UBS' George Magnus Says European "Viability Is Far From Assured"

Tyler Durden's picture

Last week, Zero Hedge first brought to readers the infamous UBS report, which has since made the global rounds, and which essentially laid out the binomial tree for Eurozone survival as follows: either the EUR survives, or we get Civil war. In keeping with the schizophrenia of the TBTF banks whose number one goal is to cover their ass by predicting the two opposite possible outcomes, so as to avoid being sued by sovereigns once the dominos start falling, here is the firm's much respected economist George Magnus, who in his latest release of "By George", does a comprehensive framing of the agenda in the Eurozone. His conclusions: don't believe the European bureaucrat PhDs - there is much more here than meets the eye. To wit: "The dilemma over where to draw the lines between integration and sovereignty lies at the core of the fiscal union debate. The policy agenda has to recognise this, and not assume that fiscal union, one way or another, is eventually a ‘gimme’, even though logic would say it should be. Parallel to the logic are the politics and vested interests, the German Constitutional Court notwithstanding, which say fiscal union only one theoretical outcome, and maybe a long shot. Most likely, the political limits to fiscal integration have not yet been reached, but if there are further moves towards but not reaching this goal, they will most certainly be on German, and therefore, limited, terms. We may conclude that while the Euro system is not about to break up, its viability as it stands is far from assured." Maybe not "about" - give it a few weeks though...

From George Magnus:

Framing the agenda in the Eurozone: bank recapitalisation, and sovereignty issues

In the Eurozone, it is hard to keep track of the moving parts, which include:

  • faltering economic growth in the core and recession in the periphery
  • stressed bank liquidity and funding markets, and total reliance on a reluctant and split ECB to purchase sovereign bonds so as to prevent contagion
  • parliamentary approval of the redesign of the EFSF, and possible changes to economic governance allowing existing institutions to play a stronger crisis management role
  • the terms of the IMF’s next loan tranche to a non-compliant Greece, the Finns’ demands for adequate collateral, the implementation of the Greek debt swap terms, and how and when a Greek default might be managed.

Agreement to address any of these issues satisfactorily will likely influence the chances of success in others. And vice versa. In the event of the former, Eurodenominated asset markets would undoubtedly squeeze sharply higher, and yield spreads lower.

But, as before, these rallies will fade unless Eurozone policy makers reformulate the policy agenda. The tools and techniques of sovereign debt crisis management, whether by the ECB, the EFSF or any other institution won’t substitute for the failure to see the crisis for what it is.

The immediate problem, which policy makers have been unable or unwilling to address successfully, is the negative feedback loop between diminishing sovereign creditworthiness and weak, undercapitalised banks. Improving sovereign credit through austerity is a long process, and, in any case, hard to pull off in recessionary conditions and when all one’s major economic partners are also in austerity mode. It is also accepted now, if grudgingly, that debt relief and restructuring are essential to that improvement process. But that emphasises the circuit breaker even more forcefully.

To break the loop, significant and mandatory bank re-capitalisation is required, as recently stated by Christine Lagarde, and in short order. Ideally, the EFSF would perform this task, as envisaged by Heads of State at their summit on 21st July. Even if the EFSF redesign is approved by all 17 parliaments by the end of September, its limited financial capacity is widely acknowledged, and boosting this would become the next urgent task.

Several proposals are circulating as to how this might be done without having to ask all the sovereign shareholders to cough up more money or collateral up front, though most involve further complex negotiations to redesign the EFSF further. Assuming there is time to do it, one of the more interesting is based on turning the EFSF into a bank, with access to the ECB, and the ability to leverage up its resources considerably (see, August 2011: What to do when the euro crisis reaches the core, Daniel Gros and Thomas Mayer, Centre for European Policy Studies, 18th August 2011).

But if, for one reason or another, bank recapitalisation doesn’t happen or is inadequate, it is hard to see how the negative feedback loop can be broken. And if European policy makers prove unable or unwilling in this regard, and the Eurozone debt crisis becomes more intense and damaging, what then? In a thoughtful piece, published recently in the Financial Times, it was suggested that the US, the IMF and China would all have strong vested interests to come to the rescue of the Eurozone, embarrassing as it would be for its leaders (It is Time for outsiders to save the single currency, Barry Eichengreen et al, Financial Times, 5th September 2011).

