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EU Deal and Hell Freezing Over

Tyler Durden's picture




 

From Peter Tchir of TF Market Advisors

EU Deal and Hell Freezing Over

So the EU finally reached a debt deal and hell (or at least New York City) froze over.

Thursday's meteoric rise was followed by a relatively calm Friday but is losing steam as more and more nagging doubts set in.

Italian and Spanish bond yields have failed to participate in the rally and in fact Italian yields are reaching yields not seen in decades.

The EFSF has morphed into an incredibly complex entity and there is no indication that Regling is up to the task of running their various programs optimally.  The Asian trip seems ill advised at best and a debacle at worst. What is he asking China to invest in? China has money, and I don't doubt that under the right terms will invest in Europe. But they need terms. What terms is the EFSF getting on the bank recap portion? Do they even know or have they even thought about it?  Are they even willing to let China invest in banks on a big scale?  What about buying bonds? Since there are no details on the new first loss protected bonds, what can Regling be asking them to invest in? At some point China has accumulated these reserves because they understood it matters what you invest in. I wonder if not only did this trip annoy China but has actually increased their concern that European leaders are way in over their heads on this financial crisis. Even Japan was only willing to say they would take some more of the German/French backed good EFSF bonds, albeit at a slower rate of purchase. Does anyone really doubt the AAA bonds backed by the 6 AAA countries still have a bid?

Some interesting noise on EFSF short dated bonds. Those will provide cheap funding - which is good - but have a lot of roll risk - which is the problem the EFSF is trying to fix for Italy and Spain.

The IIF proposal doesn't look like it will be a real 50% write-down of Greek principal. One of the senior IIF officials was on Bloomberg TV this weekend and seemed stuck on the NPV reduction and EFSF enhancements. No actual terms yet prepared. That and the insistence that it will have a positive impact by 2020 for Greece.  Why the focus on NPV and enhancements if it was a real honest to goodness write off of debt? If it was a real write down of debt couldn't we talk about the debt to GDP impact in 2012 rather than 2020?  Investors who thought the banks were really biting the bullet here are likely to be disappointed. They may even understand why voluntary restructuring isn't a Credit Event. It will be interesting to see if Merkozy were in on this little joke or also are getting hoodwinked? I'm not sure what it means, but the DB CEO seems less involved in the spin since the great haircut was announced, but I bet it means something - that he doesn't want to be too closely associated with this latest PSI - which does feel like it will be heavily paid for by taxpayers rather than banks.

US GDP was positive. Some focus will finally shift to US economic data. We seem to have made the economic data binary. Either recession or not. If no recession all great, if recession then doom. It's a continuum and it isn't as bad as feared but not great or out of danger of being bad yet either.   It is good to see earnings and data hit the forefront but we have to watch that same data out of China and Europe too.

The HVB thing is just bizarre. It is positive in the Germany found 55 billion euros. It is scary that a mistake of that magnitude can exist. And since positive mistakes rarely occur - we usually find problems that are reducing the bottom line right away - there is a fear what negative problems may not have been found - especially in Spain and Italy.

QE3 is allegedly back on the table. I guess it is never far removed. I've lost sight of what this is even supposed to do other than makes stocks go up for a bit. Since Europe is finally saying growth and exports rather than austerity are the way out of the debt problem, and dollar weakness because of more QE won't be tolerated. I guess there will be a focus on mortgages if we get one, as it can be sold to the public better that way and can help the European banks liquidate some of their portfolio to reduce dollar funding needs and potentially reduce capital required.

MF global is interesting to say the least. Weirdest part is right bet, wrong market. To the extent Corzine used his connections to determine that Europe would through more and more German taxpayer money to bail out the PIIGS and banks, he was right. That the bonds would go up in value based on that - he was wrong. It is another reminder that the "solutions" coming out of Europe have had the least impact on the assets they are specifically supposed to help. It is scary how fast a financial firm can unravel. They did a bond issue in early August. Due diligence would have ensured things were known at the time. The market ignored or didn't see or they weren't in the trades back then but once the market got concerned about the positions and the risk management that led to such seemingly large positions - it reacted quickly and decisively. Dexia - which had the advantage of being too big to fail (was a massive derivative counterparty) also toppled very quickly. It went from being a fringe problem to a ward of the state in less than a week. As the rally goes on (if it does) it is worth remembering how quickly leveraged financial institutions can unwind.

