September will be Crunch Time for Europe

"September will undoubtedly be the crunch time," one senior euro zone policymaker said. "In nearly 20 years of dealing with EU issues, I've never known a state of affairs like we are in now," one euro zone diplomat said this week. "It really is a very, very difficult fix and it's far from certain that we'll be able to find the right way out of it."

As eurocrats take their mandatory vacations for a job well done, Europe will enter hibernation mode, until September which according to Reuters "is shaping up as a "make-or-break" month as policymakers run desperately short of options to save the common currency."

Reuters explains why September will also be known as the popcorn month:

In that month a German court makes a ruling that could neuter the new euro zone rescue fund, the anti-bailout Dutch vote in elections just as Greece tries to renegotiate its financial lifeline, and decisions need to be made on whether taxpayers suffer huge losses on state loans to Athens.

On top of that, the euro zone has to figure out how to help its next wobbling dominoes, Spain and Italy - or what do if one or both were to topple.

Since the crisis erupted in January 2010, the euro zone has had to rescue relative minnows in Greece, Ireland and Portugal as they lost the ability to fund their budget deficits and debt obligations by borrowing commercially at affordable rates.

Now two much larger economies are in the firing line and policymakers must consider ever more radical solutions.

In Reuters' own words, the life raft is about to go pop:

The euro zone does not seem to have enough cash in the current setup to deal with a scenario of Spain and Italy needing a rescue, and a sense of doom is growing among some policymakers. Fighting the crisis, said the euro zone diplomat, is like trying to keep a life raft above water.

"For two years we've been pumping up the life raft, taking decisions that fill it with just enough air to keep it afloat even though it has a leak," the diplomat said. "But now the leak has got so big that we can't pump air into the raft quickly enough to keep it afloat."

Compounding the problems, Greece is far behind with reforms to improve its finances and economy so it may need more time, more money and a debt reduction from euro zone governments.

But Greece is, once again, just the beginning.

Sept. 12 is a crucial date in the European diary. On that day the German Constitutional Court is scheduled to rule on whether a treaty establishing the euro zone's permanent bailout fund, the 500 billion euro European Stability Mechanism (ESM), is compatible with the German constitution.

A positive ruling is vital, because Germany is the biggest funder of the ESM, and the euro zone would be powerless to protect Spain or Italy without the ESM.

On the same day, parliamentary elections are held in the Netherlands where popular opposition to spending any more money on bailing out spendthrift euro zone governments is strong. The Dutch vote may complicate talks on a revised second bailout for Greece, which also has to be agreed in September.

All this, and much more, is finally coming to a head, as the time for can kicking is running out.
A full timeline of the incoming events, courtesy of Deutsche Bank is listed below:

August:

• 13 August: Italy auction. Bills
• 14 August: Italy auction. Bonds
• 14 August: Euro area Q2 GDP flash estimate, from Eurostat.
• Mid-August: French Constitutional Court/Fiscal Compact. In Mid-August the French Constitutional Court is due to rule whether  the Fiscal Compact, which euro area countries are due to endorse by the start of 2013, needs to be ratified into the French Constitution. If so, a joint vote by the French Assembly would be required. Signals are that this would happen in September if required. See accompanying article on France in this issue of Focus Europe.
• 16 August: Spain auction. Bonds
• 20 August: Greek bond redemption. Greece is due to repay EUR3.1bn of GGBs. Following the PSI, these would be GGBs owned  by the ECB and EIB. While agreement on how to reconfigure the second loan programme is unlikely before September, it is unlikely the EU will hold-out from paying funds to Greece to repay the ECB/EIB. In a consolidated sense, the official sector’s exposure to Greece remains the same, but the creditor changes (to the EFSF). Alternatively, Greece could issue T-bills and the  Greek banks could absorb them with the assistance of ELA from the Greek central bank.
• 21 August: Spain auction. Bills
• 28 August: Spain auction. Bills
• 28 August: Italy auction. Bonds
• 29 August: Italy auction. Bills
• 30 August: Italy auction. Bonds
• End-August: DBRS rating on Spain/Ireland. By the end of August, the DBRS ratings agency is due to have concluded its review  of Spanish and Irish sovereign ratings.

September:

