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JPMorgan Explains Why There Is No Deus (gr)Ex Machina For Europe

Tyler Durden's picture





 

Just because there aren't enough traumatizing events in the next week to look forward to, the market has already set its sights on the next "big" (let down) event in Europe - the EU summit on June 28/29, which will only benefit just one class - Belgian caterers. But for some odd reason there is hope that Europe will, miraculously and magically, after years of failing at this, come to some understanding over either Eurobonds, a fiscal union, a deposit insurance, banking union, or some or all of the above (expect many daily rumors regarding any of the above to incite small but violent EUR and ES short covering rallies). However, as we have been observing for the past 3 years, and as David Einhorn summarized visually, nothing will come out of this latest summit. JPM explains why the one thing that can save Europe is a non-starter, and will be for years.

From JPM's David Mackie:

Consider Eurobonds as an example. In theory, it would be possible to create a system whereby a centralised debt management agency issued joint and severally guaranteed debt and then allocated funding to national governments. The size of the allocation and the interest rate would depend on an agreed path of fiscal and structural reform. To the extent that sovereigns deviated from the agreed path, the borrowing cost would go up. So far, so easy. But, there are a myriad of practical problems, in addition to the key issue of how the debt management agency would make its decisions. Government deficits and debt are a reflection of many things:

  • the size of the public sector,
  • the generosity of public sector remuneration,
  • the efficiency of public administration,
  • the generosity of the welfare system
  • and the extent of tax evasion.

The differences across Euro area countries regarding all of these things are huge. How they are dealt with is a monumental task.

And so on. Good luck to all those hopeful that absent a full-blown market collapse, and EURUSD trading sub parity, both of which are precisely what Germany wants, needs and will get, European countries will hand over their sovereignty to Germany.

Ironically, only by crashing and burning, can the market be fixed.

Ful JPM note:

Starting to think about the EU summit on June 28/29

One way of framing the Euro area debate ahead of the EU summit on June 28/29 is to consider the trade-off between national sovereignty and burden sharing. Sovereignty relates to fiscal, banking and structural policies. Burden sharing, meanwhile, can be either explicit (fiscal transfers, debt forgiveness, areawide bank recapitalisation) or contingent (Eurobonds, areawide bank deposit insurance).
 
The original Maastricht vision put the region at almost one extreme of this trade off: significant national sovereignty in all areas except monetary policy, but no burden sharing. For non program countries, the past two years has seen little movement along this trade off. Sovereigns are still expected to reduce their debt to 60% of GDP—what might be viewed as an equilibrium level of leverage for sovereign debt with credit risk—via national austerity at market rates, and the burden of bank losses is still contained within the nation state. For program countries, there has been more movement along the trade off, albeit on a temporary basis: adjustments are being cushioned by long term loans at concessional interest rates, which represent a limited form of burden sharing, and there has been some decline in national sovereignty for the duration of the programs. Meanwhile, the internal current account adjustments remain the responsibility of individual countries, albeit cushioned for both program and non program countries by low cost ECB loans to banks and Target 2.
 
It now seems clear to pretty much everyone that the approach of the past two years has run into a dead end. This is not because the region is unable to buy enough time. Although fiscally based liquidity hospitals (EFSF/ESM) are limited by the market’s appetite for their debt, and monetary based liquidity hospitals (SMP) are limited by concerns about subordination, the region could build a huge hybrid liquidity hospital if the ECB were willing to fund the ESM. Rather the dead end is because the burden of adjustment—the combined impact of sovereign and bank deleveraging and real exchange rate adjustment—is too much for some individual sovereigns to bear.
 
Given recent developments, it is not surprising that is it now widely agreed that the region needs to move towards greater burden sharing. The real disagreements regard the quid pro quo in terms of national sovereignty—how much sovereignty has to be given up—and what is the sequencing. Germany thinks that a lot of sovereignty has to be conceded over time with burden sharing coming at the end of the process. German concerns about sequencing are not just about who bears the burden, but also about the fact that premature burden sharing tends to impede fiscal, banking and structural adjustments rather than facilitate them. Other countries in the region have different views.
 
The challenge for the EU summit on June 28/29 is to agree on a path to a significantly different position in the trade off between national sovereignty and burden sharing, in a manner which ensures that the right incentives for appropriate fiscal, banking and structural adjustments remain in place. This is not going to be easy.
 
