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Hardball In Brussels

Tyler Durden's picture




 

From Mark Grant, author of Out of the Box

Hardball in Brussels

In the last hour yesterday the equity markets rallied significantly on the basis of a 120 billion growth package for Europe that had been announced. The EU put out the headline like it was all new money but further investigation revealed that it was not. The growth package was mostly the amalgamation of schemes already in existence with the addition of some new money but not a significant amount. As the news behind the headlines was assessed the markets traded back down some in the after hour’s session. Then Europe’s leaders met and the evening got more interesting. The following is the basis of their decisions.

"We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution-specific, sector-specific or economy-wide and would be formalized in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment program. Similar cases will be treated equally.

 

We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalization of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.

 

We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilize markets for Member States respecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure. These conditions should be reflected in a Memorandum of Understanding. We welcome that the ECB has agreed to serve as an agent to EFSF/ESM in conducting market operations in an effective and efficient manner.”

Behind the Headlines

Apparently Mr. Rompuy had jumped the gun in making the announcement about the growth package late yesterday afternoon as Italy and Spain had not yet agreed to it. No matter, the markets took Mr. Rompuy at his word and rallied away and it was not until after the close that the truth came out. In fact, in the evening negotiations, Italy and Spain threatened to veto the growth measures if certain other measures were not agreed to which were to their benefit. From all indications it was here that Ms. Merkel blinked and was willing to make certain adjustments that are significant. For us the most important change is that the loans from the new ESM fund will not be senior to private debt holders. That is definitely good news for bond investors and a decision that I can applaud.

The other news on that front was that the funds for the EFSF and the ESM were not increased and that while some firewall is a deception of sorts as it does nothing for the troubled nations at all it is indicative, though a contingent and unfunded commitment, of the size of the capital available should further needs arrive for the troubled nations, including Spain and perhaps Italy. If there was one eyes wide open part of the negotiations and discussion it was that Italy may also need some assistance soon because this was hinted at time and again. The ECB will be handling the distribution of bond buying in the secondary and perhaps primary markets for sovereign debt but, unlike the Fed, the printing presses are NOT available as the money allocated to the EFSF and the potential ESM is all of the money that can be used for any bond buying programs. This, then, is a significant negative for the program as there is not enough money to really help out Spain, much less Italy, if it is needed.

Another change is that money can be lent directly to the banks and does not have to go through the sovereign but this change will not take place until the end of 2012 when some sort of European banking supervisory authority is established and there are no details on what that will mean except that it will be located in Brussels. The statements seem to indicate that the money for the Spanish banks will now go the nation of Spain and then its banks and then the money will be transferred off of the Spanish books at a later date when the new banking authority is established.

Now all of this has to go back to various Parliaments, including Germanys, which may cause some consternation as the “seniority” of the ESM has been relinquished which may cause some problems in Finland, Austria, the Netherlands and perhaps even in Germany. It is interesting to note that all of the dictums that have been announced deal with funding and that none addressed the structural or solvency problems of a Europe that is mired in recession.

There is also some good news in today’s release for Ireland which indicates that troubled banks in various nations may now be funded by the EFSF/ESM and not just the nation in which the banks are domiciled. Europe is going to consider EU wide funding which is good for nations such as Ireland and Spain of course but it is bad then for the nations that must provide the bulk of the funding indicating more debt that has to be taken on by Germany, Austria, the Netherlands, Finland et al. It is not exactly Eurobonds because it is limited in scope but it is a definite blink by Germany as hardball was played by both Spain and Italy and Ms. Merkel was outflanked in the end.

The final point that I would make today is that nothing is yet in place and is not even envisioned to be in place until the end of this year. In some sense it is a lot like discussing the ESM which is not yet in place either. All of the talk concerning removing the aid to the Spanish banks from the sovereign obligations of Spain will not happen unless this new banking authority is approved by the nations in Europe and there may well be some that don’t wish to turn over their sovereign banking powers to Brussels. What has been announced then is a plan, a scheme, that is some six months away from actualization if actualized at all. I would point out that there is a lot of risk between now and then and that Europe is quite good with coming up with all sorts of grand plans that somehow do not work out. In the meantime Ireland will still pay for her banks, Spain is going to get money but money lent to the country and not her banks, Greece now awaits the Troika and their report and then the decisions of the IMF and the EU on what if any changes might be made in their agreements and if any new money will be handed to Greece or if the funding will stop.

