Sunday, October 09, 2011

The Merkozy Line

The two chief Eurostriches had a meeting yesterday. Did we learn anything from their comments?

"We are determined to do what is necessary to guarantee the recapitalization of our banks," So they now know that their banks need re-capitalising even if we've all know it for more than a while, but what is more, they will do "what is necessary". Like re-capitalise them we hope.

"We will make proposals in a comprehensive package that will enable closer cooperation between euro-zone countries that will include changes to treaties." This could encompass many things from changing the rules within the current Euro group to trying to drag in the new members to contribute more. Poland, is that you hiding behind the sofa looking smug? TMM hope it will also include a change to the mandate of the ECB. handing them a full pin cushion of new needles for their compass. Fat chance.

"We think the troika will propose a sustainable solution for Greece," "We are working closely with the troika. Greece is part of the euro zone and we will find solutions to ensure the financial stability of Europe and a long term solution for the Greek problem." The first statement hints that they know what the Troika has up their sleeve but the wording of the second "we will find solutions" implies they haven't yet got any. Sounds like hope, but it is more likely they will back any Troika plan that may work even if it entails national expense.

"It's not the moment to go into details of all questions," Because they don't have the answers? Or an implication that it is so cunning it needs a grander unveiling.

So basically they have decided they could probably get away with another month of procrastinating before they have to pull the rabbit from the hat and are hoping that sounding pretty serious about it will once again buy them a couple of weeks in which to cobble together something more lagomorphic than strong words.

TMM have for a while been suggesting that one of the prerequisites of a successful European bailout plan is to "Keep It Complicated Stupid" to prevent the public asking too many focused questions about what is really going on whilst providing just enough clarity for the markets to regain comfort. We had assumed that said complexity would be built in to a single EFSF/SPV/IMF/Bank recap super weapon that would be wheeled out of the Frankfurt financial armourers shed. However, it is dawning on us that complexity doesn't have to be within a single plan, but can be achieved by implementing many simpler separate plans at the same time. We may be preparing for a tiger when perhaps it is more likely to be an army of ants. Over the past few weeks there have been various plans and ideas mooted that individually have been found to be lacking, but TMM have considered what could happen if many of them are implemented at once and wonder if the Euro solution could actually look more like this.

It certainly looks complex enough:

Lets have a quick look at the different campaigns:

EFSF - The world's financial spies and espionage units have deployed all their agents to try and get their hands on the plans to the secret bailout mechanism that Europe is trying to build as their ultimate terror weapon with which to defeat the enemy. TMM have already suggested their view of how such a plan should work and do see it containing the sub clause that will safety net the banks. But instead of being the solution we see it as just part of a bigger manoeuvre. Provided Spanish & Italian growth hold up (see below...) , the EFSF doesn't really need to be larger.

SMP - Out of sight and generally out of mind, but the SMP program has steadily been buying Italian and Spanish debt preventing yield from further deterioration. If the other actions can hold off any renewed attack then the ECB can keep providing conditional liquidity support ad infinitum. This is an interesting one, because the ECB have provided market discipline - to the Italians in particular - by requiring structural reforms and increased fiscal tightening in exchange for providing liquidity, without the negative side effects that Bond Vigilantes tend to bring with them (i.e. - yields spiraling to the point of turning a liquidity problem into a solvency problem).

Barroso Tax - In launching the Brussels proposal for a financial transaction tax that would most significantly damage London, Barroso has effectively pinned down the UK's forces, leaving Europe to solve its own problems without UK interference. Indeed, the Barosso tax threat may be used as a stick with which to later "encourage" UK participation in the rescue. This is typical of European Commission salami tactics.

Berger Wave 1 - The Roland Berger suggested solution is plausible for Greece, even if it isn't suitable for the Spanish and Italian behemoths. It can be considered as a tactical solution to Greece.

Berger Wave 2 - If Portugal and Ireland completely collapse then the Roland Berger plan can be used as a model to rescue them, should a rescue be needed.

Finnish Feint - The Finns have agreed to the enlargement of the EFSF conditional upon collateral, but the collateral deal they have agreed to is so onerous, involving the proceeds of the sale of existing Greek bonds, that it's unlikely anyone else will push for a similar deal.

