When there is a gap between political possibility and financial necessity, Europe tends to end up right in between. It’s a comfortable position, you can patch over the worst problems, and if there are any problems you could deal with them later, while still claiming you did more than anyone could logically expect from you. We are right back where we were this summer, and here’s why:
- Leverage the EFSF? Your “big bazooka”? Totalling €1tn? There could be an application of the other meaning in ‘totalling’, as in ‘dude, that car got totalled in that crash!’ and it has not gotten out of the EFSF equation yet. Follow closely. If you leverage, you are playing with money you don’t have, ideally to enjoy potential benefits you could not have otherwise. In this case, it was the idea that if you provide more than enough money, the system is safe and if you believe as the Europeans tend to do that all is really well and bond traders are idiots who happen to use facts to support their case until the truth is revealed, then yes, leverage until the storm goes over and things are fine and no harm, no foul can be sung around Brussels to the tune of champagne glasses. Now, the downside of playing with other people’s money is that you incur risks on them that they might not want if things get sour and thus try to sell it off in some strange derivatives and hedging strategies. This is basic Awake in 2008 101 class, welcome back. Thus, if you leverage for psychological effect (instead of as for risk, which currency traders do all the time) you can’t risk losing, because if you do your core capital goes away faster than it would otherwise! Now… why on earth would you then go below the estimates of €2tn+ which were around everywhere prior to this meeting as the minimum needed to ensure total stability? You’re at the level of what Italy, Spain and Belgium need over the next 3 years! Political reality? Then you would have defaulted Greece 18 months ago and saved yourself the pain! Now you’re below the calculated “shelter if hell breaks” point which makes you a target, and still playing with a ton of other people’s money! This can’t end well… Again, the midpoint between political possibility and market necessity…
- Details to be announced later. Uh? Why on Earth… Greece is still burning, Italy is getting hotter, and “details later”. You argued for 6 days and are still employing the “dog ate my homework” strategy? Shut up and leak something to keep markets happy and then provide the full package, gift wrapped and ready a few days late!
- 50% ‘voluntary’ writeoffs (from 21% so another 36.7% off present value of principal) which sets Greece on the way to an amazing 120% Debt-to-GDP ratio in 2020 if no numbers are fudged from here to there and taxes can be collected and the entire country doesn’t preoccupy itself with strikes and getting drunk mid-day! Eight years of misery, and they’ve had two so far, and then they’re still having a prohibitively high level of debt. Wow… why not 70% haircut which the market priced it at? You needed to avoid an actual default right? So… Greece still can’t pay, and if you’re surprised what their austerity has one to growth so far, just you wait until stuff goes south sometime in the next 8 (or 20) years and no one buys Greek vacations or food and a few more state assets are worthless… Again, middle of the politically possible and the market necessity…
- €100bn to shore up banks? Something smells fishy here, and that is way outside of the growth outlook that this imposes on the eurozone. Again, either make it explicit that things are going south, and unless you have x ways of ensuring yourself of funding in y scenario, no bailout money. Or just give them a blanket cover until everything is fixed and then exact a pound of flesh.
- Slamming Greece in harder verbally? So that it becomes even harder to wiggle out should things become even worse (which, cooked books ensuring, they already are) and you have already pushed bondholders to the very limits of acceptance on ‘voluntary’ (please explain this to me…) terms which pretty much freezes them out next time? I can’t wait for December, but this year I can’t have those long Christmas socks outside my door for Santa to put gifts in! 😦 Ok, you want to make them more disciplined? Here’s an experiment: we’ll pump your lungs full with water and ask you to remain disciplined until you can run a marathon. When you faint we will give you cpr, wake you up, scold you for failing, and repeat. Place bets: Drowning vs. finishing marathon.
The way things look now is pretty grim actually. Greece looks set to be between a rock and German politics. Banks look flailing a little bit everywhere and €100bn sounds like chump change in the context should liquidity dry up. The EFSF should last maybe 2 more years, assuming France remains AAA and Italy and Spain won’t really need funding. Banks are taking more losses than they could probably afford and will likely therefore end up being a heavier drag on the EFSF, and we still don’t have details? Say after me: This is why the markets are having a relief rally. Lets see… I’m giving this one a year at best, but guessing things will start going south after the US budget debate kicks in again and Greece enjoys its new hot seat in trying to squeeze another tranche of bailout money out of a reinvigorated and retrenched Troika. This is gonna be one hell of a hangover…