Euro Template to Confiscate European Bank Accounts

As reported in my previous post, signals are there already that Cyprus will not be an isolated case and that similar confiscations will be applied to other nations in the Eurozone.
Of course having the luxury of the Eurogroup leader to agree with you and stating it publicly the day after is something unexpected.
Mr. Dijsselbloem, Leader of the Eurogroup and Dutch Finance Minister stated that Cyprus will become the new template for resolving Eurozone banking problems.
Markets did not appreciate the candour of Mr. Dijsselbloem (apparently it is pronounced Diesel-BOOM), his explosive remark did not take long to bring down the markets and put an end to the insane optimism following the Cyprus bailout deal.


Talking with Reuters, on the resolution model just put in place in Cyprus:

A rescue programme agreed for Cyprus on Monday represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors, the head of the region's finance ministers said.

"What we've done last night is what I call pushing back the risks," Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times hours after the Cyprus deal was struck.

"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'. If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders," he said.

After 12 hours of talks with the EU and IMF, Cyprus agreed to shut down its second largest bank, with insured deposits - those below 100,000 euros - moved to the Bank of Cyprus, the country's largest lender. Uninsured deposits, those accounts with more than 100,000 euros, face losses of 4.2 billion euros.

Uninsured depositors in the Bank of Cyprus will have their accounts frozen while the bank is restructured and recapitalised. Any capital that is needed to strengthen the bank will be drawn from accounts above 100,000 euros.

The agreement is what is known as a "bail-in", with shareholders and bondholders in banks forced to bear the costs of the restructuring first, followed by uninsured depositors. Under EU rules, deposits up to 100,000 euros are guaranteed.

Translation:

It is now officially dangerous to have a big bank account in Europe. In other words being an Uninsured Depositor.


After the not so amiable reaction of the financial markets Mr. Dijsselbloem (Diesel BOOM) has clarified his remarks on the Eurogroup's website:

Statement by the Eurogroup President on Cyprus

25/03/2013 - Statement

Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday.

Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.

I'm sure now all the Ininsured Depositors feel very reassured, Thank you sir!

Post-Rescue Cyprus Depression

So the rescue of Cypriot troubled banks has been finally approved after 1 week of absolute lunacy in Cyprus, for those not aware yet a quick recap on the key points approved yesterday night:

Key points of the deal:

Laiki bank will be fully resolved – it will be split into a good bank and bad bank. The good bank will merge with the Bank of Cyprus (which will also take on Laiki’s circa €8bn Emergency Liquidity Assistance – a last-resort funding system outside the usual ECB operations). The bad bank will be wound down over time with all uninsured depositors (over €100,000) taking significant losses (no percentage yet but some could lose all their money above the threshold).

The Bank of Cyprus will be recapitalised using a debt to equity swap and the transfer of assets from Laiki. Uninsured depositors will take large hits in this process – again no percentage but reports suggest up to 40%.

These actions will be taken using the new bank restructuring plan passed in the Cypriot Parliament on Friday. Crucially, no further vote will be needed in the Cypriot parliament since there is no direct deposit levy.

The banks will not receive any of the €10bn bailout money, the entire recapitalisation will be done using the tools outlined above.

Significant capital controls are likely to be in place when banks reopen, creating a risk of Cypriot euros being “localised”.

Further tax increases may be included in the detailed plan to be drawn up between the two sides.

  and as a consequence an entire country will be sliding very fast in a Great Depression:

From SocGen:

Depression for Cyprus: Our Cypriot GDP forecast entails a drop of just over 20% in real GDP by 2017. This forecast had already factored in much what was agreed, but did not account for the additional uncertainty shock generated by the past week’s appalling political mess. Risks are clearly on the downside and Cyprus will in all likelihood require additional financial assistance further down the road. Accounting for less than 0.3% of euro area GDP, any downward revision to Cyprus will be barely visible on the euro area aggregate.

