EUROZONE RESCUE WEEK: They’re off! Germany starts to shift ground

There will be no haircuts in the hubris zone

As The Slog predicted throughout last week, this one’s Big Deal is going to involve letting the lenders off most of the hooks…however that might be disguised. This site’s endlessly identified jigsaw pieces are now falling more or less into place.

On Thursday in Toulon, Nicolas Sarkozy pledged that, once this crisis is over, no bondholder will ever again lose money in the eurozone. It wasn’t widely reported like that, but read the transcript – it is quite clearly what the bloke said: no more defaults – ergo, no more haircuts….no insurance backwash in the US, no banks ruined. Sorted.

Friday’s euro central-bank cash injection has given Lagarde holding money to stop Italy and Spain collapsing. And now – late Sunday evening EST – German diplomats are gradually leaking out the first elements of the Paris-Brussels-Schauble plan.

Reuters is first out of the blocks in the early hours GMT, quoting four (4) sources saying Germany will remove the overt  haircut-compulsion wording drafted for the permanent rescue mechanism (the ESM, due to start in 2013). This effectively says to future eurozone bondholding lenders, “Fear not, you’re almost guaranteed not to lose your shirts”. The imputation in the briefings was also very clearly that, with the 17 newly bound ezone members all fiscally subservient to Brussels, a sovereign guarantor of last resort is not far away now.

The markets will make their own minds up about that. As Reuters puts it, ‘The argument being deployed is that if iron-clad fiscal rules are adopted by the 17 euro zone members, the threat of default should be negligible and so, therefore, should the threat to bondholders.’

If any of The Slog’s German fans are reading this, feel free to create awareness of it in your blogosphere: my informed guess is that this represents about the last thing Germany’s voters would want….if they realised this was what they were going to get…ie, the drift towards a central Sovereign guarantor. (In case you’re wondering by the way, the lenders still haven’t agreed to or delivered on the much-vaunted Greek-debt haircut).

I would guess that the next stage of this so far anally choreographed run-in to next Friday’s Salavation Fest will be a statement from ECB head Mario Draghi. National eurozone central banks having paved the way for laundering bailouts through the IMF, Signor Draghi will now observe that, as the Merkozy is clearly fulfilling his call for “an immediate compact” for fiscal unity, he can in turn relax the controls on ECB bond-buying, and coordination with the IMF. Et voila – we have a loaded bazooka.

But there are many ways in which the German-led waltz could rapidly turn into a drunken hokey-cokey. All observers should bear in mind that:

1. An as yet incalculable proportion of the German banking community will be very pissed off….as will the senior CDU debt hawks duped by Das MerkeSchauble.

2. An enormous can of highly inflammable and unstable liquid explosive would be kicked down the road if the Schauble plan succeeds. The problem – debt dependency – is about to get much bigger.

3. You and I would indirectly pay for the lenders’ haircuts.

4. Vast numbers of imodium-chewing lenders and insurers on Wall Street could well be celebrating by next weekend….or catatonic with fear if there’s a fudge/an event/ a default.

5. Prepare, nevertheless, for a major spike in equities on this first news…building if the week progresses without ‘an event’. Do yourself a favour unless you’re an MoU: stay out of it.

6. From next week onwards – if the plan reaches fruition – the UK would be effectively shut out of all serious debate on the nature, fiscal management and economy of the EU. Executive power will now pass de facto to the unelected Brussels body demanding total and final say on all the spending plans of eurozone countries. The Conservative Party will spiral into a major battle about whether we should be in or out of the Union as a whole.

7. Keep a sharp eye on any and all evidence of funny-money being siphoned into French banking majors. The orchestrators of this ezone/markets denouement will do whatever it takes now to try and ensure there are no bank collapses prior to Friday’s euphoria.

8. Don’t rule out these three wild cards: an attack by markets concerned that the degree of fiscal union winds up being too loose; and/or a rearguard action by German sceptics to wrestle Das MerkeSchauble to the ground; and/or a French AAA downgrade from one of the credit agencies.

9. Bear in mind the pressure on Sarkozy. It’s doubtful he can politically afford to subjugate France to Brussels overseers. But it’s doubtful if financially he can afford not to.

10. It is not inconceivable that the UK’s dirty-tricks axis might employ switch-gear muscle during the week in order to render bond-yield spikes critical – in, say, Spain…which is now, like Portugal, running on empty.

Stay tuned.

49 thoughts on “EUROZONE RESCUE WEEK: They’re off! Germany starts to shift ground

  1. We as Hellenes are getting out of the European Union, they can shove the Euro they no where and will not recognize and honor any loans signed by the PASOK scum bags. We will start a revolution to get rid of all political traitors, if the West dares to move on us, within seconds we have the Russians move in to stay in the Mediterranean. The EU and Frau Führer Angela Kasner Merkel Chancellor of the Fourth Reich can kiss our Greek arse.