Bank recapitalisation is the most important tool/technique that needs to be implemented, but this still leaves open the related but more structural problem, which is to how to provide a lasting solution that fills the chasm between the interconnected financing needs of sovereigns and banks, and the inadequate amounts available from private lenders. As an example, the reason Italy has found itself in trouble this year is not only because of contagion shock, but also because its current account deficit has been widening steadily all year (4% GDP, and 7% GDP annualised over the last 6 months), creating the demand for larger capital inflows, at a time when lenders are backing away from the periphery of Europe.

It’s a small part of Europe’s imbalances problem, and policy makers find it hard to talk about systemic problems, not least because a smoothly functioning Euro system now requires even higher levels of economic and fiscal integration, which intrude uncomfortably into the sovereignty of both creditors and debtors. Creditors are becoming increasingly powerful and assertive and debtors too are at serious risk of becoming austerity-weary, while already anxious about ceding more sovereignty to creditors and European institutions. Germany’s dominance in the Eurozone as the biggest economy and strongest creditor, makes last week’s strong judgement issued by the German Constitutional Court last week, all the more telling. The ruling, which dismissed the plaintiffs’ case, insisted, nevertheless that the sovereignty of the German state cannot be subsumed by or handed over to any third party, permanent institution, such as the EFSF’s successor from 2013, the European Stability Mechanism, or, for that matter to the proposed issuing authority of any future E-bond scheme.

The dilemma over where to draw the lines between integration and sovereignty lies at the core of the fiscal union debate. The policy agenda has to recognise this, and not assume that fiscal union, one way or another, is eventually a ‘gimme’, even though logic would say it should be. Parallel to the logic are the politics and vested interests, the German Constitutional Court notwithstanding, which say fiscal union only one theoretical outcome, and maybe a long shot. Most likely, the political limits to fiscal integration have not yet been reached, but if there are further moves towards but not reaching this goal, they will most certainly be on German, and therefore, limited, terms. We may conclude that while the Euro system is not about to break up, its viability as it stands is far from assured.

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slewie the pi-rat's picture


soundlike our friend "of 2 minds" c.h.smith?

We may conclude that while the Euro system is not about to break up, its viability as it stands is far from assured.

Ghordius's picture

+100 LOL c.h.smith's tone

while you seem to be alive enough to pay my bill, I, as a doctor, cannot be sure you'll live up to next year...

Let me recap: as long as it was conceivable, every City of London banker was asking for an Eurobond (yummy, biz and fees!).

Now the German Constitutional Court has ruled an EuroBond out, it's all about EuroViability.

Need an EuroBreakOutInsurance (EBOI), quick!

Naked Short Contracts for the chances Luxemburg breaks out before Germany, incoming.

RobotTrader's picture

USD/CHF rally off the lows is an absolute stunner.

SheepDog-One's picture

The amazing part of the USD rally is the DOW only down -150....they must be shitting bricks and pulling out all the stops behind the curtain to keep the wheels on this hoopdie!

swissaustrian's picture

It´s the logical consequence of the CHF-peg to the EUR...

Caviar Emptor's picture

OK. Here's the final deal: China takes Germany. US gets the rest. Take it or leave it

LongSoupLine's picture

Nope...China will take Italy so they can own, and squash, the argument on who invented pasta first.

We'll take Germany for the beer rights...

BorisTheBlade's picture

With such a long piece he could be much more conclusive, "euro is f*cked" for example...

mvsjcl's picture

Don't be fooled for even a second. This is all about further "consolidation" of the EU. Read their lips as they emerged from the recent G7 meeting. "Consolidation" is just the latest fog word for "loss of sovereignty." They're treating this one very delicately, folks.

SheepDog-One's picture

Like a ZH article said last week, the elites old 'problem-reaction-solution' is no longer working on the people, they know exactly whats going on, getting bent over to support criminal billionaire bankers.

mvsjcl's picture

Just my opinion, but that's what I think the problem is: perception management. The game's getting old, and these "meetings" are not about solutions, but about how to reach the goal against a rising tide of awareness. The flag outside my window twists and contorts itself around the flagpole as the wind rises. I cannot read its country's symbol. Does it matter?

