On Europe's Apparent Utopia

Tyler Durden's picture

With EURUSD hitting one-month highs and Greek and Spanish government bonds pushing higher day after day, one could be forgiven for thinking all is well across the pond. Tail-risks removed, firewalls in place, and everything ticking along nicely. The reality, of course, is a rather different picture. This week alone, 36bps compression in Spanish sovereign bond spreads, 100bps in Portugal...


European stocks are up over 5%!!!


and yet - under the surface - a harsher reality is coming into view...

Via Credit Suisse:

As we head into year-end, European storm clouds are building. In a week of considerable European news, the most significant in our view is the mass of headlines coming out on Greece. The inability, yet again, of the Eurogroup to reach an agreement in the absence of market stress we don’t think bodes well for the ECB-backed positive market environment to be sustained into 2013.


Greek headlines are negative – for Greece and Europe


It is hard to construe the newsflow out of Greece as anything other than negative. As we outlined last week, in our view the hard stance being taken by the IMF looked likely to lead to a better near-term outcome for Greece’s financial situation than if the IMF wasn’t involved. This is no longer clear.


Greece’s debt load is patently unsustainable, in our view, and it is necessary to cut it again. Which requires the euro area to put its money where its mouth is, and act to show their commitment to keeping Greece in the euro area by cutting Greece’s official sector debt.


It’s not a sufficient condition to put Greece on a sustainable economic path by any means, but it helps – not least because of the commitment it shows. And at the broader level, the fact that it would show that the euro area can take a decisive, pre-emptive action is positive when looking across to the situation in Spain. But instead, we believe the euro area again looks likely just to fudge the issue. We continue to expect funding for Greece to be forthcoming – although an agreement on Monday is far from certain – but a meaningful reduction in the country’s debtload is looking increasingly unlikely despite the IMF’s wishes.


With so many conflicting headlines emanating from this week’s Eurogroup meeting on Greece, the clearest conclusion is that there is complete disagreement not only on what needs to be done to support Greece, and when, but also how to go about it. The potential for anything meaningful therefore looks remote. Particularly since at Wednesday’s German Bundestag meeting on the 2013 budget, Merkel only discussed a cut in interest rates on the bilateral loans and a €10 billion EFSF-financed bond buyback programme. While not impossible, it is hard to see how she can agree to something greater than this next week given it wasn’t discussed in parliament.


So anything but the softest form of OSI still seems to be ruled out by Germany, and if, as reported by the FT, the Bundesbank isn’t willing to disburse its profits, it’s hard to see why other central banks would be willing to do so.


As for the debt buyback plan – on paper it may sound great: Greek bonds have been trading at around 25% of face value so spend €10 billion and buy back €40 billion face value, reducing the nominal debtload by €30 billion or 14% of GDP. Which would be a good start (although not decisive given debt levels in our opinion), but skips over a few minor details – one of which being the fact that bonds no longer trade at 25. Oddly enough, they’ve staged a rather decent rally since the buyback plan was announced… and what’s the incentive to sell? Or are we now talking about coerced bond purchases for 25% of notional, in EFSF bonds again maybe? It seems a small step from current rhetoric to a second private sector debt restructuring – at which point, maybe the 25% also comes into debate. Greece may well be the “exception” a second time sooner rather than later on current trends…


Indecision costs the whole of the euro area


The apparent inability of the euro area to reach any sort of decision on how best to address Greece’s debtload is far more negative in our view than just its impact on Greece. It speaks, once again, in our view, of the inability for progress at the euro area level in the absence of market pressure. The ECB’s (unactivated) OMT backstop has worked extremely well until now, but the ability of it to continue to do so without progress on the political side is limited in our opinion.


As we head into year-end, European storm clouds are building. We still expect Greece to get its funding, but Europe looks increasingly unlikely to grasp the opportunity to take Greek funding issues decisively off the European agenda for 2013. A decision on banking union looks more bogged-down by the day, with the EU budget at risk of going in the same direction, and then there’s Spain...


This week’s election in Catalonia is likely to create further political noise rather than a real risk of secession as outlined by our economists: Catalonia’s choice, 19 Nov 2012.


Our view (hope?) that Spain might ask for support in November, in advance of year-end, looks destined to be incorrect. Since we believe that a Spanish request for support is inevitable, we see little market-positive reason for Rajoy to not to be pre-emptive in asking.


If it really is Spain’s decision when to ask, then market pressure does look increasingly necessary – which based on developments of the last few months could take some time.


