Bloomberg EU Eases Spain Debt Rules as Merkel Retreats [17] and Euro Rises After EU Leaders Renounce Spain Loan Seniority [18]
Euro-area leaders agreed to relax conditions on emergency loans for Spanish banks and possible help for Italy as an outflanked German Chancellor Angela Merkel gave in on expanded steps to stem the debt crisis.
After 13 1/2 hours of talks ending at 4:30 a.m. in Brussels today, chiefs of the 17 euro countries dropped the requirement that taxpayers get preferred creditor status on aid to Spain’s blighted banks and opened the way to recapitalizing lenders directly with bailout funds once Europe sets up a single banking supervisor. Stocks and bonds in Spain and Italy rallied and the euro posted its biggest gain this year.
Oh yeah, that's a damn good idea. Take a murky pool of depreciating, hard to value, illiquid assets and make them even murkier, harder to value, yet easier to pledge since it's now acceptable to look in the other direction as you receive said "trash assets". To make matters even worse, the Europeans are now attempting to perfect their method of throwing good money after bad by denying preferential status to the only money that can save (or at least buoy) these zombie banks. Of course, no lender will want to go in knowing that they can be instantly subordinated, but then again when the only lender that can realy make a difference goes in, why should it take a bow to anyone else. Trust me on this one... Taxpayers will offer loans and see that money disappear... Poooffff!!! Don't believe me? Reference CNBC Asks, "So Why Are Spanish Bond Yields Falling?" I Ask The Better Question, "Why Are Spanish Banks Considered Solvent?" [19]
Bloomberg also reports Spain Gets Relief as Europe Leaders Outflank Merkel in Bid to Blunt Crisis [17]. Listen, pressuring Germany, the one remaining relatively stable/robust large economy in the union is a recipe for disaster. There's no wonder why 16 or so failing economies are in opposition to the wants and desires of the 1 or so successful economies. See any common threads here? Germany is far from bulletproof, as the same MSM page sports this headline...
German Retail Sales Unexpectedly Fell for a Second Month in May on Crisis [20]
German retail sales unexpectedly fell for a second month in May as the sovereign debt crisis worsened, damping the economic outlook.
Germany is a net export nation whose primary trading partners range from extremely hard landing to recessionary to outright depression. Exactly where is all of the economic growth going to come from to fund the world, or at least the European version of the world. I have written extensively on this... Sophisticated Ignorance Part 2: Pressuring Germany To Do The Wrong Thing Is A Short Seller's Dream [21]
Things are so predictably dead beat that I don't even have to write new material anymore. Seriously! Let's just cut and paste from the BoomBustBlog archives: Dead Bank Deja Vu? How The Sovereigns Killed Their Banks & Why Nobody Realizes They're Dead [22]
I have broached the argument in the past that the ECB is not god, or even close to it, and that it can only play the bond buying ponzi for but so long before negative consequences occur. Reference:
- ECB As European Lender Of Last Resort = Institutional Purveryor Of A Pan-European Ponzi Scheme [23]
- Over A Year After Being Dismissed As Sensationalist For Questioning the ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What! [24]
Below is my mini-debate with Doug Kass on Twitter. Let it be known that I have respect for Doug, for he called the market turn in 2009 with precision, an did it publicly. Of course, I can't agree with him on this latest proclamation though...
Douglas Kass @DougKass
The EU initiatives reduce tail risk (a crash) but dont address the deep structural issues - buy the rumor, sell the news. What I will do.
ReggieMiddleton @ReggieMiddleton
@DougKass How does the EUinitiative reduce risk/crash? Still not funded? Simply shifts dirt from 1 hole to the next, much dirt still missing
Douglas Kass @DougKass
@ReggieMiddleton yes reggie... and it worked in the U.S. four years ago. Dont be dogmatic.
ReggieMiddleton @ReggieMiddleton
@DougKass Stocks did double, though. Unfortunately neither economic output or asset quality nor true economic profit bothered to follow suit
ReggieMiddleton @ReggieMiddleton
@DougKass It all depends on how you define "worked". US banking system is still a mess. Lending is sparse. We never really left recession..
ReggieMiddleton @ReggieMiddleton
@DougKass ex. of how well it worked for banks: BAC,/C/MS/Manfinancial, soon GS, JPM, et. al. Its anathema to say, prices aren't everything.
ReggieMiddleton @ReggieMiddleton
@DougKass In essences, that means that stock prices went one way, and actual value failed to follow.
ReggieMiddleton @ReggieMiddleton
@DougKass Stocks did double, though. Unfortunately neither economic output or asset quality nor true economic profit bothered to follow suit
ReggieMiddleton @ReggieMiddleton
@DougKass It all depends on how you define "worked". US banking system is still a mess. Lending is sparse. We never really left recession..
ReggieMiddleton @ReggieMiddleton
@DougKass Taxpayers will offer loans without which banks will fail, yet don't get preferential status. that money will disappear
And a supplementary tweet from Tyler: Last Night's Critical Phrase "No Extra Bailout Funds" tinyurl.com/7nstlg2 [28]
Anyway, back to the Bloomberg story. So, now taxpayers will cough up and additional several hundred billion euro to be absolutely incinerated and vaporized once it hits that gaping oven of insolvency needing at least 500 billion euro to make a difference. Translation: Central banks will take another very big hit and not get paid for it.
Speculators should have alreday started selling French and German bonds because they are the major contributors to the ECB. I've discussed France in detail earlier this week in Now Is The Time To Prepare For The (Next) French Bailout Of Their Banking System & Potential Bailout Of France [29]. The French are not particularly well situated. I also took a find toothed comb to Germany as well, as archived... The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You... [30] You see, as you read through this last link, if Germany's Bunds so much as return to trendline, it absolutely wrecks EU insurance, bank HTM and pension portfolios. I mean negative equity everywhere.
Finally, check this out. If you don't want to watch the whole thing then start at 2:38...