Cyprus’ position as a financial centre is over. There are few other alternatives for growth. One option that remains is tourism, but with a significantly overvalued currency it is not clear to what extent Cyprus can take advantage of this.
The capital controls will severely hamper liquidity in the economy, while it will be very difficult for the small island to trade with the rest of the world (it is far from self-sufficient, importing almost everything). The collapse in GDP could be anywhere between 5% and 10% this year, depending on how long capital controls are imposed and the resulting collapse in tax revenue could make the government’s position worse. There is a strong chance Cyprus could become a zombie economy – reliant on eurozone and ECB funding to function, possibly requiring further bailouts.

Capital controls are severe and could de facto lead to Cyprus being seen as out of the euro. Ultimately, money is no longer fungible between Cyprus and the rest of the Eurozone and, at this point in time, it’s hard to argue that a Euro in Cyprus is worth the same as a Euro elsewhere. The real problem though may not be imposing the controls but removing them – Iceland still has capital controls in place, five years after it installed them (despite having the advantage of a devalued currency).

The €10bn bailout will push Cypriot debt to GDP to 140% - if Cypriot GDP falls by just 5% this year, that rises to 148%.

In the meanwhile the bailout deal is already rising anti-Euro sentiments all over the country,  one of the most influential voices speaking against the Euro and the EU is the Orthodox Church Leader Archbishop Chrysostomos II who commented on TV that "with the brains in Brussels... the Euro can't last," certainly the fact that the Orthodox Church of Cyprus lost over 100 million euro holdings in the Bank of Cyprus must have contributed to his anger toward the EU and the Cyprus politicians: "those that brought the place into this mess, should sit on the stool. " (blaming the outgoing government, Ministers of Finance, the Central Bank, and the Executive Directors of Banks).
May his prayer be accepted! When the full scale of social devastation inflicted on Cyprus will be apparent a chopping block would be more suitable than a stool!

After Cyprus levy; are Italy and Spain next?

Cyprus crisis is reaching his climax this weekend but regardless of how it will develop served well in distracting the media and the EU population from the bigger fishes frying in the EU pan, Italy and Spain.
So despite dimmed lights on the Italian political disaster and the Spanish banking Armageddon it is worth highlighting the following news:

Via El Pais (Via Google Translate),
The Minister of Finance and Public Administration, Cristobal Montoro, has advanced on Tuesday that the government will impose a type "moderate" to bank deposits to compensate communities that saw their tax autonomy canceled after the Executive created a state tax 0% rate.  This tax on bank deposits, which has nothing to do with Cyprus, does not affect savers but requires credit institutions to pay for that capture deposits. 

"The autonomous communities receive timely and therefore financially compensation shall implement a moderate rate in the state tax on bank deposits," said the minister, adding that this kind "will not be much higher than 0%" . 

The Minister of Finance has clarified that such "moderate" will have no tax collection effort, "but that these regions serve to offset the revenue loss to see."  So, he assured that the amount will correspond to the amount "exact has been undermined by the cancellation of regional taxes". 

Subsequently the Spanish Minister of Finance & Public Administration announced a tax or bank levy (probably 0.2%) to be imposed on bank deposits, without details on which deposits will be affected or timing.

and on Italy:

In an article on Handelsblatt the chief economist of Commerzbank says: Italy should bring a unique wealth tax.

It is a myth to talk of crisis-strapped states. Even the German Institute for Economic Research (DIW) and the chief economist of Commerzbank, Joerg Kraemer says the numbers suggest a different view.

Kramer relies on surveys of the European Central Bank. Net financial assets of the Italians are 173 percent of gross domestic product (GDP). This is significantly more than the net financial assets of the Germans, which corresponds to 124 percent of GDP, said Kramer for Handelsblatt Online.

"So it would make sense, in Italy for a one-time property tax levy," suggested the Bank economist. "A tax rate of 15 percent on financial assets would probably be enough to push the Italian government debt to below the critical level of 100 percent of gross domestic product."

Cyprus crisis getting ugly!

