A Great Shortcut To The End of the Euro and the UE

There are way too many questions remaining to be answered and it looks like markets are ignoring them, looking for further reasons to rebound and suck as many people in before correcting again.

Here's my personal list:

  • 400€ billion leveraged X times doesn't equal to 1.0€ trillion. It remains 400€ billion X times leveraged. This means that they can still only allow themselves to take 400€ billion losses, and believe me, they will. But, it won't be as big as they think, and leverage will kill them sooner than they think too. How long will it take for people to realize this?
  • Where will the money come from? 800€ billion is quite a massive amount, not too far from Spain's GDP or half of France's GDP. Who will they borrow it from? Certainly not the banks which are so capital impaired.
  • Will the rating agencies finally decide to provide the much deserved downgrade to France and Germany?
  • Will CDS holders just accept to take their losses and not react? This is highly unlikely. You can expect a lot of noise and reactions. The data publicly available shows that the notional outstanding for the CDS on Greece is $5 billion net notional. An amount probably worth probably fight for in courts. And who know how much CDS are traded OTC?
  • What will be the impact of the ISDA decision on the CDS market? Does it make the instrument completely useless? What will the unintended consequence be? Investors who were trying to protect themselves because they were holding Greek debt will now take losses. Will this also drive the borrowing costs of all sovereigns higher?
  • Greek banks shareholders will be most likely be wiped out. That would be another 3.6€ billion loss that someone will have to take. What is the amount of debt they have outstanding? Are there CDS contract on them?
  • “The Greeks, who are seen to be behaving badly, get rewarded, whereas the Irish, the top boys in the class, get nothing.” When will the Irish, Portuguese, Spanish, Italian come and knock at the door?
  • Forcing banks to reach 9% of capital reserves is a good step forward. It also shows how massively over-leveraged and insolvent the European banks are. If they could only force the banks to get to a ratio of 100% and get us rid of fractional reserve banking, it would be great! But in anyway, how much losses will the European banks impose to their shareholders by diluting them?
  • Does it make sense for the Euro to rebound massively with such massively inflationary news flow?
I will be very interesting to find out what our corrupt politicians will come up with in order to move this crazy plan ahead. But rest reassure of one thing: Sarkozy and Merkel only want it to give them 6 extra months, so that they can put the general elections behind them.

While I am trying to find the answers to the previous quite important questions, the unintended consequences and secondary events are actually occurring:
Did the market give away the gains from the "news effect" of the bailout when the German Court halted the EFSF approval today? No. This confirms my point from the previous post today: markets bounced because they wanted to. Anything else is pure conjecture and rationalisation.

Here are some Bloomberg reports that I used as source.

Irish Spy Reward Opportunity in Greece’s Debt Hole
Oct. 27 (Bloomberg) -- Greece’s difficulty paying its debts may turn out to be Ireland’s opportunity.
Greece’s failure to cut spending and boost revenue by enough to meet targets set by the European Union and International Monetary Fund prompted bondholders to accept a 50 percent loss on its debt. While Ireland won’t seek debt discounts, the government might pursue other relief given to Greece, including cheaper interest payments on aid and longer to repay it, according to a person familiar with the matter who declined to be identified as no final decision has been taken.
“There’s a political problem for the government,” said Gavin Blessing, a bond analyst at Collins Stewart Plc in Dublin. “The Greeks, who are seen to be behaving badly, get rewarded, whereas the Irish, the top boys in the class, get nothing.”
While Irish bonds delivered the world’s best returns during the past three months, they have pared gains on concern slowing economic growth worldwide will derail the government’s efforts to revive the country’s fortunes through exports. The yield on debt due in 2020 rose 63 basis points in October to 8.26 percent yesterday, albeit down from 15.5 percent in July.
“Had a European bank resolution fund been in place, some of the resolution of Irish banks would have been part of that,” said Alan Ahearne, economics professor at Galway University, who acted as adviser to former Finance Minister Brian Lenihan. “The Irish government has a legitimate claim that there should be some sort of burden-sharing on a European level.”

Oct. 28 (Bloomberg) -- Owners of Greece’s banks may be wiped out over coming months as the government prepares to take over the lenders after bondholders agreed to 50 percent writedowns on the nation’s debt.