The EU has done a something I would say, made some progress, but what this something means is yet to be determined and it is one-half year away from implementation under the best case scenario and there will be plenty of challenges ahead in Europe during this timeline. The markets are rallying but the realization that nothing really was accomplished, meaning implemented, will drive the markets the other way soon I fear.

In Existence Now

In the final analysis Europe is quite exposed at this moment and may be for quite some time. The ESM, after the change in seniority status, must be re-affirmed in at least two countries that are the Netherlands and Finland and Germany has not yet approved it yet either. The EFSF has already spent $450 of its capacity on Greece, Ireland, Portugal and now $125 billion for Spain. The balance left in the fund is tissue paper thin and that is all that is in existence presently for any more problems in Europe.  Plans and schemes aside, the amount of money that could actually be used today is a drop in the proverbial bucket.

 

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Fri, 06/29/2012 - 08:12 | 2572694 SWRichmond
SWRichmond's picture

"The balance left in the fund is tissue paper thin and that is all that is in existence presently for any more problems in Europe."

The solution is MEFO Bills.  Balance?  Who needs a balance?  If the markets haven't collapsed already on the ridiculous and obviously false and unsustainable nonsense that has already occurred, why should they now?


Fri, 06/29/2012 - 08:29 | 2572739 Withdrawn Sanction
Withdrawn Sanction's picture

If the markets haven't collapsed already on the ridiculous and obviously false and unsustainable nonsense that has already occurred, why should they now?

Translation:  why cant we just borrow our way to solvency?

Fri, 06/29/2012 - 08:39 | 2572764 Doubleguns
Doubleguns's picture

They still have a surplus of hot air so everything is just peachy keen.

Fri, 06/29/2012 - 08:38 | 2572759 lunar
lunar's picture

http://en.wikipedia.org/wiki/Mefo_bills

I had no idea what MEFO Bills are.....

Fri, 06/29/2012 - 08:40 | 2572767 Doubleguns
Doubleguns's picture

Similar to MOFO bills. /s

Fri, 06/29/2012 - 08:46 | 2572783 BandGap
BandGap's picture

Reality takes a holiday. I agonizingly watched CNBC this AM, the panacea of a solution has markets on afterburner. Two exceptions made my eyes bleed watching this however - the "expert" (I forget which drone this was) mentioned that the Italian contingent said this was a temprary fix AND they cited something the blathering idiot, Cramer said.

These bailouts are to saving the system what cotton candy is to a sugar junky. Short, intense respites from a bigger problem.

 

Fri, 06/29/2012 - 08:54 | 2572832 Stock Tips Inve...
Stock Tips Investment's picture

The European authorities are playing a double role. On the one hand, announcing "possible" agreements in order to give a respite to the market. On the other hand, expand the real decisions. Thus, Germany is preparing to impose their views. I do not I trust the market rise that may occur today.

Fri, 06/29/2012 - 08:11 | 2572697 machineh
machineh's picture

'The EFSF has already spent $450 [billion] of its capacity on Greece, Ireland, Portugal and now $125 billion for Spain.'

Those are commitments, not cash outlays, right?

To my knowledge, EFSF has only raised 18 billion euros in bond issues to date.

I don't believe EFSF can raise the committed sums without incurring a debt rating downgrade.

Fri, 06/29/2012 - 08:52 | 2572818 falak pema
falak pema's picture

debt raising downgrade on EFSF is like saying Eurogroup we junk you and the ECB. That is a big potato to swallow. So far the market jackals are tearing into the peripherals, as the jackals they be! The day you take on the lions the ball game changes. Nobody hits the UK, Germany, France, Us...yet. That will be awesome and will require firepower beyond the race of jackals. Remember, we are all on the Titanic together...

Fri, 06/29/2012 - 08:11 | 2572698 westboundnup
westboundnup's picture

"When you shake your ass, you notice fast, some mistakes were built to last."

Fri, 06/29/2012 - 08:11 | 2572699 Let The Wurlitz...
Let The Wurlitzer Play's picture

I agree that the "circle between the bank and sovereigns" is an issue but the larger issue is that the sovereigns wth maturities over 12 months are worthless.

 

 

Fri, 06/29/2012 - 08:11 | 2572700 sunnydays
sunnydays's picture

Even after the conference, it will always be B.S. announced by one or the other to make markets rally, when nothing will have changed.  Rumor, rumor rumor not reality is what is running the markets.  Until the same rumors and announcements are re ran for a 100th time will it finally fall.

Fri, 06/29/2012 - 08:21 | 2572713 Clint Liquor
Clint Liquor's picture

"We affirm that it is imperative to break the vicious circle between banks and sovereigns."

END THE FED!

