Sunday, October 09, 2011
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?