I'm sure we will see a lot of exciting headlines this week and can't wait to get some actual details on the proposals agreed to last week. Europe can still get it right but they need to deliver on promises - and for once really really think about the best way to use EFSF and to consider how markets (sovereign debt markets in particular) will actually respond and not base plans on how the EFSF wishes markets would respond.

 

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Mon, 10/31/2011 - 07:07 | 1827897 HD
HD's picture

Someone please inform CNBC...

Mon, 10/31/2011 - 07:08 | 1827898 williambanzai7
williambanzai7's picture

EURO TRICK OR CHEAT

Mon, 10/31/2011 - 07:10 | 1827904 Dick Darlington
Dick Darlington's picture

When things get tough I have to lie...

 Oct. 30 (Bloomberg) -- The euro area would be able to
resolve the debt crisis without investment from surplus
countries such as China, Luxembourg Prime Minister Jean-Claude
Juncker told Germany’s ARD television in an interview.
     While an investment by China in the European Financial
Stability Facility “makes sense” given the magnitude of its
surpluses, the decisions taken by European leaders last week to
overcome the crisis could stand on their own, Juncker said.
     “If China and other investors were not to invest in the
end, the decisions that we’ve made are substantial enough alone
to master the debt crisis,” Juncker told ARD.
     EFSF Chief Executive Officer Klaus Regling visited Beijing
last week to seek financial support from China, holder of the
world’s largest foreign-exchange reserves. Chinese Vice Finance
Minister Zhu Guangyao said Oct. 28 that his government wants
more details about the “technicalities” before making any
decision on investing in the fund.
     Juncker was also asked on ARD whether banks would be
“taken to task” further at this week’s Group of 20 summit in
France. He responded, “I hope so.”

Mon, 10/31/2011 - 07:16 | 1827914 Ghordius
Ghordius's picture

The Chinese - how and why should they? At the end it might all go back to recapitalize the banks so that they fill their coffers with European bonds. Nothing new, nothing that has not happened often enough...

Mon, 10/31/2011 - 07:19 | 1827916 GeneMarchbanks
GeneMarchbanks's picture

'QE3 is allegedly back on the table. I guess it is never far removed. I've lost sight of what this is even supposed to do other than makes stocks go up for a bit. Since Europe is finally saying growth and exports rather than austerity are the way out of the debt problem, and dollar weakness because of more QE won't be tolerated. I guess there will be a focus on mortgages if we get one, as it can be sold to the public better that way and can help the European banks liquidate some of their portfolio to reduce dollar funding needs and potentially reduce capital required'

That's some crystal clear logic I'd say. The Bernank wears a cape.

Mon, 10/31/2011 - 07:23 | 1827925 GerritB
GerritB's picture

The dutch social party PVDA has said that it will NOT back the EU plan if it isn't strong enough. I really hope they will not support this because this EU plan isn't solving ANYthing.

 

Mon, 10/31/2011 - 07:54 | 1827975 DutchR
DutchR's picture

Pvda are socialists and will vote for anything to keep themselves in play, they don't give a rats ass about whether it's a good or a bad thing to do.

Mon, 10/31/2011 - 07:31 | 1827935 topcallingtroll
topcallingtroll's picture

Ok maybe I gloated too soon.

Mon, 10/31/2011 - 09:03 | 1827954 Zero Govt
Zero Govt's picture

Looking good guys, looking good

there's nothing like a sack empty of any money (good start) full of political promises (luv those) backed by political repayment 'guarantees' (oh luv those too) and leveraged (adds more "stability" you see) from already bankrupt running on empty Govts like France (the news just gets better)

i'm shocked the financial markets haven't every confidence in this EFSF barrel of bollocks ...have they not priced in Jean Claude Trichets favourite word "stability" yet?

shame Trichet is leaving. His interview is on CNBC tonight on how he provided "stability" over the past 2 years and how the Eurozone banking and political world is "all going according to plan". Ok the ECB Plans bailout figure has exploded from €360bn to €500bn to €650bn to €1 Trillion (budget control is real "stable" too then Jean Claude?)

