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Europe's Latest Split: Prudence Versus Reckless Abandon
From Peter Tchir of TF Market Advisors
Prudence versus Reckless Abandon
As much as the current round of negotiations are being framed as “France vs Germany” there is more to the story than that. The battle is forming up along the lines of those who are trying to show some restraint and prudence and are willing to deal with the consequences of that decision against those who want to do everything possible, giving the highest chance of “success” with absolutely no downside protection.
The prudent camp seems to realize that all these new plans do is shift the power to the debtor nations as the good countries are taking on obligations that could bring them down. They realize lenders who made bad decisions in regards to Greece need to pay the price. Not only so that Greece can achieve sustainable debt levels, but to reduce the moral hazard that the banks believe they will always be protected for every bad decision. The prudent camp seems to realize that no matter what they do in terms of EFSF or other plans, there is a risk it fails to stop defaults, because it doesn’t address the problems, and they want some ammunition in reserve for this. So far Germany and Finland have come out in support of the prudent camp.
The ECB continues to do some reckless things (more secondary market purchases to no apparent affect with no obvious direct benefit to the country whose debt is being bought), but does seem to realize that providing massive leverage to EFSF is not a good idea. It is either with recourse and margin which risks collapsing the EFSF, or it is non-recourse which risks the ECB. Again, if the plan was 100% certain to work, the ECB wouldn’t worry, but they at least seem to be getting scared of the large numbers and are aware of the downsides of the plan, and seem to be lining up in the prudent camp and saying that enough is enough and we need some credibility and resources if this doesn’t work.
Portugal, Ireland, and Greece, with a combined €54 billion of EFSF guarantees, are unlikely to participate (they are “stepping out” countries) but in any case have lost any voice in the debates. They can default if they want, that is in their control, but they cannot shape the EFSF or any further part of the rescue plan.
Slovakia, Luxembourg, Slovenia, Cyprus, Estonia, and Malta, will contribute a whopping €18 billion of EFSF guarantees. In the end, they are irrelevant. Although there is still some pretense about this being a Eurozone decision, what these countries want is meaningless. A deal will power ahead with or without them. The most likely scenario is that the EFSF will provide them funding equal to or greater than their own guarantees to ensure that on the surface the EFSF has full support, but the reality will be the countries are neutralized on their commitments so it would be all for show. Of these countries, only Luxembourg, with €2 billion is AAA rated.
Italy and Spain are “interesting” to say the least. They have promised to guarantee a total of €232 billion. So even the most optimistic, rose colored glasses wearing analyst would have to admit the headline number of €780 billion needs to be cut to €726 billion to account for the “stepping out” countries. If these two countries, expected to receive a big chunk of the protection step out, the headline number drops to €494 billion. That number is not nearly as impressive, so they won’t step out, but realistically how much value does their guarantee have? If the EFSF was buying some uncorrelated risky assets, the Italian and Spanish guarantees would be useful, but since the EFSF intends to buy Italian and Spanish debt, their guarantees are not particularly useful. In any case, as big potential beneficiaries of the EFSF, they will likely go along with any plan, it will only be whether they are ecstatic with the plan or merely happy that is at stake.
The reckless abandon camp is led by France, with Belgium an eager follower (they have no choice after bailing out Dexia). These two countries represent €186 billion of the EFSF commitments. Belgians contribution is relatively small and given the trajectory of their own credit they may well soon be a beneficiary of the EFSF. The Belgium 10 year bond was yielding as low as 2.2% in September 2010 and is now at 3.8% which is the highest yield over that period. Not yet PIIG-like, but concerning. And they have about €330 billion of debt and are running at about 100% of Debt to GDP, so their motives are clear.
