lived.
  2. None of these decisions address the core issues facing the EU banking system: namely, insolvency and excessive leverage.
  3. No one in the EU actually has the money to make these measures work (again, Spain and Italy will provide 30% of the ESM’s funding).

 

Markets will stage a knee jerk reaction to these measures. That reaction will see bank shares rise and yields fall, temporarily. But this move will be short-lived, just as moves following LTRO1 and LTRO 2 were. After all, these announcements are just more political measures than anything else. And Europe needs capital NOT politics at this point.

So I would expect this rally and the drop in bonds to be short-lived. EU leaders may have put off the Crisis by a few weeks (or perhaps even a month). But they still haven’t addressed the core issues causing the Crisis: excess leverage courtesy of hundreds of billions of Euros’ worth of garbage debt.

 

With that in mind, I would use this rally to further prepare for the EU Crisis. I recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.

 

This report is 100% FREE. You can pick up a copy today at: http://www.gainspainscapital.com

 

Good Investing!

 

Graham Summers

 

PS. We also feature numerous other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s a US Debt Default, runaway inflation, or even food shortages and bank holidays, our reports cover how to get through these situations safely and profitably.

 

And ALL of this is available for FREE under the OUR FREE REPORTS tab at: http://www.gainspainscapital.com

 

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 06/30/2012 - 10:58 | 2576804 Jack Sheet
Jack Sheet's picture

This post is hanging around like a fart in a phone booth.

Sat, 06/30/2012 - 09:01 | 2576335 Blue Dog
Blue Dog's picture

Europe needs to drastically cut entitlements. Feeding the debt monster just delays the inevitable.

Sat, 06/30/2012 - 07:02 | 2575883 Poor Grogman
Poor Grogman's picture

I love the smell of newly printed money in the morning...

Keep those printers humming boys theres  gold in them there hills..

Fri, 06/29/2012 - 22:21 | 2575279 andrewp111
andrewp111's picture

The ECB will provide the funding - by printing it. The power to print is infinite. They just have to be willing to use it.

"Moreover, none of the measures address the most critical issue pertaining to Europe: where is the money going to come from?"

Fri, 06/29/2012 - 15:29 | 2574293 Randall Cabot
Randall Cabot's picture

Define short-lived.

Fri, 06/29/2012 - 15:38 | 2574335 Jack Sheet
Jack Sheet's picture

until the next free report

Sat, 06/30/2012 - 01:17 | 2575465 The Monkey
The Monkey's picture

Graham Summers, you are a fucking idiot. If investors will pay big money for low rate - long duration corporate junk, they sure as hell can return to funding these insolvent sovereigns. All it takes is perception. Don't fool yourself. Investors these days will buy almost anything. The Fed has left them with no choice.

Wait and see how hard the EU bond markets (and global markets) rally on a 50 bps cut. It will be eye watering for any remaining shorts in the commodity and equity markets.

Everyone should have seen this coming. Why else did the Fed keep the brakes on open market purchases?

Give it up Graham. You have lost 2012 and you're wasting your time.

Sat, 06/30/2012 - 01:17 | 2575464 The Monkey
The Monkey's picture

Graham Summers, you are a fucking idiot. If investors will pay big money for low rate - long duration corporate junk, they sure as hell can return to funding these insolvent sovereigns. All it takes is perception. Don't fool yourself. Investors these days will buy almost anything. The Fed has left them with no choice.

Wait and see how hard the EU bond markets (and global markets) rally on a 50 bps cut. It will be eye watering for any remaining shorts in the commodity and equity markets.

Everyone should have seen this coming. Why else did the Fed keep the brakes on open market purchases?

Give it up Graham. You have lost 2012 and you're wasting your time.

Fri, 06/29/2012 - 14:53 | 2574141 MrBoompi
MrBoompi's picture

I don't think the issue is whether the money's there or not.  We all know it can be created out of thin air.  What they're arguing about is who will pay it back and how.

Fri, 06/29/2012 - 12:32 | 2573630 steve from virginia
steve from virginia's picture

 

Another sham, another short squeeze on the cash markets, more witch-doctoring from the establishment.

They had an empty bag yesterday, they have an empty bag today they will have the same thing tomorrow.

The central banks cannot 'print', they cannot do anything because doing so removes what shreds of credibility remain to them. The ESM is not a central bank, it is another insolvent mess no different from the other insolvent euro-banking messes ... a daisy chain of bad loans. 

Fri, 06/29/2012 - 12:16 | 2573555 walküre
walküre's picture

COUNTDOWN TO BANK RUN IN GERMANY 3,2,1

Germany agreed to an absolute and total capitulation for the 3rd time!

The Italian Mafia got to Merkel. Germany is de facto without representation. Germans have only one choice now. Bankrupt the country faster than the FPIIGS will do, hoarding cash, PMs, other tangibles and force a RESET.

When you can't beat them, you join them. Now that Athens, Rome, Madrid and Paris are dictating to the Germans how to run their affairs and they're all pillaging from Germany, the Germans should stop working, stop producing, stop paying taxes.

Germans have savings they can live off. Shut down factories, lay off all the staff. Do like the Greeks, Italians, Spanish and French.

FUCK THIS SHIT.

 

Fri, 06/29/2012 - 13:27 | 2573819 magpie
magpie's picture

But but bankruns are good, aren't they ? We need the higher velocity...

Fri, 06/29/2012 - 12:04 | 2573492 ATG
ATG's picture

Dear GS

Despite all the scoffing you suffer here, could not agree more:

Show us the gold.

