As Italy Comes Begging For A Semi-Bailout, Germany Says Non-Semi Nein (Without Conditions)

Two days ago, when noting that Italy is on collision course with technical insolvency should its bonds remain at current levels for even one more week, we wrote that "As Italy Hints Of Subordination, Did Rome Just Request A "Semi" Bailout?" Of course, yesterday's big market moving rumor was just this - namely that "supposedly" Germany had agreed to provide the underfunded EFSF and non-existent ESM as ECB SMP replacement vehicles, and implicitly to launch the bailout of not only Spain but also Italy. This turned out to be patently untrue, as we expected, despite speculation having been accepted as fact by various UK newspaper and having taken Europe by a storm of false hope, leading peripheral spreads modestly tighter (and Germany naturally wider). Of course, even if Merkel were to allow the ESM/EFSF to effectively replace the ECB secondary market bond buying, which is what this is all about, nothing will be fixed, and in fact it would lead to even more subordination and more bond selling off of positions which are not held by the ECB or ESM. But that is for the market to digest in 4-6 weeks as it appears nobody still understands how the mechanics of the flawed European rescue mechanism works. In the meantime, now that Italy has tipped its hand, it has only one option: to push full bore demanding that someone, anyone out there buy its bonds. Sadly, Germany just said nein. Again.

From Reuters:

Italy put forward a proposal at a G20 summit in Mexico on Tuesday for the euro zone's rescue funds to start buying the debt of distressed European countries, and the idea is expected to be discussed at a meeting of leaders in Rome on Friday.


The Italian proposal foresees using the EU's rescue funds, known as the EFSF and the ESM, to buy bonds of countries such as Spain and Italy in the secondary market to help bring down bond yields and lower refinancing costs.


Both facilities have the power to buy sovereign debt, but so far only the European Central Bank (ECB) has been active in purchasing the bonds of stricken euro zone countries, snapping up over 210 billion euros worth of debt since launching the programme in May 2010.


"The idea is to stabilize borrowing costs, especially for countries who are complying with their reform goals, and this should be clearly separated from the idea of a bailout," Italian Prime Minister Mario Monti told a news conference in Los Cabos at the end of a G20 meeting.

Here is a thought: perhaps the countries who are "complying with their reform goals", can actually avoid using the debt markets for once? There is a novel thought.

And just in case it is lost in translation, the idea is to bailout Italy in the absence of actual bond buyers. Because last we checked the bond market (forget idiot stocks) is still quite capable of judging for itself who is actually "complying" with non-existent targets and goals. In fact, by pushing spreads wide, the market is doing precisely that: forcing Italy to be honest about fixing its fiscal mess. Sadly Italy refuses to see logic in the eye. Actually, it spits in it.

French President Francois Hollande said no decisions had been taken on using the funds to buy debt, but that the idea was worth exploring and would be discussed at a meeting between him, Monti, German Chancellor Angela Merkel and Spanish Prime Minister Mariano Rajoy on Friday.


"Italy has launched an idea which is worth looking at," Hollande told reporters in response to a Reuters question.


"We are looking for ways to use the ESM for this," Hollande said. "At the moment it is just an idea, not a decision. It is part of the discussion."


Merkel has signaled in the past that the funds could be used to buy bonds, but that is unpopular in Germany and would require the agreement of other euro-zone member states.


The idea was set out by Italy's Europe minister, Enzo Moavero, in Brussels on Monday.


Moavero said the plans would also be discussed at a meeting of finance ministers in Luxembourg on June 21-22.

Note the "no discussions" had taken place to replace the SMP with ESM. But even if that did happen, and the ESM is perfectly in its right to buy Spanish debt, the only thing it would achieve is subordinate existing debtholders even more.

At least one person gets this: Credit Suisse’s Andrew Garthwaite said in a note that the reported proposal by Italian PM Monti does "little to resolve" the 3 main problems - growth, PIIGS solvency, and need for a banking union.

  • Isn’t clear if ESM / EFSF “has enough firepower to make a sustainable difference;” cites maximum lending volume of €500 billion
  • Any crisis resolution will have to have the ECB at its core

Finally, Germany has spoken, and has dashed all hopes once and for all that it is not the ultimate paymaster in Europe, superseding even the ECB. From Market News:

The German government on Wednesday reaffirmed that the European bailout funds EFSF and ESM won't be able to buy bonds of EMU member states on the secondary markets without these countries applying formally for such aid and accepting the conditions tied to it.


"Such secondary market purchases are foreseen as one of several instruments in the EFSF as well as in the future ESM," government spokesman Georg Streiter said at a regular press conference here. "They are naturally tied to conditions and there won't ever be any purchases without conditions."


Commenting on Greece, Streiter said Germany expected that the new government there will abide by the fiscal consolidation and reform program agreed with the EU, the ECB and the IMF.


Yet, finance ministry spokeswoman Marianne Kothe said at the same press conference that regarding the timetable of the consolidation and reform program "small adaptations can be made, as has been already the case before."


German Finance Minister Wolfgang Schaeuble told German weekly Die Zeit in an interview to be published Thursday that "we did not ask too much of Greece and we won't ask too much of Greece."


ECB Executive Board member Joerg Asmussen, a German national, said Monday it was too early to tell if Greece should be allowed more time to meet its goals. One must first see how the new government judges the state of the economy and the progress on reforms, he explained. Asmussen also warned that giving Greece more time meant automatically that "there will be an additional external financial need."


A senior EU official said Tuesday that Eurozone finance ministers are expected to open talks on modifying the details of Greece's second bailout program because months of political paralysis in the country have caused reforms to stall.

Well that about kills the existing rumor mill.

Now let's see what rumor that Germany has completely changed its policy of pushing the Eurozone to the brink of default, keeping the EUR lower (and its export sector humming), keeping its mercantilist trading partners on the edge of disaster and thus demanding a bailout at any condition that Germany sets (the last being most critical), can give us today...


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