A few days ago we mocked the market's naive belief that a loose union of 17 different countries and hundreds of separate political organizations, each torn by thousands of unique interests and lobby groups, can all agree unanimously in the pursuit of the common monetary (read: banker) good, over that of their own people. Yet that did not stop stocks from enacting the second weekly massive short covering squeeze, in 3 weeks, purely on hype, rumors, innuendo and lies. And just like the last time the market soared by nearly double digits in a few short days, only to plunge when hopes of a quick resolution were mercilessly dashed, Monday has all the makings of another epic risk off day. Because while all it takes is a rumor (of a plan for a plan) to start a squeeze, we are about to get some very nasty actual events which will demand immediate and forceful intervention by the powers that be, something which Europe (and the US) has proven is virtually impossible. The events in question are, as Reuters reports, that i) "Dexia's Funeral Will Be Announced On Sunday" and, as Bloomberg reports, that ii) Slovakia’s ruling Freedom and Solidarity party won’t back the overhaul of the European bailout mechanism after Prime Minister Iveta Radicova rejected the party’s conditions for approval, a lawmaker said. Said otherwise, bonds are currently thanking their lucky stars the bond market is closed because not only will Europe have to deal with the headline risk that the weakest link in Europe, the tiny country of Slovakia, can scuttle the entire second Greek rescue operation, and thus, lead to the expulsion of Greece from the eurozone following its bankruptcy, but this will have to take place as Europe fights the stem the contagion resulting from the collapse and nationalization of the first Greek bank, which nobody, nobody, could have foreseen.
First, on Dexia via Reuters:
France and Belgium are expected to finalise plans this weekend to break up Dexia, which helps finance hundreds of towns in both countries and became the first European bank to fall victim to the euro zone crisis.
Dexia, whose board is likely to meet on Sunday, was forced to seek government help earlier this week after a liquidity crunch hobbled the lender and sent its shares into a tailspin.
The bank's implosion has added to investors' worries about the solidity of European banks and has coincided with increased European Union talk about coordinated action to recapitalise banks across the continent.
The burden of bailing out Dexia also prompted Moody's to warn Belgium late on Friday that its credit rating could fall.
The ratings agency also cited the prospect of higher funding costs and weak economic growth as reasons for putting Belgium's Aa1 government bond ratings on review for possible downgrade.
France and Belgium have guaranteed Dexia's financing, paving the way for a new rescue for the bank, which is struggling to wind down billions of euros in toxic assets accumulated during an overambitious expansion plan.
But there were signs that the details of the rescue were proving troublesome, as a Dexia board meeting originally scheduled for Saturday slipped back to Sunday.
Still, a source close to the talks was confident the bank's future would be determined before the opening of markets on Monday morning.
"The need to rescue Dexia is symbolic of the uncertainty that characterises the banking sector," said Eric Galiegue, president of Valquant, an independent research firm. "Who would have imagined that a bank so linked with European construction would end up being dismantled?"
"Dexia's funeral will be announced on Sunday," the source said.
Summarizing the above: nobody has any clue what the proper response here is nor how the market will react.
And as for the second key event just unveiled...
Slovakia’s ruling Freedom and Solidarity party won’t back the overhaul of the European bailout mechanism after Prime Minister Iveta Radicova rejected the party’s conditions for approval, a lawmaker said.
The party, known as SaS, insists its three coalition partners agree to two conditions before it will back the enhancement of the euro region’s bailout fund, the European Financial Stability Facility, in a parliamentary vote Oct. 11, said Jozef Kollar, head of SaS’s parliamentary caucus. “If the solutions we have put forward aren’t accepted then we will not vote for the EFSF,” Kollar said in a debate on state Slovak Radio today.
Slovakia and Malta are the only countries that haven’t yet ratified the key element in the European Union’s plan to prevent the region’s debt crisis from spreading. The Slovak row risks sinking the EU plan, which needs the unanimous consent of all 17 euro members to come into force.
SaS is calling for the creation of an inter-party committee that would have a right to veto individual EFSF disbursements. It is also demanding that Slovakia doesn’t participate in the European Stability Mechanism, a permanent rescue vehicle set to come into force in 2013. SaS will negotiate “until the last minute” with its coalition partners, according to a statement posted on the party’s web site today.
Smer, the largest opposition party, has said it won’t support the EFSF overhaul unless the government steps down.
For those who are still confused, here is what is going on:
The bailout plan that was proposed in July, and was supposed to be operational by the start of September, has still not been ratified, and now the smallest European country is holding the entire continent, its currency, and frankly the Fed, which will have to step in and bailout Europe, hostage.
In the meantime, the first actual core bank casuality is about to go 6 feet under, and unleash a falling house of cards of unpredictable consequences, which will likely make the "fear and loathing" chart presented previously double in a very short time.
And in this environment, where the decisionmakers in Europe are objectively about 2 years behind the curve, are paralyzed into inactivity and torn asunder by warring political parties, the market actually believes that some actual "solid" policy intervention can about to take place?
Oh yes, "Dexia is fine"... The stress test (the second one) said so.