Fri, 06/29/2012 - 08:45 | 2572775 Doubleguns
Doubleguns's picture

Yes and end the circle jerks.

Fri, 06/29/2012 - 08:22 | 2572714 DormRoom
DormRoom's picture

structural problems in the monetary union still exist.    Nothing was fixed.  The solution, as always, is free & easy money.  We'll be back here in a decade, but next time the problems willl lead to a pan European War.

Fri, 06/29/2012 - 08:41 | 2572769 adr
adr's picture

Decade? Try six months. This plan is nothing more than a Euro wide Greece bailout. Last time I checked Greece is worse off now than before. How many Finance Ministers have there been now? Has anyone actually walked into the office of Greek finance and survived more than a week?

You can pretend your bills don't exist all you want, but the people waiting to be paid won't.

Fri, 06/29/2012 - 08:23 | 2572718 gjp
gjp's picture

You support subordinating rescue money to the lenders being rescued? A direct bailout of the bad lenders. Yeah that's a great idea.

Fri, 06/29/2012 - 08:34 | 2572745 Withdrawn Sanction
Withdrawn Sanction's picture

That's one interpretation.  An alterntive is that anyone stupid enough to lend to a bunch of deadbeats gets no special consideration.  Put all the dopes in a bankruptcy cage and let them fight it out.

Fri, 06/29/2012 - 08:32 | 2572741 GCT
GCT's picture

People forget the ECB will step in at the last moment and swap out all the bonds and debt and subordinate all the private investors anyway.  Nothing has changed.  They can add all the acronyms they like in the end the ECB is the king!

Fri, 06/29/2012 - 08:36 | 2572752 debtor of last ...
debtor of last resort's picture

And after Dutch elections september 12, there won't be an approval for the ESM. That's what i believe. But our Kunduz NSB coalition will try to vote before sep. 12.

Fri, 06/29/2012 - 08:49 | 2572795 SmoothCoolSmoke
SmoothCoolSmoke's picture

Isn't that the problem?  So now we're out to Sept 12th.  Then they'll find a way to kick the can to 2013.  The Ponzi elite always seem to find a way to delay the disaster.

Fri, 06/29/2012 - 08:37 | 2572753 adr
adr's picture

Seriously, didn't we get an agreement like this last year at this time to create the EFSF and over a year later it hasn't done anything.

Greece got its bailout and screwed over bondholders. Greece was supposed to be fixed, but it is anything but. The bailout was just cash to pay back bankers for making bad bets. The real country is fucked.

TARP and QE may have helped the US market "recover" while the zombie banks got some more brains to chew on. Instead of helping the economy, the money was thrown at worthless paper to pay for banker bonuses. The media claimed the economy was getting better, but it was really just deteriorating even faster. By killing the dollar acergage Americans got screwed.

Europe really wants to follow that? What is funny is that printing Euros has been seen so far as bullish for the currency. Ith this announcement the Euro should be heading straight fr all time lows against the dollar, not the other way. Dollar denominated commodities should be dropping like a stone, not increasing, on this news.

For the past five years I have been told, "A weak dollar causes oil prices to rise as it becomes cheaper for overseas investors to buy." So destroying the Euro will not have the opposite effect?

The plan really is:

Governments can't sell bonds to fund their operations, banks can't buy the bonds because they have no money. So the ECB will find cash using bailout utilities to give to the banks, so the banks can buy the government bonds, so the government can have cash to run the programs they don't have money for?

This fixes the problem of the citizens of the country having no money how? The only way this works is to get the cash from citizens that have money, giving them bonds that will never be paid back in return.

Goldman will be buying European bonds like mad to sell to gullible American clients, to let them hold the bag for Europe. If you touch a Spanish bond, you are losing all your money plan and simple.

This system can not grow any economy, so we will be right back to where we started as soon as the first new bond is issued.

Fri, 06/29/2012 - 08:38 | 2572761 falak pema
falak pema's picture

Hey Mark, you were off the mark on this summit, just like that other poster Wolf of Testo pit. Both of you said Merkel will not blink. And she did. Reality is a bitch and now Germany is stymied until their supreme court and bundestag vote to clear or block the way. 

Anyways, the Euro doom clique got its butt kicked this week end. Thats my only point. 