Consider Eurobonds as an example. In theory, it would be possible to create a system whereby a centralised debt management agency issued joint and severally guaranteed debt and then allocated funding to national governments. The size of the allocation and the interest rate would depend on an agreed path of fiscal and structural reform. To the extent that sovereigns deviated from the agreed path, the borrowing cost would go up. So far, so easy. But, there are a myriad of practical problems, in addition to the key issue of how the debt management agency would make its decisions. Government deficits and debt are a reflection of many things: the size of the public sector, the generosity of public sector remuneration, the efficiency of public administration, the generosity of the welfare system and the extent of tax evasion. The differences across Euro area countries regarding all of these things are huge. How they are dealt with is a monumental task. Also, there is the issue of how lower levels of government try and avoid hard budget constraints created by higher levels of government: borrowing by entities outside the general government sector, borrowing from local banks, forms of financial engineering, the build up of arrears, the provision of explicit or implicit guarantees. Again, there are many differences across the Euro area. Another key issue is whether a move to Eurobonds also requires a much bigger system of fiscal transfers. State governments in the US face a hard budget constraint which seems to work. But this is not only due to the credibility of the no bailout threat from the federal government, and the political sanctions regarding the balanced budget rules in state constitutions, but also the much more extensive system of fiscal transfers from the federal level.
 
But, agreeing on a path to burden sharing in the form of a fiscal and banking union is not enough to change the region's growth trajectory over the coming years. The challenge of getting sovereign debt to 60% of GDP is not only about the sovereign’s marginal borrowing cost. It is also about the size of fiscal deficits and the level of outstanding debt. In our view, the benefit of a move to Eurobonds is not just about lowering the marginal borrowing cost for peripheral sovereigns. It is also about increasing the equilibrium level of leverage for peripheral sovereigns, which would enable a less aggressive fiscal objective to be adopted. Confidence would surely be lifted by an agreement on a credible path, but if the region sticks with the current fiscal objective of getting debt down to 60% of GDP, then growth is likely to be lacklustre over the coming years even with the prospect of greater burden sharing down the road, unless monetary policy is able to deliver a significant and sustained boost to growth.

 


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Wed, 06/13/2012 - 07:42 | Link to Comment LULZBank
LULZBank's picture

Banking Union?

All the banks share the same Mainframe storing all the zeroes?

Wed, 06/13/2012 - 07:50 | Link to Comment evolutionx
evolutionx's picture

DEUS EX MACHINA

With most of the world’s major economies as well as the financial system bankrupt, there is only one solution that can save the world economy. Like in the Greek tragedies, Deus ex Machina is now the only way that the world can avoid a total economic collapse. This would involve God being lowered down onto the world stage and miraculously saving the plot.

 

http://www.mmnews.de/index.php/english-news/9031-deus-ex-machina

Wed, 06/13/2012 - 08:12 | Link to Comment fnord88
fnord88's picture

  • the size of the public sector,
  • the generosity of public sector remuneration,
  • the efficiency of public administration,
  • the generosity of the welfare system
  • and the extent of tax evasion.

 

Weird...JPM must have forgot to add criminal banks stealing peoples money...... an oversight i guess.....

Wed, 06/13/2012 - 08:20 | Link to Comment boogerbently
boogerbently's picture

In this case, the "Deus ex Machina", is the DELETE button.

 

Wed, 06/13/2012 - 07:43 | Link to Comment Poor Grogman
Poor Grogman's picture

 

New scource of possible euro-peon funding.

Hot air derivative's

 

Wed, 06/13/2012 - 07:44 | Link to Comment Al Capowned
Al Capowned's picture

Something I put together last night,

 

Warren G - Regulate ( Banker Parody)

 

No Regulators,

 

CTFC , SEC , FSA , FINRA we don’t regulate any stealing of people’s property and we damn corrupt too, 

But you can't be any geek off the street, gotta be in the City of London , Wall street club if you know what I mean, earn your keep!