GDP - Quietly in the background, Irish and Spanish growth has been doing relatively well. Given enough support, this local resistance movement could make life painful for the bears. This morning's Industrial Production Paratroopers have had significant success in discrediting the recent PMI numbers, particularly in Italy where IP jumped sharply, reducing the risk that Italy falls victim to economic contagion from Greece.

Helios - As with all European "Grand Plans", the diktat from German Finance Minister Schauble several months ago was that Greece's growth model should involve exporting solar power to the rest of Europe. TMM thus found last week's approval of a EUR 27bn solar energy development in Greece particularly notable.

US Growth - It has become particularly apparent that the US data have not collapsed, with ISM refusing to plumb below the 50 level, and the employment report revising away this summer's jobs slowdown. With most indicators now consistent with trend growth for Q3, there is hope that a convoy of better US growth may be coming to assist (as opposed to arriving two years too late).

SWFs - The most critical part of the plan. Everything else is working towards the Sovereign Wealth Funds and other regular investors regaining enough confidence in Italy and Spain (Greece being a lost cause) to start buying again. If they do, then not only are those countries back from the brink but the European banks will see their capital recover as the peripheral debt they hold rallies. The short term objective is to crank up the EFSF or an SPV to a suitable credit rating that will prime the pumps. But ultimately for direct investment.

Bank Red Cross Packages - Beginning with Dexia and the Merkozy agreement to recapitalise Europe's banks in a coordinated fashion so as to reassure markets that senior bank bondholders are not going to be hit, unleashing a wholesale run on the banking system a la 2008.

Anti-Ratings Agency Guns - Shoot them down before they bomb anymore countries.

Now this may not be "the" solution , but TMM do think that we should stop looking for a single solution and instead consider what would happen if all the suggested policies are implemented as part of a of a more complex Masterplan. Let's face it, when has Europe ever been won without the involvement of many armies fighting on different fronts?


Anonymous said...

V interesting. I guess a Method in the Madness view. Though markets would prefer a large simple ECB print plan.

Leftback said...

Misdirection day today. US bond markets closed and we will flirt with the 50 DMA at 1177 for most of the day. EURUSD squeeze driving a one day version of DGDF. Ignore this. More Bucky bounces ahead.

It's all very well to buy the bank recap rumor, but if that is in the works, then defaults and haircuts are ahead. Best to be cautious on Europe and EURUSD. It is still a massive dog's dinner, as illustrated.

Anonymous said...

Myrmelachista schumanni ant attack...Dexia.
Dexia is bigger than the entire GDP of Belgium. Ratings downgrades for Belgium are next and with it increasing funding costs. France takes on 40 percent of the "bad" bank putting their AAA at risk and lessening their ability to fund other bailouts.

Anonymous said...

Today you've truly surpassed yourselves!

I'm linking that map (luv the curlicue away from Greece) wherever and whenever I can.

Corey said...

Vhat, vhere aur ze panzers?!

Zhey must have gotten PINned down trying to cross ze Alps!

MoreLiver said...

Excellent map. Partial reposting soon. Thank you, TMM. Surprised how much risk-on an announcement of a possible announcement one can get.

Leftback said...

Greek bonds not exactly surging on this news. Well, OK, the yield is surging......

Anonymous said...

Slovakia aside the Whole enterprise at this point hinges on France's AAA rating. This is the real sarkozy line. at the negotiations in the coming weeks (and don't kid yourself, there are still fierce negotiations going on) the decision to use the EFSF to recap French banks will be settled. if Germany wins then France will be on the hook for more than Dexia, and their AAA will be in jeopardy. A negative watch by one of the ratings agencies will be all it takes.

Keep in mind that what makes the process so cumbersome is that Every member is playing the dangerous game of preserving the union whist jockeying for their own national advantage. To think otherwise is historically naive

Leftback said...

We have been wittering on here about Austrian bank exposure to Hungary after writing loans in CHF. That bird is finally coming home to roost:

Erste Bank Writedowns

Leftback said...