  2. Tim Geithner has already agreed with the Merkozy circus that the Fed will counter inflate the EZ credit deflation. That is a done deal.
    In an unguarded moment he is quoted as saying..”our printing presses need the work more than the germans’.


  3. But of course we haven’t even got to the shrinking economies of the Eurozone yet, will be interesting to see how these loans are going to be repaid with ever decreasing tax revenues.


  4. Well, I am not pleased by this news.

    I will add that the situation needs dealing with – not in terms of banks – but in terms of Europe’s productive industries. They are still a prize worth fighting for.

    Other than that, JW mentions bond spikes (nr.10): how will this be achieved? The bond markets have just opened sharply down, and have already hit lows, wiping out Friday’s end of week optimism. You can follow Italy’s bonds on Bloomberg here:

    As to Britain’s dirty tricks axis, it may be that they will turn to bite you in their turn. The hedge funds have bet their shirt on this, along with their socks and next door’s cat. If they have unloaded their toxic derivatives onto the taxpayer á la Bank of America, you too will have some pretty prices to pay. BoA only moved $76trillion, and the regulator did not even make a tired wakey-uppey sort of “woof” let alone try to look awake.


  5. Bernanke is rumoured to be about to increase the US’s IMF stake:

    He’s been looking for an opportunity for QE3 since September.

    Obama’s unlikely to get this increase in spending past Congress, so will lob it over to the “super committee” via executive order, which will cause tremors in the US political landscape, with parallels being drawn with dictatorships on both sides of the pond.

    Americans last week tripped their fuse wires over the National Defense Authorization Act (overwhelmingly passed), which allows the President to detain anyone, for any reason, without charge, for as long as there is still the “threat of terrorism”.- under martial law.

    Stewart Rose came out last week and virtually called Americans to arms.


  6. I may be wrong – it happens – but somehow I don’t think Stylianos is quite what he purports to be.

    However, if I’m wrong and he is real then Oh Sh*t!


  7. Good luck and best wishes, I hope the Greeks do what is needed to bring down the evil empire and stuff the loan sharks.


  8. This is now quite frightening because, on top of the can being kicked down the road, I cannot envisage the citizens of many EU sovereign nations accepting this. I see revolt – a huge split within and between nations as the gravity of what is being considered sinks in. Will the people of Europe just let this happen? Perhaps it will become palatable in the context of unfolding warmongering regarding Syria/Iran as a deflection from this chicanery, and arguments put forward that in such a rapidly changing and unstable world, integration will mean security. Interesting times indeed – for those of us still comfortable enough to witness it until the s*** from the fan starts landing on us.


  9. …actually the can being kicked down the road is a hot bright explosive fiery white object I’ve coined an oxyeuromoronic snowball. I am also puzzled by the way this ‘final solution’ is being presented by news outlets without any sense of alarm.


  10. Discussing recipes with a Greek Cypriot acquaintance recently she told me “we Greeks are good at stuffing things….”
    I replied: “such as the EU?!”
    It adds a whole new dimension to the quaint custom of Phukelaki…..


  11. luaprebmik

    I quite agree; this would be difficult to carry off in a stable world situation, but we are very far from that. Governments are toppling as we write, protests – generally kept out of the MSM – are increasing daily, and the ME is about as stable as a bottle of nitroglycerine driven at speed over a cobbled street.

    This has no chance of ending well.


  12. What, with the ongoing wars of aggression, and the designed economic collapse it is all going exactly as planned and described by Douglas Reed some 50 years ago. Almost down to the last detail.


  13. Am I right in saying that if this is correct, the Fed will lend money to the IMF who will then lend money to the EU or ECB so they can then lend money to indebted PIIGS nations……because they’re overly indebted!!!!

    Does this seem insane to anyone else?


  14. The situation explained with clarity at
    The question in the end comes always down to whether one wants to take the losses as soon as possible and begin again with a clean slate, or whether one wants to delay the day of reckoning by doing again – and usually on a bigger scale – what has led to the crisis in the first place. The choice is always between short term pain in exchange for long term gain or the avoidance of short term pain in exchange for long term misery.

    Why everyone seems to favor taking the path to long term misery remains a mystery to us. As we keep saying, the focus, especially in Europe, should be on how to revive the currently taxed-and-regulated-to-death entrepreneurial spirit. In the end, only a resumption of genuine wealth creation can solve the economic problems of the region. This requires that the market economy be freed to do what it does best. Printing more money is not going to help this process.


  15. Ditto, goundedkiwi,

    JW, Gem, BT et al… what the hell do we do, just sit and watch the whole thing blow up in our faces?


  16. “I cannot envisage the citizens of many EU sovereign nations accepting this”

    You’d be surprised just how many citizens will neither accept this nor reject this as they’ll be too busy watching “Dancing with the F**king Stars” or some similar rubbish. Distraction, distraction distraction…..


  17. Agreed. Timing is everything in politics. Christmas is coming (no work during that fortnight, please), followed by an election year. All manner of deceits will be employed to ensure that the electorate does not realise how much the bill will be, and when it finally does (and twigs that electorates, at least the taxpaying parts thereof, will be paying), it will be too late to stop.