Fri, 06/29/2012 - 08:40 | 2572766 chubbar
chubbar's picture

How is this announcement any different than what we feel was intended from the start? A centralized gov't that determines budgets and controls the banking for each (for now) individual country? That the ESM will allow it's bonds to be subordinate to existing bondholders may be a distinction without a difference because if a country defaults on ESM bonds the ESM rules that speak to that issue are pretty draconian, as I understand them. Whatever small amount of self-determination a country would retain prior to a default are completely obliterated after a default. I don't think that Brussels cares so much about the money it creates out of thin air nearly as much as it wants the power to rule over Europe. So to get a deal done that puts itself in second positiion on bond payments is small potatoes compared to the fact they will now have european countries by the balls because piling on more debt isn't going to make this crisis go away but will eventually result in default and loss of sovereignty. Game, set, match.

Fri, 06/29/2012 - 08:43 | 2572772 Silvertrader
Silvertrader's picture

Markets are up on the news. Precious metals up also. Gouden en zilveren munten kopen, that is what i am going to do.

Fri, 06/29/2012 - 08:48 | 2572792 SheepDog-One
SheepDog-One's picture

'The news' of what, they voted on pure delusion as main financial policy? We'll see how long that lasts, I'm not betting on a long time at all.

Fri, 06/29/2012 - 08:52 | 2572815 SmoothCoolSmoke
SmoothCoolSmoke's picture

That may be, but they have strengthened the Pavlovian response to BTFD AGAIN!  That is their ace in the hole it seems.

Fri, 06/29/2012 - 08:46 | 2572781 DrDinkus
DrDinkus's picture

there are no words to describe the feeling of frustration with TPTB. guess its a rite of passage for a plebe

Fri, 06/29/2012 - 08:48 | 2572794 d edwards
d edwards's picture

Everything is fixed! Everything will be great-for about a week (maybe). Sucker rally in markets.

Fri, 06/29/2012 - 08:50 | 2572802 SmoothCoolSmoke
SmoothCoolSmoke's picture

Ponzi on!  The Criminal Elite win again.  Dispite all all rage we are TRULY just rats in a cage. 

Fri, 06/29/2012 - 08:52 | 2572816 valley chick
valley chick's picture

The ECB will be handling the distribution of bond buying in the secondary and perhaps primary markets for sovereign debt but, unlike the Fed, the printing presses are NOT available as the money allocated to the EFSF and the potential ESM is all of the money that can be used for any bond buying programs. This, then, is a significant negative for the program as there is not enough money to really help out Spain, much less Italy, if it is needed.

Extend and Pretend Friday! 

 

Fri, 06/29/2012 - 09:06 | 2572875 milanitaly
milanitaly's picture

hard ball in Berlin

Fri, 06/29/2012 - 09:08 | 2572882 q99x2
q99x2's picture

In other words, the market can ramp higher on rumors and the threat of rumors until at least 2015 after which a concerted QE effort by central banks worldwide can get us past the 2020 hump before the earth is finally destroyed by an asteroid.

I hate Soros. 3 days...in 3 days he said we could see the collapse.

Fri, 06/29/2012 - 09:22 | 2572942 insidious
insidious's picture

"Another change is that money can be lent directly to the banks and does not have to go through the sovereign ... there are no details on what that will mean except that it will be located in Brussels. The statements seem to indicate that the money for the Spanish banks will now go the nation of Spain and then its banks and then the money will be transferred off of the Spanish books at a later date"

I have to wonder what happens when the banks, which will now receive their bailout funds directly, fail? I'm guessing the sovereign, in this case Spain, will have to step back in and transfer the losses back to the Spanish government books (or maybe they are counting on the ESFS/ESM/Germany to absorb the banking losses - probably not though). So basically one more attempt to kick the can down the road while appearing to do so without increasing the sovereign debt loads but doing nothing to alter the basic problem of too much debt (except perhaps by really increasing the total amount of debt and thus making the situation worse in the long run). Wasn't it Greece, with the help of Goldman, that found various ways to cary Greek debt off the books to make their debt to GDP ratio look better? Someone remind me how that worked out?

Fri, 06/29/2012 - 09:25 | 2572961 CrashisOptimistic
CrashisOptimistic's picture

It all comes down to Merkel.

She folded.  All the Iron Lady talk was so much claptrap.  When this array of measures fails, she'll wind up allowing Eurobonds.

As has been said, this financial stuff is meaningless.  It will never be allowed to disintegrate the system.

Only oil scarcity will do that.  It will, and they can't print it.

Fri, 06/29/2012 - 09:34 | 2572995 Mountainview
Mountainview's picture

They still look for a "fit all policy", sort of win-win, which simply doesn't exist!

Fri, 06/29/2012 - 13:18 | 2573781 Fort
Fort's picture

Clearly they communicate to the markets like they communicate to their voters. Both remain unconvinced.

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