Greek Prime Minister George Papandreou said yesterday that the government will likely buy shares in some banks as a result of a planned writedown, without giving details. The 30 billion euros ($42 billion) already set aside for Greek bank aid should cover the lenders’ needs, the European Banking Authority said.
For shareholders in Greece’s publicly traded banks, led by National Bank of Greece SA and Alpha Bank SA, there may be little left once the companies end up in government control. The six biggest lenders, which have assets of 380.2 billion euros and a combined market value of about 3.6 billion euros, are unlikely to attract investors willing to bet on a turnaround.
Greek banks never had choice on whether to buy Greek bonds, and they’re now being punished,” said Andreas Koutras an analyst at InTouch Capital Markets Ltd., a fixed-income adviser in London. “It is possible equity valuations will go to zero.”

Oct. 27 (Bloomberg) -- European leaders cajoled bondholders into accepting 50 percent writedowns on Greek debt and boosted their rescue fund’s capacity to 1 trillion euros ($1.4 trillion) in a crisis-fighting package intended to shield the euro area.
Measures include recapitalization of European banks, a potentially bigger role for the International Monetary Fund, a commitment from Italy to do more to reduce its debt and a signal from leaders that the European Central Bank will maintain bond purchases in the secondary market.
“It’s long on words, short on detail,” said Peter Dixon, an economist at Commerzbank AG in London.

Sarkozy said the bankers were escorted in “not to negotiate, but to inform them on decisions taken by the 17 and then they themselves went on to think and work on it.” Luxembourg Prime Minister Jean-Claude Juncker said the banks’ resistance was broken by a threat “to move toward a scenario of total insolvency of Greece, which would have cost states a lot of money and which would have ruined the banks.”
The resulting “voluntary” losses by bondholders were the key plank in a second bailout for Greece, which was awarded 110 billion euros in May 2010 at the outbreak of the crisis. The new program includes 130 billion euros of official aid, up from 109 billion euros envisioned in July.
The Washington-based IMF, meanwhile, said it is ready to disburse its 2.2 billion-euro share of the next installment of Greece’s original bailout. The release of the euro zone’s 5.8 billion-euro share was approved last week
Leaders tiptoed around the politically independent ECB’s broader role in keeping the euro sound, making no mention of its bond-purchase program in a 15-page statement. The Frankfurt- based central bank has bought 169.5 billion euros in bonds so far, starting with Greece, Ireland and Portugal last year, then extending the coverage to Italy and Spain in August.

While Trichet didn’t mention the controversial purchases either, his successor, Mario Draghi of Italy, indicated that the policy will continue. Speaking in Rome yesterday, Draghi said the ECB remains “determined to avoid a poor functioning of monetary and financial markets.”
“It will be important to detail further the modalities of how this enhanced EFSF will operate and deliver the scale of support envisaged,” IMF Managing Director Christine Lagarde said.
Europe also struck a bank-recapitalization accord, setting a June 30, 2012, deadline for lenders to reach core capital reserves of 9 percent after writing down their sovereign-debt holdings. Banks below that target would face “constraints” on paying dividends and awarding bonuses, a statement said.

Greece Default Swaps Failure to Trigger Casts Doubt on Market

Oct. 27 (Bloomberg) -- The European Union’s ability to write down 50 percent of banks’ Greek bond holdings without triggering $3.7 billion in debt-insurance contracts threatens to undermine confidence in credit-default swaps as a hedge and force up borrowing costs.

As part of today’s accord aimed at resolving the euro region’s sovereign debt crisis, politicians and central bankers said they “invite Greece, private investors and all parties concerned to develop a voluntary bond exchange” into new securities. If the International Swaps & Derivatives Association agrees the exchange isn’t compulsory, credit-default swaps tied to the nation’s debt shouldn’t pay out.

It will raise some very serious question marks over the value of CDS contracts,” said Harpreet Parhar, a strategist at Credit Agricole SA in London. “For euro sovereigns in particular, the CDS market is likely to remain wary.”

Politicians and central bankers came to a last-minute agreement after banks, the biggest private holders of Greece’s government bonds, were threatened with a full default on their debt, according to Luxembourg Prime Minister Jean-Claude Juncker. David Geen, ISDA’s general counsel in London, said that his organization considered the agreement to be voluntary, even if there may have been “a lot of arm twisting.”

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