"Springtime For The Euro, Then Reality" - Citi Summarizes What Happened In Europe, And What Are The Next Steps

Tyler Durden's picture

Citi's Steven Englander summarizes last night's 4 am Eurosummit announcement, the kneejerk reaction in the all-important EURUSD, and what to expect both over the immediate future and the longer term:

From Citigroup:

Springtime for the euro, then reality

The nice thing about 4AM press conferences is that no one expects or wants them to be long. The agreement eurozone leaders reached with each other and the banks contain the following points:

1) Nominal write-down of 50% (EUR 100bn) of Greek debt in private hands; Greek debt owned by official lenders not touched
2) Remaining Greek debt will be refinanced at preferential rates
3) Bond swap to be done by end-January
4) Closer supervision of Greek adherence to the program
5) EFSF to be levered 4-5 times
6) No ECB involvement in EFSF; but EU officials were hopeful that they would decide to remain supportive
7) President Sarkozy will speak with China on EFSF involvement
8) EFSF will have both a direct insurance and SPV element; looking for EM/IMF support for the SPV
9) Estimates of EFSF firepower ranged from EUR1.0-1.4tn
10) Italy to deliver specific budget and deficit reduction program
11) Banks must meet minimum capital requirements, seek private capital to cover shortfall
12) If private capital raising insufficient, national governments and then EFSF to meet banking sector needs

The full text of the EU Summit statement can be found here: http://consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/125644.p...

Overall there was very little that had not been discussed earlier. The euro rallied but the rally did not seem based on much new information since there are very few details and the agreements are to be finalized in the next few months.

We would expect the next 24 hours to be driven by how the Sarkozy call to China President Hu Jintao goes, how investors analyze the sustainability of Greek debt under this program, and the reception that the EFSF proposal will get. We are a bit surprised by the enthusiasm given the lack of detail and lack of surprise. We are also wondering how seriously investors will take the EFSF guarantees (which only apply in the event of a default), given that the banks were strongly encouraged to declare the current restructuring voluntary. Investors may fear that the EFSF - guaranteeing - governments will similarly contrive to avoid paying out on their first-loss guarantees.

For FX, we see this as broadly positive for risk, since the package seems adequate to avoid any euro zone driven financial market catastrophe for the next year or possibly longer, but it is probably not enough to improve euro zone growth prospects a lot and there are a lot of loose ends that could unravel. We continue to prefer small G10 currencies with good fundamentals (CAD, AUD, NOK, SEK, NZD). We think they will be supported by macro policies in the US, UK, Japan and China (if needed).  We also note with satisfaction that investors have forgiven CAD and AUD for dovish central banks and weak CPIs -- we think that they will continue to be bought more on risk than off rate differentials.

We doubt that this package can bring long-term support to the euro, even as we note that there are a lot of committed USD sellers out there. There is a risk of running stops to the upside, as positions still seem somewhat short EUR, but we don't think this package can sustain major gains unless outside money is more enthusiastic about backing euro zone debt than either the ECB or euro zone governments seem to be, and we are not sure why this should be the case.

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prophet's picture

Not a matter of buying it, trusting it or taking it seriously, just a matter of whether you can sell it.

disabledvet's picture

And gold declines.

Ghordius's picture


"We doubt that this package can bring long-term support to the euro..."

"...unless outside money is more enthusiastic about backing euro zone debt than either the ECB or euro zone governments seem to be, and we are not sure why this should be the case..."

Wake up, you are being duped with this constructed "Dollar Strenght Season" - the MegaBanks have a target of EURUSD 1.3 for December and they are desperately trying to reach it, even if "gravity" is somewhere 1.425...

Debtless's picture

Same banks called for $2200 year-end gold.

Propaganda machines.

Belarus's picture

For FX, we see this as broadly positive for risk, since the package seems adequate to avoid any euro zone driven financial market catastrophe for the next year or possibly longer, but it is probably not enough to improve euro zone growth prospects a lot and there are a lot of loose ends that could unravel

Risk on. Stocks rally 20% into year-end. Better than expected GDP tomorrow. Reality doesn't set in until spring/summer of '12. Presendtial election cycle rally on. Shorts on NYSE will get massacred. Once this happens, it'll be safe to short again. 

Mentaliusanything's picture

I'm thinking of buying a Gold Coin - just one thogh it's all I can afford.