Cyprus' banks are in worse condition than imagined, and the bailout amounts has jumped again.
How can a tiny country get in so much trouble in such a short time?
The real-estate and construction bubble, fed by corruption and abetted by banks, burst two years ago. Home sales and prices have collapsed. Some 130,000 homeowners (in a country of 840,000 souls) are tangled up in a nationwide title-deed scandal.
It is estimated that 50,000 homes would be dumped on the market—though only 4,876 homes were sold during the first nine months of the year! Losses have gutted banks. Unemployment has reached record levels. And the construction industry, once a major employer, is being annihilated.
The index of building contracts, after a two-year downhill slide, has reached the lowest point in its history, and “activity is expected to continue dropping,” lamented the Federation of Associations of Building Contractors (OSEOK).
Contractors are going out of business. Over the last four months, the crisis has deepened. And now there are only enough pending construction projects for seven months, and after that, there are no projects.
Locked out from the financial markets since early summer 2011, Cyprus was bailed out by Russia last November with a €2.5 billion loan. In June, as the banks began to topple under a mountain of Greek debt and rotting mortgages, Cyprus asked for a bailout.
The Troika took a look and figured €6 billion for the banks and €4 billion for the government. €10 billion in total.
But in August, Central Bank Governor Panicos Demetriades told parliament that the banks alone would need €12 billion!
Then Russian Finance Minister Anton Siluanov told last week: Cyprus would indeed seek a €15 billion bailout from the Troika, and an additional €5 billion from Russia, for a total of €20 billion.
A vertigo-inducing 107% of GDP.
But he cautioned that Russia and the Troika would need to coordinate the loans—thus throwing a monkey wrench into Christofias’ efforts to use the negotiations with Russia as a lever against the Troika to get a better deal and more lenient conditions.
Conditions that the Troika had already spelled out in a memorandum.
In short,  a privatization of state-owned enterprises, a 15% cut in the public payroll by the end of 2013, a 10% cut in benefits, elimination of the automatic Cost of Living Adjustments (CoLA) that index salaries to inflation, and an increase of contributions to pension plans.
The CoLA elimination would also hit private sector employees, as would the elimination of the 13th month salary.
“You cannot tell someone they won’t receive a 13th salary. It automatically means you paralyze the market” declared communist President Christofias during a TV interview.
He would, however, try to cooperate with the Troika. “We aren’t just saying ‘no’ to them,” he added. “We are giving them counterproposals.” They focus apparently on a VAT increase, a luxury car tax, taxes on cigarettes and alcohol, disincentives for public sector workers to take early retirement, and a 5% wage cut for those earning over €1,500.

Iceland did it right!

Should Europe have followed Iceland in letting go bust their banks to avoid a sovereign crisis and impoverish the population to cover banks' bad debt?


Nobel prize winning economist Joe Stiglitz notes:

What Iceland did was right. It would have been wrong to burden future generations with the mistakes of the financial system.

Nobel prize winning economist Paul Krugman writes:

What [Iceland's recovery] demonstrated was the … case for letting creditors of private banks gone wild eat the losses.

Krugman also says:

A funny thing happened on the way to economic Armageddon: Iceland’s very desperation made conventional behavior impossible, freeing the nation to break the rules. Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net. Where everyone else was fixated on trying to placate international investors, Iceland imposed temporary controls on the movement of capital to give itself room to maneuver.

Bloomberg reports:

Iceland holds some key lessons for nations trying to survive bailouts after the island’s approach to its rescue led to a “surprisingly” strong recovery, the International Monetary Fund’s mission chief to the country said.

Iceland’s commitment to its program, a decision to push losses on to bondholders instead of taxpayers and the safeguarding of a welfare system that shielded the unemployed from penury helped propel the nation from collapse toward recovery, according to the Washington-based fund.

Iceland refused to protect creditors in its banks, which failed in 2008 after their debts bloated to 10 times the size of the economy.

The IMF notes:

[The] decision not to make taxpayers liable for bank losses was right, economists say.

In other words, as IMF put it:

Key to Iceland’s recovery was [a] program [which] sought to ensure that the restructuring of the banks would not require Icelandic taxpayers to shoulder excessive private sector losses.

Icenews points out:

Experts continue to praise Iceland’s recovery success after the country’s bank bailouts of 2008.

Unlike the US and several countries in the eurozone, Iceland allowed its banking system to fail in the global economic downturn and put the burden on the industry’s creditors rather than taxpayers.

The rebound continues to wow officials, including International Monetary Fund chief Christine Lagarde, who recently referred to the Icelandic recovery as “impressive”. And experts continue to reiterate that European officials should look to Iceland for lessons regarding austerity measures and similar issues.

