Merkozy's Frankenstein

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors

Whatever the European experiment once was, it has morphed almost beyond recognition.  The policy responses have made the problem worse, not better, and it is becoming more complex.  The contagion is spreading because every policy is linking the countries more closely, but not in a controlled and thoughtful way but in a haphazard poorly thought out way.

Many banks in Europe would fail without ECB funding, so the ECB funds those banks.  Even more banks would fail if sovereigns fail, so the ECB funds the sovereigns so the banks don't fail.  A Greek default, which may not actually be bad for Greece, was deemed as bad for Europe so they get money from the IMF to pay back the ECB directly and to the banks so that the ECB doesn't have to offer as much direct support.  It is all so circular.  It probably was also unnecessary.  Anyone notice some big write-downs banks are taking on Greek bonds?  The world isn't ending.  The world wouldn't have ended in 2010 either had Greece defaulted or banks negotiated restructurings with Greece with similar haircuts.  The fear of that led to the creation of programs that have spread the contagion and taken the attention of the EU and IMF away from other, even bigger problems.  In hindsight, it is hard to argue that Europe wouldn't have been better off with a Greek default over a year ago.  Bank stocks wouldn't have gotten as low as they are now, and the system would be easier and simpler.

EFSF has gone through forms faster than Lady Gaga goes through costumes at a concert.  At every step, the EFSF has been poorly thought out, and has been an attempt to create a number or vehicle that the street can be happy with. It is clear, without a doubt, that no serious credit structurers or traders were involved in the process.  Not a single iteration has been met with anything more than disdain by people who create these sorts of vehicles for a living.  Why Europe couldn't pause and try and figure out something real, I don't know, but they got hooked on the idea of all members participating (at least on paper headlines), that guarantees weren't real money but were effective, and that the market (China) would beg for a chance to invest in their latest scheme.  These schemes never involved more than a page of ideas when at least a ten page term sheet would be necessary.  Had they ever tried to create an actual term sheet they would have seen the flaws and been able to start from scratch on something that could work.  Instead they plug along, and Regling, goes and asks China for money, in spite of not having a product to offer.

How many EU leaders are necessary?  Can there be a gag order on some of them?  How many are over their heads?  Regling may have been good for the original EFSF, but he seems incredibly out of his element on this.  When did the IIF guys ever speak, and who ever listened?  Not Ackerman, but Dallara? Then there is Juncker and Rehn.  Both clearly benefit from a bigger Euro, but what is their role?  Then you have 17 ministers of finance, and some similar number of ECB board members.  It is a shambles, and way too many people are involved and spread their often poorly formed opinions freely. Not that I'm a fan of task forces or anything, but this haphazard approach of giving everyone a voice and then reacting to how markets react to their comments is ridiculous and is a part of the problem.

In the meantime we are happy that "Unity" governments are being imposed on a couple of countries.  The "technocrats" will save the day.  Unity government sounds like a cult.  How long will the people accept being governed by these "unity" governments that seem to be Merkozy's puppets?  Probably until the next economic downturn or the first austerity measure they don't like is actually enforced.  Berlusconi may have been pushed out, but I think Papandreou left in order to try and avoid being tainted but the outcome of agreeing to taking money to pay back the ECB and EU banks.  The unity governments will agree to anything right now to get money, but the next step in the process is far from clear.

The bull case for the Euro is that the ECB will lower rates to zero and buy all the debt of all the countries.  Yes, zero rates and unlimited printing are the bull case for the Euro.  As far as I can tell, zero rates and unlimited printing are the bear case for the dollar.  I am not saying that the Euro bulls aren't correct, it just seems strange that the same policies would have the opposite impact over the pond.

French bond yields are now the widest relative to Germany ever.  There is outrage that there is an "attack" on French bonds.  Seriously, you don't think Sarkozy's willingness to backstop anything and everything (including Dexia) has had an impact on French bond yields.  The bonds are weak because the economy is getting worse, and the French have shown no willingness to do what it takes to remain a safe haven.  Trying to turn this on speculators is just silly, the French bond problems are a direct result of the French governments actions.  What constitutes an attack must also have changed, since a 2.4% yield for 5 years is not exactly disastrous.  Who knows what 5 year rates will be once the ECB is done printing money to buy all the sovereign debt and then all the debt of banks.  If the inflationists are correct, 2.4%  might be quarterly inflation, not a 5 year bond yield, but I shouldn't say anything negative since "clearly" the policy makers know what they are doing - at least to prop up stocks for a few days, weeks, or maybe even months.  The S&P report that allegedly downgraded France from AAA is interesting.  The French are angry about it, but what no one is saying, is that when the US got downgraded, treasury prices went higher.  French bond prices went lower because the market doesn't believe they are AAA.  The French can complain all they want, but the market doesn't believe in their credit or their ability to support prices; whereas, for US bonds, no one really cares what the rating agencies have to say.  This is a big distinction, and rather than maybe some angry phone calls between cigarette breaks, the French should figure out how much European risk they can really sustain.

