Forget The Unknown Unknowns: Just The Known Unknowns In The Eurozone Crisis Paint A Dismal Picture

Tyler Durden's picture

While only the market, and no one else, seems to have a grasp on the unknown unknowns in the Eurozone crisis, and has voted two toes up, despite really having no clue what is coming for Europe, here is a report from Exclusive-Analysis that summarizes the known unknowns, and comes up with a bleak conclusion: "We remain very doubtful that the relative optimism that has followed the EU summit will last. Last time, the 10th of October, following a Berlusconi announcement of austerity in the previous week, it took markets only a few days to distinguish between the detail of what was agreed and the more optimistic  principles that were announced." So as everyone scrambles to figure out what is still missing from European bailout plan, perhaps focus on what is already present, because if that is any indication, the Thursday rally is nothing but yet another confirmation of just how broken the market as a discounting mechanism truly is.

From the report's executive summary:

  • European leaders’ agreement to increase the size of the European bailout fund is unlikely to have an impact given the absence of clarity on where the final figure of 1trn euros funding will come from.
  • The Bundestag has sent a clear message that it will commit no more than the 211bn that it already has. China is likely to only commit token sums and then only for significant political and business concessions or perhaps physical assets.
  • The vague concepts of “leverage” and “insurance” that have filled the gap between what is available and what is needed. These are unlikely to appease anxious creditors and financial markets for long.
  • The relief of the markets seems to be that a Lehmans style credit-event did not follow the Eurozone leaders meeting of 26 October, but the threat of one clearly remains. With 61bn euros of debt repayments due in February 2012 alone, Italy will likely have to reschedule.
  • The forecasting scenario choice is between a managed default and a disorderly recalibration of currencies, liabilities and obligations such as happened after Lehman declared bankruptcy on 14 September 2008.

Full report:

We remain very doubtful that the relative optimism that has followed the EU summit will last. Last time, the 10th of October, following a Berlusconi announcement of austerity in the previous week, it took markets only a few days to distinguish between the detail of what was agreed and the more optimistic principles that were announced.

The EU leaders have agreed to raise the funds available to the European Finance Stability Facility (EFSF) to 440bn euros, which is not enough to cover the PIIGS’ financial obligations in 2012. The rise of the EFSF to 1trillion euros, loosely agreed on 26 October, would avoid a disorderly default in 2012. The problem, however, is that it is not clear where this extra 560bn euro will come from.

Germany at the Limit

Of the possible sources, Germany is solidly behind its commitment of 211bn euros. But our political analysis of the Bundestag shows clearly that German is at, or very near, the limit of what it will offer. To underscore this, the German constitutional court has just ruled out a fast-track committee based decision process that would bypass a full parliament.

China Aloof

Our contacts in China have been telling us for months that China does not trust any part of the euro-system it is now being asked to bail out. Not the currency (which is being printed), not the people (who in the summer promised banks "a one off" 20% haircut over Greece but now impose a 50% haircut, even wanting the banks to say it was voluntary). They do not trust a system where the ECB cannot control monetary and fiscal policy or where EuroStat failed  to scrutinise Greek economic data on accession to the Euro. They certainly do not trust the European political process and its relatively powerless central bank. They are unlikely to have found the fist fights in the Italian parliament reassuring. If China contributes it is likely to be for a high political price and at a symbolic level. They would be more interested in buying brands and physical assets cheaply but that is not what is presently on offer.

Private money will want a high risk premium if it wants to come in at all. Thus, as has we have noted before, most of the money will need to be printed. The Germans are not quite ready for that, so the crisis will drift on.

We are very keen on clear language. ‘Leverage’ is vague and aspirational. ‘Insurance’ is not wholly accurate. Insurance is when the unfortunate-few are bailed out by prior and collective contributions of the careful-many. It is hard to map those two definitions onto the present crisis. If the fund only covers the first 20% of defaults then it is simply too small, and calling it insurance does not change that. More specifically, The unfortunate-few (the PIIGS) are already identified. Thus, they do not need insurance; they need a bail out. There is no sense in which they are now (or ever were) part of the careful-many (Germany, Finland etc). Greek default is less a risk than a near-certainty, which makes the fund a bailout, not insurance. All of which makes the fund as big as it is and no bigger.

And then there are the banks, which is not a problem the summit addressed on a convincing scale. The value of the PIIGS’ debt held by the 20th most exposed banks sum up 529bn euros, which means that the European authorities expect that 80% of these debt will be serviced – a too optimistic figure given that the same authorities have demanded that the banks accept a 50% haircut on Greek debt alone.

We are still where we started.

