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Guest Post: Euro Tarp - Why It Will Be A Screaming Failure
Submitted by Lance Roberts of StreetTalk Advisors
Euro Tarp - Why It Will Be A Screaming Failure
Is 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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"carpet muncher Christine Lagarde"
hahahahaha
the best thing about ZH is we all can come here and be kids again! and the FED is going to shred all the files, just like th SEC did so no worries there! YAY!
I can dig that...
Once the major sell kicks in on Friday, totally gonna get wasted. Probably good Polish Vodka, maybe some Tequila etc
It's healthy, wholesome and beautiful... supposedly:)
Tyler --- How does this stand against what ECB and German FinMin screaming around saying they will not monitize the debt? Is not this EIB repo facility outright monetization under a different disguise?
A basic understanding of ponzinomics would infer that monetization only occurs if you actually print paper notes, and as virtually no one can understand this highly convoluted scheme. Then clearly it is not monetization.
That would be illegal wouldn't it?
/sarc
Tyler --- How does this stand against what ECB and German FinMin screaming around saying they will not monitize the debt? Is not this EIB repo facility outright monetization under a different disguise?
Euro-TARP...lol
Don't be a dick, get metals like gold, silver, and lead.
I also recomend TP unless one want to go 'Roman' then a sponge on a stick soaked in vinegar works...
If the solution rests on a United States of Europe, then that TARP was passed into law in 1776; Good Luck Bitchezzz
All incapable of recognizing their utmost failure while living the blingbling life. Who supervised the banks, who learned from 2008 ?
This public confusion will certainly enhance Euro credibility ?
All is well ...can potentially kicked until end of October or November or even December...when we will be right back at the same place...but deeper in debt.
This crashes the European EFSF plan....
http://www.telegraph.co.uk/finance/financialcrisis/8793010/Germany-slams...
three card monte. someone learned banking on nyc streets in the 70s and 80s. as long as the correct card stays unpicked the euro wins. fn brilliant. they should hand out gold tooth caps with dollar signs on them to all the euro bankers.
Monte Carlo Test?
Really?
ALL! of Europe?
Like WOW! Man!!
This kind of trickery is really art. Right Marcel?
http://www.toutfait.com/unmaking_the_museum/Monte%20Carlo%20Bond.html
Monte Carlo Test?
Really?
ALL! of Europe?
Like WOW! Man!!
Liesman??
as author of the rumor one has to ask the obvious:
who or what was the source of said rumor?
an EZ source or a source from closer to home?
What Liesman will have a hard time explaining, GDP vs Tax Revenues vs Unemployment vs New USD debasement plans to spend money to remain revenue neutral.
Consumerism
Tag, your it Liesman. :)
Liesman is a useful idiot for TPTB.
Liesman is a reporter BSing like an economist, similliar to a crack whore BSing like a fortune teller.
Liesman is an entertainer, masquerading as a financial reporter, but the other idiots on CNBC (except Santelli) humor him by calling him an economist.
Any deal that pays off debt with debt cannot remediate the situation. P.e.r.o.i.d.
Peroid is french for PERIOD!
Glad that's cleared up now
Euro Tarp. Who thinks this shit up. The only intention I can come up with is to fuck the europe as we know it untill the national boundaries and national identities no longer exist. John Cleese was quoted as saying after the recent riots in London that he no longer recognizes the city he grew up in. Sucess. Soon Europe will be unrecognizable all in the name pan-europeanism, whatever that means.
Read my prior post. If Greece goes, so do French, Spanish, Italian and German banks. That default arrow points straight to Wall Street, who have many tens of billions in exposure. Don't forget all of these banks are highly levered, such that a Greek default results in an unbelievably large detonation, in levered-dollared terms.
Knowing this, the answer to your first question is: Tim Geitner. He knows if eurozone blows, so do our banks. Think Obama can get reelected with another TARP for Wall Street? Answer: nope.
I know the dominos will fall if greece blows. greece needs its own currency. The banks should fail fail. and on their ashes will rise new and solvent banks. Derivitive bullshit.