Financial REGULATORS do ‘f’ all, Mount up,

 

It was a clear black night, a clear white moon ,Financial rapists were on wall street, trying to consume,

some debt for the eve, so they can make more loans, just rollin in there Rehypothecated Tier 1, doing Gods work on their thrones,

 

Just hit the Eastside of the corrupt Wall street, 

on a mission to find Mr. Jamie D, 

See JPM full of debt, about to freak, asymmetric hedges? and naked silver shorts starting to Creeek, 

 

So I hooks a flight out to London and see M. Blythe 

Manipulating and taking Down the silver price, 

I jumped out my ride, and said "WTF "

Not a regulator in sight so the price is temporarily stuck , 

 

Buffet .W and Munger.C what they say is just absurd ,

these uncivilised idiots going to hit the curb, 

Won'tcha think of better things than some Fiat mind tricks,

I just stacked a load of barbarous relic to stick it to these di*ks,

 

I'm gettin financially raped , There breakin myself, I can't believe they taking Our wealth

They took my 401k,

They took my fake ETF's,

I looked at the bankers said "Damn, come on I got Jack all left!” 

 

The Bankers got Europe hemmed up and they all around ,

Unelected Goldman Sachs technocrats stealing pound for pound,

I gotta Bank Run real quick before they start to clown, 

I best put it into gold & silver and lay them bankers down,

 

They got financial weapons to my head,

I think I'm going down,

I can't believe this happenin in my own town,

If I had silver I could fllyyyy and get rid of my pain, 

I glanced towards the future and I see my homeys Max Keiser & Chris Duane,

 

Sixteen trillion in debt and only one in the vault,

Fractional reserve banking is about to Make the markets turn cold,

Bank stocks are droppin and there yellin but it's a tad bit late, Zerohedge et al , going to regulate .

 

They laid all them bankers down and let my precious metals explode,

now were switching are minds back into think mode ,

Get your Precious Metals sit back and observe,

And well leave the Corrupt Wall Steet bankers over there on the curb,

 

Congress got the freaks and that's a known fact,

before Gerald C & Alex J woke up I was on the same track,

Back up Back up cause it's on,

N.D.A.A and S.O.P.A are clearly unconstitutional and wrong,

 

Just like I thought the banks were in real sh*t in need of some desperate heelppp,

The Obama and his administration were in need of some more campaign wealth,

A lot of them banks were as big as hell, Obama said  "ooohh I like your size."

They said "Yeah we're Too Big to Fail and you seem real nice, would ya bail us out?"

Now we got banks full of TARP and it aint going swell, the next stop for these corporate shills is the depths of heeellllllll, 

 

There tweaking the markets 

into a whole new era

G-Funk

Invest in this

I dare ya

Manipulation 

on a whole new level…….

 

High frequency trading is the market and the market is in perill,

 

LTRO 

QE

Debt We bring

TARP

ZIRP…

Where debt is the money,

And the money is the debt,

 

If you know the markets like I know , you don't wanna partake in this,

It's the Ben Bernanke era and he's messin round with Operation Twist,

If you smoke like Ben smokes and your high on hopium everyday,

All I can say is get your PM's and expect QE to infinitayy, 

Wed, 06/13/2012 - 07:52 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

+1

 

Wed, 06/13/2012 - 07:46 | Link to Comment insanelysane
insanelysane's picture

If I am the Eurozone, I sell trillions of long term Eurobonds, and then before the bonds come due, dispand the Eurozone.

Wed, 06/13/2012 - 07:53 | Link to Comment LULZBank
LULZBank's picture

How about adding an extra layer? Involve the IMF and issue Universal Bonds and then WW3?

Wed, 06/13/2012 - 07:52 | Link to Comment evolutionx
evolutionx's picture

ECB Fear Indicator near record

 

almost 800 B

http://www.cds-info.com/

 

Wed, 06/13/2012 - 07:50 | Link to Comment lolmao500
lolmao500's picture

Just because there aren't enough traumatizing events in the next week to look forward to,

What about war in the middle-east? Syria-Israel-Lebanon??

Wed, 06/13/2012 - 07:52 | Link to Comment twotraps
twotraps's picture

Good morning,  the Euro itself is a political construct.  It was not due to some event or emergency or out of necessity.....they sold the idea of a large enough economic force to compete with the dollar....'just like the United States'.   Part of this 'sale' involved eventual political union, or some version of it.  The head of the ECB was to be a first step in this direction with an 8 yr non-political post agreed to by all.  Unfortunately, this being political idea from the start, that first hurdle was not cleared!  France agreed to Wim Duisenberg but said unless everyone agreed to get a French guy in their next there was NO Deal.  Voila, Wim decides after a short term that everything was great and he was moving on to other opptys., bring on Trichet.

 

Politics and economics, hilarious.  People with little actual skin in the game, making decisions without economic consequence for the supposed benefit of all.  How's that workin out?