For us this is not a contest between scenarios of Euro survival and Euro failure. The question is whether recalibration will be orderly (i.e. managed by politicians over weeks or months) or disorderly (i.e. managed by central bankers over a weekend in a credit event like the Lehman default). Clearly, we are still on the orderly transition pathway in that a credit event did not occur but it remains a credible scenario in the next few months. In both cases, as we have concluded previously, money will be created, debts and assets married up regardless of the history (e.g. bad banks forced on good banks); cash piles like pension funds and corporate cash perhaps forcibly diverted into bonds and so on. In short, there will be a major redistribution of wealth. The second question is after the recalibration, how long will it take to reset the system?

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GeneMarchbanks's picture

In the Eurozone it's all about FrAAAnce...

'Our contacts in China have been telling us for months that China does not trust any part of the euro-system it is now being asked to bail out. Not the currency (which is being printed), not the people (who in the summer promised banks "a one off" 20% haircut over Greece but now impose a 50% haircut, even wanting the banks to say it was voluntary). They do not trust a system where the ECB cannot control monetary and fiscal policy or where EuroStat failed  to scrutinise Greek economic data on accession to the Euro. They certainly do not trust the European political process and its relatively powerless central bank.'

But they trust the US? Please...

If they are looking to put any money to work in the EU at all it'll be like the Qatar deal, where they take over resources or corporate bargains.

unknownknowns's picture

Or as the Greek sage Epictetus [AD 55 – AD 135] put it:

"Appearances to the mind are of four kinds. Things either are what they appear to be; or they neither are, nor appear to be; or they are, and do not appear to be; or they are not, and yet appear to be."

Town Crier's picture

Before my nervous breakdown my former Greek girlfriend Epictitties used to say the same thing.

earleflorida's picture

what's logic got to do with it, when the insane are still reverse engineering the final postulate as said,"yet they appear  not,... but they are?"

SwingForce's picture

Its all about France not letting Germany go out of the EuroZone without them.

greased up deaf guy's picture

the only known i'm aware of is the need to continue stacking (au and ag).

Schmuck Raker's picture

Thanks again ZH for presenting Exclusive Analysis (and,this time literally) that many of us would not otherwise be privy to.

Doubleguns's picture

....makes the fund a bailout, not insurance.

Could not be clearer. Only the idiots do not get it yet.

Black Forest's picture

Perfect summary. Thanks.

Georgesblog's picture

The first thing I question is how many unknowns are being deliberately created.  The process of inflicting poverty in the wealth transfer process is very well documented. Some people celebrate currency collapses. Winston Churchill and his elite friends did, in 1929. I see everything playing out exactly as I have observed in studying history.

http://georgesblogforum.wordpress.com/2011/10/13/the-real-weapon-of-mass...

s2man's picture

I thought the ECB couldn't print, per Germany's dictum.

Western's picture

Where are all the heroes of the human race?

Börjesson's picture

We don't need another hero
We don't need to know the way home
All we want is life beyond the thunderdome

Don Birnam's picture

Sorry, Börjesson:

Two men enter; one man leaves.

MasterBanker runs Bartertown.

disabledvet's picture

right here brother. you're amongst them right now.

Hannibal's picture

Detail crunching and Euro ragging is for nervous nellies, Europe ain't going anywhere! 

lapedochild's picture

I am reading this and think yes, they are so right. Yet at the same time I see the markets go up. It seems there is a HUGE disconnect here. Can someone explain to me why promises still carry this market, yet when a bit of reality sets in we don't fall back? If you recall this all started with a rumor on Oct 4th with S&P at 1074.

I am also thinking banks who hold AND Greek bonds AND CDS's on them could perhaps sell this combo them at say.. 90% of par to other private parties since it's not supposed to blow up while being held by a bank.

As this private party you can decline a haircut and wait it out. Yo could hold the bonds to maturity and if not, have your CDS triggered as this is cleary a credit event.

Something wrong with my logic?

oldman's picture

lapedochild,

I have the same questions, but it 'feels like' a lot of derivative positions are being unwound. I have not been in these markets for decades because of their artificial nature with so few very big players and the virtual accounting that became the virtual-reality post 1987, but in the 'olden days', this feeling I have now came when large hedging spreads had to be unwound. I am certain that there are many here who can enlighten the two of us on this possibility.

Come on, dudes-----please help us out!                           thanks     om

Hedge Fund of One's picture

To whom are they unwinding? Who would buy those compromised CDS at this point? Of what value would they be now?

oldman's picture

Hedge Fund,

I asked if anyone has a better sense of this possibility than do I, because I cannot answer the same questions thay you pose.

I said that it 'feels like' because I don't have these answers and I know that the 'insurance' is so well configured that it cannot be unwound.

Unless two friends like you and I happened to end up with all the pieces in our hands at the same time and wanted to unwind a pile of shit that was just going to continually beat us to death.

