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Europe - Political Fabrications Instead Of Economic Realities
Via Peter Tchir of TF Market Advisors
The latest EFSF “collateral” package shows once again, just how wrong Europe has it. Dreams of Eurobonds should be relegated to the trash bin. Fantasies that EFSF will leverage itself up to save Europe should be discarded. The latest outcome of EFSF meetings should be enough to let everyone know that even the people with the money have no clue what to do, and the structure of compromise will never get anywhere. The Greek bond rollover is another example of an overly complex, unwieldy mechanism, that doesn’t do what it portrays. This problem goes back all the way to the first EFSF headlines in 2010 where the headline was great but massively overstated potential funding of the vehicle. After a year of changes, you would think someone, somewhere in Europe, would have decided dealing with facts would be the best way to fix the problem, but instead they cling to fabrications and hopes and unrealistic assumptions.
Let’s start at a basic level. The IIF, the politicians, and anyone else in Europe who can get their voice heard has spoken about the “Private Sector Involvement” requiring banks to take a 21% haircut on Greek Debt. This 21% haircut is now viewed as a real number. That only works in politics, not in finance. A real haircut is exchanging €10 million of Greek bonds and receiving €7.9 million of new bonds, with lower coupons, longer maturity, and less (if possible) seniority. That is a real 21% haircut. In the convoluted world of say one thing, pretend to help, but protect yourself at all cost, that isn’t even one of the solutions the bankers have. Most of the solutions would extend maturity, but would turn a portion of their bonds into EFSF obligations (up in credit quality) and have higher coupons than current debt. The 21% is some number pulled out of a hat based on some Net Present Value calculations. Even if you believed those calculations back in July, you would have to check them out now as rates have moved a lot – both on long dated German/French bonds and on Greek bonds. Anyone who chooses to discuss the “21% haircut” is passing along a political fabrication, not an economic fact, and if Europe wants to fix itself, it is time to deal with economic facts, not political fabrications.
Speaking of political fabrications, let’s look at the “collateral” agreement for Finland. As with every other EFSF announcement, it sounds great, but is short on details, and still needs to be approved by every country. From the details that have been released so far, it is clear that the “solution” is a complex set of rules so that Finland can say they got collateral and the other countries can say that they didn’t really give up much.
Any country that wants collateral has to pay their ESM money up front rather than over 5 years. How many of us forgot that the ESM, the “permanent mechanism” was only going to be funded over 5 years? I had forgotten that the political fabrication was “fully funded permanent vehicle” when the reality was “money dripped in slowly over 5 years”. But that isn’t even the funny part of this criteria – the funny part is Finland is going to borrow the €1.4 billion they have to provide the ESM. Yes the age old solution of more borrowing to fix a debt problem.
It is a bit confusing what happens to the collateral if there is a default. In one version, the collateral isn’t provided to the collateralized country until the original scheduled maturity – a nice little NPV trick to diminish the value of the collateral. Another headline suggested the collateral would become subordinated in event of default. That left me scratching my head, but if anyone could figure out a way to call something collateral, and subordinate it at the exact time it is required, it would be the EFSF. They are also proposing only a small portion of any funding can be collateralized. So the political fabrication is “we provided funds only on a collateralized basis” and the economic reality is “we lent money, against which a small portion has collateral, though we are not sure we will ever get access to that collateral”.
The highlight of the requirement package was that any country that opted for collateral would have to give up some potential EFSF profits. EFSF profits? That is optimistic. Giving up a portion of future EFSF profits is about as punishing as me selling rights to any money I make as a professional football player. It is easy to give up nothing.
Until Europe is willing to address the reality of the situation and take some simple but painful steps rather than complex, unworkable ones, that sound good but do nothing, the problems will increase. If you can read the above and believe that Eurobonds are a real possibility, I have some land in Florida to sell. The countries each have too much of their own sovereignty at stake and at some point shuffling debt around really does nothing, but lower the average credit to the point of collapse.
