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Put Some Lipstick On This Pig And Sell-It - The EU Statement

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From Peter Tchir of TF Market Advisors

Put Some Lipstick On This Pig And Sell-It - The EU Statement

Markets initially sold off across the board but have recovered somewhat this morning.  Credit is weaker across the board with MAIN, SOVX, and FINS all wider on the day.  Financials are underperforming and adding to yesterday’s losses and are back to their widest levels of the day.  Italian and Spanish bonds are lower again.  Italian 5 year yields almost hit 7% but have improved a little bit.

Stock futures have bounced back to positive but have been reasonably volatile and seem surprisingly strong in face of weak credit markets and pressure on the banking sector.

It seems strange that the person everyone is most concerned with is Draghi.  What a strange world when policies that potentially change Europe really don’t matter much to the markets, all that matters whether this is enough for Draghi to change his mind from yesterday.  I wouldn’t bet on that.

So what did we get:

A New Fiscal Compact

I thought a compact was a make-up kit or small car, but it turns out it also means a general accord or consent (learn something new every day). 

General government budgets shall be balanced or in surplus (anything better than a deficit of 0.5% is considered a surplus).  What is a “general” budget?  Is that primary or overall?  Are there “special” circumstances?  Somehow I don’t think this will get us balanced budgets.

Each country will be required to create some legislation that “automatically” forces them to have a balanced budget.  So nothing is actually in place, and I bet this won’t be as easy as it sounds. 

“Member States shall converge towards their specific reference level, according to a calendar proposed by the Commission.”   I really don’t know what this means, but “converge towards”  “reference level” and “calendar proposed” doesn’t sound particularly solid. 

The rules of “Excessive Deficit Procedure” will be reinforced.  “There will be automatic consequences unless a qualified majority of euro area Member States is opposed”.   So they don’t define the consequences but did define how they can be waived.  Not exactly a strong statement either.

Budgets have to be shown to the Council and the Commission and there are pledges to work further towards fiscal integration.

This section was underwhelming at best.

Stronger policy coordination and governance

Blah blah blah.  Some platitudes and a commitment to hold at least 2 Euro Summits a year.  Yes, Euro Summits are part of the solution, I feel better already.

Strengthening the stabilization tools

This is where it at least gets a little interesting. 

The “EFSF leveraging will be rapidly deployed through the two concrete options agreed upon by  the Eurogroup on 29 November”.  Calling what they have documented already as “concrete” seems a stretch.  Why the mention of leveraging?  Seems to me like they are trying too hard.  Shouldn’t it have been sufficient to say EFSF?  Sounds like they don’t believe it, so they figured writing the word leveraging would make it more real.

ESM will go into place once 90% of countries have ratified it.  The target is July 2012.  More votes.  I guess it is okay that ESM is coming into place earlier, but with EFSF not even launched yet, but about to be “rapidly deployed” it doesn’t seem that exciting.  The AAA countries are pushing for this because EFSF relies on their guarantees so they support all the funds, whereas ESM has paid-in capital so other countries can contribute.  Yes, Italy can put in paid in capital to the ESM so that the ESM can buy Italian bonds.  Problem solved.  It does help if France pays in capital before they get downgraded to AA+ (or lower) as that impacts the EFSF much more than ESM.

“The EFSF will remain active in financing programmes that have started until mid-2013 as provided in the Framework Agreement”.  So yes, the EFSF will function as has been stated over and over.  Nothing exciting about this at all.

They will “reassess the adequacy of the overall ceiling of the EFSF/ESM of Eur 500 billion in March 2012”.  This is interesting.  First it confirms that the combined “firepower” of the two vehicles won’t exceed 500 billion.  They will both be in operation but the capital available to them is 500 billion in total.  Some people have been estimating that they will both function with 500 billion for a total of 1 trillion.  That is clearly not the case.  It is encouraging that they may look to increase this total in March 2012.  That is a long way away in this market, and it makes the assumption that they will have the ability to do it if they choose to.

Oops, I got ahead of myself.  “during the phasing in of the paid-in capital, we stand ready to accelerate payments of capital in order to maintain a minimum 15% ratio between paid-in capital and the outstanding amout of ESM issuances and to ensure a combined effective lending capacity of EUR 500 billion”   Can’t they ever make anything simple?  So there is a phase-in period?  So rush rush rush, accelerate implementation of ESM, then have a long drawn out “phase in” period?  What is the 15% thing?  If ESM is supposed to have paid in capital, why is it contemplating issuance?    Hmmmmmm.

