Guest Post: Euro Tarp - Why It Will Be A Screaming Failure

Tyler Durden's picture

Submitted by Lance Roberts of StreetTalk Advisors

Euro Tarp - Why It Will Be A Screaming Failure

eurozone_crisisIs Dick Fuld running this show?

The Eurozone bailout, now being referred to as Euro TARP, is doomed to fail.  While nothing has been officially announced the markets are rallying broadly on the back of a news article published by CNBC on Monday.  The details are lacking as to the actual structure but speculation is already running rampant across the financial markets as to what it might look like.  

What is presumed is that Euro TARP will follow the proposal originally proffered by Tim Geithner on his European trip recently.  That proposal had been widely dismissed by the G20 as they couldn't come to terms on any type of structure.   The current idea outlined by CNBC will bypass the G20 entirely and allow the European Investment Bank (EIB), a bank owned by the member states of the European Union, to take money from the European Financial Stability Facility (EFSF) and capitalize a special purpose vehicle (SPV) that it will create.  

The SPV will then issue bonds to investors and use the proceeds to purchase sovereign debt of distressed European states, which will hopefully alleviate the pressure on the distressed states (PIIGS) and the European banks that already own their sovereign debt.     

If alarm bells aren't already going off they will be in just moment as you get the gist of the rest of this disastrous plan. 

The special purpose vehicle could then be used as collateral for borrowing from the European Central Bank (ECB), allowing the central bank to make loans to banks faced with liquidity shortages.  Let me be clear on this.   The European banks which are already undercapitalized and on the brink of failure will buy bonds issued by the SPV that is full of bonds issued by broke countries.  The banks will then used these bonds as collateral to borrow money from the ECB.   The ECB winds up with loans to broke banks and holding bonds backed by debt issued by broke countries as collateral. This is worse than circular logic, its circular borrowing akin to the Credit Default Swap (CDS) markets that helped sink Bear Stearns and Lehman Brothers, just with a European flair.

Are you getting the picture yet?   It get's better.  Let's throw in some leverage.

The EFSF fund has already committed to providing emergency loans to Ireland, Portugal and Greece – the worst bets on the table. It is expected to provide over 100 million euros ($134.9 million) in additional funding for a Greek bailout.  According to some estimates after those loans, the fund will be down to about 295 billion euros ($400 billion),  So we assume they take roughly $200 billion or so from the European Financial Stability Facility to fund the special purpose vehicle.

$200 billion is not NEARLY enough to solve the problems that Europe faces so the SPV will likely, as suggested by Tim Geithner, be levered up to 9x its capital giving the this vehicle about $1.8 Trillion to work with.  The SPV, as stated will take the PIIGS debt in and the banks will get EIB paper which they can then use as collateral to get liquidity from the ECB.  Doesn’t this sound a lot like the “good bank/bad bank” solution that Lehman tried to sell?

Yes, the EIB paper is of stronger credit – barely - than the PIIGS paper but you are still left with the fact that broke countries are taking in debt from countries that cannot pay their debts, issuing a SPV to sell to other broke banks so that they can use it as collateral to borrow money after it has been leveraged 9x.   9x times a problem doesn’t make the problem smaller does it? What could possibly go wrong?

There is no doubt that the banks and the financial markets want a solution but the reality of the situation is that this is not really a solution to the problem -- which is the fact that the PIIGS are broke and they need an orderly default process to clear the excesses from the system.   However, this leveraged solution will inevitably "kick the can" and shift a massive level of toxic debt to France and Germany which are not in a tremendously strong position to handle it.  

The other problem is whether or not the German government can actually get this solution passed.   This out of Germany this morning "Andreas Vosskuhle, head of the constitutional court, said politicians do not have the legal authority to sign away the birthright of the German people without their explicit consent.  He stated that 'The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature (even with its powers to amend the constitution),'  There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit – which might be politically legitimate and desirable – then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people, he told newspaper Frankfurter Allgemeine."

Therefore, if the expansion of the EFSF, including the SPV, isn't legal from a German perspective without a formal vote of the people, then this deal is most likely dead before it starts.  If that is the case then the markets are in for a lot of trouble and most likely soon.  Again, this sounds a LOT like what the UK government said to Barclay’s when they wanted to buy Lehmann. Is this sounding more and more familiar? Are you getting as worried as I am?

However, if Europe is going all in with leveraged bets that will water down the credit quality of both France and Germany -- which leaves no strong credits in the Eurozone --then there will be further complications down the road as borrowing costs for Germany and France push higher dropping the Eurozone into a deeper recession. 

Of course, SPV's have a dubious and disastrous history to start with and it is highly likely that this whole process will end badly.  The reality is that PIIGS need an orderly mechanism to default, figure out what banks to save and which ones can be let go and start the process of clearing the years of bad debt and excesses from the system.   The only question is not whether this "clearing process" will occur it is only a function of when and under what terms.