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But ve only need time to get to ze chopper, bitchez!
http://youtu.be/OaTO8_KNcuo
EFSF profits...LOL...EFSF's profits will be the envy of Lehman and Kaupthing for the largest financial profits in the red.
everything is moving into 'cloud' computing...for eg iCloud of apple...., kindle fire etc
for me EFSF is similar to a cloud....everyone hopes that the cloud will do everything for them...take care of them.....not realising that this is effectively making everyone into just dumb terminals....
I lol'd.
The same can be said for the good ol' US of A. Reality is a bitch.
The difference between Greece and California...(besides the dot com sector and Hollywood)is that Greece had to increase it's military spending. But unlike California, Greece has oil it can use as collateral. California doesn't have that. Neither does the US.
The US government is just raping(fiscally) and pillaging the younger adults in this country to make their interest payments.
This is getting beyond bizarre; these alchemists are still continuously trying to turn this pile of steaming crap into a pot of gold.
2011 = Middle Ages
What? Throwing just "enough" debts into the game does NOT result in happy-happy society & economics?
SHOCKING!!!
</sarc!!>
(Hilarious enough they call that lev. EFSF a "financial firewall" - I need a lev. facepalm on that one!)
Europe doesn't want to print yet all the gold bugs say the Euro is going to die. (the only way a fiat dies is through hyperinflation)
http://freegoldobserver.blogspot.com/
The ECB minus Germany is ... what, exactly?
a man without his nuts..
“Europe doesn't want to print yet all the gold bugs say the Euro is going to die“
Exactly - Spitzer, I definitely like part of your outlook and words but I do regret your choice of avatar ;-)
It's not the "gold bugs", it's the whole UK/US "commentariat", including the Financial Times, who were so sure that the EuroBond would be the "preferred solution" (for everybody except the EuroZone)
If "Our Financial System" is not capable of functioning because of the threat of such a small country like Greece defaulting, then perhaps we do need a new one.
I repeat as in the last months: Greece is going to default - Greece will continue to use the EUR, perhaps not the Greek Gov but the people - the EUR will continue to be there. A few banks might go lost in the process. And expect a lot of meaningless words from politicians until we are there.
And, for the pleasure of all Central-Banks-Haters-because-they-are-all-the-same I repeat that IMO the ECB is still doing a good job.
Sheesh, I wonder how the blogs would have reacted to the last Brasilian Hyperinflation (look it up, it's a couple of years ago) or to the Latin American Debt Crisis? Somehow life was possible before the internet...
By the way, the FT is calling "the end of the gold bubble", which makes me very bullish...
Finland is going to borrow the €1.4 billion they have to provide the ESM.????!!!!!!
That is so crazy it is truly incredible
good highlight
None of the eurozone gubbmints actually have the money they have to provide to the ESM. None. They all have to borrow it. It's just another leg in the debt tsunami game. EU-kleptocrats talk of it as it is REAL capital they provide but the reality is that it's just more debt they have to raise from the "markets".
They should borrow from Greece.
With leverage.
"Until Europe is willing to address the reality of the situation and take some simple but painful steps rather than complex, unworkable ones, that sound good but do nothing, the problems will increase."
So, what you are saying is that they are in the same boat as we are.
thanik you Tyler Durden .... Peter Tchir is a good analyst grounded in reality. And this is beyond agreeing or disagreeing ...
Reading currently Matt Lynn's (and am not a big proponent of Bloomberg overall) "Bust" about Grekl crisis and EU et al. Pretty good 1/3 in. Boy, we may disagree with each other in Amerika left/right, conservative/liberal/libertarian, etc. but even hard left or right or libertarians are grounded in a certain practicality of human behavior and economics ala 'self-interest' assessments. Europe? it must be their water. Why the preceding .. how Greece ever was allowed into Euro is pretty outright stupid .. and this is not 'Monday morning quaterbacking' ...