Greece should have been allowed to default or restructure over a year ago. They didn't because of fear, and now they are in worse shape, and the various programs dragged down other countries.  While the focus is on Italy right now, Spain is a mess.  Unemployment is high at 21.5%, and McDonald's received 310,000 applications for 2,700 positions (from  The Spanish banks are fighting for deposits.  In spite of government laws trying to prohibit banks from paying high interest to depositors (yes, another example of how convoluted it has become), the banks now offer IOU's rather than deposits. They also offer gifts such a crystal with deposits rather than the toaster (the gift is now a meaningful part of the interest being paid).

I don't know what Europe can do right now, but maybe 2 weeks in seclusion, with gag orders is what is required.  Step back and try and figure out real solutions.  No rhetoric, just real work.  They need to get some people who can focus on details and understand credit markets involved.  They need to focus less on advice from FX and Interest Rate specialists and get some real credit experts involved since it is a credit problem.  The EU should be stopped out.  They should be put in a time out, and not come out until real solutions are decided (and that solution may have some real negative consequences for some institutions).  It won't happen, they will keep trying to deal with this piecemeal and make the problem bigger and more complex.

It reminds me of a time being long a HY homebuilder bond.  That bond was going down in price as the housing market was getting crushed.  I bought some CDS on the name to "cover the position".  But the CDS was already trading extremely wide of the bonds and had support from the "index arb" community, and the biggest holder of the bond was still selling.  The position was losing money, but the idea was to short some forest product bonds.  I mean, if housing is selling off, the lumber companies would have to be in trouble.  Between a weakening dollar and strong EM demand, those bonds kept rising too.  So I decided I should get long some energy names since they should benefit from the same influences as the timber companies. I decided to sell CDS rather than buy bonds, because that seemed prudent against the short CDS in homebuilders.  Of course, a big oil discovery was made, and the bonds dropped, but worse than that, this company had a short term maturity that was now at risk making the CDS particularly weak.

Nothing worked, and the reality is the only smart decision, obvious to most from the start, was to sell the stupid homebuilder bond.  Making things more complex primarily in reaction to previous moves with limited understanding of what you are getting into is a recipe for disaster, and Europe has followed this policy for years now, it is a shame they don't see it before it is too late to fix.

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GeneMarchbanks's picture

'How many EU leaders are necessary?'

Not bad stuff today Pete, but leaders should really be "leaders"

paarsons's picture

I'd fuck Angela Merkal.

In a strange way, I think she's sexy.

I'd rather have Becky Quick.  But beggars can't be choosers.


sushi's picture

Tyler -

You gotta start charging the dude above.

He is advertising but not paying.

knukles's picture

Did Becky get her mouth Botoxed without Orthadontia?

nmewn's picture

I smell a short squeeze!!!...get long on pouting lips!!!

knukles's picture

The Inevitablitiy of the Law of Unintended Consequences when Applied to Rube Goldbergesque Unstable Politically Correct and Motivated, Socially Engineered Systems, Providing the Null Solution Set as Bounded by Murphy's Law, the Fourth Turning, Realization of Precession's Impact and the Book of Revelations.

Bolweevil's picture

Roger that Knukles. You're 5 by 5 and cleared for launch.  Commence ignition in T minus 20 at 09:00 hours. Godspeed and buckle your chinstrap.

Mary Wilbur's picture

Utopian economic and social engineering fantasy foisted on the 99% by elite intellectualoids doomed to failure from the beginning.  An enormous amount of the EU's social and economic life is dictated by highly paid Brussels bureaucrats. Of course these guys are cronys of the politicians and are paid  by the EU taxpayers who are stupid enough to pay taxes. (That does't include the PIIGS.)  

old naughty's picture

GMB, Question is where do you want them to lead. Look around, who is real-ly leading, except perhaps the elites? Sad.