Just took windfall profits on SPY Jul 131 Calls and averaging into QQQ Jul 64 puts:

http://richcash8tradeblog.blogspot.com/ 

Cheers for Financial Indpendence Day...

Fri, 06/29/2012 - 11:58 | 2573470 disabledvet
disabledvet's picture

Again "what am I buying here?" A bailout? From whom? A bank? Maybe if they took the ECB public first so investors could see inside that thing. Otherwise "you're only option is the Fed" and my guess is there Secret Santa days are done. Indeed by driving down the value of the dollar thereby creating massive internal demand WITHIN the US economy thereby "sucking up any hope for liquidity."

Fri, 06/29/2012 - 11:43 | 2573413 Snakeeyes
Snakeeyes's picture

Exactly. All they did was kick the can down the Socialist road.

Great that Frence GDP printed at 0%. What a friggin' mess!!!!!!!!!!!!!!!!!!!11

http://confoundedinterest.wordpress.com/2012/06/29/angelas-angst-germany-surrenders-and-allows-direct-bailout-of-spanish-banks/

Fri, 06/29/2012 - 11:11 | 2573296 Jack Sheet
Jack Sheet's picture

No comment.

Fri, 06/29/2012 - 12:42 | 2573672 old naughty
old naughty's picture

sigh !

Fri, 06/29/2012 - 12:57 | 2573711 Jack Sheet
Jack Sheet's picture

Graham writes the post then gets busy on the downvotes.

Fri, 06/29/2012 - 09:44 | 2573032 This is the end
This is the end's picture

Eventually he will be right but really quickly I would go bankrupt investing off of this guy's predictions.

Fri, 06/29/2012 - 20:01 | 2575070 GernB
GernB's picture

This may not be a popular opinion, but it is good advice. The author of the article may give great investment advice, but if you run off and short the market after just reading this article you are asking for it. It could take days for reality to hit and the market could rall to over 1400 while your waiting. Who was it that said the market can remain Irrational longer than you can remain solvent.

Fri, 06/29/2012 - 09:17 | 2572917 q99x2
q99x2's picture

End of world newsletters should be in demand at least until earth gets hit by an asteroid.

Fri, 06/29/2012 - 09:13 | 2572906 Joe A
Joe A's picture

So Graham, where is the Fed getting all this money from then?

Fri, 06/29/2012 - 09:12 | 2572902 BinAround
BinAround's picture

Three questions...

1. Does the creation of a central bank pan-Euro regulator open the door for unlimited lending by the ECB to banks?  Maybe.
So, far Germany has opposed this, but that position can change.

2.  Would the reduction of local bank regulation (by local politicians) reduce the banks preference for local soveriegn bonds?  Maybe.
That would not help the soveriegn bond market.

3.  Would more realistic bad debt reserving coincide with a more objective regulator?  Maybe.  That would not help solvency ratios. 

If they change their mind about printing money, as in point 1, then this rally might have legs.

Sat, 06/30/2012 - 01:56 | 2575484 The Monkey
The Monkey's picture

The only question I care about:

Will investors be convinced and return to funding the insolvent sovereigns?

I believe they will return (at least for a while) with a bang given a bit more clarity and a 50 bps cut. This should set up a pretty big rally with a great short at the end - but we have a loonng way to go before sentiment runs it's course and prices top out again.

Next short is going to be extremely hard to call but aren't they all?

Fri, 06/29/2012 - 09:05 | 2572870 NEOSERF
NEOSERF's picture

Good summary...agree with you.  My guess is that there could be a sideways or up move through next week which will have NO volume and expectation that the ESM gets ratified which it probably will.  This will cause us to go to 13,500 setting us all up for a huge hit in Sep-Oct where it will be obvious that the US has some issues to fix, corporate profits have peaked and Europe needs the ECB to start printing and for Congress to push out both the auto-cuts and Bush tax cut expiration...that will happen probably in mid-October and reset what happened last year where the markets relaxed for 6 months where we replay this year yet again...

Fri, 06/29/2012 - 09:01 | 2572854 digitlman
digitlman's picture

EU didn't blow up, Graham.

So fuck off now.

Fri, 06/29/2012 - 09:00 | 2572839 falak pema
falak pema's picture

If the Euro group goes FED wise, they can print capital to infinity. And it is a contagious disease! Don't count on the opposite. The only issue is ONE DAY second world can take first world to the cleaners and say, pay up and/or, move over your reserve is toilet paper! That's when things get interesting; not these fiat shenanigans amongst first world banksta controlled crooks who can print until the cows come home! 

Fri, 06/29/2012 - 12:41 | 2573662 old naughty
old naughty's picture

sht, dup.

not me, rogers did it.  ;p

Fri, 06/29/2012 - 12:39 | 2573660 old naughty
old naughty's picture

"...ONE DAY second world can take first world to the cleaners and say, pay up and/or, move over..."

I won't count on that happen too soon.

Banks still want to lend (eh, kick the can), so sovereigns should still borrow.

Let the short-live be...meantime enjoy the football. It's only a crisis. Lots more to come.

Me, going back to bury my head in the beach.

Sat, 06/30/2012 - 03:43 | 2575518 falak pema
falak pema's picture

its happening in front of our eyes as more and more MOVE OUT of USD denominated trades.

Fri, 06/29/2012 - 13:50 | 2573895 Popo
Popo's picture

Another junior-varsity post from Zerohedge's resident lightweight.

Have you ever considered getting a four year degree Graham?

Do NOT follow this link or you will be banned from the site!