France’s headlong rush down the reckless abandon policy is more confusing. If anything, it seems that this has become way too personal for Sarkozy and has gone to the point of being something more than policy and has become a crusade. If he was a trader, he would have been stopped out long ago. His decisions have not been working, and rather than cutting back, and pausing to think about a new strategy, he just keeps rolling forward. He, more than any other leader except Papandreou, continues to focus on speculators and CDS as the core of the problem. That is pure nonsense, but he in particular seems to see the world in that way. Maybe sipping wine with other exquisitely dressed rich bankers in a smoke filled room with the occasional dismissive wave of the hand and comments of “if only ze speculators were crushed, all would be tres bien” has influenced him. In any case his focus seems directed in the wrong direction. The fact that the country with the biggest problems at the bank level is the biggest proponent of turning the EFSF into a bank is also somewhat ironic, if not ludicrous. Maybe he has some friends at the big banks looking for a less stressful, but high profile and high paying job, and what better way than creating a bank? Imagine the field day someone as witty and smart as Sarkozy would have if someone he was up against was caught proposing such wild plans. In the end, he seems to believe that Europe can do something, anything, and everything that can “solve” the problem with 100% certainty. That is the problem with his stance, nothing is 100% certain, except debt and taxes (except in Greece where taxes at least, are optional). He is going down a path that leaves no plan B, and that is scary. The fact that most of his plans fall flat when discussed amongst people who would be buying the bonds of all the whacky entities and structures has totally fallen on deaf ears.
Austria and Netherlands have not taken a stand so far. They remain strangely quiet. With €66 billion of commitments they are not trivial. The fact that their commitments are rated AAA makes them even more important. I suspect they remain quiet because they are in the “prudent” camp. The “reckless abandon” camp has the benefit of any good crusade – the ability to say that they are saving the Eurozone. I would bet they are in the prudent camp and are hoping that, Germany who has the most to lose in the reckless abandon plan, and Finland which has already demonstrated a willingness to fight for themselves with collateral demands, win and they don’t get blamed for the near term problems that result.
In the meantime, Italian, Spanish, German, and French yields are all higher again today (not good) and Spanish and Italian spreads are wider as well, doublenotgood.
The market feels positioned extremely long. I think there are a lot of closet longs. It is cool to say negative things about the possibility of Europe resolving anything, but people are long or have cut hedges dramatically, just in case, but aren’t willing to admit it. That is away from the crowd the believes Europe “gets it” and is long on the back of that. Without a doubt, there is a willingness to try and figure it out, but it seems that they waited way too long to look at any actual details, and things are so dire, that no plan has a high probability of success, and many have extreme downside risks.
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idealism vs reality is the key difference here.
It's more like... majority of people VS bankers shills + useless idiots.
The majority of people are too ``moderate`` (for now) to do what is necessary (citizen-arrest of the scumbags in office and their banker friends, and citizen arrest of cops who protect these same traitors).
Closet Long or 'the end"
Such a farce, a few billion here and there in Europe is what it all hinges on.
But here in the US we can transfer $100 trillion bad debt from TBTF banks, just get rid of it, hand it to the sheeple... and its no big deal at all with debt/GDP at 100%, we had a 'beat' in some number of .02% so its all good.
I think the closet longs are about to be closet poled in the head.
Recklessness has been the "norm" .....so why change now?
I think France is setting Germany up. The frogs know a huge, risky bailout package will cause France to lose its AAA rating immediately, leaving Germany holding the bag.
No doubt, as is the way of the Euro-leaders, they will reach a compromise. Something that gives everyone a part of what they want, like 'Prudent recklessness' maybe. Or 'Abandoned Prudence'.
Well, today uncle Mario took over the reigns at the ECB and he sure hit the ground running. Can't blame him really, with his Goldman Sachs and Bank of Italy background.
Rumors have it his favorite song is "I believe I can fly" by R. Kelly
How appropriate. Now we have Mario on board, it's definitely time to 'Get it on like Donkey Kong'. Player 1 Up!
See, the interesting part here is that our founding fathers actually designed the Senate to function like this. Instead of going to DC and function as a Democrat from MN or a Republican from WI they were actual appointees of the states this representing the state and not just the "party" or "people". So the fiscally responsible "states" wouldnt have to bail out the...we let's just say it...morons like CA, IL and NY.
Basically the whole shop is net broke, at least in realistic terms since I don't expect the French to sell the Eiffel Tower to China or the Italians to sell the Coliseum to Singapore. They cannot meet their debt obligations today so they are massively increasing those debts hoping that they magically all win the Irish, Spanish and English lotteries every week for the next twenty years. No, wait, dammit. They need to win the Beijing, Mumbai, and Rio lotteries every day for the next twenty years.