Thanks for sharing.

mudduck's picture

The EU leadership proves the impossibility of over-estimating the incompetence of governments. If they gave these guys a time-out from flappin their gums in public and locked them in a conference for a week or two to sort shit out, I believe they would come out into the press conference all smiles and declare "we are all in agreement, we are at war."

joq's picture

The EU is doing all the things that the US failed to do. Rather than inflate themselves out of the problem, they want to spur deeper structural changes, calmly and ordered in a careful manner. So far they are executing everything they have promised to do. I think out of the chaos will grow a stronger and more stable Europe.

GeneMarchbanks's picture

'The EU is doing all the things that the US failed to do.'

The US never failed. Their political class just knows who their owners are, whereas the Eurocrats think they are in charge. Look for bond market problems to persist as long as they don't print. Printing is what TPTB want and that's what they'll get.

hedgeless_horseman's picture



The EU banking class is now doing all the things that the US failed to do US banker class accomplished at Jekyll Island.

Just a matter of a little time and pain before we are given the "opportunity" to invest in European Union Treasury Bonds. 

GeneMarchbanks's picture

You never disappoint hh. You've been pumpin' Griffin with zeal lately, kudos. May I suggest:

hedgeless_horseman's picture



I will read it.

When you know the history, all the parts of the story fall into place, like England's non-participation in the Euro, for example.

old naughty's picture

are you suggesting UK knew? Hummmmmmmm.
Thanks for sharing.

DormRoom's picture

dude, that's like saying I'm gonna start exercising as you have a heart attack. 


The EZ is suffering a metaphorical heart attack, and the union will end faster than the time needed for structural reforms.  They had 12 years for structural reforms, and chose to do nothing.


The mandarins, and politicians knew about the North-South imbalances for a long time.  But their banker friends/donors were getting rich, and they didn't want to ruin the party. 

Bureaucrats love a good party, cuz they never get invited to any.


Welcome to the banquet of the macabre.

knukles's picture

Dude, get a fucking grip.
That or professional help.  You been subsumed by the system way too long.

Next you'll be telling us that the 2 Minutes of Hate led by Martha Stewart is A Good Thing


KxAlpha's picture

I sometimes wonder if the lead component of leader is coming more from lead, as in metal, than lead, as in to lead...

Nascent_Variable's picture

Behold the downside curve of diminishing returns to complexity.

count_de_monee's picture


Don't forget that these people are always behind the curve. They always will be because they cannot anticipate anyhting and they're too scared to face the ugly reality. So they'll keep marching on until they fall off the cliff.


Reading some of my old posts, here's what I wrote back in October of 2010. If it was obvious to me why wasn't it obvious to the EU officials? Ideological bias seems the most likely explanation.

"To sum up: Portugal will inevitably have to be bailed out by the IMF/EFSF. It's no longer a question of if, but when. In Portugal the proverbial shit is hitting the fan."



P.S. A good friend of mine has started a new blog. Check it out if you so desire

slewie the pi-rat's picture

behind the curve?

is peter ahead of the curve? 

what greek default? 

Stoploss's picture

OK, somebody tell me again how you make 3+ T  in Italian and Spanish debt go away with only a 1T 'levered' rescue fund that doesn't exist yet. Rally!!

Mary Wilbur's picture

You don't. If the EU gets smart they will create a two tier system. The PIIGS will default and the shaky French banks will either be bailed out by the French taxpayers or will be allowed to fail. The Eurozone has painted itself into a corner, and no wonder they have inept and cognitively inpared leaders (who doesn't). And last but not least, the Euro was a bad piece of economic engineering to begin with.  I never believed it would work and it certainly hasn't.


Mary Wilbur's picture

You don't. If the EU gets smart they will create a two tier system. The PIIGS will default and the shaky French banks will either be bailed out by the French taxpayers or will be allowed to fail. The Eurozone has painted itself into a corner, and no wonder they have inept and cognitively inpared leaders (who doesn't). And last but not least, the Euro was a bad piece of economic engineering to begin with.  I never believed it would work and it certainly hasn't.


praps's picture

"Step back and try and figure out real solutions".


There are no solutions. 


Everybody is making the same mistake - print more money because there's a recovery just around the corner.  There always has been.


There isn't. The baby boomers are retiring over the next 10 years and this means massive depression and debt default.  Nothing can be done to stop this occurring. 

sabra1's picture

the soon to be in hell oldidorks have the best accountants working for them! all this this going as planned to transfer wealth to them! they don't pay taxes, abide by any rules or laws! they all meet regularly, raising a glass to cheer how stupid and gullible we all are! they use the U.S. army and navy as their private police force! notice the american eagles wings encompass the entire world! but as long as we keep on voting for the next raper, and not take a stand, nothing, and i mean nothing, will get resolved! cheers!!!

vegas's picture

The Law of Unintended Consequences clearly is in play here. The "smartest-people-in-the-room" crowd learn nothing from history and are doomed to repeat it.

aleph0's picture

***** five stars


Either those bEUrocrat Clowns ...

