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The EU Summit Scenario Matrix

Tyler Durden's picture




 

With any and every European leader talking unilaterally (and only one worth listening to, given the market's reactions), we ask and answer what should investors expect from the forthcoming EU Summit and what are the investment implications? Morgan Stanley's Arnaud Mares offers a succinct analysis of the three key axes being debated around the 'banking union' premise: a European Deposit Guarantee Scheme (DGS); a Common rule book and European level bank supervisor; and a federal resolution regime (and, in some proposals, a federal recapitalisation vehicle). The base-case view is that the current set of EU banking union proposals, whilst directionally helpful, are too long-term or too timid to address the 'crisis' with supervision stratified and insufficiently federal leading investment implications of little meaningful relief in  Eurozone banking and sovereign credit markets. Recent comments from European ministers suggest that the path to federalized Banking Union will be far from an easy one, given the tightly interconnected federal debate.

Scorecard on European initiatives to be discussed at the June 29 summit

 

The current proposals revolve around three poles:

1) Deposit Guarantee Scheme:

The current deposit insurance proposal is essentially a patchwork quilt of national schemes with a European backstop rather than a truly federal scheme so pressure on the weakest sovereigns (and banking systems) would persist. We believe a truly federal scheme would be a far better outcome.

2) Common rule book and single European level bank supervisor

A consequence of federalisation of banking is a common rule book and European level supervisor; again, there are competing proposals. We believe that investors should also not underestimate the need for federal level supervision of the banking systems hould a federal guarantee be put in place. Given the very natural domestic vested interests in banking systems (domestic lending, buying sovereign debt and so on), we should not underestimate the potential opposition.

3) Common resolution regime and potential for crisis recapitalization vehicle

We critically need to see a way to resolve – and support – institutions. The current proposals have much to commend them over a 10 year point of view. But our discussions with regulators underscore that the tools and ability to address the resolution of a large institution in today’s stress environment feels highly unlikely.

 

And the various scenarios play out as follows:

  • Our base case view is that the current set of EU banking union proposals, whilst directionally helpful, are too long-term or too timid to address the 'crisis'. In our base case, national deposit guarantee schemes are likely to remain national but with European-level bridge loans. No provision is likely to be made for the ESM to recap banks directly (which the ECB and we think advisable to reduce the sovereign-bank doom loop). Supervision would be stratified and insufficiently federal. Clearly the investment implications need to be dovetailed with other fiscal measures, but we think there will be little meaningful relief in markets from this base case and we would continue to be cautious on Eurozone banks and sovereigns.
  • Our bull case revolves around the ESM being able to intervene directly in banks, ECB being the lead supervisor for all Eurozone banks and Euro-outs having some safeguards. This, alongside other proposals, could be a game changer and lead us to be far more constructive on sovereigns and banks.
  • Our bear case revolves around little progress being made on the three key axes. We think the risks of even greater bail-outs being needed and the 35% chance of Eurozone divorce that we laid out in a prior note would be most heightened in this scenario. Investment implications would be most negative in this scenario.

 

 Recent comments from European ministers suggest that the path to federalized Banking Union will be far from an easy one, given the tightly interconnected federal debate.

 

  • “The question of a banking union is very tightly connected to the question of the other themes we are considering, for example a fiscal union,” “It makes little sense to single out the banking sector when talking about mutualization of debt, without taking the rest into account.” “It’s important that a banking union doesn’t lead to euro bonds by the back door, for example when a bank is active in financing the government and then that bank enjoys a common debt guarantee,” Jens Weidmann, Bundesbank, Bloomberg, June 25, 2012
  • "Whoever is footing the bill must also have a right of control, particularly when it comes to the large sums that are seen in banking crises", Sabine Lautenschlaeger, Vice President of Bundesbank, (June 12, 2012).
  • “We cannot push through a banking union when the French have just cut their retirement age to 60 and we have raised ours to 67.” Senior Dutch politician cited in FT (June 11, 2012).
  • "It seems to me absurd that our deposit protection schemes, which were built over many years, should be used for insuring savings deposits in euro-zone crisis countries," Christian Brand, President of Germany's Federal Association of Public Banks (June 11th 2012). 
  • “It is important to develop EU banking regulations and supervision and to safeguard depositors. However Finland cannot accept a banking union based on shared responsibility.”, Jutta Urpilainen, Finnish Finance Minister (13th June, 2012).
 

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Tue, 06/26/2012 - 14:30 | 2562359 buzzsaw99
buzzsaw99's picture

nogo Germany wants all the power of federalization with none of the responsibilities (i.e. deposit insurance).

Tue, 06/26/2012 - 14:46 | 2562399 MarsInScorpio
MarsInScorpio's picture

Just looked at Yahoo's DJIA chart - there was a huge gap in transactions - did something happen I missed?