Maybe some of this stuff would be easier to follow if there was some bookkeeping entries like what these people are going to do. I can figure some of it out, (or not???) for example:
On the El Stupido Bank's Books:
Credit Loans to Greece (a asset) $1 trillion
Debit Some piece of paper from the SPV (with 3rd party guarantee)(a asset) $1 trillion
On the SPV's Books:
Debit Greek Loans (A Asset) $1 trillion
Credit Note Payable El Stupido Bank/Guarantor $1 Trillion
On The Guarantor Whoever's Books:
Either no entry because they are just a Guarantor, which keeps the crap off the balance sheet until money/payments change hands.
OR
Debit Greek Loans (A Asset) $1 Trillion
Credit Really Cool Bonds From Us to El Stupido Bank (a liability)$ 1 Trillion
Do I have the gist of it, because if I do, all thery are doing is shuffling paper and when the payment still does not get made, somebody is getting screwed depending on the paperwork. I mean somebody is going to inherit the Greek debt out of this. I think.
Squeeky Fromm, Girl Reporter
"all thery are doing is shuffling paper"
They're playing pass the parcel with one hand while robbing the citizens to make the bank's solvent with the other.
kinda on the subject, but couldn't we locate the $11,000,000,000.00 in cash we somehow lost in Iraq to help our Euro friends out? or do we just say "FUCK EU!"
Don't worry folks. After Obama's vacation, the new law will be signed. Liberals will be quite satisfied until they actually read the ObamaCare bill on medical coverage. LOL
Onion funnies
Social Security Reform
Good night ZH family. A good laugh is often needed to get thru chaos.
Liesman jacks off with his left hand
And speaks Russian.
EURO TARP - Will it Be A Screaming Failure?
yep
the burning Eurozone logo image is a bit er, 'dramatic' ....but Europeans could rather learn to like it
This is going to end very very badly, you can believe it. You are correct, to say this is a circular argument is weak to say the least. All this is doing is moving the toxic stuff around until the the hammer finally comes down and whomever is holding it will pay for it (France and Germany).
So was Liesman's rumor that Germany had approved this plan really a planted story intended to float the idea that it would be passed, a priori to any consideration by the German government, in the hope that if a lot of people believed this, it would actually come true? Is this the case, and if it is, isn't it likeley that Liesman was acting on the behalf of Tim Geithner? Does anyone else intuit this? I'd like to know the thoughts of other ZHers.
sounds a little like the balfour declaration
Whatever version of eurotarp they eventually come up with i don't think it will be a screaming failure (from their point of view).
What's the actual problem?
1) The banking cartels became insolvent through running up hundreds of trillions in bad gambling debts.
2) They didn't want to go bust so they bribed enough politicians to get plan B i.e where the money required to make the banks solvent again is taken off the tax-payers.
Now if it was just 50 billion or 100 billion that would have been done and dusted but it wasn't it was tens of trillions so the greatest bank robbery in history had to be done in stages over a number of years.
Problem: Say the bank cartels are short ten trillion and the first stage of the robbery nets them one trillion what do they do? Do they go back to lending and investing in the non-parasitic economy? Of course not they're still massively insolvent so they hoard it.
What happens if the banking cartels stop lubricating the non-parasitic economy? It seizes up. What happens as the non-parasitic economy siezes up? The banking cartels healthy assets gradually become toxic and their already toxic assets gradually become even more so.
So we're in a vicious spiral where the bought politicians are trying to rob citizens whose ability to pay is steadily declining due to the economy seizing up in an attempt to make banks solvent whose balance sheets are continuously going two steps forward (as a result of the robbery) and one step back (as a result of the recession casued by the robbery).
However as we've seen so far this spiral doesn't neccessarily lead to a crash in the financial system. It can lead to a crash in everything except the financial system. The central bank crimelords will lie, print and deceive however much is neccessary to get past each potential crash-event while the blood gets slowly sucked out of the real economy into the banking cartels. The vampire doesn't die. The host dies.
It seems possible to me, in fact likely, that the financial system won't crash until the very end when there's nothing left to rob - at which point the vampire flies off to SE Asia and starts again.