“the provision of additional resources for the IMF of up to EUR 200 billion, in the form of bilateral loans, to ensure the IMF has adequate resources to deal with the crisis”.  So the EU is bailing out the IMF?  Or the EU is giving money to the IMF so it can bailout the EU?  If the EU has the money why not lend directly, or wait, better yet, pay off some of the debt!   Watch this carefully.  I have to assume that it is better credits lending money so it can be funneled to weaker countries.  This should be credit NEGATIVE for the better countries.  I think this could impact yields over time at better countries, and may also be enough to see some ratings downgrades.  Again, I’m really confused why the IMF is involved in this.  Why they can’t do bilateral agreements within the EU is bizarre, and if anything, we have learned that whenever there are unnecessary steps or seemingly bizarre steps, it hasn’t worked out well.

The ESM can have a “qualified majority” of 85% to make some emergency decisions.  Remember, the ESM needs to be approved still, and I would think some countries may be very reluctant to have “paid in capital” at risk that they can’t veto. (this clause is already qualified as subject to confirmation by the Finnish parliament).

They end it with “we welcome the measures taken by Italy, we also welcome the commitment of the new Greek government, supported by all parties, to fully implement its programme, as well as the significant progress achieved by Ireland and Portugal in implementing their programmes.”

Summary

Nothing really new here or unexpected or earth shattering or even approved.  The bilateral loan thing is new (subject to confirmation) but something about that seems too bizarre to get excited about.  If they have the EUR 200 billion lying around to lend, why use the IMF.

In the end I don’t see much here.  I cannot imagine we are going to get any new support from the ECB on the back of this.  I don’t think this is enough to get the rating agencies to take the countries off of watch.  Nothing has been really agreed to.  I’m not even sure that if everything is implemented it is enough to avoid some countries getting downgraded.

Since I started reading this, markets have improved a bit, but once again, as people read more and get past the headlines and the lipstick, this is very disappointing.  The UK has taken a further step away from the EU and may have opened the door for more countries to take that step over time since everything that was “agreed to” still needs to be ratified and implemented and defined.

 

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Fri, 12/09/2011 - 07:59 | 1962225 Housicker
Housicker's picture

Could somebody just explain to me where the money will come from to get all the financing done in 2012 if the ECB doesn't print ?

Fri, 12/09/2011 - 08:01 | 1962231 i be julia
i be julia's picture

You know what's cool?

Despite all the turmoil, I still have a very large penis.

I love to shake it in the mirror.

Don't hate me because I'm beautiful.

http://fucklloydblankfein.blogspot.com

Fri, 12/09/2011 - 08:10 | 1962247 LeBalance
LeBalance's picture

this is definitely a senator.

Fri, 12/09/2011 - 09:09 | 1962419 falak pema
falak pema's picture

could it be a Pelosi or a Bachmann who loved big frankfurters...?

This is the sort of thing a woman would say, no man dares say his dikk is big, as there is always one that is bigger. Life teaches you that. But a woman...can exercise poetic licence ad infinitum in this domain!

"I'm the fastest gun in the west!"

Fri, 12/09/2011 - 11:04 | 1962769 smore
smore's picture

Penis size and IQ are negatively correlated.

http://www.targetmap.com/viewer.aspx?reportId=4923

Fri, 12/09/2011 - 08:47 | 1962364 AntiLeMaire
AntiLeMaire's picture

Hmmm, sure.

  • Because the Eurozone (EZ) countries as a whole are creditors, whereas the UK and US are debtors.
  • And the EZ has a trade surplus, whereas both US and UK have trade deficits.
  • And the Debt/GDP ratio for EZ is lower than 85% on average, whereas for the US that ratio is > 100% and for the UK that ratio is > 150%.
  • And the FY2011 expected government deficits are less than 5% in EZ on average and more than double that in UK and US.

 

Something along those lines perhaps?

 

Fri, 12/09/2011 - 08:00 | 1962226 silver500
silver500's picture

The agreement is the same as the original entry agreement except the punishments are not specified

Original entry Criteria:

Government finance 

Annual government deficit:

The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. If not it is at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases.

Government debt:

The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.

 

Fri, 12/09/2011 - 08:00 | 1962229 oogs66
oogs66's picture

But they have the media pushing it hard

Fri, 12/09/2011 - 08:10 | 1962248 Popo
Popo's picture

...and they've agreed to hold 2 meetings, sorry "Euro Summits" every year.

