EUROPE MAKES WALL STREET LOOKS LIKE ANGELS
The latest news from the Euro front: apparently, European leaders have agreed to a “leveraged” EFSF to go up to one trillion Euros, to add firepower as they say. This agreement would also include a 60% haircut on Greek debt.
Not too long ago, those same politicians were blasting Wall Street for the “leverage” and the SPIV (Special Purpose Investment Vehicle – Enron got famous with those) which were the hallmark of the mortgage industry in the years leading to the crisis. Now those same politicians want to use “leverage” to try to rescue the Euro! Well, who doesn’t like leverage? Until it blows up in your face.
Leverage is simple – it just says you don’t have the money. But in this case, it is MBS all over again because in turning the EFSF into an insurer of sovereign bonds – we know how those bonds are worth! There are issued by the same countries that are shot out of the market. They think the market will buy those bonds? Well they may find some hopefull s*?*&?&* but I would not bet on many. Also, leveraging the EFSF, as we have mentioned before, put the AAA rating of the said rescue fund and also of France in jeopardy. The spread between the German bonds and the French bonds is at a record high of 1.20% – showing the leverage possibility.
Now, we know who backs the “insurance” – there is only one player – Germany. If you feel we’re back to square one, you’re right. This is what European leaders are supposed to agree on at their Wednesday meeting (if it’s not postponed!). What part of “THERE IS NO MONEY (UNLESS THEY PRINT) THEY DON”T UNDERSTAND?”
Germany does not want to print because they would have done so already (they are the ECB). Between price stability (Weimar 1923!) and currency appreciation – it seems the Germans could easily live with a strong DM as they have in the past. BMW does not compete on prices. In a response to a FT article entitled “Germany will never leave the Eurozone”, very connected Dr. Pippa Malmgren, was indicating on her site (www.pippamalmgren.com)
“The European project will move forward much more robustly once everyone finally realizes that the Euro in its current format is unworkable. Nothing stops Europe from moving forward other than public opinion. The fact is that Germany’s social contract is very different from the social contract between the citizens and the state in any of the peripheral countries. What is required to satisfy Germany brings riots in southern capitals. What is required in Southern capitals breaks the social contract in Germany. The failure of the Euro will bring this conflict into sharper focus and set the stage for new commitments to create a Europe that can satisfy the needs of the members without destroying civil society in Europe”.
We are looking forward to more meetings.