• September: Moody’s due to conclude review of Spanish sovereign rating. Logically Moody's should wait until there is clarity on  direct recap before making a decision on Spain’s rating. Since governments have not made progress fleshing out a direct recapitalisation facility — indeed, have created some ambiguity as to whether it will be non-recourse — there is a distinct risk that Moody's, in another move to be “ahead of the curve”, decides to downgrade Spain within the next 3 months. Moody’s currently rates Spain Baa3, the lowest investment grade rating.
• September: Detailed bottom-up Spanish bank stress tests due for publication.
• 6 September: Spain auction. Bonds
• 6 September: ECB Governing Council meeting. If we are right about the outcome of the 2 August ECB meeting (dominated by “quantity” measures), we suspect that revisions to staff forecasts for growth and inflation are likely to be a basis for a 25bp rate  cut.
• 11 September: Greece auction. Bills
• 12 September: German Constitutional Court ESM ruling. The German Constitutional Court is to rule on the complaints lodged  against the ESM and fiscal compact. The chances of the ESM being vetoed are low. However, the Court might again strengthen the German Parliament’s prerogatives as regards future European integration (see Focus Germany, 20 July). Germany is the last approval needed for the ESM to come into effect. Then the first instalment of the capital has to be paid by the ESM members  within 15 days of the ESM treaty entering into force. There are three other countries where Constitutional Court queries are outstanding — France, Austria and Ireland. France’s Constitutional Court will be deciding by mid-August. Neither Austria (which  may take another 3-6 months) nor Ireland are large enough to hold back the ESM — the ESM will come into force when countries representing 90% of the subscribed capital have approved it. Both Germany and France have an effective veto power in that case.
• 12 September: Dutch Election. In April, the VVD/CDA minority government failed when Geert Wilders' PVV party withdrew its  support amid negotiations for the 2013 austerity budget. A crisis was averted when three smaller parties came forward to give support to a budget, but an early election was unavoidable. Domestic austerity and European crisis issues will likely play  important roles in the election. Compared to the configuration of parliament at the October 2010 election, the latest opinion polls (Maurice de Hond) show PM Rutte's VVD liberal party vying with the Socialist Party for the dominant party position. Both would  gain 31 seats in the 150 seat parliament on the latest polls. This is an unchanged position for VVD, but a doubling of SP seats. SP are gaining at the expense of all other parties except VVD and neo-liberal D66. This may reflect a backlash against the  austerity for 2013 which has broad party political support. SP have also taken a stance against euro rescue initiatives, voting against the ESM alongside the PVV and extracting a pledge from Dutch FinMin De Jager that parliament will vote on any future  direct bank recapitalisation disbursements. Given the typical distribution of the vote among several parties, the questions are  what coalition emerges from this election, how long it takes to form a government and what policies will it support? Markets in particular will be watching the ramifications for domestic fiscal policy (the 2013 Budget is a week after the election) and euro  rescue initiatives.
• 12 September: Italy auction. Bills
• 13-14 September: G20 Finance Ministers and Central Bankers meeting. In Mexico.
• 13 September: Italy auction. Bonds
• 14 September: ECOFIN meeting. This is very likely the finance ministers meeting when adjustments to Greece's second loan programme will be considered. The remaining EUR23bn recapitalisation of the Greek banks is due to complete by the end of September, assuming a positive review of the loan programme. This is also when finance ministers should have their first discussion on the proposals for a common bank supervisory regime under the ECB. Any delays, with knock-on delays for a direct bank recapitalisation mechanism, will disappoint the market. Options for a reconsideration of Ireland’s legacy bank bailout policies may also be discussed (decision not due until October ECOFIN meeting).
• 15 September: Eurogroup meeting. Coinciding
• 18 September: Greece auction. Bills
• 18 September: Spain auction. Bills
• 20 September: Spain auction. Bonds
• 25 September: Spain auction. Bills
• 25 September: Italy auction. Bonds
• 26 September: Italy auction. Bills
• 27 September: Italy auction. Bonds

Eurozone update graph

An update graph on the situation of the Eurozone:

Finland asking for a "deposit" to Greece in exchange for bailout

For those who have doubts that the current Euro situation is getting crazier by the day please consider Finland and Greece agree on loan guarantees

Finance Minister Jutta Urpilainen said in a Tuesday press conference that Finland and Greece have reached common ground on loan guarantees demanded by Finland for its participation in the Greek bailout package. The agreement still requires approval from other eurozone states.

The Finnish and Greek Finance Ministries have agreed that the Greek state will transfer a sum to the Finnish state, which, together with interest on that sum, will serve to guarantee Finland's share in the bailout loan to the troubled southern state. 

The guarantee sum would, however, be only a fraction of the money that Finland is contributing to the rescue package. 

Urpilainen has not divulged a concrete sum, because that is still being negotiated. 

So Finland agrees to lend let's say 10 Euro to junk Greece and in exchange will get a deposit of 1 Euro which will keep as a guarantee that Greece will pay back the other 9 euro, with interest, at an agreed upon rate.
This is clearly a political trick to avoid anti-bailout resentment in the population as per the practicality of the agreement, it is absurdly laughable. Another proof of desperation rising in Europe and the complete ineffectiveness of any government in dealing with the situation aside from implementing ridiculous publicity stunts.