This is what happens when the idiots are in charge:  They agree to have meetings.   

Fri, 12/09/2011 - 08:17 | 1962270 oogs66
oogs66's picture

Summit coordinator is the job to get

Fri, 12/09/2011 - 08:00 | 1962228 williambanzai7
williambanzai7's picture

This is a ploy to get through the Holidays without having to work.

Fri, 12/09/2011 - 08:04 | 1962232 i be julia
i be julia's picture

My cock is larger than yours.

So put that in your pipe and smoke it.

Tune in, turn on, and drop out.

Just saying.

http://fucklloydblankfein.blogspot.com

Fri, 12/09/2011 - 08:10 | 1962251 LeBalance
LeBalance's picture

nope, this is Sarkozy....or Corzine.

Fri, 12/09/2011 - 08:12 | 1962255 Danielius
Danielius's picture

You certainly seem to have a center of focus.  Are you certain you are adding comments on the correct site? 

Fri, 12/09/2011 - 08:04 | 1962234 Josephine29
Josephine29's picture

The problem is as explained below.

There was a proposal towards more fiscal control

General government budgets shall be balanced or in surplus; this principle shall be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of nominal GDP.

Quite how they are going to achieve this objective I am not sure and it looks very “pie in the sky”. For example if we look at France it has needed two recent extra austerity packages to get its budget deficit back on track to hit 4.6% of Gross Domestic Product in 2012 and 3% in 2013. So exactly how would she achieve a balanced budget? Also if you consider the state of Europe’s economy let me pose a wider question is aiming for a balanced budget right now even a good idea?

Actually there is some debate already as to whether this proposal is even legal so it may turn out to be as (in)effective as the 1997 Stability and Growth Pact which this new proposal seems to mimic in many ways.

http://www.mindfulmoney.co.uk/wp/shaun-richards/more-euro-fudge-puts-the-euro-zone-in-a-sticky-mess-and-uk-producer-inflation-is-not-dead/

 

So if they enforce any of this they will create an economic depression in Europe...

Fri, 12/09/2011 - 08:06 | 1962238 nmewn
nmewn's picture

"If they have the EUR 200 billion lying around to lend, why use the IMF?"

Everyone check under those seat cushions!!!

Oh, that would be considered from savings wouldn't it? Back to putting the debt owed on different credit card, that'll solve it...lol.

Fri, 12/09/2011 - 08:19 | 1962272 oogs66
oogs66's picture

Lol. This just seems bizarre. Central banks rule the world

Fri, 12/09/2011 - 08:11 | 1962254 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

We spent many hours over several days together discussing something. Here is your answer "nothing". As with the case of all politicians, they have to show something was done and admitting the truth is never an option.

Fri, 12/09/2011 - 08:14 | 1962260 Dick Darlington
Dick Darlington's picture

Finnish YLE reports (Google translated):

Unanimity or Finland out of the crisis fund

 

Minister of Jutta Urpilaisen (soc dem), the permanent crisis fund to changes there are two choices: either abstain from making a unanimous decision or Finland is not involved in the fund. He said he did not see any other options.

http://translate.google.com/translate?sl=fi&tl=en&js=n&prev=_t&hl=fi&ie=...

Fri, 12/09/2011 - 08:20 | 1962275 oogs66
oogs66's picture

Why does Finland need to be in eur?

Fri, 12/09/2011 - 08:36 | 1962317 Dick Darlington
Dick Darlington's picture

That's exactly the question finnish people are asking. Finns were never given the opportunity to vote in a referendum abt joining euro. The decision was made by one of the eurofanatics, former prime minister Lipponen. The current weak coalition led by PM Katainen, eurofanatic to the bone, is doing the exact the opposite that people want. There's a huge and growing contempt towards the undemocratic EU-dictatorship and the never ending robbing of tax payer money to "fund" the bail outs.

 

Judging by the relative success of the other Nordic countries who decided not to join euro, Finland would be in a much better place if it hadn't join this communist dictatorship in the first place. Finland is abt the only country which has obeyed the original Maastricht treaty (max 3% deficit, max 60% debt/GDP) and the "reward" is tens of billions of liabilities for other countries (read foreign banks) debts. And esp when looking the net debt/GDP Finland is in a league of it's own. Net debt/GDP is roughly -57% of GDP. (yes, that's a minus sign).

