Ireland

As the Germans ponder the truthiness of Greece's planned austerity measures it will perhaps come as a shock to many that since the start of the Euro (Dec 1998), Greece (followed closely by Spain and Ireland) has experienced the highest nominal GDP growth rates (rebased to USD) among a sample of large global economies (ex-China). As Deutsche Bank's Jim Reid points out from this surprising fact, these three nations (and to a lesser extent Portugal) have been major beneficiaries of the Euro and have seen their economies improve their international wealth position at a faster rate than their developed market peers since 1999. In the current environment, post the leverage super-cycle, this creates stress (as is all too obvious) and in the medium-term we would expect mean-reversion of this 'fake' wealth/growth. The dilemma is whether the peripheral nations see large and negative GDP growth to revert down or if Germany is willing to accept far higher growth and inflation (maybe 7% nominal) to adjust upwards to the seemingly unsustainable levels of the peripherals. Austerity versus Growth/Inflation. It seems from Ireland's suffering and Greece's slide that the former (peripheral deleveraging and austerity) is the path chosen for now though ongoing appetite (Papademos/Samaras aside) for this seems as unpalatable as German's accepting socialized losses via firewall and the specter of high inflation.

The situation in Greece has taken a more sinister turn. The outrage in Greece is growing. More and more of the people on my distribution list with ties to Greece are pointing out how bad things are there. Daily life is getting more difficult by the day for most people, yet the EU has told the Greeks that their current offer isn’t enough and that they have doubts about its implementation. At least they got that right, the austerity measures, will not remain implemented. It seems obvious to anyone who hasn’t become locked into a negotiating stance that the whole austerity idea isn’t working. It is possible over the weekend that the Greek parliament will defer to EU demands and vote in a plan that is “acceptable” but I don’t see it lasting. The people are fed up and more and more realize that defaulting and costing the foreign bankers money is worth a shot. Default is NOT the end of the world or of Greece. For all the politicians who keep saying default is the end, they are just wrong. It will cause problems, but Greece will survive, and for the first time can start focusing on a plan to move forward rather than dealing just with problems of the past.

While a lot of the just completed Draghi press conference was mostly fluff, the one notable exception was the announcement that the European central bank would "approve eligibility criteria for additional credit claims" (see below). While purposefully vague on the topic, Draghi noted that the step is one of onboarding even more risk: "Sure, it's going to be more risky. Does that mean that we take more risk? Yes, it means we take more risk. Does it mean this risk is being unmanaged? No, it is being managed. And it's being - it's going to be managed very well because really there will be a strong overcollateralization for the additional credit claims. The conditions will be very stringent." While it remains to be seen just how stringent the conditions will be, but a bigger question is what is the total pool of eligible claims that can be used to flood the ECB in exchange for freshly printed cash. For that we go to Goldman whose Jernej Omahen a month ago calculated the impact of the expanded collateral pool which was formally confirmed today. To wit: "Scarcity of collateral was becoming an evident problem for a large number of banks, especially smaller and medium sized. In our view, the ECB’s collateral pool expansion was therefore a critical decision. Select corporate loans – which form over >€7 tn, or >30% of total balance sheets – will now be admissible for refinancing operations, through national central banks. Criteria on eligibility have yet to be determined – we are therefore not able to quantify the actual expansion of collateral pool at this stage. That said, the €7 tn starting points suggests it will be significant." In other words, and this is excluding anything to do with the LTRO, the ECB just greenlighted a potential expansion to its balance sheet all the way up to €7 trillion. Will banks use this capacity to convert "trash to cash" - why of course they will, and this goes to the very heart of the biggest problem with Europe: the fact that there are virtually no money good assets left as collateral, which requires the implicit rehypothecation of bank "assets" back to the ECB, to procure cash, to pay out cash on liabilities. How much will they do - we don't know yet. We will find out very soon. What we do know is that the ECB's €2.7 trillion balance sheet is about to expand dramatically, pushing the European central bank even further into bad bank status. And this is excluding the upcoming new usage of the Discount Window known as the LTRO in three weeks. Trade accordingly.

Irish Finance Minister saying that whatever the ECB does with Greece would be of interest to Ireland. So if ECB forgives Greek debt (directly or through EFSF), Ireland is going to want the same deal. Portugal won't be far behind. And why stop at ECB and not go for PSI as well?

This chart from Credit Suisse cuts through all the propaganda BS like a hot knife through butter.

Setting a precedent of official sector losses would raise huge questions over whether Portugal and Ireland will request similar treatment. However there are now no easy options. The current course of a second Greek bailout could just as easily have knock-on effects in the form of a second round of taxpayer-backed rescues. We have always argued strongly against taxpayers taking losses but, unfortunately, this is one of the few plausible options we’re now left with.

If the people in this country had any balls (or actual leaders and not just the Corporate puppets we're allowed to vote for), we'd have a mortgage strike.