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jdelano's picture

Why is ZH even lending credibility to this "plan" as though it hasn't already been debunked? See the telegraph's finance section

bluengolden's picture

Perhaps BC it was the latest dose of hopium administered over the last two days to prop up otherwise death-spiraling markets?

bluengolden's picture

If Tyler weren't posting this, quoth the retrospectives: "TD-420, why aren't you at your post?"

jdelano's picture

Yes yes-- granted. My point was, might have been worthwhile to mention that the Germans are openly mocking the "plan" as a ridiculous rumor as not doing so perpetuates the notion that liesman didn't just concoct this nonsense out of his ass to goose the market. Got puts on that will suffer if people continue to assume there's a scrap of validity buried somewhere in this dungpile. No offense to the tylers.

Spirit Of Truth's picture

The truth is authorities are just changing the tune in their endless charade of musical chairs to keep the global banksters' Ponzi-scheme afloat.  Here's the newest song:

Libertarians for Prosperity's picture



Legarde, Trichet, Merkel, Bernanke, Geithner, et al. are all crafting a European version of TARP - le TARP Royale - which will temporarily re-capitalize the Eurozone and delay the inevitable implosion of the Euro by several years, just as the original TARP delayed the insolvency of American banks. Despite what you hear from the doom and gloom cultists, the original TARP was a monster success, if only temporary.  Quite impressively, it yanked the financial system from the abyss and delayed the inevitable reset indefinitely. The problem with TARP is that it worked!  

So now the Europeans will give it a go.  Just as soon as le TARP Royale is crafted (October), Greek bonds will be allowed to blow up in a gigantic, controlled, sovereign toilet flush (November).  A roiling miasma of low-grade financial flatulence will hang over the EuroZone, pushing them well into recession territory as a massive deflationary buzz saw cuts across Europe indiscriminately.   

Rest assured, though, thanks to le TARP Royale, the euro-banks will be encased with layers and layers of bubble wrap and a thick coating of marshmallow creame - metaphorically speaking, of course. As always, the story for the working class will be a different one, as they'll see significant haircuts to their pensions and retirement accounts.  But the plutocrats and bankers who control the puppet strings don't care about that.    


jdelano's picture

You sir, have a problem of ethnocentricity, meaning you can't conceive that there are people in the world who don't think like Americans. E Germans for example, having experienced first hand the horrors of hyperinflation, are not so blasé about printing/leveraging as you might think. Or, to put it another way, you're just wrong. Euro tarp DOA.

Libertarians for Prosperity's picture



You, sir, have a problem with coherence.  I am perfectly capable of understanding that Europeans don't think like Americans.  First of all, you folks don't believe in deodorant; we do.  Secondly, you folks like your women hairy; we don't.  

But everyone likes their banks well capitalized, and that has nothing to do with nationality.  There are exceptions, of course, such as those who enjoy watching the world burn.  Fortunately, though, the vast majority of the world doesn't listen to these carnival barkers.  

You cannot compare the situation in Weimar (with their debts denominated in foreign currencies) with the situation today, and any European who conflates the two is, most likely, suffering from the effects of acute ignorance.  If hyperinflation was solely a function of money printing, the USD would have imploded, and the USD denominated commodity markets would have gone parabolic.  Instead, after QE1, QE2, and now in the middle of QE2.5, we find USD denominated assets mostly flat for the year and within a narrow range over the past 2 years.  Except gold.  But everyone is cuckoo for cocoa puffs with gold right now.  That's another story. 



FinalCollapse's picture

Unlike Germans we believe that shower is better than deodorant. However continue the use of dedorants, as long as you  stay away. As for women - when it was the last time, Miss Germany won the world title?

NumberNone's picture

Germany calls Timmy stupid..."I don't understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense," he said.



jeff montanye's picture

some americans like hairy women a lot.

snowball777's picture

Leave Rachel Maddow out of this.

crazyjsmith's picture

We put hairy women in charge of departments that enforce public groping

Dingleberry's picture

I saw a porno call "Dirty Hairy" was both.

Mr. White's picture

That quote from Schauble is great -- he's a real hardass. He'll defend German capital to the bitter end. I'd like to hear what he says about Timmy in private.

walküre's picture

Kleines Timmilein.. so eine DUMME ROTZNASE!

jdelano's picture

Whoops--did I say ethnocentric? On second thought solipsistic would have been far more apropos as clearly you can't see far enough out of your own sad little bubble of reality to see that I am not European. I'm 100% amerikan (fuck yeah!). The rest of your diatribe I consider too feeble to be worth dignifying with a response. Buona notte, figlio di puttana.

JW n FL's picture



did you know.. that when the moor's invaded italy that they did so much fuckin that they changed the whole genetic makeup of every wop? did you know that?

now call your cousin in da white house ( pun intended ) and tell him to chill the fuck out!

jdelano's picture

I bow before the almighty wit of the joo, endowed with such gifts as the ablility to plagiarize hackneyed slurs from a Quinten Tarantino flick. Is there anything you people won't stoop to steal? (seriously though, not sure why you felt the need to stick your undoubtedly protuberant nose into this feud--joos and I-talians are supposed to be simpatico...)