Barry Ritholtz noted last year:

Rather than bailout the banks — Iceland could not have done so even if they wanted to — they guaranteed deposits (the way our FDIC does), and let the normal capitalistic process of failure run its course.

They are now much much better for it than the countries like the US and Ireland who did not.

Bloomberg pointed out February 2011:

Unlike other nations, including the U.S. and Ireland, which injected billions of dollars of capital into their financial institutions to keep them afloat, Iceland placed its biggest lenders in receivership. It chose not to protect creditors of the country’s banks, whose assets had ballooned to $209 billion, 11 times gross domestic product.

“Iceland did the right thing … creditors, not the taxpayers, shouldered the losses of banks,” says Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York. “Ireland’s done all the wrong things, on the other hand. That’s probably the worst model.”

Ireland guaranteed all the liabilities of its banks when they ran into trouble and has been injecting capital — 46 billion euros ($64 billion) so far — to prop them up. That brought the country to the brink of ruin, forcing it to accept a rescue package from the European Union in December.

Countries with larger banking systems can follow Iceland’s example, says Adriaan van der Knaap, a managing director at UBS AG.

“It wouldn’t upset the financial system,” says Van der Knaap, who has advised Iceland’s bank resolution committees.

Arni Pall Arnason, 44, Iceland’s minister of economic affairs, says the decision to make debt holders share the pain saved the country’s future.

“If we’d guaranteed all the banks’ liabilities, we’d be in the same situation as Ireland,” says Arnason, whose Social Democratic Alliance was a junior coalition partner in the Haarde government.

“In the beginning, banks and other financial institutions in Europe were telling us, ‘Never again will we lend to you,’” Einarsdottir says. “Then it was 10 years, then 5. Now they say they might soon be ready to lend again.”

And Iceland’s prosecution of white collar fraud played a big part in its recovery:

The U.S. and Europe have thwarted white collar fraud investigations ... let alone prosecutions. On the other hand, Iceland has prosecuted the fraudster bank heads and their former prime minister, and their economy is recovering nicely because trust is being restored in the financial system.

Greek Restructuring Deal Explained

An interesting and detailed report on what really happened in Greece and how this deal will affect Europe in the following years:

From OpenEurope (pdf version)

A small step forward, but the Greek restructuring deal could prove to be a pyrrhic victory
Open Europe has responded to the agreement between the Greek government and its private creditors which laid out how much and under what format the country’s massive €360bn debt burden should be written down. The deal involved private sector bondholders agreeing to a 53.5% nominal write-down, while so-called Collective Action Clauses (CACs) will be used meaning that Greece is now technically in a state of default – precisely what EU leaders have spent two years trying to avoid. While marking a small step forward, Open Europe notes that the deal is unlikely to save Greece, and that the country is still on course for a full default in three years’ time, if not sooner.
Open Europe’s Head of Economic Research Raoul Ruparel said,
“With the use of CACs Greece has entered a coercive restructuring or default – something which Greece and the eurozone have spent two years trying to avoid. While the financial markets can handle the triggering of CDS that this will entail, at some point serious questions need to be asked over the amount of time and money which policymakers have wasted on what has ultimately amounted to a failed policy. Instead, Greece should have undergone a full restructuring combined with a series of pro-growth measures.”
“There will be plenty of optimism in the corridors of power around the eurozone today, some of it justified – Greece has avoided a chaotic and unpredictable meltdown. However, this deal could end up being a pyrrhic victory: the debt relief for Greece is far too small which means that another default could be around the corner, while the austerity targets are wholly unrealistic and kill off growth prospects. Furthermore, Greece’s debt will end up being almost completely owned by eurozone taxpayers and by exempting official taxpayer-backed institutions from the write-down, the deal has created a distorted, two-tier bond market.”
Breaking down the key figures
Greek law bonds (Total €177bn) – voluntary participation 85.8% (€152bn) – with CACs 100% (€177bn)
Foreign law bonds (Total €29bn) – voluntary participation 69% (€20bn) – CACs unknown (to be settled by 11 April)
Total private sector involvement (PSI) participation so far – with CACs 95.6% (€197bn)
Total level of nominal write-down achieved so far – €105.4bn (This is short of the €107bn assumed under the EU/IMF/ECB troika debt sustainability analysis, meaning that more foreign law bondholders will have to participate or not be repaid).
Money needed to push PSI through - €93.7bn
‘PSI LM Facility’ (Bond sweeteners for private creditors) - €30 billion
Bond Interest Facility (EFSF bonds to pay off accrued interest) - €5.7 billion
Bank Recapitalisation Facility - €23 billion
ECB Credit Enhancement Facility - €35 billion
Under this scenario Greece is getting a €105.4bn write down, but taking on at least €58.7bn in new debt straight away. The EFSF, the eurozone bailout fund, is also taking on a further €35bn (by issuing additional bonds) to ensure Greek banks can still borrow from the ECB.[1]
What will this deal mean for Greece and the eurozone?

