European Banks Tumble On Schauble Comments Against "Blank Check" EFSF

When we first summarized our take on the second European bailout package we completely ignored the specifics of the rollover mechanism and the private investor participation scheme because they were entirely irrelevant. We said: "This is merely a red herring that attempts to confuse the issues associated with the first, and far more important concept: the nuances of the EFSF and its imminent expansion. And expand it will have to, because in reality what is happening is that the net debt of the countries will end up growing even more over time for one simple reason: this is not a restructuring of existing debt from the perspective of the host country! Simply said Greek debt will continue growing as a percentage of its GDP, meaning it, and Ireland, and Portugal, and soon thereafter Italy and Spain will be forced to borrow exclusively from the EFSF. Therein lies the rub... The bottom line is that for an enlarged EFSF (which is what its blank check expansion today provided) to be effective, it will need to cover Italy and Belgium." We further said that "by not monetizing European debt on its books, the ECB has effectively left Germany holding the bag to the entire European bailout via the blank check SPV." We concluded with the rhetorical: "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?" Well, German Finance Minister just gave us an answer, and it is the reason why various European banks are once locked limit down, and the entire banking industry in Europe is bleeding: "The government rejects a 'carte blanche' for widespread purchases on the secondary market." This means that the entire second bailout package has now been unilaterally unwound courtesy of German which has realized it was the "weakest link" patsy, and will not agree to the clause giving the EFSF unlimited PPT powers. Time to start planning bailout #3.

From Reuters:

Euro zone leaders agreed last Thursday on a second rescue package for Greece in a deal which includes the right for the European Financial Stability Facility (EFSF) to buy bonds on the secondary market at the ECB's recommendation.

 

"Even in the future, such purchases should only take place under very strict conditions when the European Central Bank deems there are exceptional circumstances on the financial markets and dangers for financial stability," Schaeuble said in the letter to members of parliament dated July 26.

 

"The government rejects a 'carte blanche' for widespread purchases on the secondary market."

 

He said the decisions taken at the summit were not without risks, "but the risks of the conceivable alternatives are much greater".

 

Indeed the summit's agreed measures could prevent Greece's debt crisis from becoming "a crisis that would endanger the euro zone as a whole and therefore the euro".

 

However, Schaeuble said one summit would not be enough to solve the euro zone's debt crisis, echoing cautious comments made by Chancellor Angela Merkel.

Even others have finally gotten to the same conclusion we did last week:

"If you look into the details of the EU summit decision, it doesn’t take you long to get to where the weak points are,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich.

The result from Bloomberg:

German bonds rose for a fourth day after Finance Minister Wolfgang Schaeuble said the government is against a “blank check” for the European Financial Stability Facility to buy bonds of troubled euro members in the secondary market.

 

Stoxx 600 banks declines 2.3%, insurers fall 1.5%, as main index drops 0.5%.

 

All major European insurers fall as earnings approach; Ageas slumps 4.4%

The race to the bottom between the US and Europe is now truly and fully on.