LeonardoFibonacci's picture

not always simpaitco.  Hanno amazato il nostro caro gésu quelli bastardi con il naso lungo

Andy Lewis's picture

Yer breath stinks like shit.  Why don't you go brush yer teeth?

LeonardoFibonacci's picture


how can you smell it on the computer BASTARDO

Andy Lewis's picture

I wondered about that myself.  I guess he's speshul.

TBT or not TBT's picture

Don't think it was a Tarentino. Anyway for sure it was Christopher Walken delivering the insult along those lines, that the wops are "niggaz" because the moors did so much fuckin.

jballz's picture


written by tarantino...

and you all should really be more polite to each other as you're going to need all the friends you can get when the cannibalism starts.

EasterBunny's picture

You really are a cretin.

Obviously not very well travelled. Do you have a pssport?

BigJim's picture

It's true... if I were given the choice between choosing (sight unseen) either an average European woman or an average American, I'd choose the former.

sushi's picture


The UK is a member of the EIB but outside the monetary zone. No way will they agree to putting themselves on the hook for this fantasy of a delusion inside an improbability.

??'s picture

right on sushi

Cameron would never, I mean never sell out to the bankers.  He's one great guy, a man of the people, a winston in waiting.


sushi's picture

Cameron would never sell out to French or German bankers. As for a winston in waiting I think of him more as a Disraeli in desuetude.

tumblemore's picture

Cameron and Osborne are 100% going to bail out the eurobanks and will throw their deficit reduction plan under the bus to do it. They're owned by the London banks and the London banks don't want contagion from the eurobanks.

The only barriers to eurotarp are Germany and some of the smaller countries like Finland (who i assume could be rail-roaded if neccessary but not sure on that).

andrewp111's picture

If they want to do a EuroTarp, there is a very simple way. The horrendously convoluted scheme described above is both stupid and unnessesary. All they have to do is have the ECB print up a trillion Euros, and then buy newly issued bank stock with those Euros. Voila! The banks are recapitalized.

abalone's picture

Isn't that the problem. They can't. It's like an eposide of "Underbelly" Benny & the Fed have got a press & the ECB want it.

fuu's picture

That's a gem right there: "Despite what you hear from the doom and gloom cultists, the original TARP was a monster success, if only temporary."

M.B. Drapier's picture

The leverage-the-EFSF masterplan has been around since days before Monday, and it's pretty clearly not the invention of any journalist; it's something which is being pushed hard on journalists by, evidently, the US government. Maybe Liesman added the use-the-EIB flourish, but I wouldn't even bet on that - $5 says that notion was fed to him too.

Some Germans like Schäuble are indeed mocking the idea of leveraging the ECB (whether through the ECB or whatever), but it's being pushed frantically by the US; it has partial or full support from the UK, France and many other significant countries; it apparently has domestic support in Germany from business types, the SPD and so on; and it's likely going to come down to a decision by Merkel, who's always given in and supported the bailout every time so far that push has come to shove. So the rumours can't be lightly dismissed, I'm afraid.

??'s picture

sounds great Drapie

could you perhaps provide some substantiation to your assertions?


I do agree that this is an American based initiative but then that's my opinion so a link to a source that supports such a claim would be greate

jdelano's picture

Missed the part about constitutionality and the need for a referendum....?

G-R-U-N-T's picture
"Germany and America were on a collision course on Tuesday night over the handling of Europe's debt crisis after Berlin savaged plans to boost the EU rescue fund as a "stupid idea" and told the White House to sort out its own mess before giving gratuitous advice to others."

Germany pulls White House covers. Absolutely classic.


Manthong's picture

"politicians do not have the legal authority to sign away the birthright of the German people without their explicit consent"

Thank goodness politicians do not have such silly constraints in the U.S.

Two Towers AU AG's picture

I understand that I understand that I did not understand the understanding which one had to understand to understand that I said I did understand the plan after reading this article...

F***.... this plan seems more twisted than a pretzel.. took me two readings to understand that the people have no understanding of its implication...

tekhneek's picture

A graph/flow-chart would pretty much sum this up.

Someone please detail this debt circle jerk so we can be done with this.

Golden Receiver's picture

A flow chart would imply some logic to this madness. An Escher or Dali rendering might be easier.

Doesn't parts of this sounds suspiciously like the mortgage backed securities bs that got so opaque nobody knew what anybody was holding and what risks were being assumed by which parties? Could this be an intentional consequence?

Dr Hackenbush's picture

it's a corporate check kiting ring with 8 to 1 leverage - done in broad daylight by those that sit above the law. 

MaximumPig's picture

So who is showing up with the E1.6 trillion of lending to provide the leverage?  That is strangely missing from the 'plan.'

covert's picture

maybe failure is the goal? if poverty is the goal, then it will succeed.