France could be the next domino to fall

France has become officially the next target in the orchestrated attack to the Euro. Sarkozy had to fly back from holiday and announce a draconian austerity package in a rush amid rumours that France was on the verge of losing the AAA rating. Few hours later rating agencies confirmed the rating although damage was done and another major blow was dealt to the credibility of the Euro.
France and Germany have become after the explosion of the Italian crisis the only two left with capacity to back the Eurozone and bailout if necessary everyone else even if it could cost them the AAA rating and a dramatic jump in their debt ratio to Italian levels.
This series of events is getting more and more dramatic everyday and it is hard to think they are exclusively movements due to speculation on sovereign ratings. It seems the wolves are going straight to the jugular of the EU, Spain is not out of the woods at all but has been put in standby while the attacks are targeting the big ones: France and Italy. It does not mean that Italy is a poor victim of all this mess, It deserves being under attack after having lost a decade living well above its means. The apathetic population has always been more interested in petty local interests and absurd regional ideologies while ignoring the wider picture and the general rotten state of affairs in the country.
Joining the pillage of the public coffers in the interest of local and restricted groups of interest has been the main occupation of everyone, confident they could have gone stealing forever to their future.
None can be blamed for the sorrow state of the country other than the Italians who applauded and contributed to the degeneration of their own country. Foreign investors and bond vigilantes simply acknowledged and took advantage of the sorrow state of the country when they had motives to do it.
There is no doubt though that for some reason they are in a hurry to strike hard now.
There are only two exits, either there will be a strengthening of the EU with a single fiscal and economical policy for everyone which would be the end of the single nations' capacity to deliberate laws or the Euro and the EU will break up. The first is the trend the EU and the ECB are trying to pursue when taking power in bailed out countries and dictating terms to local governments in exchange for bailout money in the case of Greece, Ireland and Portugal, or bond purchase programs as for Italy and Spain.
Germany is currently together with Slovakia and Finland opposing any further centralization or bailout intervention in a final attempt to prevent what it would become a transfer union where healthy countries will transfer their surpluses to sick countries in order to prevent a total collapse of the Euro. True that requirements now for transfers are getting tougher and tougher with practically a surrender of sovereignty in exchange for assistance, but still there is no guarantee that indebted countries will stick to the plan when bailouts will not be any longer urgent or that a new government will honour the same terms. The only way for the plan to work is to write down the contract in the EU Constitution and practically create a federal government dictating to every member state political and economical laws to be approved.
The other solution is to do what Europe has been doing in the last 2 years, kicking the can down the road, disburse money to indebted states only when strictly needed and find themselves in the same spot only few months after with a never ending crisis slowly draining the Euro.
To create a super-national entity with real power will require though a complex and lenghty procedure that will need the creation of a new European Constitution, the acceptance of every state to delegate power to the EU government and the acceptance of higher taxes, growing debt an big losses in the healthy states  to support the dying indebted states.
 Even if by miracle would everyone agree this would take years at best to be done and clearly we have only months left.
Default is no longer an option it was an option for Greece, Portugal and Ireland, but it something inconceivable for Italy and Spain unless there is a desire to trigger a new Great Depression.
An exit strategy is no longer available and in the following months the ECB will have to face dire decisions, it is clear now that the situation has passed the no-return point and that mentality in the ECB has switched to damage control mode.

Portugal propaganda video or God save the Eurozone

Not sure if they are trying to snob the Finnish or gain some simpathy for their recent bail-out but certainly we hope that Greece will not try something similar with the Germans.
Worth watching the following bizarre video:

Eurozone crisis update

Image by Mesq via Flickr

More bad news from Europe today:

Ireland's banks are now officially junk following a downgrading of the long-term deposit ratings of the four surviving banks by the ratings agency Moody’s.
The decision to downgrade Bank of Ireland (BoI), Allied Irish Banks (AIB), EBS Building Society and Irish Life & Permanent (IL&P) follows the move to cut Ireland’s own ratings status to one level above junk status last week.
In the meanwhile Athens repeated today it has no plans to restructure its debt, denying a Greek media report it had already requested talks with its lenders. Greek daily Eleftherotypia  said today Greece had told the International Monetary Fund and the European Union earlier this month at a meeting of European finance ministers that it wanted to restructure its debt. Discussions on the issue were expected to start in June, the newspaper said, citing a senior IMF official. US treasury secretary Timothy Geithner had also told Greek finance minister George Papaconstantinou a restructuring would be needed, the paper said.
A further addition to the Portuguese's woes is the recent Finnish election where the party True Finns quadrupled its share of vote in Finland elections, and its party leader says he expects EU to change Portuguese bailout plans.
Unlike others in the eurozone, Finland's parliament has the right to vote on EU requests for bailout funds, meaning it could hold up costly plans to shore up Portugal and bring stability to debt markets.
The strong showing for the populist True Finns reflects growing public frustration in some EU states about footing the bill for weaker economies such as Greece, Ireland and Portugal.

Portuguese five-year credit default swaps climbed 26 basis points to 625bps this morning, according to data monitor Markit.
And this euro mess is bringing back the 2 elephants Italy and Spain in the arena with spreads reaching new highs:

• Portugal 625 (+26) - officially insolvent
• Italy 156 (+13)
• Ireland 588 (+21) - officially insolvent
• Greece 1225bp (+89) - officially insolvent
• Spain 250 (+16)