• The debt write-down offered to Greece is far too small to allow Greece any chance of recovery. Of the total amount (€282.2bn) that is entailed in the various measures now on the table to save Greece – through the bailouts and the ECB – only €159.5bn, or 57% will actually go to Greece itself. The rest will go to banks and other bondholders.
• The use of CACs will almost certainly trigger the pay-out of Credit Default Swaps (CDS) in relation to Greek debt. Despite the opacity and secrecy surrounding the CDS market, there is little evidence to suggest that financial markets will be unable to cope with paying out on Greek CDS. Sellers of CDS have had plenty of time to prepare for this eventuality. Any who are not fully prepared or cannot bear the cost were likely taking irresponsible risks or have much deeper solvency problems.
• Greek banks have taken substantial losses. These banks will be recapitalised, but ‘only’ by €23bn. In contrast, to meet the 9% capital requirements set by the European Banking Authority, Greek banks could need between €36bn and €46bn. It is unclear if further money will be forthcoming, but valid questions will continue to be asked about state of Greek banks.
• For the most part, Greek pension funds (which held around €30bn in Greek debt) have seen their assets reduced significantly. Some public sector pension funds did refuse to take part voluntarily. But they are likely to be forced to do so by the CACs. Importantly, it is unclear where Greek pension funds will recover their money from – the political fallout of having to cut pensions would only add to social unrest.
• The Greek government’s threat to default on the remaining foreign law bonds – held by bondholders who have refused to take part in the voluntary restructuring, hoping to be paid out in full – seems credible. However, since most of Greek debt will now be in the form of new bonds and EU/ECB/IMF loans (which do not have cross default clauses related to the old foreign law bonds), Greece can default on these old bonds without being judged in default generally or on the rest of its debt.[2]
• The upcoming Greek elections at the end of April mean that the future of the second bailout package is still uncertain. The two main parties, New Democracy and Pasok, have been losing ground to both far-left and far-right parties. The hope is that these two leading parties will be able to form a coalition government with a clear majority in parliament. Even if they do not win the majority of votes, they may still have a majority of the seats due to the electoral structure in Greece. Even so, it will be a close run election and without a strong majority in parliament, every future vote on new austerity measures, of which there will be many, will be a hard fought battle – not conducive to political stability.
• Under recent proposals, the total level of budget cuts Greece is expected to undergo stands at a massive 20% of GDP by 2013. Historically, no country has ever gone through such a large level of fiscal consolidation – successful or otherwise – especially without the option of currency devaluation. For example, the extensive fiscal consolidation seen in Ireland during the 1980s and 1990s totalled ‘only’ 10.6%.
• Athens is highly unlikely to meet its debt targets by 2020. This means that combined with the poor growth prospects due to continuous austerity, Greece will almost inevitably need either another bailout in three years’ time, or be forced to default on its outstanding debt.
• In parallel, the deal sets the eurozone up for a political row involving Triple-A countries. At the start of this year, 36% of Greece’s debt was held by taxpayer-backed institutions (ECB, IMF, EFSF). By 2015, following the voluntary restructuring and the second bailout, the share could increase to as much as 85%, meaning that Greece’s debt will be overwhelmingly owned by eurozone taxpayers – putting them at risk of large losses under a future default.
• Therefore, this deal may have sown the seeds of a major political and economic crisis at the heart of Europe, which in the medium and long term further threatens the stability of the eurozone.