Apparently Erste were also writing CDS a few years back and those positions have been "marked to invisibility" in the balance sheet until quite recently.

The conservative and friendly Austrian people are going to be quite ticked off when they discover that not only are they going to be bailing out the profligate Greeks, but some of their own bankers, Irish style.

Occupy Wiener Börse will be out there in no time....

ntwsc said...

Ohh nooo, occupy Wiener Börse - whatever will Fekter come out with next then.

Smashing Monday morningish read btw, ta Pol.

Polemic said...

Sorry we have been so unresponsive in the comments column for a while. Been holding our breaths hoping for last tuesday's call to play out. So we are pretty happy now and willing to curse our luck by emerging again.

We actually see this phase of the market as denial. So many folks expressing "I dont understand" that it implies a load more "I don't understand" capitulation to come. Yes its a relative holiday, yes its thin etc etc .. but if it rips higher again tomorrow the air is going to be white with towels. And we will be happy.

Thanks for your kind complements on the map , there is a Macro Daughter here smiling at the reception of her artwork. Amazing what they teach school kids to do on "word" these days. I thought it only did "word"s.
"Daddy whats an SMP MAIN ATTACK?"
Don't worry love .. hopefully you'll get a proper job and never have to know.

LB do we care what Greek bonds do on all this ? Whether they go up as deals mean the banks have to pay less, yet the Sovs have to do more of the bail out, or they go down and the banks pay more and the sovs less, net net as we know sovs bail banks its all the same pot. Surely got to watch Italy and Spain as they are the real measure of euro package success. Watching Greek bonds is like watching which way up a corpse is floating.

Talking of occupy Wall Street, Wiener Borse etc.. be interesting to see which part of London they'd chose. Stock exchange? empty relic .. have it .. Mayfair for HF's, or Canary Wharf for the odd tall shiny bank. Hope it's Canary Wharf. ...they'll all then leave in sympathy.

oh and thanks ntwsc


Polemic said...

Oh and anon . i looked up those Myrmelachista schumanni .. interesting.. and they taste of Lemon !! Though wonder who first tried that stunt on a stag night.

Anonymous said...

I wonder, has Macro Daughter been watching Dad's Army?

Anonymous said...

Shouts from the audience...

Bail me out!
No bail me out!
Bail me out or else!
Bail them out to bail me out!
Bail me out to bail them out!
Bail them out to bail me out to bail them out or else!

Amplitudeinthehouse said...

This threads theme is sounding more and more like a breakout is on the horizon...gosh-golly-god!!!is it happening?

charles said...

Regarding the Helios Project, it is even worse than you think. See and
Essentially, Germany would finance solar panels (hopefully German-made) by securitizing the money flow of feed-in tariffs, that is itself "guaranteed" by the greek government and paid by greek customers.(euphemism du jour in Bloomberg : "I’m not sure the government will have the money to pay for a feed-in-tariff that’s guaranteed for 20 years") It looks like increasing electricity bills is the new game in town in terms of squeezing the greek citizen stone.!
As for exporting that power, you will need lot of persuasion to persuade Austrians to crisscross their mountains with High Voltage lines.

At least, now we know why the Finance minister became the Energy minister !

PS : after thinking about it, it could be a, rather scary, compromise for the EFSF : German accept the bail-out of french banks in exchange of the bail-out of the German solar manufacturer... Eurozone intergovernmental version of pork !

Leftback said...

Off topic for a moment, since today may be a snoozer.

The protests are much more interesting and important than people realize, and trying to read it in left/right political terms is asinine.

These Occupy Wall Street protests are the first verbal shots in an inter-generational conflict that will continue in the US for decades as the smaller Gen X, Gen Y et seq. groups enjoy the privilege of carrying the aging Boomers and their associated costs on their backs to work every day.

People who view the US as an enlightened, "free" and democratic society will be quite shocked when the National Guard is called out and we have our very own Kent State moment.

It will happen - the US élites think they are untouchable, but when the spectre of true free speech appears before them, they will panic and start shooting, as their fathers and grandfathers did before them.

Leftback said...