This week Spain did another private placement, this time €3.27 billion bought by its social security reserve fund (the last few we believe were primarily bought by the banks). Sovereigns as we’ve often said, are sovereign, and have many means at their disposal to ensure buyers for their debt. The cost, however, is to further increase the correlation in the Spanish system, and hence systemic risk. If, on the other hand, and as we suspect is at least partially the case, the timing of a Spanish bailout request is a decision for the Eurogroup more generally, this begs the question of the advantage to the Eurogroup of a delay. If all countries are on board, there seems to be little to gain from waiting – particularly given the risks to a deterioration in the situation in Greece. And if not all countries are in agreement on the best approach for Spain (which given the situation with Greece, is a depressing possibility), this is clearly market-negative in our view. There is only so much the ECB can do without political support – as Draghi has frequently made clear.


Meanwhile, as illustrated in Exhibits 6 and 7, the private sector is voting with its feet:


German exposure to the periphery continues to fall (down 56% from the peak to the end of September), with exposures to Italy and Spain in particular lower this year. As we highlighted in our publication on the negative sovereign-bank feedback loop, buying time, particularly when done through indecision, comes at a substantial cost. Without certainty or confidence in the likely path ahead, business has to act in accordance with the risks, and cross-border exposures to the periphery will continue to decline, with the resultant negative implications for growth and lending-market fragmentation. As Santander’s CEO said this week: while the Treasury may not need the Spanish bailout, the Spanish economy and firms do.

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kaiserhoff's picture

I see people on both sides of the pond making the same mistake: thinking America is on it's way to becoming a Euro-trash style social democracy.  There are many historic and ethical reasons why that can't happen, but this is the most obvious.

In Europe, government handouts benefit almost everyone, but always a wide swath of population, including the slacker young.

In America, welfare benefits go only to the permanent poor of the ghetto, and the parasite kleptocrats.  That will not change, so a rapid collapse is inevitable.

Atomizer's picture

Yep, merging two financial disasters into one has always been the MO [Modus operandi]. They believe, more dumb fucks will join an insolvent membership charter. The days in selling a country club business model are over! Carry on Christine Lagarde.

Ghordius's picture

lol - can't say I like your tone or choice of words but I also can't find much fault in your view - except the "inevitability", that is

Atomizer's picture




Country Club Rule:

Member Charge Account: An account will be established for the convenience of each Member. This account will accumulate any charges incurred by the Member at the club. The balance of charges will be billed to the member on a monthly basis. As a Member, I agree to pay all amounts charged to my account by me or at my direction.


IMF Country Club rule:

IMF Fund Charge Account: This account will be established for the convenience of each IMF Member. This IMF Fund account will accumulate any charges incurred by the IMF Membership policies. The balance of charges will be billed to my IMF membership on a monthly basis. As a IMF Member, I agree to pay all amounts charged to my account by me or at my country of origin. IMF Payment delinquency will result in frozen banking assets.

Yen Cross's picture

 I wonder how many short euro accounts got blown up this week? The usd has just been pummeled over the last 2 days.

falak pema's picture

calling Orly, Calling Orly...

So swastika cross is not greenback bonered? What a betrayal of USA, USA! 

Eur : 1. 2971

Where is this going. I always believe in roller coasters. 

magpie's picture

I hope Rompuy is selling into the strength

bank guy in Brussels's picture

Europe is still rather a damn fine place to live ... indeed utopia in practical terms still, in our north-west Continental quadrant

That's part of the lack of pressure in resolving the euro-farce more quickly

But the harm to the common people in the Mediterranean countries is a crime and betrayal of European ideals ... Days of storming the Bastille are ahead

kaiserhoff's picture

Agreed, but that's hard for many to see, because everything in Europe is so damn small, including the aspirations.  The life-styles are completely different, not better or worse, just different.

What Europe has lacked, since the war, is genuine innovation.  Don't think that can be fixed.

Damn fine place for whom?  That's the common problem.  If you have a government or health-care job, or the right union, you are set for life.  Otherwise, you are fucked-over for life.  That won't end well.

Ghordius's picture

mmhhh... let's put it this way: is it better to be poor in the US or in the EU? or, in your words: where are you, if poor, fucked more?

dunce's picture

The poor in some countries inherit their poverty like the untouchables in India. This is much the same in effect as a reverse aristocracy. Our country has always provided upward mobility to the hard worker. The European underclass may well be free from want but they are also free from hope of eventual success. The hope that obama talks about is not what decent people harbor.

jusman's picture

Actually European multinationals are world leaders in innovation (think ABB, Siemens, ALSTOM in the electrical field....or BMW, Mercedes in automotive). Yes the culture is such that with 5 weeks vacation and hiring/firing policies that make it difficult to be flexible, but the culture seems (to me) to be less on the short term profit and more on longer term success.

And if you are "fucked-over for life" I posit that the safety nets that exist(ed) in Europe offer much more support than for the poor in the USA.

Of course, the forthcoming bankruptcy of nations unfortunately makes continuing this culture an increasingly impossible challenge.

Nussi34's picture

"European multinationals are world leaders in innovation"

With the exception of ALSTOM these companies and most other examples you can come up with share that their home is in Northern Europe. The ClubMed with the exception of Northern Italy is a third world country.