 

http://finance.yahoo.com/q/bc?s=^DJI&t=1d&c=

 

-30-

Tue, 06/26/2012 - 14:28 | 2562360 Bill D. Cat
Bill D. Cat's picture

One bank to rule them all ....... precious .

Tue, 06/26/2012 - 14:29 | 2562361 SourNStout
SourNStout's picture

Line the pockets of the wealthy. 

 

 

What else is there? 

Tue, 06/26/2012 - 14:31 | 2562367 Cognitive Dissonance
Cognitive Dissonance's picture

Looks like they could have it all wrapped up by Tuesday............in the year 2022.

Focus people. Ya need to make it to next week, as in a week from today.

Tue, 06/26/2012 - 15:46 | 2562636 knukles
knukles's picture

Is the week half started or half over?

Tue, 06/26/2012 - 14:31 | 2562369 fonzannoon
fonzannoon's picture

If the market is going to just keep doing what it's doing I am going to stop giving a shit what happens in Europe.

Tue, 06/26/2012 - 14:33 | 2562371 Conman
Conman's picture

markets saying to me, hold your nose and buy. because the ppt will keep on buyign on no volume days.

Tue, 06/26/2012 - 14:33 | 2562374 Ag1761
Tue, 06/26/2012 - 14:36 | 2562380 Dr. Engali
Dr. Engali's picture

Reason #1 why a banking union won't happen anytime soon: 2500 years of waring nations trying to be forced together in a generation's timespan.

Tue, 06/26/2012 - 14:41 | 2562387 RobotTrader
RobotTrader's picture

My buddy Rasputin pretty much sums it up here:

....................

Why Germany WON'T be leaving the ChocoZone (and other Ras predictions)
Rasputin - Sat, Jun 23, 2012 - 11:17 AM

I have been scouring the Web and TV (international news programs, NOT the pedestrian drivel offered to the GUMS by mainstream U.S. media) over the past few weeks, and then pondering and contemplating the future, and here is what I predict will happen shortly in the ChocoZone, beginning next week:

1. Germany WON't be exiting the ChocoZone. How do I know this with such certainty? Well, it's simple mathematics: right now, the other ChocoMembers owe Germany approximately ONE-POINT-TWO TRILLION choco-scleros, just from trade imbalances (Germany having shipped that many more goods to Greece, Spain, Italy, etc. than they have to Germany). On top of that, Germany has also provided SEVERAL HUNDRED BILLION choco-scleros in bailout funds to prop up these deadbeat countries. So, if Germany were to pull out of the ChocoZone, they would take a nearly ONE-POINT-FIVE TRILLION choco-sclero hit to the ol' balance sheet, rendering them instantly bankrupt.

So, Germany stays.

2. No other members of the EU are gonna get kicked out, either. Firstly, because of point #1 above. Secondly, because any country that tries to leave will find itslef frozen out of trade AND electronic-digit flows--including loans to the sovereign's Alpha Thug government.

So, the other members stay as well.

3. Spain's gonna get their bailout.

4. Italy will, too. All because:

5. The ChocoCrats are gonna further consolidate their power and control in Brussels, virtually taking over the entire ChocoZone banking system.

6. A little-known tidbit that came out of yesterday's "pre-meeting, meeting" between Germany Italy, France and Spain: the ChocoThugs are about to slap a "financial transactions tax" on Pigmen banks to help fund these bailouts. So, it will no longer be just German GUMS shouldering the financial burden, but also every single Pig bank in the ChocoZone as well.

7. As the above comes into place, Angela Merkel--already under tremendous pressure from all the other ChocoZone members AND the IMF, AND the U.S.--will finally agree to the issuance of ChocoBonds.

8. At that point, the Euro Choco Bank will be given the green light to snap up the ChocoBonds, deemd them "AAAAAAA"- rated, and the entirety of the ChocoZone will be deemed "saved".

(Ras Conclusion): And there you have it folks: Rasputin's predictions on how the ChocoZone is gonna be "fixed", and even why it will be so. And we won't have to wait months to find out if my predictions will be proven prescient, because many of these prognostications will begin takng place next week.

And you then can say: "Wow, that Rasputin guy sure knows how to call 'em!"

LOL.

Tue, 06/26/2012 - 14:47 | 2562403 NooooB
NooooB's picture

Not sure how to react when you don't troll.....