... but then again ... how the USof A could go down the path of increasingly dubious MBS and a clearly overblown housing market fed by so many forces soout of whack (reality was never permitted to intrude ... from credit policies, to gov't advocacy. to goofy securitizations, etc.) ..... I guess that is Euroland's counter to letting Greece into Euro craziness
Really, after 4 years of this, we should recognize that the system is far past the point of no return, the problems will increase anyway, and any steps being taken are exactly like all the previous ones, just a stall. The ESFS is merely a rearguard action allowing TPTB to feather their nests before the storm, and possibly ready another system.
Sounds a lot like QE2, QE3 etc and TARP, TALF, bail out programs here in the US.
Mr Tchir, u da man! Thanks for another great article!
PIIGS is not enough.
All 17 unfortunate euro countries are in the same mess:
BEG, SNIFFS CALM PIGS
Austria
Belgium
Cyprus
Estonia
Finland
France
Germany
Greece
Ireland
Italy
Luxemburg
Malta
Netherlands
Portugal
Slovakia
Slovenia
Spain
Here is some (sur)reality from Spain...
By Emma Ross-Thomas
Oct. 4 (Bloomberg) -- Spain’s pharmaceutical lobby is
negotiating with authorities to sell state-guaranteed securities
backed by 5.4 billion euros ($7.1 billion) of unpaid bills,
Farmaindustria Director General Humberto Arnes said.
The group, which represents companies including the Spanish
units of Roche Holding AG and Novartis AG, is in talks with the
regional governments that owe the debt and the central
government, Arnes said in an interview in Madrid today. The aim
is to bundle the unpaid bills into a vehicle that would issue
securities guaranteed by the central government, he said.
“It would allow the payment of the debt to be deferred by
several years and has a government guarantee which allows it to
be sold in the market,” Arnes said. “The mechanism allows a
delay until Spain is in a financial and economic situation that
allows it to face the pharmaceutical bill,” he said.
Work on the proposal is “very advanced,” and contacts
with regions and the government so far have been “positive,”
he said. The facility, which would allow regions to delay
payments for around four to six years, would remain open to
including future unpaid bills, he said.
Spain’s regional governments, which control health and
education, owe 5.4 billion euros for medicines supplied to
hospitals and are paying bills an average of 430 days late,
Arnes said. That debt, as at June 30, increased from 5.19
billion euros at the end of March, when the average delay was
410 days, according to the group’s statistics.
The 17 regional governments are suffering from a slump in
tax revenue linked to real estate and are struggling to rein in
a surge in debt levels to record highs and trim deficits.
Regional governments account for more than a third of public
spending and hire half of all public workers. Moody’s Investors
Service cited concerns about the regions’ budgets when it put
Spain’s rating on review for a downgrade on July 29.
another good catch .. thanks for posting .. have been reading some other real bad stuff last fe wmonths about masking attempts in Spain
That's really no different than a bank selling a delinquent mortgage to a collection agency.
ECB says we are here to protect you from mayhem like us.
http://www.youtube.com/watch?v=thzUR_mq6OY&feature=related
http://www.youtube.com/watch?v=tZXM_g3mqew&feature=relmfu
http://www.youtube.com/watch?v=tGtFbFMOkpU&feature=related
Attention Euro-Sluts, this message is for you!
http://www.youtube.com/watch?v=VKVTmx1zos8&feature=related
Peter, it's the words. If they could just get the words right, all would be ok.
Trust me. As to your land deal in Florida..........
If I were a martian who knew how to count in earthly economic wisdom, my head would be spinning. Who is not in debt?
Who is not in deflationary mode? Where is rock bottom land? I'd take the first plane to the moon...And wait for the meltdown on earth. I believe that Neil Armstrong left his binoculars there. So I'd get a good view of planet earth as the entropy played itself out.
Everybody here on earth right now is in denial at home and beggar thy neighbour mode abroad. US-China currency war hotting up if that legislation passes.
This seems to be an article of desperation.
Web site down <insert conspiratorial economic apocalyptic scenario of your choosing here>
Don't get me wrong. I know we're slowing spiralling down the toilet with no good end coming from this (I envision mass riots, complete currency devaluation, etc etc etc), but this eems like reaching to me.
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