National Acronym Day In Europe

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors,

So the EC wants the ECB to bypass the EFSF and use the ESM to recap EU banks?  That was the rumor that shifted global stock markets by 1% in a matter of minutes?

It has been awhile see we looked at the EFSF Flowchart or had a detailed look at the EFSF Guidelines but it looks like it is time to dig a bit deeper into what is possible and what is not.

The ESM is not yet up and running.  There was talk that it would be done by June or July of this year, but in typical EU fashion I don’t think much progress has been made towards that promise.  So right now the EU is stuck with EFSF and the potential to set up the ESM.

The EFSF actually has a lot of powers.  I’m not sure exactly why it is such a big deal if the EFSF (or ESM) invests directly in banks or lends money to countries to invest in banks.  In theory the countries could lose on their bank investment but pay back EFSF loans?  That is a possibility but it would seem more and more likely that if the bank rescues fail the sovereign is dead anyways, so the market might be reacting too much to that distinction.

The bigger problem is that the EFSF is not well set up to leverage itself.  The EFSF is technically the entity that could be buying bonds in the secondary market.  It is supposed to have taken over that role from the ECB, yet it hasn’t done that.  Why not?  It is possible that they haven’t figured out a good way to leverage the EFSF and therefore would get minimal bang for the euro by buying bonds in the secondary market without leverage.  The same issues apply to its role in the primary markets.  Yes, the EFSF can intervene in the primary markets, but again, had very convoluted leverage schemes, which would never work.

The problem isn’t so much what the EFSF is allowed to do, it is how constrained it is in terms of leverage and access to funding.  There is almost nothing that can be done about how EFSF is set up at this stage, nor should there be.  That messed up entity should be put out of its misery.

Europe’s big hope is to actually launch ESM and launch it with a banking license.  If ESM can be launched, and it can get a banking license, then the EU has a powerful tool.  The ESM is allowed to do all the things the EFSF can do – participate in new issues and the secondary market and lend to countries for them to support their banks.  Without a banking license its firepower is limited.  With a banking license it can leverage itself to a very high degree and can tap all the cheap funding already in place and whatever new programs the ECB decides to launch.

So worry less about any “new” powers the ESM might have and worry about 1) the ESM actually getting funded, and 2) the ESM getting a banking license.  Germany was very resistant to the idea of the banking license.  I assume they still are, but they have already given the ESM all the powers it needs, and has endorsed leveraging the capital, so a banking license might not be out of the realm of possibility.

With a banking license, the ECB can do a lot to help the ESM.  The LTRO deals did a lot for the banks.  They really have reduced the pressure on European banks.  In spite of the fact that Bankia is a total mess, we are not reading headline after headline about how BBVA or SocGen or even DB are in trouble.  The banking system is in much better shape than last year because of LTRO.

The market got carried away with the promise of LTRO as a sovereign debt savior.  The market, more than the ECB, created the idea of banks buying lots of sovereign debt.  That was never going to work because the banks that would do it, already had too much exposure to their national sovereign debt.  It created a potential death spiral.  Taking the concept of the “carry” trade and LTRO out of the banking system and into the ESM might have more of an impact.

The market has lots to worry about, whether it is China, Facebook, Banking Regulations, Fiscal Cliff, whether American Idol is rigged, economic data, etc., but we are still very much at the mercy of policy intervention.  Strong signals of new QE for the U.S. seem more likely by the day, and in Europe, there is likely to continue to be a lot of contradictory comments, but  banking license for the ESM seems more plausible than many of the other rumors (like Eurobonds or Greek Exit) and would be a powerful catalyst for a bounce in European equities.

The credit markets and CDS in particular seem tired.  They don’t seem to have the energy to compete with the swings in equities.  So far IG18 has traded in about a 1 bp range in spite of the gaps in equity futures.  Even MAIN, right in the center of it all, has traded between 173 and 175.5.  The high yield market, and HYG and HY18 both had big days yesterday, with cash up as much as 1%.  We will likely see some give back there, but there really is no evidence that retail is giving up on high yield and there isn’t as much leverage in the market as there was in 2011 as hedge funds have been cautious and banks have cut their exposures.

Spanish and Italian bonds are definitely getting crushed today, but with Spanish 10 years above 6.5% and Italian 10 year bonds nearing 6%, the potential for intervention rises.  The secondary market is affecting the primary market, which is driving up the cost of funds, creating more pressure on the budget deficits.  The countries are painfully aware of that, as is the ECB.  One ongoing frustration for the ECB is their inability to translate their short term rate setting of 1% into the sovereign debt market.  They are looking for ways to ensure that policy can impact all sovereigns because without that occurring it makes their job far harder than the Fed’s where treasuries instantly respond to the Fed rate decisions.

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hugovanderbubble's picture


markmotive's picture

Doctors don't give medicine to prevent disease. They wait for the disease to manifest and then they apply the cure.

Same goes for central banks.

Ratscam's picture

Another acronym
go fuck yourself central banksters

OttoMBMP's picture

ESM with or without banking license is unconstitutional in Germany.

But who cares if the Führers call, right? In the end, a powerful 3-months-bounce in equities is a very good excuse, isn't it?

franzpick's picture

End the fiat euro charade with a german version of the Herman Cain plan: "Nein-Nein-Nein".

tocointhephrase's picture

Yeah but this disease is comparable to Cancer, so whats your cure, Chemo? If so thats a treatment, not a cure!

lolmao500's picture

No biggie, they have until end of 2014 to find 345 billion euro... no problem, they'll just call Ben.