..and the next figure in the air of this mushrooming cloud of political delusion is €2 Trillion. Yep, the ECB's plan is "stable", it's just the bill for it has rocketed into space out-of-control toward planet Uranus!

.. grab your popcorn and give the carpet a hoover as you're going to spend most of the evening rolling all over it pissing yourself laughing

Mon, 10/31/2011 - 08:21 | 1828015 jdelano
jdelano's picture

Not triggering CDs was a tragically bad idea. Yay! Excited to watch Italy blow past 7%

Mon, 10/31/2011 - 08:39 | 1828049 mccoyspace
mccoyspace's picture

Does anyone remember back several years (late 08 or early 09 maybe) the 1 trillion euro plan? I forget what that was even all about.... Was that a bank recap? Who can even keep track anymore.....

Mon, 10/31/2011 - 08:43 | 1828054 Pseudo Anonym
Pseudo Anonym's picture

China has money, and I don't doubt that under the right terms will invest in Europe. But they need terms. What terms is the EFSF getting on the bank recap portion?

if I were China, I'd ask for collateral in the form of gold/silver/platinum FOB Bejing

Mon, 10/31/2011 - 08:46 | 1828061 Dick Darlington
Dick Darlington's picture

Latest Youth UE-figures from Eurostat out today:

Oct. 31 (Bloomberg) -- Following is a table detailing
eurozone youth unemployment rates for September from Eurostat
in Luxembourg.   
*T               
==========================================================
                       Sept.      Aug.      July      Year
                        2011      2011      2011       Ago
==========================================================
                    ----------------Under 25s-------------
Eurozone               21.2%     20.9%     20.8%     20.8%
EU27                   21.4%     21.2%     21.2%     20.9%
----------------------------------------------------------
 Belgium               17.4%     17.3%     17.6%     20.8%
 Bulgaria              26.8%     26.9%     27.0%     23.5%
 Czech Republic        18.8%     18.6%     18.6%     17.6%
 Denmark               13.9%     14.1%     14.0%     15.0%
 Germany                 n/a      9.1%      9.0%      9.4%
 Estonia                 n/a       n/a     21.8%     27.8%
 Ireland               29.5%     30.8%     30.1%     28.2%
==========================================================
                       Sept.      Aug.      July      Year
                        2011      2011      2011       Ago
==========================================================
                    ----------------Under 25s-------------
 Greece                  n/a       n/a     43.5%     34.2%
 Spain                 48.0%     47.6%     47.3%     42.3%
 France                24.0%     23.9%     23.9%     23.7%
 Italy                 29.3%     28.0%     27.8%     27.7%
 Cyprus                22.6%     22.6%     22.6%     15.2%
 Latvia                  n/a       n/a     29.7%     33.1%
 Lithuania               n/a       n/a     32.7%     35.0%
 Luxembourg            14.7%     14.7%     14.7%     14.1%
 Hungary               23.1%     23.7%     24.2%     25.6%
 Malta                 15.3%     15.1%     15.1%     13.1%
 Netherlands            8.0%      7.5%      7.5%      8.6%
 Austria                7.1%      7.2%      7.7%      9.1%
 Poland                23.8%     23.7%     23.9%     24.2%
 Portugal              27.1%     26.9%     27.2%     29.3%
 Romania                 n/a       n/a     22.8%     22.1%
 Slovenia              13.4%     13.4%     13.4%     14.6%
==========================================================
                       Sept.      Aug.      July      Year
                        2011      2011      2011       Ago
==========================================================
                    ----------------Under 25s-------------
 Slovakia              30.7%     31.2%     31.6%     33.8%
 Finland               20.4%     20.3%     20.2%     20.8%
 Sweden                22.1%     22.9%     21.5%     24.7%
 U.K.                    n/a       n/a     21.2%     19.2%
----------------------------------------------------------
U.S.                   17.4%     17.7%     17.4%     17.9%
==========================================================
NOTE: Rates are compiled based upon ILO definitions.
Unemployed people are those aged 15 to 74 who are without
work, are available to start work within the next two weeks
and have actively sought employment at some time during the
previous four weeks.

SOURCE: Eurostat 

Mon, 10/31/2011 - 10:11 | 1828248 srsly-wtf
srsly-wtf's picture

Normally I'd say that chart spells utter catastrophe, but does that just mean we're gonna get QE3 and its all good...Bullish?

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