IMF voiced to prepare an emergency 600 billion loan to Italy

Some stories in European press suggest that Italy is working on a very big loan package from the IMF according to the newspaper Repubblica a loan of 600 billion euro is being considered for Italy.
I'm very curious to find out what kind of tricks the IMF will resort to find this amount of money which is much larger than the current EFSF allocation.
If this option is being considered it means that there is zero possibility that Italy can refinance any portion of its $300b of 2012 maturing debt. If there is anyone who think that Monti can pull off a miracle, they are deluded, he is simply in charge of seizing the private wealth accumulated by Italian citizen to cover for the enormous Italian public debt and compensate foreign investors and banks in the process. There is a zero chance for a market solution for Italy. Either the ECB (aka Germany) steps in and underwrites the debt with some form of Euro bonds or the IMF (aka the USA) steps in with some very serious money.
Italian bond yields more than doubled in a month and this has left banks and financial institutions scared to death.
Either this gets fixed or Italy defaults in less than six months. The default option is not really an option that policy makers would consider. If Italy can’t make it, then there will be a very big crashing sound. It would end up taking out most of the global lenders, a fair number of countries would follow into Italy’s vortex. In my opinion a default by Italy is certain to bring a global depression; one that would take many years to crawl out of. The policy makers are aware of this too.
Something is brewing. If there is a plan in the works it must involve the IMF and it’s going to be big.

In the real world of global finance the reality is that any country that is forced to accept an IMF bailout is also blocked from issuing debt in the public markets. IMF (or other supranational debt) is ALWAYS senior to any other indebtedness of the country. That’s just the way it works. When Italy borrows money from the IMF it automatically subordinates the existing creditors. Lenders hate this. They will vote with their feet and take a pass at Italian new debt issuance for a long time to come. Once the process starts, it will not end. There will be a snow ball of other creditors. That's exactly what happened in the 80's when Mexico failed; within a year two dozen other countries were forced to their debt knees.
There is unfortunately not anymore a safe exit from this mess. The liquidity crisis in Italy is scaring us to death, the solution will almost certainly kill us.

Berlusconi resigned or is he just taking time?

Today the dream of many Italians could have become reality with Berlusconi announcing his resignation after the approval by the end of this month of the austerity budget.
Although my feeling and knowledge of Italian politics would suggest a more cautious attitude.
First he has not resigned yet and he will be in power till approval of the austerity budget, which is supposed to take place at latest by the end of November but given the epic ability of Italian politics to complicate things either willingly or unwillingly could very well last longer regardless of all proclamations of urgency.
Secondly knowing the mindset of Berlusconi he has either struck a deal with the Italian President Napolitano for an amnesty in exchange for his quiet exit from power or he is simply trying to buy time to recover from a majority loss.
It was clear today that Italy was on the edge of bankruptcy if no answer was provided to the total horror of the Italian spread and CDS rates. Italy is clearly weeks if not days away from economic collapse and the total inability of the government to deal with this crisis was shouting for some decisive answer to the markets.
It remains to be seen how many days this resignation promise of Berlusconi will buy before markets will realize that nothing has changed in Italy and that the inability of Italian politics to offer a serious and credible alternative to Berlusconi will not stop the economic collapse.
There is still the thought back in my mind that Berlusconi faithful to his reputation of a shameless crook will pull another trick of his, finding a way to turn this impasse to his advantage. Let's hope it will not be a delaying tactic to block the approval of the austerity package because Italy will be under deep scrutiny and any whiff of fraud will resume the spiral death of the Italian economy.
Furthermore the IMF is going to Rome this week to scrutinize the Italian books as previously done in Greece and we have to hope they will not find ugly surprises or black holes of debt courtesy of our fraudulent still to be Prime Minister Berlusconi.