    As for the UK’s involvement in all this, forget it. You are either in or out, and we are not in. I guess Cameron has figured that out by now, hence his fine imitation of total powerlessness.


  18. I wonder if OLAF the E.U. anti-fraud unit is being as investigative about the financial alchemy currently going on within the E.U corridors of power, as it was over the item in this link .
    If a multi -million pound fine is warranted for the cost of this negligence, how much of a fine pro-rata does the cost of the bungling, negligence and crass ineptitude of the people handling the euro crisis warrant ?


  19. That looks to be about it, although the money could go straight to the PIIGS’ creditors from the ECB to buy up the debts (to avoid the PIIGS spending it!)…and so they can start over with a clean sheet and begin borrowing/spending again.
    If I understand correctly, the difference between this action and all/most other IMF actions is that large sums will never be repaid. That makes the action a violation of the IMF rules methinks. It is by any other name a transfer of PIIGS debts onto IMF member state taxpayers using a two-step dance surrounded by smoke and mirrors.


  20. Anyone remember Michael Milken,Drexel Burnham, junk bonds,1986?Well,if you want to enable high risk (corporate borrowers,then)to borrow billions,unsecured(cf.the PIGS and France),you have to put in an equity kicker(eg.the right to buy some juicy state asset at a knock down price ,in five years,say) or it will not fly in the market.Do you think between now and Friday Merkel will talk the German electorate into guaranteeing this shower?Or that the PIGS will grant a warrant to the lender over every government building at half their current value? UK debentures used to be secured by a charge over just about everything.There will be smoke and mirrors on Friday,but you cannot turn junk(high yield) into AAA by decree,following yet another pathetic Euro summit.These people should get a job at Euro Disney,for which they are uniquely qualified.


  21. Sorry to do this here JW but, I don’t know what else to do, at least it’s something..
    Join my Facebook group called “We want a referendum and we want it now”


    FFS, DO IT!


  22. @Rebraz
    thanks for the link, I usually keep an eye on Mish, but only looked at this one because you pointed to it. Given that it deals with a columnist better known as Mr Evans-Pritchard, I skipped it. Interestingly he wonders why A E-P makes a comment – well this could be explained by it being the view of his editor?

    As to your analysis, I agree with the part about the debts/kicking.

    I will take you up on the following though:
    “As we keep saying, the focus, especially in Europe, should be on how to revive the currently taxed-and-regulated-to-death entrepreneurial spirit. ” – – – I disagree. For a starting entrepreneur there is plenty of scope in the taxation system to get going in Germany/NL, to the tune of €20 000 over five years.

    “In the end, only a resumption of genuine wealth creation can solve the economic problems of the region. ” – – – indeed. The problem has been that European industry has suffered through the turmoil of the bond markets. A turmoil now settling with the ban on naked CDSs (or whatever other reason).


  23. Sorry to do this here JW but, I don’t know what else to do, at least it’s something..
    Join my Facebook group called “We want a referendum and we want it now”


    FFS, DO IT!


  24. So when the “wonderful solution for all the insolvable” (TM) comes on Friday, how long before “the markets” stop celebrating and start analysing?

    Surely this is intended to lead the PIIGS back to being able to borrow on the bond markets. However, said plans growth killing abilities will only mean that the sovereign bonds of these nations have a perpetually high rate of interest meaning they are permanently reliant on the core (germany) for money.

    The markets should quickly be able to see this and the attacks will resume. Said plan will be deemed useless and the dance begins again.

    Am I missing something here because this is the way I am seeing it. Am I wrong?


  25. We did not get what we wanted last time, so this time it is not going to be any different. MSM co- operation is what we need to get the message across, but they are all fully paid for cowards so it wont happen. This is the very reason the state locked up Tommy Sheridan, he would have had the people out in the streets by now and would be leading by example. There is not a politician that will break from the herd to become a true hero of the people. Its up to us now, we cannot keep redrawing that line in the sand.
    The populace apathy is unbelievable, it will take the loss of jobs houses and massive hikers in taxation before they will do anything at all, and we all at the Slog know that that is what is coming. The greedy sloth masses will get what they deserve.
    We need a UK wide Cairo type peaceful non compliance demonstration whilst we still have the opportunity to do it, we might be carted off to jail but at least we wont be shot at this time around.


  26. I just want a cheap holiday, When are these johnny Foreigners going to go broke. I’m sick of all the going round the bloody houses. No-one knows what is going on, no-one knows what to do.Lets invade Australia. Doesnt matter anyway, any of this. Shortly the Israelis will be incinerating some bits of Iran and the bauble counting of the EU will be but a trifle.


  27. @OAH
    sorry – I meant bond interest rates. Yes, I do know that if the yield goes up, the price goes down or maybe sideways.

    Well, as long as you can catch a few fish with whatever currency you are using, you will be okay.

    In any case, thanks for the clarification.



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