Johnny Lawrence's picture

Gold & silver getting raped in the anus today.  Very weird.

walküre's picture

Not weird.

It's a paper game. Did you buy and hold oil at $147 a barrel in July 2008? Of course not. So why should gold and silver be different in 2011.

Prepare to get raped.

SheepDog-One's picture

Someone wants out of their paper PM's real bad? TBTF banks know no QE3 trillions will be delivered?

Who cares, we havent printed any less and Im not selling my PM's under any circumstances.

Jonas Parker's picture

The futures prices for two months out don't always reflect the physical price today...

WonderDawg's picture

Gold and silver have markets. Markets go up AND down.

walküre's picture

JPMorgan's chief executive Jamie Dimon called new international bank capital rules "anti-American" and said the U.S. should consider leaving the Basel group of global regulators, the Financial Times reported.

“I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” Dimon told the FT. “Our regulators should go there and say: ‘If it’s not in the interests of the United States, we’re not doing it’.”

Read more:
You know, Jamie Dimon is a patriot. His fantastic banking institution that generates wealth and superb quality of life for many Americans should know what's best for America. In fact they do so well for everyone, that they may ask once in a while to get a bailout from the people who they serve so well. Ace of Spades, Jamie Dimon. Ace of Spades.
caerus's picture

he's warming up for his next job as SOT

10044's picture

Ok great, now explain why gold is down 3%

SheepDog-One's picture

Who cares? Their only solution is more fiat out of thin air. Anyone trading gold minute to minute is destined to get churned and burned. Its a long term buy and hold, VERY log term, like waiting out and surviving WW3 if you can.

DefiantSurf's picture

Think of it as a buying opportunity or just BTFD!

longhardbull's picture

Why in the H E double hockey sticks is G&S getting killed?


SheepDog-One's picture

Rats jumping off the Titanic? Maybe too big to fail isnt really all that big after all.

walküre's picture

Jumping into where or what rather?

Everything is ON THE TABLE.

Global debt implosion means just that.

SheepDog-One's picture

Apparently jumping into 0% bond liferafts.

walküre's picture

I'm not a billionaire but how does that make any sense? Giving it all to the government freely? The government could rape them blind. Actually, here's hoping government will do just that. So much stupidity is asking for punishment.

Imagine a broke government holding all that money from people who they could otherwise not collect from?

Maybe my paranoia is getting the better of me but Jeez, why? Could be the perfect coup d'etat. Panic them into giving it all up, then default by way of holding onto the funds for an extended period of time. Extended deposit refunds or bank holidays.

DefiantSurf's picture

While "viability is far from assured, mutual distruction is completely assured"

there , fixed

slewie the pi-rat's picture

tyler or anyone:

i'm getting djia ~-145

futures ~-200

is this extreme?  whatzit mean?  futures may lead to "risk on" tomorrow due to "oversold"?

SheepDog-One's picture

Tonite there will likely be another rumor of QE3 heard to take care of those futures.

DefiantSurf's picture

apparently the PPT has not turned on todays melt up yet...

Sequitur's picture


Can someone link me a good article or two on methods to defeat financial repression? I gots me gold and silver, but am looking for a good writeup on different methods to avoid being inflated/taxed/austeritied to death -- because, unquestionably, this is coming to the United States, and arguably it has already begun.

So, any good links or "plan of action" type papers/articles, thanks in advance.

DefiantSurf's picture

renounce your citizenship and move to Somalia, with a fair amount of gold you could be King of Somalia and make your own tax laws

longhardbull's picture

Gotta go off-grid as soon as G&S spikes.. Gold, guns and garden

JohnG's picture

Better get a supply of K-Y, here it comes:


