Report on the Euro and European Financials for July 20, 2011
1) … Juergen Baetz and Angela Charlton of the Associated Press report from Berlin France, Germany in last ditch crisis talks, the eurozone’s economic powers are struggling to agree on a new debt crisis plan to present at an emergency EU summit, with Germany downplaying calls from France and Brussels for a big announcement that could boost market confidence and contain the turmoil. French President Nicolas Sarkozy was flying to Berlin on Wednesday afternoon in an apparent last-minute bid to strike a deal with Chancellor Angela Merkel on some kind of new aid package for Greece. European Commission president Jose Manuel Barroso said “nobody should be under any illusion, the situation is very serious.” He said that at the very least, leaders need to present how they will make Greece’s debt sustainable, under what terms private creditors will have to contribute to a new bailout for the country, and what new powers to give to their bailout fund. European leaders have faced criticism for their slow, piecemeal efforts to stem the debt crisis. The IMF urged European leaders to act more boldly, warning that there is “no consistent roadmap ahead” and that this could produce “possible significant regional and global spillovers.” Merkel has opposed a restructuring of Greece’s debt that would force losses upon private sector creditors as well as any notion of creating eurobonds, debt that links different countries together.
The first would see the eurozone’s bailout fund finance a buyback of Greek government bonds at their current distressed prices, paired with guarantees that the remaining bonds would be repaid. That option would give the Greek state the biggest short-term relief, but may be the most expensive for the eurozone.The eurozone would not only have to fund the buybacks and repayment guarantees, but the paper says they would likely be seen as a default by rating agencies. That would force the eurozone to come up with the liquidity support for Greek banks that would be cut off from the European Central Bank’s financial life support.
The second option reverts to a proposal made by French banks several weeks ago. Banks would reinvest part of the money they collect from maturing Greek bonds into new bonds with long repayment deadlines.
However, that proposal would still trigger a “selective default” rating, requiring liquidity and capital support for Greek banks. It would provide significant short-term relief for Greece, the paper says, but should come with lower interest rates and longer maturities for the eurozone loans.
The third option is the only one that would avoid a default rating, but will likely run into huge opposition from banks that don’t hold Greek bonds. It proposes a tax on the financial sector to recoup part of the money the eurozone will have to lend Greece under the second bailout. However, it would only result in small relief for Greece.
I ask will there be a big agreement or a big event? I believe the latter, not the former.
Open Europe reports the IMF called for greater fiscal union yesterday, with Antonio Borges, Director of the IMF’s European department, saying, “To put the crisis behind, we need more Europe, not less. And we need it now.” An IMF report released yesterday called for “decisive action” on the crisis, warning that without a solution the crisis could cause problems for the global economy. IMF staff also called for the temporary eurozone bailout fund, the EFSF, to be used to purchase government bonds directly and to recapitalise banks. FT Deutschland reports that tomorrow’s summit will consider introducing a flexible credit line to the EFSF, which could issue loans to Spain and Italy outside of a full bailout agreement, as well as an increase in the size of the bailout fund
Open Europe reports Ewald Nowotny, Governor of Austria’s Central Bank, caused Greek two-year borrowing costs to jump nearly 5% yesterday when he suggested that a short-term “selective default” by Greece might not have “major negative consequences” – the first time a member of the ECB Governing Council has broken rank on the issue.
Open Europe reports Spain managed to auction €4.45bn of short term debt yesterday but at significantly higher costs, with the borrowing cost on twelve-month debt 1% higher compared to last month. Open Europe’s Raoul Ruparel is quoted in the Telegraph suggesting that contagion fears may be changing Italian and Spanish views on private sector involvement in a second Greek bailout. Open Europe’s finding that the ECB has an exposure of €444bn to struggling eurozone economies is cited by Kurier.
Open Europe reports Writing in the FT, columnist Alan Beattie argues that the “risk to [the IMF’s] reputation is beginning to outweigh the benefit from its presence” in Greece, and that “the possibility that the fund will disengage from Greece is increasingly under discussion in Washington. The IMF is supposed to be there to smooth over liquidity problems, not to pour good money after bad by lending to insolvent governments. If the eurozone wants to follow a boneheaded rescue strategy, let it pay for it.”
Wall Street Journal reports The Spanish government wasted little time dismissing the results of last week’s EU stress tests, which gave failing grades to five Spanish banks. And perhaps Madrid can be forgiven a little indignation at this stage, having disclosed far more about its banking system than the rest of the European Union. German state-controlled lender Helaba, for example, would probably have joined the Fail Club had the bank allowed its results to be published. Spain’s savings banks, the cajas,remain riddled with serious problems, meaning their lenders in Germany, France, Britain, the U.S. and beyond could have serious problems as well.
2) … International Forecaster relates collapse unfortunate but inevitable. The problems in Europe are never ending. The solvent countries are discovering what we discovered a year ago May. The cost of the six-country bailout we projected at $4 trillion. A month ago we increased that to $4 to $6 trillion. When we said $4 trillion Germany said $1 trillion. This past week they said $3.5 trillion. We wonder why it took them so long to catch up. As of this writing the Greeks have signed a bailout deal but the lenders still do not know what they want to do. They are finally reaching the realization that they cannot be serviced never mind be repaid. You can cut wages and spending 40% or 50% and not expect revenues to fall.