Wed, 06/13/2012 - 08:08 | Link to Comment BeetleBailey
BeetleBailey's picture

Well said sir. Well said indeed.

Forgot about that putz Duisenberg.....good historical reference to the EURO's checkered, fucked up short past.

Wed, 06/13/2012 - 08:17 | Link to Comment boogerbently
boogerbently's picture

The ONLY cure these morons can come up with is to keep THEIR taxes low......after all, they are the job creators.

And raising our taxes to pay for their indiscretions and lowered taxes.

Wed, 06/13/2012 - 07:55 | Link to Comment Peter Pan
Peter Pan's picture

Yes we can all see it coming.......but how many of us are actually taking precautions?

I still suspect that the majority see this whole sorry mess just blowing over as if it is just a bout of period pain.

Wed, 06/13/2012 - 07:59 | Link to Comment poldark
poldark's picture

People would be happy just running their own country. It is the EU bureaucrats who are making everyone miserable.

Wed, 06/13/2012 - 08:09 | Link to Comment Euro Monster
Euro Monster's picture

I heard that the bureaucrats sleep well at night. How is that possible???

Wed, 06/13/2012 - 08:06 | Link to Comment supermaxedout
supermaxedout's picture

This is the way the EU is going forward. The whole EU except UK is going in this direction.

read it and then think.

http://www.sachverstaendigenrat-wirtschaft.de/a-european-redemption-pact...

BTW is JP morgan a source one can rely his decissions on ?. Everybody should decide for himself.

I see the following on the way:

1) European Redemption pact.

2) Rolling over of the debt of EU states is wheter financed by local European giants, like Generali in Italy, Allianz in Germany, or from China Russia.    US/UK banks are not needed anymore. Think about the situation, that the Bric countries including Japan and Iran have already made big steps forward to install a paralell finance sytem to substitute  the Anglo/US system. This train is rolling and only a war can stop it.

Interest rates of the Redemption fund are going to be substantial higher then the rates Germany pays now . My best guess is appx 2.5 - 3%. All debt concentrated in the redemption fund is backed by the gold of Italy, Germany, France, Portugal, Spain and others participating. There will be a European gold vault in Strasbourg  France I guess (not Frankfurt so that no anti German card can be played by UK/US). Once the gold value has risen where it belongs to in comparisation to fiat then the debt accumulated in this fund is much more safe than the individual souvereign debt of EUs member states. This is then the new safe haven. This means the time of  low rates for Treasuries are over. Thus only printing is left for the US.

This redempltion pact/fund has far reaching consequences !!!!  Think for yourself.

 

Wed, 06/13/2012 - 08:20 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

 

BTW is JP morgan a source one can rely his decissions on ?. Everybody should decide for himself.

The answer is no.

 

Wed, 06/13/2012 - 08:10 | Link to Comment magpie
magpie's picture

Just waiting for the bond vigilantes to land in Normandy.

Wed, 06/13/2012 - 08:29 | Link to Comment BeetleBailey
BeetleBailey's picture

CNBC is calling this "event" "A Dimon In The Rough".....fuckers.....whores

Wed, 06/13/2012 - 08:36 | Link to Comment elwu
elwu's picture

Consider Eurobonds as an example: in whatever disguise they are planned, they are strictly against the Maatricht and Lisbon treaties, the German Constituiton, and the interests of the taxpayers of Germany, Finland, Austria and the Netherlands.

Nevertheless, they will be introduced in one form or another, because the spendthrift GIPSIFs don't give a damn about all the above. They just want to continue with the party they have on borrowed money since the introduction of the EMU, they want to push the necessary structural reforms further down the road.

Wed, 06/13/2012 - 10:02 | Link to Comment twotraps
twotraps's picture

Exactly.  Where o where have we seen this before??  A Giant Pretend Account gone horribly wrong.....creating more of a PR problem than economic problem in that there were no real consequences anyway, cause its a Pretend Account!  You have a PR problem in that you need to show the world (investors) that the game is still legit!!  Other than that subordination thingy.

 

The spanish prime minister wants Guarantees for depositors------------go ahead, make'em all good for a bazillion kabillion euros each.  You can't fuckin pay, so whats the difference how big the guarantee is.

 

Question for the day?  How to prepare for major rule changes and not lose too much in the process.

Do NOT follow this link or you will be banned from the site!