2nd UPDATE:White House:Obama Jobs Plan To Be Paid For With Taxes Last update: 9/12/2011 2:21:51 PM --Obama plan to be paid for with taxes --Itemized deductions for individuals making over $200,000 would end --Tax breaks for oil and gas companies would end (Updates with comments from Boehner spokesman in the 4th paragraph.) By Jared A. Favole and Carol E. Lee Of DOW JONES NEWSWIRES WASHINGTON (Dow Jones)--President Barack Obama will pay for his $447 billion jobs plan by ending a series of tax breaks for oil and gas companies, hedge-fund managers and people making over $200,000, the White House said Monday. In total, Obama's plan will end about $467 billion of tax breaks over 10 years, said White House Office of Management and Budget Director Jack Lew. The president has previously proposed ending the tax breaks, but has faced stiff resistance from Republicans. By choosing to end the tax breaks, the White House is likely setting itself up for a fight with Republicans. Over the summer, Republicans said they wouldn't end tax breaks amid concerns doing so as the U.S. is coming out of a recession would hamper the recovery. "It would be fair to say this tax increase on job creators is the kind of proposal both parties have opposed in the past," said Brendan Buck, a spokesman for House Speaker John Boehner (R., Ohio). He continued, "We remain eager to work together on ways to support job growth, but this proposal doesn't appear to have been offered in that bipartisan spirit." The White House disputed the notion that raising taxes on the wealthy would hurt growth. "The pay-fors are spread out so that there aren't negative impacts," White House press secretary Jay Carney said, using policy jargon to describe measures to pay for spending. The White House is also taking a gamble that Republicans are willing to budge on taxes after getting bruised, politically, over a tough budget fight in the summer. Lew said he thinks most Americans would easily end tax breaks for oil and gas companies and hedge fund managers to spur growth. "That is not a hard choice for most Americans, if the choice is creating, you know, economic growth and jobs, or tolerating the results of many years of inequities in the tax code," Lew said. Obama is sending his jobs plan, including details of how it will be paid for, to Congress later Monday. Speaking in the White House Rose Garden Monday morning, Obama urged Congress to pass the package. "This is the bill that Congress needs to pass--no games, no politics, no delays," Obama said. The following is a list of tax breaks that will be ended or limited to pay for the jobs bill, according to the White House: --Limit on itemized deductions ($200,000 individuals, $250,000 families) --Carried interest would be treated as "ordinary income" rather than at capital gains rate --Oil and gas company tax breaks --Corporate-jet depreciation would change
SheepDog-One's picture

The Big Takedown of USA disguised as a 'jobs bill', indeed prepare to get bent over for the big cornholing fest we're about to see.

DefiantSurf's picture

never going to pass, those damn tea partiers will be the blame, damn them and their terrorist hostage taking ways!


SheepDog-One's picture

MHFT, you better revise your article from this morning, Negrobama just kornholed you bud.

walküre's picture

At what point does government concede that they're no longer representing the people?

When over 50% of the people stop believing the lies and propaganda, imo the gig is almost up.

Impossible to recover credibility. This is not a Dem/Repub issue btw. They're all part of the same construct.

I'm curious. Asking when does it break? When do people start referring to government as their oppressors?

ZippyDooDah's picture

I'm glad I'm "short."

longhardbull's picture

After the last 10 or so years, we don't need KY any longer... Of course, I'm betting on it getting worse, so why should I care..

slewie the pi-rat's picture

OT:  morgan strong is reporting from the tripoli post that the "clock" to start the "8 months till elections" will not start till later

this is a paste, unedited, as he presents the la times' Tension rises between rebel and civilian leaders in Libya

The transitional government has said it cannot declare the nation liberated until the entire country is free of Al Qathafi's rule. A declaration of liberation is needed before the country can start on a timetable for elections and the drafting of a constitution.

We ask whether by challenging Israel's blockade of Gaza at the ICJ, Turkey is setting a precedent others might follow. Pakistan: a state adrift

A review of the 10 years since the September 11, 2001, attacks for a country that has weathered more crises than most. Drug war cables: 'Burn poppies, burn'

WikiLeaks cables on the US 'war on drugs' reveal saucy diplomatic prose on Mexico, Afghanistan, Haiti and Burma. Exposing religious fundamentalism in the US

The US media has been downplaying a radical Christian theology that is increasingly influential in the Republican Party.(end paste)

link:  Summary of the American and International Press on the Libyan Revolution - <i>Morgan Strong</i>   (last paras)

SheepDog-One's picture

Just watched the DOW melt down -170, only to get perp-walked within minutes back to only -120. Ponzi ON!

mrkolice's picture

i was wondering if there is a list of tbtf banks and institutions.

i did some research via google and i came across some clues suggesting that there are such lists but that they are not public (e.g. from japanese regulators and basel committee).

i believe that if such lists do exist then they should be public.

any suggestions where to look further?