But first better get a bigger wallet to keep it in... call me crazy but I like all of my eggs in one basket


wang's picture

The nice thing is you could hide it in plain view

silver500's picture

And yet again its the goverment "solution" to the problem that is the real crises.

wang's picture
wang (not verified) Oct 27, 2011 5:54 AM

Suggest you CNBS afficiandos tune in to get some real commentary from Bloomberg Radio - these guys are not on the band wagon - Carl Weinberg among the guests - one guy earlier coined the phrase the new Euorpean Ice Age



topcallingtroll's picture


I got lucky this time.

Everybody all in EWZ. BUT there has to be a drop again soon, unless this bull market is gonna leave everyone behind.

Hehe. Maybe I should say everyone else!

misterc's picture



Springtime for Hitler & Germany,
Winter for Poland & France 

The Axe's picture

The bulls have played this perfect, they have used negative media and a basket full of shorts to ramp the market to 1240, this morning they have their ramp to get a pay day.. well done  crazy but excellent market manipulation..and lots of money..

Mercury's picture

Exactly what information do we think the CDS market is still conveying if something like a 50% haircut can be deemed to be not a credit event?

If this flies even for a little while you know it will be tried in the US.  The PrimeX index for instance is after all an index of CDS on prime US RMBS. There has been lots of talk lately about what the PrimeX is forcasting but we've just learned that all that can go out the window at the wave of a wand.

This may be a good day for the markets but it's a very bad day for market based economic systems.

Ghordius's picture

If you think ahead this could eventually deconstruct into

a part of the world that welcomes hot money (Brazil and the former Asian Tigers hate it), CDS and other derivatives and all the financial innovation /sarc


a part of the world that learns the lesson...

As soon as those lines are drawn I will know if I should migrate to the second...

Tuffmug's picture

You have to stop calling them markets. They are now just crooked casinos.

TooBearish's picture

What Investors is he referring to?

falak pema's picture

A good article of the downside of this Euro deal :


CONTRARIAN TAKE: Here's Why The EU Deal Is Good For The Bears Mike "Mish" ShedlockGlobal Economic Trend Analysis

Read more: http://globaleconomicanalysis.blogspot.com/2011/10/good-news-for-bears-torture-by-rumor.html?

My take on the longer perspective (reposted) :

This is only the first step in the grand euro plan, the following steps being :

1° New financial regulation world wide presented at G20 in November. Interdiction of naked derivative plays and taxation of financial transactions in eurozone. Move to Gl-St type regulation. The core problem is destroying the current financialized economy. As the USA/WS Oligarchical clique won't do it Euro zone has to take the lead with Russia/China/Brazil backing.

2° As the markets are fuked and debt deleveraging is the big issue in first world, we will see a strategy to cut government spending drastically in eurozone and redeploy money to infrastructure new technology sectors to stimulate growth big time. Big painful period of government sector adjustment in perspective. The USA has same problem at an even bigger level.

3° To prevent debt induced liquidity contagion in PIGS, the Euro zone will TRY to decouple with the current financial market and set up alternative lending institutions to bring down bond interest rates to lower levels over the medium term. 

Can this ambitious scheme of financial engineering architecture work, to short circuit current debt slavery ponzi hold leveraged by financials based in WS and City, aka diminish the hold of anglo-saxon finance by creating an alternative Euro/Bric financial model, time will tell. To make it work Merkel and Sarkozy as the heads of the two main euro economies have to be the icons of future euro rapprochement and federation. Its a ten year deal to this type of paradigm change.

Further down the road, if this paradigm change becomes operational,  in geo-political terms this spells the end of Pax Americana age and of God $, Mammon of the current globalized, debt slavery financial model! It also spells the rise of Pacific rim/SE ASia economy and Southern hemisphere countries in balance of global power equation.

What will be the reaction of US Oligarchs to this power play by Euro Zone? Big question mark!

We are in any case, one way or the other, in tipping moment of western and world civilization history. 

The question now for Sarkozy is : How do you generate growth while cutting expenditure in a probable zero growth scenario and NOT lose your triple A?

If France loses triple A in february, then this whole deal goes mega fragile. We are not out of the woods in Euro zone. The short term is a real killer!

We are still in the possibilty that this could be a "Munich" type moment for the Euro construct, if the short term conjecture buckles under.

JenkinsLane's picture

Does someone want to start running a book on how long this is going to buy time for?

Mentaliusanything's picture

This is straight from the Play/opera. "Barber of Seville" or  (Le Barbier de Séville ou la Précaution inutile) The useless precaution.

Whos up next for a short back and sides...... 5 chairs no waiting.

Italy, Portigul, Spain, Ireland. France... don't be afraid its all about the Love of Money 

e-recep's picture

Zombie Citi still talks. I wonder who listens to it.