So eurotarp (in whatever form it eventually takes) won't fail in their terms. It will fail to solve the problem from the citizen's point of view but it will succeeed in getting past the current potential crash-event and letting the process of blood-sucking continue till the next crash-event - which is the problem from their point of view.
(edit: nb i'm not saying the rumoured version of eurotarp has any validity just that whatever version does actually happen will probably *work* short-term, which is all they care about.)
Nicely put, exactly no reset until they are ready. There is only one way to force a reset not of the PTB timing and that will is nonexistent. So buckle up buttercups this will take years..
You get the "nailed it" award for clear and to the point writing.
From what I'm hearing, the Euro TARP is not big enough to matter much...
Escape plan for the world power elite. Last man out turn off the music.
see we do export something from this country...recipies for disaster, new and improved now............this one is Capt. Turbo
Timmie's Meat loaf. It's all in dare...
Asia stock rally runs out of steam, Hong Kong reversing (down 1.8%).
Australia housing bubble pricked: price index falls for 2nd consecutive quarter by >2%.
Martin Feldstein on "Europe’s High-Risk Gamble":
The eurozone’s politicians may learn the hard way that trying to fool markets is a dangerous strategy.
http://www.project-syndicate.org/commentary/feldstein40/English
So in other words it is a type of MERS ...http://en.wikipedia.org/wiki/MERS hahahaha
http://www.youtube.com/watch?v=NHWjlCaIrQo
perfect ;-) and your over 40 now right lol
hahahahaah "At least you got a free toaster with your checking account"
Hitler finds out about the rogue UBS trader
http://www.youtube.com/watch?v=sX03_yZJOMI&feature=related
Continental Illinois & Enron. Been there, done that.
Lance,
In principle I agree with you completely. However, the veteran trader that I am is betting the other way. I don't know how, but with the entire world betting against any positive outcome, my sense is that what we have seen in short-covering is only the tip of the iceberg.
I'm betting we see 1.50 in the Euro before we see 1.30 and in AUD I'm betting 1.05 - 1.10 by year end before we see sub 0.95. Maybe I'm wrong, and that's Ok, but with OTM calls dirt cheap, any surprise move will pay big time.
I know how governments operate, and the only winners here will be PM holders [if the system collapes], and the very last thing they want is for anybody holding physical metals to be a winner. They will committ political suicide before that happens. We'll see.
Got a hunch, bet a bunch :)
All i can say is, Wow!
Cant you see? its not about saving PIIGS countries, its about saving those Zombie banks. Thats the real kicker! giving these down n outs bankig institutions collateral to borrow 9x the leverage of their bonds.
It took me 1 second to conclude that this scheme is just a roundabout way of creating Eurobonds. Does this fool anyone? Geithner just proved he's a con artist. Who does he want to bail out exactly? Put all the cards on the table. What a scam.
But the author forgot to mention that the BRIC's will be lapping this stuff up :) Or in other words, Chinese slave labor camp prisoners will be subsidizing the Greeks (and the Spanish) lovely lifestyles. Yea, that's the ticket;)
Sorry to ask a stupid question, but why not just let the Banks go under? They aren't performing any socially useful purpose anyway. Sweden temporarily nationalised troubled Banks, wiped out equity holders, bond holders, boards and managements. Only then were taxpayer funds used to write down bad assets. Then the Banks were re-floated with the good assets and a sustainable capital structure. The proceeds of the IPO's, of course, then offset losses to the taxpayer. Sweden is now one of the strongest economies in Europe.
Obvously not a popular solution amongst the Banksters, but then, Fuckem.
If you are a PM holder you have to love the current financial situation. All hyperdebt creation by the public sector financed by a dying private sector becomes unpayable at some point. A debt jubilee is on its way. Having a bit of the shiny stuff will buy you a front row seat at the soon to be next ponzi creation. The monied have already moved to Physical PM's awaiting total collapse.
This plan is simple-- give (give) the banks money to make money with again--the tax payers (read worker citizens) will be on then hook----simple--