As for this market, I still don't quite see how we break out of the present trading range. SPX 1200 always brings out sellers. Crude oil still seems too high, the USD will probably rise b/c of EURUSD weakness, and that means more pain or chop ahead for energy and materials. So does a giant squeeze in the financials automatically mean an upside breakout? Not yet.

We are about 65% long, still think we end the year with a rally, but it will be a bumpy ride with a lot of strange misdirections likely during the US earnings season. So modestly bullish, but also cautious here.

Those who are enthusing about the Euro bank bailout might want to consider the likelihood that the burden of recapitalization may include a private sector component, i.e. issuing more shares, and therefore dilution is not out of the equation.

Leftback said...

Say what you will about Krugman, and I am not always a fan, but the man knows a bloody good bandwagon when he sees one and is extremely articulate. There is more than one extremely talented polemicist in our midst:

Panic of the Plutocrats

Better get used to this kind of stuff. LB thinks it will be wise to go to work dressed like a janitor for a few years, like the 80s, we may have to leave the pinstripes in the office.

The counterpoint to all this is, of course, that nobody was actually forced at gunpoint to take out a monster mortgage and a HELOC on their lovely but somewhat commonplace split level ranch. Many economic actors neither borrowed nor lent during the binge years, but we sure as hell are going to pay for the cleanup. It's a huge headache.

Anonymous said...

C says'
many years ago I was doing my degree and as part we ran business competition where everybody got certain resources and ten was intended to use them according to well established qnantititive principles. The game was supposed to run for 6 months ,but it was ended after 2 months because it was apparent the most successful player had made it impossible for anyone else to compete so the game was over from a practical point of view.
What in heavens name as this to do with anything?
In essence the game of skewed rewards is over even if the major players have not even realised it yet.You could say these protests are an early first recognition of that process.Yes,I'm sure there will e the odd smirk or two at that.
I'd suggest they think about what this really means in terms of the economic game.Are the current trends in wealth distribution really going to lead to sustainable growth when the 90% who are losing in this game are finding it harder and harder to stay in the game of 'growth'?
I could trace this nonsense back for you ,but if you've any real interest you could do it for yourself without my help.
I simply point out we are in a generational transition in certain aspects of how our financial system works and given I have nothing riding on it at my age I'm going to be entertained watching it work out.

Leftback said...

While we are reviewing polemics and rants, there are all kinds of very odd people out there calling for Debt Jubilees and the like. Now, is LB the only one that thinks this kind of thing is stark staring bonkers?

Debt Forgiveness?

I cannot for the life of me figure out where the author is coming from or what kind of economic landscape he envisages at the end of his rant. The fact is, this huge mess is all going to have to be worked through. Very slowly, with some modest episodes of printing, in a rather unpalatable, terribly unexciting, and yes, remarkably un-American way. Turning Japanese....

Leftback said...

Not that it is a very important company, but AA just reported 13c for Q3 and is being sold hard right now.

Industrials, miners and I-bank earnings will be poor for Q3. Retail, money center banks and tech may be much better than expected.

Leftback said...

Slovakia said NO. Cue more Eurobolleaux™?
USD/UST safe haven trades might be on again.

Leftback said...

The aluminum producer has been canned by many investors this evening...

Anonymous said...

LB, are you kicking the Can?

Anonymous said...

So is this just another playful squeeze, or is Mr Market really pleased to see me?

Leftback said...

To put it another way, does anybody have any idea what EURUSD is doing up at 1.38 with Eurostriches still mumbling incoherently but doing nothing?

We are encouraged to see some signs of life among the Carry Monkeys (AUDJPY), but a bit bemused by the latest round of DGDF. Maybe it's just that a few too many players had been backing Bucky*?

* Backing Bucky = an analog of Bashing Betty.

Leftback said...

50 bps of relief in the 10y and this tool is already calling it a "rout" in the Treasury market as investors "flee" the "debased dollar". What a silly bunt. What do these people have on their corn flakes in the morning? Amphetamines?

Sky Falling at Long End?

A bit of spread tightening and fading of TEOTWAWKI crowd hardly constitutes a rout in the Treasury market. Let no-one be fooled that last Friday's US jobs data was evidence of "Morning in America".