ABB = Swiss & Scandinavian

Siemens = German

ALSTOM = French

BMW = German

Mercedes = German

Oh regional Indian's picture

Funny to read Santander CEO's remark. He/SATANder is one of the key drags on Spain, no all of it visible yet. 

They have huge exposure in Argentina and Brazil. They will drag Spain down, finally, so of course they need bail-outs. 

FIRMS are looking Shakey, all around.

EUtopia, will end in a rain tears when Spain finally explodes.


falak pema's picture

ORi, Spain has already told Chavez to do a reverse conquisitador on him. He told China Spain was for sale. So now China can buy either Greece or Spain, and Chavez can buy Catalonia. 

Barcelona football team is worth 5 billion! That's a start, next Real MAdrid. 

Oh regional Indian's picture

Funny Falak.

The reverse Bolivar, a new move in Global Geopolitical Wrestling.

seek's picture

Nothing like the DXY tanking to launch gold prices. Nice amplifier though, DXY down under a half percent, AU up 1.2%, AG +1.8%, and market insanity +100%

akak's picture

Fundamentally, the DXY has about as much to do with the price of gold as does the price of pork bellies, in fact even less.  The US Dollar Index is a spurious, misleading and meaningless measure of anything REAL connected to the value of the US dollar, which is constantly and perpetually losing value, while the DXY hovers around the same value it had over 30 years ago, when the dollar was worth more than three times its purchasing value of today.

Forget about the DXY --- it is nothing but a bullshit tool of feeble propaganda used by TPTB to attempt to convince us that fiat currency depreciation is not an ongoing and inherent fact of life.

Yen Cross's picture

 Actually Akak what you say is mostly true, but I use the DXY on a 4 hour and daily chart for risk trades all the time. I works very well for me to get a general sense of direction before putting on a trade. shorter time frames are mostly worthless.

  When it eas rejected @ the 200day avg. earlier this week , was an indicator of risk on. I have been trading aud/jpy longs all week partially based on that info.


akak's picture

Yes, Yen, I do usually acknowledge (and forgot to above), in my rants against the DXY being held up as some kind of meaningful long-term yardstick of the value of the US dollar, that the DXY does have meaning in the context of short-term currency trading --- but only in that one narrow context.

seek's picture

Oh, totally agree -- I was just using it to explain the ballistic trajectory of AU/AG today. A relative measure of value benchmarked against other relative measures of value is a fundamentally flawed methodology regardless of what's being measured.

akak's picture

He looks bearish on the market.

jubber's picture

Euro up now 150 points on European Budget talks collapse...joke or what?

Renewable Life's picture

It's all just theatre until the people have had enough and burn it down!!!!

If we are waiting for a systematic collapse like 2008, we are dreaming, the govt, corporations, and banks have taken that possibility away a long time ago, and made it VERY clear they will print unlimited amounts of money, create unlimited amounts of new taxation, and inflict unlimited amounts of austerity on the working class people of this planet, in order to maintain the current levels of inflation and beyond!!!

This thing is about NATO countries maintaining their military power and our survival on this planet, as we have grown accustom too over the last 65 years!! The stock market, free market principles, liberty, indivdual freedom, and small entrepreneural innovation ALL died in 2008! What remains is only a ticking clock, and the unknown event that will begin the burning!!

Lord Of Finance's picture

free market interference continues seemingly without end. The central planners(politicians/bankers) will fail as they always do. They think and thought they eliminated the free markets corrective forces. They thought all those piles of money dropping continuously from the helicopter would bury it for good. But I hear rustling coming from the pile. Capitalisms sledge hammer is emerging once again. The central planners have turned their backs thinking they buried it for good this time. The hammer is rising up, preparing for another devastating blow. The central planners are backs turned, walking away.

     Part of the "fiscall cliff" deal will include something that is being overlooked. They politicians have enough votes to end the tax exempt status in municipal bonds. Obama tried to end it before. Look for enough idiot house republicans(of course all the dipshit democrats will be on board with it) to cave into the pressure to "raise revenue" and end the tax advantages for this junk bond market. The only reason so many investors are in this junk is only because of the tax advantages. In fact, record amounts have been flowing into this paper for the last two months. When the "deal" is reached before the deadline, and when it includes ending the tax advantage, all those in the bond market better lookout. There will be a stampede the likes of which has been seldom seen. Then the central planners better duck, and they better have eyes in the back of their heads, because the sledge hammer of capitalism will take another swing from its supposed final burial under 'the planners' piles of paper.

    The central planners are playing a kids game of rock,paper, scissors. Paper covers rock, but its only a game. The free market is not a game. It's a reality. In real life, the paper tears and wears out. When the next hard rain comes that paper will tear apart. When the next hard wind blows, their paper trash will blow away. The rock will always be there. Be patient.