Is that it? Is that the plan? Have I missed something? Is is really that simple?
Peter - well reasoned overview. I agree with you completely except for your final comment about the market being positioned extremely long. Not sure what market you refer to (but I suppose they are almost all the same), but it still seems that aggregate of weak hands are on short side..
reposted : France vs Germany/desperation vs realism.
The very fact that the Euro banks have transferred their client's wealth, upto 500 billion in the last two months to US, shows you that THEY know their heads are on the anvil.
It is becoming more evident that BOTH sovereign debt and Bank Recapitalisation with real money injection, not insurance hanky panky, is BEYOND the means of the EU collectively. The ECB and the liquid sovereigns, Germany and France, ultimate bulworks behind EFSf, cannot carry on their shoulders both these stones of debt and be able to face the market convincingly. It would KILL growth in EU without solving the debt mountain issue. Rock and hard place. As ECB's only solution then would be uncontrolled money printing. That would spike the USD and send the US economy and WS into tail spin as money would run there as marginal haven. The interconnection makes this a lose-lose situation all round. Financial Globalisation is now the problem, not the solution. As the devil is contagion.
Merkel's whole strategy is to nail down the banks as the villains of excessive, past phony globalisation. The banks KNOW it, whence the flight to safety in US. This whole show can't go on. I don't know how they'll square this circle but it'll be a botched up job and the market won't believe it. French/Italian/Belgian banks are now quaking in their shoes. Lets see how Sarkozy tries to save his 3A rating which is as of today total mirage, fancy screen curtain for a dud show for another 3 months when it will become torn curtain.
2012, as projected in current EU grid-lock, is going to make 2008 melt down look like hors d'oeuvre. Keep your fishing rods handy.
It there were the wholesale transfer of European wealth to the US as you asserted, there is no expected correlation in the EUR/US currency exchange rates.
It there were the wholesale transfer of European wealth to the US as you asserted, there is no expected correlation in the EUR/US currency exchange rates.
to be frank this was posted here on ZH by a guy quoting a blog reference I can't find. But then it was not contested on the thread, around two days ago....
here it is I've found it :
http://streetlightblog.blogspot.com/2011/09/europes-banking-system-trans...
"So far Germany and Finland have come out in support of the prudent camp."
Actually Finnish government is NOT in the prudent camp. They just pretend to be to avoid further embarrassment in elections.
The parties in Finnish government will be ultra pro-EU long after the EU has been dead and buried. That's what you call an inferiority complex -
better to be an EU colony without own will than an independent country. Worse quislings are difficult to find.
Thanks for that perspective. I was wondering which way things would go there ... after discovering that the President is a lefty unionist and the PM is a Bilderberger.
Both PM Jyrki Katainen and EU Commissar Olli Rehn are Bilderberg members. So is also the probable next President of Finland Sauli Niinistö.
Finland has no hope at all. :(
Peter, good read. Always read your stuff and enjoy your interviews with the BBTV crew. (Is Sara Eisen single?)
I am Dutch and also BAFFLED why we have not come out against more bailouts! It is sickening that we don't take a stance. Holland is DEF in the prudent camp but you might be on to something. If Ger/Fin can crush the latins (because that's what this is, Calvinistic North vs Catholic South) Holland can save face by not having to show their card. But that's surpriseing because they were so quick to vote down the EU constitution:
http://en.wikipedia.org/wiki/Dutch_European_Constitution_referendum,_2005
ENOUGH already! Let the chips fall where they may and start anew!
+100 You sound awake!
I think it's true that Europe "gets it" - the problem is, can they do anything about it?
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Makes me want to sell all my gold and put the proceeds in a bank for safe keeping. LOL. Some day the paper traders will understand the real definition of risk off. Until then, I stack.
NASDAQ megaphone pattern on daily chart indicates big move ahead.
USD weekly chart remains bullish and as predicted for some time further dollar upside expected.
http://stockmarket618.wordpress.com