Total Government Net Debt (% of GDP) for Finland in year 2010 is -56.797 %

Fri, 12/09/2011 - 08:38 | 1962332 Housicker
Housicker's picture

HELSINKI, Dec 9 (Reuters) - Changes in the European Stability Mechanism (ESM) must be made unanimously, or Finland will drop out, Finnish Finance Minister Jutta Urpilainen told public broadcaster YLE on Friday.

'We will stick to this demand for unanimity,' Urpilainen was quoted as saying on YLE website.

The Finnish parliament's influential Grand Committee said on Thursday the country could not accept a change to the EU's rule of unanimous decision-making without two-thirds of its own parliamentarians agreeing to the move. The opposition parties have said they would vote against such proposal.

Fri, 12/09/2011 - 08:15 | 1962265 ucsbcanuck
ucsbcanuck's picture

The markets will be up today. That's the ridiculousness of it all.

Fri, 12/09/2011 - 08:16 | 1962267 Tense INDIAN
Tense INDIAN's picture

they dont have much of a choice either....

Fri, 12/09/2011 - 08:21 | 1962276 dbells32
dbells32's picture

Sell this market!!! 5 damn EU summits and zero accomplished...use this baseless rally in the futures to sell

Fri, 12/09/2011 - 08:21 | 1962277 The 100 Trillio...
The 100 Trillion Dollar Man's picture

Anything better than a deficit of 0.5% is considered a surplus.

Of course it is. Why didn't I think of that? How can they possibly enforce anything with such logic?

Fri, 12/09/2011 - 08:33 | 1962315 chaartist
chaartist's picture

farage reaction pls, need to get back my mood.

Fri, 12/09/2011 - 08:38 | 1962335 AntiLeMaire
AntiLeMaire's picture

Via IMF: not very brave, but quite wise...

>> “the provision of additional resources for the IMF of up to EUR 200 billion, in the form of bilateral loans, to ensure the IMF has adequate resources to deal with the crisis”.  So the EU is bailing out the IMF?  Or the EU is giving money to the IMF so it can bailout the EU? 

It is the AAA countries (mostly) that increase their IMF funding.
EU funding of IMF should be on par with or larger than US funding of IMF. But more importantly the strong EU countries only want to lend money to the weaker EU countries via such an entity like the IMF, because the IMF always plays Bad Cop.

The stronger EU countries do not dare to tell the silly weaker EU countries to simply stop such nonsense such as pensioning-off people at 45, without actually having funded their pensions (like GR did).
Nor do they want to be forced to install AT/DE/NL/FI/CH/SW/NO/DK (etc) tax controllers in countries that seem to have difficulty to simply tax their own subjects properly (like GR, IT, ...).
They like to keep up the idea that they are nice neighbours, yet they do not dare send any more money to southern black holes without much more effort by those debtors and stricter controls on them.
So they are hiding behind the IMF.

So perhaps not very brave, but quite wise IMHO ;).

>> If the EU has the money why not lend directly, or wait, better yet, pay off some of the debt!   Watch this carefully.  I have to assume that it is better credits lending money so it can be funneled to weaker countries.

As to the last sentence, I think so as well. As to the first bit, see above & below.

>> This should be credit NEGATIVE for the better countries.  I think this could impact yields over time at better countries, and may also be enough to see some ratings downgrades. 

Huh, no, why should it?
The IMF is expected to need more money to deal with some of those weaker EU countries. The money will have to come from somewhere and the EU will have to fork over more money to the IMF anyway in case they do not lend directly to their neighbours (or via the EFSF or EMS). Via the IMF the conditions will be strict and severe.

>> Again, I’m really confused why the IMF is involved in this.  Why they can’t do bilateral agreements within the EU is bizarre, and if anything, we have learned that whenever there are unnecessary steps or seemingly bizarre steps, it hasn’t worked out well.

See above. The constituents in the richer EU countries do not trust the backbone of the debtors. They know / think that via the IMF they will get their money back eventually, so this idea can be sold to the general public in the AAA countries.
In this way the governments of the AAA countries guarantee / fork over more money, without running the risk of being eliminated in a next general election...

 

Ceterum censeo OTC esse delendam

Fri, 12/09/2011 - 12:04 | 1963041 tony bonn
tony bonn's picture

humpty dumpty sat on a wall
humpty dumpty had a great fall
all the king's horses and all the king's men
couldn't put humpty together again.

Fri, 12/09/2011 - 12:23 | 1963148 waterdude
waterdude's picture

wow - zerohedge gets it wrong again!  SX5E up 2.2% into last 10min, looks to close at day high.  Ever think you guys are just chasing what the market was discounting last week or last quarter?

 

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