One Day After The Euphoria, Here Comes The Hangover

Now that the kneejerk euphoria, in which nobody had done any work, confirming that the only thing worse than a clueless Europe is an even more clueless market, over the non-bailout has ended, here is the hangover, courtesy of Tullett Prebon.

From Tullett Prebon

It isn’t now…euphoria has greeted the latest rescue plan but stock markets really should get a grip-the grand plan is riddled with pitfalls if not yet holed beneath the water line:

  • The voluntary haircuts have still not been fully acknowledged even from the original 21% let alone 50%
  • ECB and Troika investments are protected (circa Eur 150 bio)-if Greek bank and pension funds are also ringfenced, otherwise they are bankrupt, this is another Eur 85 bio or so which leaves approximately Eur 120 bio of the Eur 350 bio to be restructured i.e. an Eur 60 bio loss but there is a sweetener (credit enhancements) of Eur 30 bio to offset this which makes Eur 30 bio.
  • The debt is projected to be 120% GDP after 8 years, pretty much where Italy’s is now
  • The Eur 1 trillion has not even been established yet, thus the begging bowl to China (Brazil and India have already said jog on). What inducements will be offered?
  • 20% first loss insurance will potentially mean lower rates for insured bonds more pressure on the uninsured
  • No strategy whatsoever for employment or to correct internal or global trade imbalances. Austerity measures continue to asphyxiate the continent, tax revenues collapse further, depression looms, debt levels surge (again)-ECB raise rates(doh!!)

So, all in all, nice try but no cigar-expect more summits sooner rather than later and they won’t be discussing the eonia fix which fell 2.3 bps last night to 0.923% and is foreseen slipping further this evening. The average this MP is presently just under 0.94%-Tuesday may well observe a settlement in the 0.80%s so that, despite the month end turn, which ought to be fairly innocuous, and the make up day on 8th Nov, the eventual tally could be nearer to 0.92%. All things being equal, the dampening effect of the 12 month SLTRO injection is favoured to slice 2/3 bps off this number for the November MP assuming no rate cuts are forthcoming
"[Europe is] a monument to the vanity of intellectuals, a programme whose inevitable destiny is failure: only the scale of the final damage is in doubt"  Margaret Thatcher (she did, however, sign the Single European Act onto the Statute Book!)