1. really are that stupid
2. or their plan is .. Order out of Chaos
3. or they are lucky , and get (2) despite (1)

Lord Peter Pipsqueak's picture

It is only now,with the sovereign debt crisis,that the people of Europe can see the Eurozone and the ECB for what it is-the Trojan Horse of a banker controlled superstate.The problems,the politics,the bailouts,the deficits and the intervention of politicians to maintain the corrupt edifice have now become so numerous and so vast that they don't even try to disguise them or cover them up anymore.

Fifty years ago the Trojan was called the Common Market - it was expalined as exactly that a common trading zone that would promote and encourage free trade between the countries of Europe, nothing wrong with that surely? Then they changed the title to the E.E.C - the European Economic Community, a bit more sinister with the implications of possible closer economic ties especially as it now had acommon currency and finally all pretence was dropped when they called it the Eurozone - yes, named after the currency,because if you control the currency and its issue you control everything.

Now the "final solution" is either a controlling governmental body - a suprantional government - mainly controlled by Germany to police the austerity measures conditional on the basket case countries getting further loans, or just outright money printing by the ECB to inflate away the debt.In the process destroying the wealth of a generation of savers and pensioners,but that is a small price for the banksters to achieve their ultimate aim-total control of Europe by one body answerable to noone but themselves,where they can decide monetary and fiscal policy and have a puppet government in each state that have no real powers.

It has took them a long time to achieve it, but they are probably now only a matter of months away from removing the last vestiges of democracy and sovereign independance from any of the countries left in the Eurozone. The politicians of each of those countries have either been bribed, conned or simply sleepwalked into the trap, a trap so cunning that even now, most people cannot see it for what it really is.

History in the making as they say.

sabra1's picture

there is but one Invester who laid out an even playing field for all, not to be overruled, with new rules fabricated to benefit a few. what these few will soon realize, is that where they'll be headed, gold and silver will melt back into their original form, from the eternal heat of hell! 

Mary Wilbur's picture

@ LordPeterPipsqueak  Creeping totalitarianism.

vast-dom's picture

Bride of Frankenstein, illegitimate daughter of Count Dracula.....I knew her is a shame it was too late to fix long before I saw it all.

Paladin en passant's picture

Uh...isn't this how World War I started: too many poorly thought out, interlocking dependencies that led to the most destructive war the world had seen to that date.  The ignorant arogance of the Ivy-league trained "elite" folks running the show is something to behold.  The willful stupidity of the American elite thinking this won't impact the American markets or economy.  God save us all, for our leaders sure won't.

spanish inquisition's picture

OT - faster than Lady Gaga goes through costumes at a concert

A creativity fraud who lifts her looks from artists (movie ,music, comedy) without credit and claimed them as her own.

americanspirit's picture

Any 'boomer' who has a job and gives it up voluntarily to retire expecting to somehow be taken care of in their old age is a fool.

lolmao500's picture

it is a shame they don't see it before it is too late to fix.

Really? Because the EU failling is good news.

Franken_Stein's picture

Don't sully my name.

Cassandra Syndrome's picture

One Word describes this. FASCISM.

Melin's picture

This article holds the premise that our bizarro-world leaders and bureaucrats should continue to muck around in the economy, just more quietly and behind closed doors. 

Liberty anyone?

gojam's picture

Merkozy's Frankenstein is very applicable as France and Germany cover the historic Empire of the Franks ruled by Charlemagne.

WhiteNight123129's picture

The US treasuries can not signal either inflation or credit given printing...

[..]The French can complain all they want, but the market doesn't believe in their credit or their ability to support prices; whereas, for US bonds, no one really cares what the rating agencies have to say.  This is a big distinction, and rather than maybe some angry phone calls between cigarette breaks, the French should figure out how much European risk they can really sustain. [...]


At least the bond price moving down send a visible political signal. In the US none, so the Gov spends and pretends everything is under control (which it is because control still works) until control does not work and Adam Smith´s free hand is untied again. I would not be surprised if the Fannie CEO who got an outrageous bonus for running a bailed-out entity is "invested in treasuries".  I would not be surprised if a lot of banksters smart asses are in the same situation. I hope they are, so they can get rammed at some point.


AldoHux_IV's picture

The beast has many heads.


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