The perfidy of EUROPE has led down a path of possible financial ruin as the EUROCRATIC ELITE have lived in a fantasy land denying that the markets have had a better understanding of the ills plaguing European finances. Tomorrow, the Brussels bureaucrats and their political comrades will announce what type of program has been crafted to halt the spread of FINANCIAL CONTAGION. The EURO currency was well bid early in the day as the market was breathing a sigh of relief that a genuine plan is in place to stave off default and build a fire wall to protect Italy and Spain. The Italian BTP futures rallied again against the BUNDS. In CASH terms, the Italian 10-years were 14 basis points lower while the BUNDS were 9 basis points higher.
The markets got word that the Europeans are going to utilize the European Financial Stability Facility (EFSF) to buy a huge amount of secondary sovereigns and also take poor collateral from the banks. Presently, the EFSF is guaranteed 440 BILLION EUROS by the nation-states of the EU. There were rumors flooding the markets that the value of the EFSF was to be raised to 2 TRILLION, thus providing the bailout facility with enough firepower to buy a great amount of distressed sovereigns as well as have enough to prevent a credit crisis in the large European banks. Again, this is all rumor with nothing confirmed until sometime tomorrow. There were so many articles making the rounds:
1. How to contain the European Debt Crisis (Francesco Giavazzi and Anil Kashyap)
Main points are centered on the idea of the strong core of Europe pooling their assets to expand the EFSF so as to backstop the banks against all losses and possible defaults. The authors admit that this type of plan would be unpopular in Germany and the other strong core nations but that should not be a problem as the taxpayers would be protected by the collateral of the failed sovereigns. They would own the banking systems in those countries. One big question: How do you value the collateral?
2. EU Said to Weigh Using Bailout Fund for Crisis Credit Lines (James Neuger)
Covers a lot of ground on several different proposals but the mainstay again relies on utilizing the EFSF, but doesn’t put a value on the size of the money to added to the EFSF guarantees. “Discussions of more flexibility for the EFSF come on the heels of last month’s accord to boost its lending power to its original target.IMFstyle credit lines would enable countries with stronger fundamentals than Greece to ward off speculative attacks.
3. I would add my own to this: Be prepared for an announcement of support from the world’s CENTRAL BANKS as the BOJ, BOC, BOE and the FED are all on record of being worried about a LEHMANESQUE FINANCIAL CRISIS. Look for a massive package of international support.
If the EFSF were to have its lending levels raised to the 2 TRILLION EURO amount, what should we look for as far as the market action? The first reaction would be for the EURO to rally as the risk-on crowd will finally be able to breathe as it has been suffocating under the threat of massive defaults in EUROLAND. A EURO rally would lead to RISK-OFF and the siren call of WHEN IT’S ALL CLEAR … but not so fast.
THE QUESTION THAT ULTIMATELY HAS TO BE ANSWERED IS: WHO WILL PROVIDE THE ULTIMATE GUARANTEE FOR THE EFSF? IF THE GERMAN POLITICOS, EXCEPT THIS SOLUTION, THE BUNDS WILL BE A SALE AS THE GERMAN CREDIT RATING HAS TO BE LOWERED. A GERMAN GUARANTEE WOULD MEAN THAT THE EUROPEAN UNION IS NOW ESSENTIALLY A FISCAL UNION AND THUS A TRANSFER UNION AS THE BAVARIAN BURGHERS ARE SHOULDERING THE FINANCIAL BURDEN OF THE ENTIRE EU. IF THE GERMANS SAY IT IS NOT THEIR RESPONSIBILITY, THEN IT MUST MEAN THAT THE ECB IS GOING TO PRINT THE EUROS NEEDED TO FUND THE INCREASED MONEY NEEDED FOR THE ENHANCED BAILOUT.
If the ECB‘s printing presses are the funder, it is a reason to see GOLD make new highs as the world becomes awash in another reserve currency. ANOTHER MARKET OUTCOME SHOULD BE TO BUY EQUITIES AND SELL BONDS IN ANY COUNTRY, FOR EQUITIES WILL OUTPERFORM DEBT IN A BAILOUT OF SUCH MASSIVE AMOUNTS. The BUNDS OUGHT TO BE UNDER PRESSURE, WHICH MAY WELL BE WHY THE BUND FUTURES FAILED TO RALLY. THE 2/10 GERMAN CURVE WILL STEEPEN. AGAIN, THIS IS ALL RUMOR SO I ADVISE WATCHING THE MARKETS FOR DIRECTION.
In an outlier to the entire EUROPEAN BAILOUT, the Financial Times today had an article by Alan Beattie, “Let Europe Pay for its Policy Failures.” This author is absolutely in la la land. He opines that the IMF must rectify the mistake it made by getting so deeply involved in the Greek bailout. He says, “The IMF needs to think hard about the company it chooses. Mr. Strauss-Kahn rightly took a calculated risk and got the fund into the thick of the capital markets firefight in Greece.
Christine Lagarde, his successor, might well be the one to organize it being airlifted out. Mr. Beattie, the France finance minister was rushed in to head the IMF precisely for the fact that she is the consummate EUROPEAN INSIDER. She is no more capable of letting Europe pay for its mistakes than Putin is of making political mischief. Sarkozy has been out front on his views about reordering the global monetary system from a DOLLAR STANDARD. Ms. Lagarde will utilize every penny at the IMF‘s disposal to insure against a credit catastrophe in EUROPE. The IMF Director will rush headlong into the fire with the WORLD‘s MONEY FLOWING OUT OF ITS FIREHOSE. Airlifted out–Alan Beattie get a clue. Lagarde will treat the IMF funds as a college freshman would with a no-limit credit card. Washington gave a SARKOZY MINION the keys to the Treasury. Wait for the bills to arrive.