Wikileaks cable reveals Germany conundrum over Euro

The following is an integral Wikileaks cable issued on the 12th of February 2010 from US Ambassador to Germany, worth reading to understand what is going on behind the scenes:

C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 000181

SIPDIS

STATE FOR EEB (NELSON, HASTINGS), EEB/IFD/OMA (WHITTINGTON), DRL/ILCSR AND EUR/CE (SCHROEDER, HODGES) LABOR FOR ILAB (BRUMFIELD) TREASURY FOR SMART, ICN (NORTON), IMB AND OASIA SIPDIS

E.O. 12958: DECL: 02/12/2020
TAGS: EAID EFIN ECON PREL EUN GM GR PGOV
SUBJECT: GERMANY RELIEVED BY EU SUMMIT OUTCOME ON GREECE

Classified By: ECONOMIC COUNSELOR INGRID KOLLIST, REASONS: 1.4 (B) AND
(D)

¶1. (C) SUMMARY: Chancellor Angela Merkel's government welcomed the decision taken at the EU's February 11 informal summit in Brussels not to provide financial assistance, for the moment, to cash-strapped Greece. German officials believe a bailout is not needed at this time, and that extending a lifeline to Greece would have carried too many risks. One major fear in Germany is that "saving" Greece would lead to other needy Eurozone members expecting the same treatment. Another concern is that extending an explicit guarantee for Greece could weigh on Germany's own good standing in the markets, ultimately raising its borrowing costs.  While German government officials do not totally rule out an IMF program for Greece if push came to shove, most consider this eventuality highly unlikely, especially in light of the European Central Bank's strong opposition.  In fact, the German government, the ECB and private German economists are downplaying the seriousness of Greece's predicament and its potential impact on stability of the Euro.  They agree, however, that the crisis could have longer-term consequences for EU institutions and how they interact with member states that stray off course.  END
SUMMARY.

NOT IN THE MOOD
---------------

¶2. (C) Prior to the February 11 EU Summit in Brussels, there was much hair pulling in Berlin over the wisdom of participating in some sort of Greek rescue. No one savored the idea of explaining to German taxpayers, already concerned about Germany's record deficit, that they would be footing the bill for the irresponsible behavior of another country. A Finance Ministry official explained to us that many Germans felt disgusted by the situation in Greece: "While Germans have spent the past decade tightening their belts and improving their competitiveness, Greek civil servants still earn 14 months' salary per year."  A recent editorial in the German daily Frankfurter Allgemeine Zeitung (FAZ) asked rhetorically whether Germans would need to work until age 69 just to finance early retirement for Greek workers.  With important upcoming elections in the state of North Rhine-Westphalia, bailing out Greece would not be a vote winner.

OFF THE HOOK
------------

¶3. (C) The German government was, in fact, "relieved" that the European Council meeting on February 11 decided not to put concrete assistance on the table at this time. Wolfgang Merz, Director for European Financial Affairs, German Ministry of Finance, told us that while Germany stands ready to throw a lifeline if the Greek government truly runs aground, Greece currently has access to capital markets and needs no outside assistance. The key to overcoming the crisis will be the Greek government's implementation of the planned austerity measures, said Merz. Bernhard Speyer, Head of Banking, Financial Markets and Regulation at Deutsche Bank (DB) Research, agreed that the EU struck the right balance: "The decision gave reassurances that Greece would not be abandoned, but kept the pressure on the Greeks by not yet putting cash on the table."

¶4. (C) Stepping in with assistance at this point carried too many downside risks, according to Merz. Legal questions aside, a German or EU bailout of Greece might have harmed Germany's credit worthiness, thereby raising its own borrowing costs. Merz added that a bailout would certainly have set a bad precedent for other Eurozone countries, such as Spain and Portugal, experiencing similar stresses. (Merz acknowledged, however, that these two countries' problems were less acute -- a sentiment echoed by Speyer.)

¶5. (C)Still, there is some skepticism that Greece's austerity program will get the country's finances on the right track, even if fully implemented. Merz said an IMF bail out remained on the table, despite the official line that the situation in Greece could be addressed within the EU.