Back in July of 2011, when we first predicted the demise of the second Greek bailout package, even before the details were fully known in "The Fatal Flaw In Europe's Second "Bazooka" Bailout: 82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP" we asked, "what happens tomorrow when every German (in a population of 82 very efficient million) wakes up to newspaper headlines screaming that their country is now on the hook to 32% of its GDP in order to keep insolvent Greece, with its 50-some year old retirement age, not to mention Ireland, Portugal, and soon Italy and Spain, as part of the Eurozone? What happens when these same 82 million realize that they are on the hook to sacrificing hundreds of years of welfare state entitlements (recall that Otto von Bismark was the original welfare state progentior) just so a few peripheral national can continue to lie about their deficits (the 6 month Greek deficit already is missing Its full year benchmark target by about 20%) and enjoy generous socialist benefits up to an including guaranteed pensions? What happens when an already mortally wounded in the polls Angela Merkel finds herself in the next general election and experiences an epic electoral loss? We will find out very, very shortly." Alas, it has not been all that very "shortly", as once again we underestimated people's stupidity and willingness to pay the piper of a crumbling economic and monetary system. But our prediction is finally starting to come true. Spiegel has just released an article, which encapsulates what well over 50% of Germans think, who say that the time to let Greece loose, has come.

Since the start of the year, global markets have been apparently buoyed by the understanding that Draghi's shift of the ECB to lender-of-last-and-first-resort via the LTRO has removed a significant tail on the risk spectrum with regard to Euro-banks and slowed the potential for contagious transmission of any further sovereign stress. In fact the rally started earlier on the backs of improved perceptions of US growth (decoupling), better tone in global PMIs, and potential for easing in China and the EMs but it does seem that for now the ECB's liquidity spigot rules markets as even in the face of Greek uncertainty, as George Magnus of UBS notes, 'financial markets are most likely to defer to the ECB's monetary policy largesse' as a solution. Both Magnus and his firm's banking team, however, are unequivocal in their view that the next LTRO will unlikely be the last (how many temporary exceptions are still in place around the world?) and as we noted earlier this morning, banks' managements may indeed not be so quick to gorge on the pipe of freshly collateralized loans this time (as markets will eventually reprice a bank that holds huge size carry trades at an inappropriate risk-weighting) leaving the stigma of LTRO borrowing (for carry trades, substitution for private-sector funding, or buying liquidity insurance) as a mark of differentiable concern as opposed to a rising tide lifts all boats as valuations reach extremes relative to 'broken' business models, falling deposits, and declining earnings power.

They expect a EUR300bn take up of the next LTRO, somewhat larger than the previous EUR200bn add-on - but not hugely so - as the banks face a far different picture (in terms of carry profitability) and yet-to-be-proven transmission to real-economy credit-creation that will make any efforts at a fiscal compact harder and harder to implement as its self-defeating austerity leave debtor countries out in the cold. The critical point is that unless the market believes there will be an endless number of future LTROs, covering the very forward-looking private funding markets for banks, then macro- and event-risk will reappear and volatility will flare.

Our bullish premise rests on Greece being fixed.

If you think the EU Crisis is over, think again. True we’ve got until March 20^th for the Greek deal to be reached, but things have already gotten to the point that Germany has essentially issued its ultimatum. Either Greece hands over fiscal sovereignty, or it defaults in a BIG way.

Three weeks ago, Zero Hedge was the first to bring the world's attention to the legal (and explicit trading/risk) ramifications of European sovereign bonds. We noted the ECB/IMF's subordinating impact on unsuspecting sovereign bond holders but much more explicitly showed the huge gap in market perception between domestic- and foreign-law bonds (and the fact that they have very different ramifications given the rising tendency for retroactive CACs or simply local-law changes to accommodate restructurings). The arbitrage of "dumping all weak protection bonds and jumping to the 'strong' ones" which we preached is indeed occurring and now three weeks later, JP Morgan is suggesting its clients take advantage of this same arbitrage strategy (citing the very same thesis and legal justifications as we did) as domestic law bonds offer significant advantages to the sovereign (and therefore implicit disadvantages to the lender or bond holder just as we said) relative to foreign law bonds. While we are flattered that our analysis is deemed worthy of mainstream sell-side research regurgitation, we caveat the celebration with the concern that perhaps JP Morgan already took advantage of the information a 'fringe blog' provided to the world (as we know many funds did given the requests for more explicit bond details) and is now looking to unwind the profitable (though modestly illiquid) positions it has been accumulating for the past three weeks.

In one of the clearest (and most optically pleasing) discussions of recent months, David McWiliams (of Punk Economics) succinctly explains how Europe has evolved from a democracy to a bankocracy, the implications of which lead to austerity for the people and a Franco-German imposition (the 'fiscal compact') that can only lead to social unrest and chaos. In this brief (and expertly illustrated) video, the Irish economist clarifies Europe's 'dirty little secret' where economic policy is being run almost exclusively for the banks which, as we see in Greece and Ireland, means the political elite are becoming more and more detached from the people. The terror of the r-word (referendum) looms large as McWilliams analogizes the two ways out of a debt crisis (squeeze the debtor or forgive the debtor) with the catholic and protestant perspectives on sin and forgiveness. While falling short of calling for governments to go full-Keynesian (everyone knows you never go full-Keynesian), he (focusing on the problems of the current hopeful solution) summarizes the fiscal union as envisaged by France and Germany (which actually penalizes countries that are in trouble, rather than help them) as not a friendly-union but a vindictive strait-jacket put in place to help banks, not countries. It comes as no surprise to him that the price of Gold (and Bunds) is firm as the 'example' that Greece is likely to set (or face extreme social upheaval) will domino-like stumble across the other troubled nations and as he points "we have been warned". Our view remains that austerity works if countries manage to cut expenses while keeping a balance. Alas, the balance is out of skew due to 30 years of runaway full-Keynesianism, which leads indeed to the problems that McWilliams so well espouses.

A one-stop shop summary of bullish and bearish perspectives on this weeks news, data, and markets.

What the heck is going on in Europe, and why are the peripheral countries putting up with it?