I don't know, man---a thing about this. To me it was never 'insurance' as much as it was opportunity in a virtual reality, and now, that does not match the real world----'Wha--Wha--What do I do----?'. If I was the jefe here, I'd call all my clowns in and tell them to empty their pockets of everything----and I would give everyone back an even amount, keeping 50% for the trouble this has put all of us through. I'm a non-violent guy, but I would order this done under penalty of death without a second's thought. Banking was a game with real people in it at one time----not a bunch of wanna-bees who know nothing about risk and reward. In fact, I hope the CBs play god in this fashion----show some huevos so we can get on with just being again.

Thanks for the questions though and get back to me if you find any answers, please                om

NOTW777's picture

I am waiting for someone to explain (or even speculate) the impact of the absurd prenouncement that the 50% haircut is NOT a credit event and CDS are not triggered.  It seems to me that prenouncement would destroy the CDS market and potentially any type of insurance product for at least, sovereign debt.  All the rules of lending are thrown into question.  In my naive way of thinking, borrowing costs should soar.  The value of debt should drop dramatically.  It is shocking that in the same context the so called leaders immediately announce they are looking to leverage or borrow more - right after they have proved to be unreliable borrowers.  There must be a huge and complicated ripple effect in the whole debt market.

Peter Pan's picture

Your point is perfectly valid and one that has troubled me as well. BUT BUt BUT, the collapse of CDS as an insurance tool might force the lenders to conduct true due diligence and would also bring an end the market for those who bet on collapses.

Mind you, I am not against those that take out CDS without having exposure. In fact they simply reveal the markets clear assessment of debt quality. The only problem is that they have the potential of multiplying greatly the fallout of any debt default.

theMAXILOPEZpsycho's picture

Leaving physical gold and silver the only place for bearish people to go??

Ghordius's picture

Be prepared to a yield adjustment
The End of Risk Free

gwar5's picture

Economic Quantum Tunneling rules the day. Magical thinking is the new normal.

Peter Pan's picture

Well we know that the majority of wealth is held in few hands. Will these hands risk the global finance system breaking up with unknowable consequences to both their wealth as well as their safety if war begins?

Or will China back off and declare a debt jubilee?

SwingForce's picture

That tangled web picture of Who's on First and who owes who is total bullshit. On one hand, it only shows what the banks & govs WANT you to know, on the other hand there is NO reason to NET OUT liabilities- there are many different entities within larger entities that have perfect reason to be positioned the way they are, no matter how there bosses run their book. Greece at 2% of US GDP is just another average STATE, 2%. Who gives a shit, financially, although I share their fury over the haircuts the pensions take, and the payback of 100% to banksterz. EUROPE takes far too much of my attention, not worth it, let them blow themselves up, I don't care. 

BurningBetty's picture

Hah...what are you saying? That the US Dollar and the US economy is better off than the Euro and EU economy? Please, $15 trillion in deficit and still counting. Add the goverment spending on top of that and we are close to $25 trillion. The only difference between Euro/EU and Dollar/US is that EU(or should I say Germany) are still reluctent to turn on the money printing machines at maximum gear. Everyone knows where the dollar is going; into hyperinflation. Euro is following in the Dollars footsteps, but we are not quite there yet. Soon though, we will.

BurningBetty's picture

Pick your gold and silver people while the prices are still low, for when this pyramide collapses, the only valuable thing left will be the precious metals(which, I may add, are guarded well(at least gold) by the central banks. And there is a reason for why they are guarded well in their vaults)!

 

ricocyb13's picture

China is clever: they want physical assets for their cash.

Germany and all other EU-countries who want to bail out the PIIGS are stupid: they get debt (which is not backed by anything) for their cash.

http://www.youtube.com/watch?v=9fzO_YhOYNQ

onlooker's picture

I just read the Cyprus Real Estate article and this article; you have to wonder what happened last Thursday and Friday in the American Markets.

This is really unreal. Having been a ZH reader of a year or so, I can not say that we were not warned. Never the less, it is difficult to comprehend.

slewie the pi-rat's picture

not only are we where we started...

we are getting mail addressed to Sisyphus, BiCheZ!

radish juice's picture

Excellent summary of the situation, thanks Zerohedge

masterinchancery's picture

The program is simple; loot the middle class everywhere until there is nothing left; neither the financial elites nor the nonworking proletariet will be bothered.  Then bread and circuses.

oldman's picture

Masterinchance,

Often, I think that the 'middle class' is the real problem with capitalism and democracy: it cannot quite get to where it is going and cannot remember from where it came           om

straightershooter's picture

The Michael jackson's doctor trial show is on display daily, which makes me wonder:

 

Would Michael die sooner or later had he had the privileges of writing of whatever drugs he coveted?

Would Euro die sooner or later had the powers-to-be had the privileges of prescribing of whatever SIVs they surreptitiously, adventiously, and voluntarily CDO-ed?

By the way, the Fort Knox has been renamed as Fort Nothing--Nothing to guard, defend, and steal. No worry for the security of Fort Nothing--Nothing is the best security policy.