Things That Make You Go Hmmmm - Such As Europe's Daisy-Chain, Round-Robin Bailouts Without A clue

Tyler Durden's picture

The punchline from Grant Williams' latest edition of Things That Make You Go Hmmm (aside from endless human stupidity of course)

Europe is far too reliant on Germany and the other ‘strong’ countries for the various individual nations to be able to take care of their own problems - particularly if any localized bank recapitalizations are to be in addition to the already pledged EFSF contributions by each nation (left). What is far more likely is some kind of ‘bazooka’ or ‘shock & awe’ (to use two tired cliches) approach using the newly-approved EFSF.


If France had to recapitalize BNP and Soc Gen to the tune of €11 billion in addition to its €158 billion stake in the EFSF (as is widely suspected), it could well kiss goodbye to its AAA rating now that the ratings agencies seem to have finally found religion (Italy & Spain saw downgrades this week) and that, for a country currently running a debt-to-GDP ratio of 84%, would NOT be a good thing.


Whether a ‘station-to-station’ plan is in the works or not, it will rely on a nice, orderly procession from one country to the next and I think it has been made abundantly clear over the last year that Europe DOESN’T do ‘orderly’.


There is absolutely no way that the Eurocrats can stop the markets turning their collective eyes towards the next domino in the line at every point in the process. As they struggle to ‘fix’ the Greek situation, the markets have already done it for them and Greek 1-year bonds now yield 166%. Job done. Next up? Whether the architects of a solution are ready for it or not, it’s Spain and Italy... and France.


This week, Credit Suisse published a report that suggested the NEXT round of European Bank stress tests would value government bonds more closely than in the July stress tests - begging the question “What is the POINT of a stress test if it DOESN’T place realistic marks on the very liabilities being stress-tested?” But then, we already know the answer to THAT question, don’t we?


The report suggests a €220 billion shortfall at 66 of the participating banks (citing RBS, Deutsche Bank and BNP as being most endangered) and predicts that two-thirds of the region’s banks would fail the test - a far cry from the most recent stress tests, conducted three months ago, which gave Dexia a clean bill of health...


So if we assume the Credit Suisse numbers are correct and the recapitalization of European banks will require €220 billion (which is, coincidentally, exactly half of the size of the expanded EFSF) then it stands to reason that a much bigger amount is going to be required to in order to ring-fence the next dominos in line and that means good, old-fashioned leverage. Yes. The source of the entire problem will now be used to solve it. It’s really quite beautiful if you think about it.


Look for an announcement out of this weekend’s G-20 meetings that will mention some kind of multitrillion Euro pledge to make ‘absolutely certain’ that everything is fixed and nobody needs to worry about anything anymore.


Me? I remain skeptical - after all, we have just seen how the murine roar of little Slovakia very nearly derailed a political process that had taken six months to coordinate, and that process was required in order to approve a €440 billion bailout fund. Now, it is likely a fresh round of approvals will be required to increase it to several trillion and the largest contributor to those pledges will undoubtedly be Germany; The same Germany whose Constitutional Court ruling last month gave the Bundestag’s Budget Committee an effective veto over future activation of the EFSF, and reinforced German constitutional restrictions on the introduction of Eurobonds.


This isn’t over people - not by a LONG shot.

full report (pdf):


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Fips_OnTheSpot's picture

No happy-happy week upcoming? </s>

MFL8240's picture

Have no fear, the courrpt USA finacial markets will rally this joke of a market higher depite the global collapse.  Our markets have no corrolation to growth, risk or levergae.  Just bullshit games and manipulation.

Fish Gone Bad's picture

The markets are a merchandising operation.  The "little guy", and by that I mean pretty much anyone not the size of a hedge fund, is absolutely NOT supposed to make money.  Sure people will get lucky every once in a while, but the game is to sucker in all the easy to manipulate money, and then pull the carpet out.  If you are so sure the market is headed higher, you can always go long.

LawsofPhysics's picture

No kidding, the song remains the same, buy low, sell high.  Have faith, then go long.  Otherwise the only sure-fire way to keep your money from being stolen in a rigged game is NOT TO PLAY.

If the market is indeed rigged, you can bet TPTB will not let it fall, if they were to let it fall then the fraud would be there for all to see and at the end of the day the market has really been a CONfidence game since inception, aside from the largest ponzi on the planet.  Why people act surprised is beyond me, I guess folks just haven't been paying attention.

MFL8240's picture

What purpose do the rating agencies serve when their after-the-fact ratings are in fact, after-the fact?

knight99's picture

Eur/Usd line in the sand is being drawn this week is critical for price action. We should not move pass 1.395

Dr Hackenbush's picture

no hmmm here, it's a check kiting ring  - criminals should sue for royalties. 

CrashisOptimistic's picture

An announced agreement of whatever kind is, of course, likely.

The algorithms read headlines.  It won't be the announcement that determines the result.  It will be what reporters write.

The market moves on the headlines from reporters and editors, not fundamentals or events.

bartek's picture

G-20 officials promise not to let markets go down. Here it is:

They vowed to keep banks capitalized and financial markets stable, while reiterating an aversion to excess currency volatility.