Tue, 06/26/2012 - 14:43 | 2562392 Spirit Of Truth
Spirit Of Truth's picture

FYI

Turkey sends tanks and military equipment to Syrian border

http://thespiritoftruth.blogspot.com/2012/06/turkey-sends-tanks-and-military.html

Tue, 06/26/2012 - 14:59 | 2562411 sitenine
sitenine's picture

I don't understand the premise that centralization is more important than sovereignty. What is it about freedom and pursuit of happiness that almost all leaders seem to despise? Why cede power to banks based on ridiculous promises of comfort and prosperity? Seriously, how have these arrangements worked out in the past? Education and work ethic have suffered, and prosperity is the obvious casualty. I don't care any more about Europe BS 'solutions', because they don't aim to solve anything. They simply aim to continue the generational theft that we always knew was unsustainable. Just my 2 cents.

Tue, 06/26/2012 - 16:36 | 2562802 Lore
Lore's picture

You have to be a psychopath to understand.

Tue, 06/26/2012 - 14:53 | 2562414 walküre
walküre's picture

Chronic summit fatigue. Some people get paid to give a shit. I don't. FUBAR is FUBAR. ESM, EFSF only with Germany's blessing. Guaranteed fiscal and economic suicide of one nation to support several other nations. Divided they would have a chance. Together they will absolutely and without a doubt fall into financial mayhem.

It is mind boggling to see just how much time is spent talking in circles. Maybe that's their plan. Keep talking about the same old, same old bullshit and hope that everyone will stop paying attention and then go for the jugular and initiate the mother of all bailouts.

This whole "crisis" has been forecast for years now and the well paid political leadership had years to make up their mind and put forth some concrete time lines and plans. There is still no plan. Just lip service and ideas for a plan, but no plan. Even IF ESM gets ratified in Germany by a 2/3 majority, who is going to sign the cheque? Who is sending billions of Euros from Germany's treasury straight into the black hole that is the ECB? Whoever has to do that, is going to get a Darwin award of some sort. It's got to be the dumbest thing a person ever did. For sure the most expensive decision anyone ever had to execute.

So think about that if you care. If you're like me, you don't care anymore because you don't get paid to give a shit. Just nodd and smile and pretend you're playing along. Keep all of yours what is yours because I will keep mine what is mine. Do not think for a minute that anyone really gives a shit when you're broke or poor because you played by the rules. The rules have been suspended .. if they actually ever existed. It's not our game to control but we can surely avoid being part of their game strategies.

Live life to the fullest and enjoy every day as if it's your last!

Tue, 06/26/2012 - 14:54 | 2562421 CatoRenasci
CatoRenasci's picture

I see the likelihood of the Bull case as 0, the likelihood of the Base case as asympotically approaching 0, and the likelihood of the Bear case as asymptotically approaching unity.

Tue, 06/26/2012 - 15:51 | 2562652 timbo_em
timbo_em's picture

I'm going with your bear case.

Probably, they will allow the ESM to give money to national restructuring funds like the Spanish FROB. But at the end of the day the sovereign will have to guarantee the money. So, no actual change here. Then there will be talks about the ESM's seniority status. Removing it would require a change of the ESM treaty if I remember correctly. So it won't happen and even if it happened, I would not trust them, think about Greece.

Tue, 06/26/2012 - 18:09 | 2563076 RossInvestor
RossInvestor's picture

Tyler - I am surprised you are not covering last week's story that the ESM will be stalled by the German President and the German Constituional Court will likely call for a popular vote on the ESM.

Germany's Constitutional Court has asked the country's president to delay the ratification of the permanent ESM euro bailout fund and the EU fiscal pact. German commentators accuse the chancellor of trying to push the legislation through parliament too quickly. Offering a brief boost to opponents of the long-term euro bailout program and the planned European Union fiscal pact, Germany's Federal Constitutional Court on Thursday asked the country's president to hold off on signing the legislation into law if the two bills are approved as expected by the country's legislative chambers next week.

 

 

President Joachim Gauck's decision to respect the court's request means that Germany will not be able to ratify the European Stability Mechanism by July 1, which Chancellor Angela Merkel had hoped would send a strong message to the markets. Some opposition politicians are even calling the development a "slap" in the chancellor's face.   "What actually needs to happen in order to wake up both the German government and the pro-Europe parties in parliament? For the second time in one week, the Constitutional Court has applied the brakes on the government for the overly hasty implementation of euro bailout measures. This time it is 'requesting' that the president wait before signing the treaty on the ESM. It's a preemptive request, because it is assumed that the Left Party and some members of parliament will challenge the decision in parliament and that the court will need two to three weeks to review the suit. With the request, the court is able to avoid having to issue a temporary injunction against the treaty, which could lead to a complete escalation of the situation."   "The ESM and the fiscal pact impinge on the core of the Bundestag's budgetary autonomy. The constitutional court judges will probably rule that the constitution's possibilities have been exhausted. They will then only accept the new treaties, when, within a reasonable amount of time, the people are also allowed to decide." http://www.spiegel.de/international/germany/german-press-review-on-delay-to-ratification-of-permanent-euro-bailout-a-840403.html

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