At least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade, Moody’s Investors Service said. An “automatic” downgrade affecting $130 billion in municipal debt directly linked to the U.S. would occur if the federal level is reduced, Moody’s said yesterday in a report.
Additionally, top-rated securities with no direct links to the national government will be reviewed for similar action.
Municipal debt including mortgage-backed bonds secured by the U.S. or agencies such as Fannie Mae and Freddie Mac, would be trimmed with the federal government, Moody’s said. It didn’t provide a total value for other state and local credits that may be affected, including housing authorities and nonprofits.
“Between now and the end of July, we’re going to evaluate all of those issuers using the same quantitative metrics that we have developed,” Naomi Richman, Moody’s managing director of public finance, said yesterday by telephone from New York about the indirectly linked securities.
“In the event that the U.S. government is downgraded, we won’t automatically downgrade those,” she said. “We’ll do a full review that we would normally do on a state rating.”
Moody’s put the U.S. rating under review as talks stalled in Washington on raising the government’s $14.3 trillion debt limit. Democrats including President Barack Obama want to raise taxes to curb the national deficit while congressional Republicans have sought deeper spending cuts.
The company rates 15 states at Aaa. It also gives top marks to 440 local governments, 100 state housing bond programs, 43 higher-education and nonprofit institutions, a like number of state revolving-fund bond programs, and the Tennessee Valley Authority and the Bonneville Power Administration.
Issuers that are partially dependent on the federal government, such as states receiving Medicaid matching funds, also will be reviewed for vulnerability. Medicaid is a health- care program for the poor that is jointly funded by the states and the U.S. Moody’s said Aaa-rated states on average rely on the federal government for a quarter of total spending.
3) … The world is passing through peak credit as is seen a number of metrics such as in the 300% of US Treasury Bonds, TMF, topping out.
The 10 30 Yield Curve Daily, $TNX:$TYX, is bottoming out, suggesting that interest rates will be heading higher.
The chart of the day is that of Banks, KRE, which ominously manifested a long legged doji in a bear cross.
The failure of the seigniorage of neoliberalism, and the exhaustion of quantitative easing is seen in the ratio of the gold mining stocks relative to the 30 Year US Treasuries, GDX:EDV, manifesting the entrance into an Elliott Wave 3 Down with an evening star doji; these always make market turns together. The chart of this ratio suggests that both will be turning lower once agian.
The chart of bonds, BND, is clearly topping out.
The ratio of BLV relative to LQD, BLV:LQD, is entering an Elliott Wave 3 of 3 down.
4) In other news
Zero Hedge documents China’s Mysterious Multi-Trillion Shadow Banking System.
Andrew Taylor of the Associated Press reports Obama Calls Democratic Leaders to White House. President Barack Obama summoned top Democratic lawmakers back to the White House Wednesday to resume negotiations on averting a potentially crippling default, as attention focused on an emerging bipartisan budget plan.
5) … Commentary: European Sovereign Debt Is Too Big To Repay
Steven Erlander and Rachael Donaldson of the New York Times report that “Jean Claude Trichet will not accept any kind of default or credit event over Greece. What he wants the analyst says is a comprehensive solution that protects the central banks balance sheet from a markdown to Greek debt and recapitalizes commercial banks exposure to Greece, inevitably with taxpayer money. But the need to inject more public money is what Germany and its allies do not want to do, because critics charge that recapitalization would represent a transfer of funds to undeserving (read socialist) countries.”
Greeks cannot become Germans. Socialists cannot become libertarians. All European must and will become one, serfs living in debt servitude. Thomas L. Friedman writing in New York Times editorial Can Greeks Become Germans? communicates that Socialism in Greece produced a government and economy characterised by patronage and pork,
Debt which served as the seigniorage of Neoliberalism cannot be repudiated; it must be and will be applied to every man, woman and child on planet earth.
Neoliberalism’s democracy and socialism’s ills will now be replaced with neofeudalism‘s diktat and austerity.
Out of Gotterdammerung, a clash of the gods, that is the rating agencies and the ruling elite, there will come an economic collapse, characterised as a head wound, that is a stroke to the world’s most important institution of finance, investment, commence and trade. Out of this casos, will come order: a European Chancellor, the Sovereign, will rise to power. It will be one for all and all for one; one governor and one government. This One Leader will establish a One Europe Government, based upon regional framework agreements, where state leaders waive national sovereignty.
The Sovereign, will be accompanied by the Seignior, who will provide a new seigniorage, which will be more political than economic. The word, will and way of these two will provide the New Seigniorage, that is the new moneyness. In as much as Greece has lost its debt sovereignty, it must and will sacrifice its fiscal authority. Greek socialism stands as a white washed tomb full of dead men’s bones and a prosperity that came through a currency union.
Symbols: TMF, KRE, EUFN, FXE, MUB, TMF, KRE, GDX, EDV, BND, BLV, LQD, ECH, IGN
Keywords: Transfer Union, Peak Credit, Ewald Nowotny, Sovereign Crisis, Sovereign Debt Crisis, Gotterdammerung, Fiscal Union, One Euro Government, European Economic Governance, The Sovereign, The Seignior, Neoliberalism, Neofeudalism, Global Economic Collapse, Municipal Debt, Jean Claude Trichet, Socialism,