BLOTTO's picture




insanelysane's picture


Money 4 Nothing's picture

F.U.B.A.R. Comes to mind..

Sauk Leader's picture

EFSF = Europe's Fucking So Fucked

Zero Govt's picture

let nobody forget, especially the fraudsters, that it was Goldman Sucks that helped cook Greece's books to get them into the EU

impressive that the Goldman-Greece partnership will be the first to be kicked out

another fine/fraudulent example of New York banking and the "highly valuable work" Blankfein thinks his Bank does in the economy and is keen to impress on all of us (good luck with that Lloyd)

evolutionx's picture

Interest Rates, CDS exploding


Spain 6,7%

sudzee's picture

I think we need the Greek poll chart updated. Syriza now at 30%.

GMadScientist's picture

Tango Uniform, Bitchez.

Zero Govt's picture

Crisis management is going well in Europe... any similarity with a stumbling chaotic clown show is purely incidental, if not technical.. these boys really have everything under control

now, pass the popcorn

LongSoupLine's picture

Here's my acronym contribution for today:

FU all CB's, as well as GS, MS, JPM, C and the MSM such as CNBC, NYT and FT.

GMadScientist's picture

I'd like to offer a sincere and heartfelt "fuck you" to IPOs, HFT, and CDS.

oddjob's picture

An ESAD would have sufficed

GMadScientist's picture

Not for these SOBs.

An ESAD, a GFY, and an FU.


FrankIvy's picture




Um.  Those aren't acronyms.  Acronyms have to be pronounceable.  Like SCUBA, MADD, FUBAR, and so on.  Maybe go with that last one for the EU.

BlueCollaredOne's picture

You're correct.  ECB, LTRO, etc. are all initialisms, at least thats what wikipedia tells me.

Gief Gold Plox's picture

And besides what does he mean "National acronym day in Europe"? Any European nation in particular? Last time I checked Europe was comprised of many nations --part of the reason why they can't get anything done in due time :P

f16hoser's picture

..."Oh No, I've gone Crosseyed!"

sudzee's picture


Tomorrow Ireland Says NO

nearvana's picture

The ECB is waiting at the sidelines  leaving Spain sliding into the abyss  hoping that the germans  will get scared and  allow them to print at will. And they will eventually, which will be presented in Germany as a huge success of AnJela as at least the eurobonds will be off the table.  It is getting kind of obvious now ...

LoneStarHog's picture

Yes!...And in local news...we have MDB BTFD of FB with DCA and KY


ajk24455's picture

Does Europe really need another overleveraged bank buying up sovereign ponzi debt.  Maybe if this one is levered 100 - 1 it will work this time? 

CreativeDestructor's picture

makes no sense. replace letters ESM with ECB, so if ECB started buying all bank and sovereign debt problem would be solved? that makes no sense mathematically. Therefore, ESM buying all this crap won't solve it either, remember? solving debt with more debt thingy? Guess what... leverage is debt.

this is a bullshitttt post

williambanzai7's picture

I thought we exhausted this TCM last year...Three Card Monti

sockratte's picture

the spiral's radius is becoming smaller and smaller. ;-)

Shizzmoney's picture

Greece: GTFO

Germany: STFU

Italy: TBTF

Portgual, Ireland: WTF

Spain: SHTF

Britain: LOL


g speed's picture

as it's shaking out -the gov'ts of the EU are becoming obsolete-- the banks have less and less use for soverigns-- The plan all along has been to Federalize Europe under a Central banking authority and then lock the Dollar and the Euro so they become one literaly-- When the NWO central bank is in place and the Socialist(democratic)  and the Facist(corporate) and the Theocratic(religious) gov'ts finally realise that they are superflious in the scheme of totalitarianism all hell will follow. My bet is that the meek shall inherit the earth.  Just saying. This is a wonderful time to live in from a historical point of veiw

wallie's picture

I see only 2 solutions.  A combination of both is my favourite. 

1. Eurobonds with compensation for countries who therefore have to pay a higher interest rate (e.g. Finland, Luxembourg, Germany, NL).

 2. “Printing” of 5,000 to 10,000 Euro and resolve most of the "mess" permanently (de facto a devaluation of the Euro with 10 to 20% based on the M3+ money of the Euro countries). A part, e.g. 20%, could be used to compensate citizens and local business in the surplus countries (e.g. Finland, Germany, NL, Luxembourg) for the additional (estimated) extra inflation of 8 to 15% that this action will cause. 

Note how the atmosphere in the Euro countries now is, shown by the fact that Spain had not even consulted the ECB for that “bond trick” with Bankia. They probably knew that consultation would deliver a no, and "gambled" with a chance of 1 to 100 that Portugal, Italy, Belgium and France would support them. 

The new announcement that Bankia is going to be funded via bond sale on the market is downright laughable, but also deeply sad as far as I'm concerned.

dereks1's picture

PRINTING BE DAMNED, The answer is right in their faces; THEY AREN'T TAKING ENOUGH "E"

Lebensphilosoph's picture

Not one of these is an acronym. Perhaps Tyler ought to consult a dictionary if he is unsure of the meaning of a word.