EFSF Plan in Europe is no Free Ride

Courtesy of Russ Winter of Winter Watch at Wall Street Examiner 

The debt ratios of the key players illustrates well that virtually everyone is courting fiscal crisis. 

The easy way out of turning to bigger, more solvent governments for bailouts has run its course. The chamber is empty. Government debt to GDP is running high everywhere. When a country (such as the U.S.) runs near 100% gross debt to GDP and household debt combines with huge future deficits, it's already dead on arrival.

Looking at the next dead-on-arrival candidates leads us to Germany and France. Although superficially it appears as if those countries are running a tight fiscal ship, in reality they are highly exposed to enormous losses via the Troika mechanism they have set up to bailout the weak sisters of Europe. These sisters continue to come for more manna from heaven (tranches), which in turn further weakens the so-called core countries. How many more tranches can France absorb? France, with a debt to GDP of 88%, was warned back in August on its bogus, inflated, top-notch credit rating. The mere revelation and recognition of the Troika losses taken by France in particular as well as Germany puts these countries into the tar pit. Now this weekend S&P is already out with more warnings that European credit ratings will be lower if a large EFSF plan is announced. Notice that when CNBC "released" this story that the Italian 2 year yield increased 26 basis points.

Meanwhile the banksters are resisting the Greek haircut. A Greek haircut (debt relief) is a solution as long as the banksters take most of the hit, not other sovereigns. The banking sector worldwide needs to be shrunk. In other words, the Germans are right, not Turbo Timmy's bailout out the banks view. 

More bailouts for the banks, if implemented, will be very bearish. It is important to recognize that all the countries in the Eurozone are ECB members.  In addition to Germany and France, Italy is a substantial member of the ECB and would share in the liabilities, and one should add Belgium and Spain. If the US gets involved this would definitely be a catalyst for downgrades. Meanwhile the US continues to show its ungovernable nature as more down-to-the-wire budgetary machinations get under way. I think we see more US downgrades in the 4th quarter.

As if the tar-pit reality of dealing with Greece, Portugal and Ireland was not enough, these pseudo stronger Euro nations and their pseudo solutions will next be challenged with assisting in buying overpriced Italian debt. So right after the agencies downgrade Europe's countries across the board, attention will need to be shifted to Italian debt rollovers.

Elsewhere in Europe:

10:43 AM Irish property prices continue to slide, off another 1.6% in August, taking the Y/Y decline to 13.9%. Since the 2007 peak, residential home prices have fallen 43%

Portuguese two year Treasuries are getting Greek-like:

This post is reprinted from Russ’s premium service, Russ Winter’s Actionable. Click here for more information.  

Comments

[AngryGerman]

German parliament will not accept any further expansion of the EFSF. IF it gets passed on Thursday, and it will be expanded afterwards (by tricking), then heir coalition will be over AND she looses the support within her party.

So basically it's the last money europe gets from germany, and that ain't enough.

So Greece will (partially) default, and european banks will have to be bailed out per country...

So anyone who governs right now will loose next election, either bc of bailout or bc of lehmann events + economic crisis...

After that: Extremist will win elections (either lefties or righties), both leading to protectionism etc.

Post-WWII is over, properity is done, the Western World experiment has detroyed itself.

[Cynical Sidney]

total future financial obligations for the US surpasses 70 trillion!!!!!!!!! 

100% debt to GDP ratio is BS, call it cooked financials or creative accounting.....

RIP capitalism fun while it lasted.

[Tic tock]

For all the wisdom at the top the larger banks, it is surprising that the deeply structural-type changes are not being endorsed; this is, after all, the age of Aquarius.

[DeadOnArrival]

When a country (such as the U.S.) runs near 100% gross debt to GDP and household debt combines with huge future deficits, it's already dead on arrival.

I truly hope we are not DOA, but as we are about to enter our 4th consecutive year of a +$1T budget deficit, our future looks bleak at best.

[Sambo]

That we were able to enter a 4th year is in itself a miracle.

[RoRoTrader]

From what I read, and I don't have resources available to others so not inferring my impression is right, but..........Merkel's authority looks to be on a slippery slope and without a very decisive vote over the EFSF on Thurs then my best guess is the topside risk for the Euro looks very limited, especially in the event of political fragmentation inside Germany and all of the rhetoric coming from the FinMin to the German Supreme Court (allready voted against unilateral intervetion) EURO looks like a sell to me.

How does that size up/square with Phil's outlook?

Great writing about difficult and complex subject matter made simple on your site and thanks for the deep insights. Ilene.

Vee shall see, as the Germans like to say.......but for what that is worth I am short Euros, again.

PS.......also short Oil at 83 and a stop over 85