Belarus's picture

Yep, bartek,  at the end of the day, the can will be kicked and the end of the world will have to wait a little longer. The way i see it, the 50% haircut is coming, and then this will be implemented:

The bank-aid model under discussion is to set up a European-level backstop capitalized by the rescue fund, the people said. It would have the power to take direct equity stakes in banks and provide guarantees on bank liabilities.

So once the 50% haircut comes, so to comes banking and pension backstops (which is why the debt holders will ultimately agree to 50% haircuts), and a flood of capital to resuce  said pension fund obligations and bank explosions (which will stem anger from pension holders becuase they'll be made whole beyond any 21% haircut while this will systmatically hold off a systmic collapse of banks). That way, Greece cuts its debt payments, gets the second tranche (150 billion), Germany gets more control,  etc.....

And it'll work to kick the can down the road, why? Well....if there isn't enough firepower from the IMF and EFSF, all G-20 members, including Geither, said they'd fund the IMF "if needed."

LawsofPhysics's picture

Yes, and it will continue until at some point in the future when everyone has plenty of credit, with precious few resources to go around.  The whole plan has been to eliminate free market values and the whole concept of supply and demand from the equation such that people simple accept what they are being told.  This is the only way central planning can work and has workd in the past.  Don't even think about an independent solution, because it is illegal.  Old fashion survival techniques will be outlawed as "barbaric relics" of the past.  The state will decide how you live and how you die.  The state will have capital controls on everything and claim to own everything in the known universe.  In several southern states already there is talk of banning the capture of rain water by private citizens.  I don't have a link but I believe this has been tried before in south American cities with horrific consequences.  

The laws of physics are very real and infinite growth on a finite planet is impossible.  It is what it is, so if we all want more people (wake up fucknuts this is what GROWTH means), then everyone gets less.  Any questions?

Market Efficiency Romantic's picture

I wonder what those rating agency economic models assume regarding medium and long-term world GDP growth. The sustainability of those 70-100% debt to GDP levels or larger economies depends not only on the AAA, but on avergae economic growth and an as expected population growth.

Sure, the developing economies take over the burden as growth driver, but unlike in similar historic shifts of growth driver reallocation, the developing economies do not drive growth based on innovation and technological breakthroughs. That in my opinion is the reason, why they won't balance the Western downturn, but accelerate it.

Assuming a negative case of such growth stagnation, partly triggered by private develeraging, the assumptions about population growth will not be appropriate so much longer. The psychological effects of economic expectations have for some time been driving population growth.

Having maxxed out any buffers from low-interest-rates already, the 70-100% debt levels won't be economicall sustainable.

The development of world debt to GDP indicates that geographical shifts of debitor / creditor structure won't solve the problem, it is increasing.

So, unless there will be breakthrough technological innovation (for which the the increasingly short-term incentive structure is not ideal), it will either take a total shift of power and control to existing asset holders or a rebalancing of assets. Only that the time horizon for such developments is too long for a political establishment that has developed kicking the can down the road to some kind of art form. With that well-established structure, a courageous and tough 21th century economic policy is highly unlikely.

PulauHantu29's picture

Sad these corporations (and sovereigns) have givena  bad name to AAA.

Used to be the "AAA" was a trusted lable....made you feel safe.  Now most people I talk to don;t believe any of these ratings anymore and politicans even less.

So what does "AAA" mean anymore when we all know it means at least much less, but what exactly?

Market Efficiency Romantic's picture

Absolutely right. But I think there are two categories are falsely classified AAA, those that never were like some subjunk CDO that due to their complexity could fradulently be termed AAA. And then there are sovereign, dynamic evolutionary structures, for which logically a rating only can have short-term reliability. Sure, rating agiencies include the stability of the political system etc, but we all know, how new realities sometimes either create new political leadership or alternativerly the old political leadership with concessions made in their political agenda.

But look at it from a different perspective. In financially healthy countries, past generations would turn in their graves and future generations would wish not to be born, if they realized how a one-time legitimized government with a 4-year legislative turn has the power to burn past achievement and future opportunities with one signature. I bet no past and no future generation would (have) expect(ed) that. So, the expectation of a sovereign with a AAA tradition maintaining may well be be reasonable also from that perspective.

Miss Expectations's picture

It was wonderful to be able to listen to Martin Armstrong.

lolmao500's picture

What is far more likely is some kind of ‘bazooka’ or ‘shock & awe’... or blitzkrieg.

Germany is about to get shafted again once France gets downgraded.

LawsofPhysics's picture

Sort of makes you wonder what China is thinking, they are very aware of history and how countries have behaved when they thought they would not be paid back.  More and more fucking idiots collecting fat checks to work on a plan for a plan for plan.  How about a few more people actually executing a plan before countries simply start executing?

sasebo's picture

Lets see if I've got this straight. Greece & some other European countries have borrowed more paper money from some European banks than the debtor countries can repay. So some stupid high level European politicians are trying to decide whether to print more paper money & give it to the debtor countries to repay the banks or whether to beg the banks to take partial repayment for the stupid loans the stupid banks made to the stupid debtor countries with other stupid peoples money?

Seems like the problem is just too many stupid people. Let me know how all this stupidity plays out.  

slewie the pi-rat's picture

we need a comprehensive solution for the future!

menage a` daiZy chain, BiCheZ!