IMF RESCUE? RESOUNDING NO FROM ECB
----------------------------------

¶6. (C) According to Karlheinz Bischofberger, Deputy Head of the Financial Stability Department at the European Central Bank (ECB), the likelihood that the IMF will be asked to bail out Greece is "zero." Greece does not have a balance of payments crisis, so there is first and foremost no basis for the IMF to step in. Bischofberger added that apart from the damage to the ECB's reputation an IMF intervention would inflict, it was uncertain that the IMF could even succeed in doing the "political dirty work" of forcing Greece to implement a structural adjustment program. DB Research's Speyer concurred, adding that [and IMF intervention] would undermine the credibility of EU institutions to manage a crisis.

REPORTS OF MY DEATH ARE GREATLY EXAGGERATED
-------------------------------------------

¶7. (C) Talk of a possible break-up of the Eurozone is "absurd," according to Moritz Kraemer, Managing Director, Standard and Poor's. He noted that Eurozone membership is still seen as highly desirable, and there was absolutely no incentive to exit, despite the allure of devaluation. Any country that tried to leave the Eurozone would get hammered in the credit markets, exacerbating any underlying structural problems. S and P estimates that Greece's rating in the case of an exit would drop to "BB " or lower, i.e. below investment-grade. Even today, Greece's rating of "BBB " is higher than it was in 1997 ("BBB-") before joining the common currency. [ZH: HAHA]

¶8. (C) While the current crisis may have revealed an "Achilles heel" of the Eurozone, it may present opportunities, according to Klaus Masuch, Head of the EU Country Division, Directorat General of Economics, ECB.  The crisis is a "healthy warning signal" that Eurozone members must conduct "sound national policies in line with the agreed rules."  It also underlines the necessity of better integration and coordination of member state fiscal policies. 
The Euro will come out of this crisis strengthened, he said.
Better and stricter early warning and surveillance systems will be in place, and the Stability and Growth Pact will ultimately be reinforced. DB Research's Speyer agreed, adding that the crisis could make EU member states proceed more cautiously with enlargement.

A EUROZONE CHAPTER 11
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¶9. (C) DB Chief Economist Thomas Mayer told Ambassador Murphy he was pessimistic Greece would take the difficult steps needed to put its house in order. A worst case scenario, says Mayer, could be that Germany pulls out of the Eurozone altogether in 20 years time. In 1990, Germany's Constitutional Court ruled that the country could withdraw from the Euro if: 1) the currency union became an "inflationary zone," or 2) the German taxpayer became the Eurozone's "de facto bailout provider." Mayer proposes a "Chapter 11 for Eurozone countries," which would place troubled members under economic supervision until they put their house in order. Unfortunately, there is no serious discussion of this underway, he lamented.

COMMENT
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¶10. (C) Chancellor Merkel is clearly relieved she does not, for now, have to explain to the public why the German government is running up its own deficit to bail out debt-laden Greece. Still, the German government appears prepared to step in as a last resort if needed and is cognizant that German banks (such as Hypo Real Estate and Deutsche Bank) and insurance companies (Allianz) have significant exposure to Greek sovereign debt. The crisis is also viewed -- within the German government as well as within the ECB -- as a way to exert greater influence over the public finances of profligate Eurozone members. Some Christian Social Union (CSU) politicians are even using the crisis to promote the candidacy of Bundesbank President Axel Weber as next ECB President, arguing that Weber's selection would send a signal that Eurozone stability is paramount. [ZH: Axel Weber was passed over for the post of ECB head and instead former Goldman staffer Mario Draghi was appointed] One way or another, the consequences of the Greece crisis seem likely to outlive the immediate situation. One strong possibility is that German influence over policy in the common currency area will grow.

ECB threatens stopping purchase of Italian Bonds

Three months ago, in exchange for the ECB's purchase of Italian bonds, allegedly the only backstop that has prevented Italian bonds from experiencing an all out collapse to date, Italy was presented with a list of strict "austerity" demands, among which were spending cuts, higher revenues and labor reform. Since then none of these has occurred... or will occur, simply because Berlusconi has no control over the government and cannot care less while taken with more important judicial issues. Well, It appears that the ECB has just made it clear that the status quo is about to end, unless Italy does in fact push with something the ECB will have no choice but to play hard ball. Reuters has just confirmed that The European Central Bank had discussed the possibility ending the purchase of Italian government bonds if it concludes Italy is not adopting promised reforms.
ECB Governing Council Member Yves Mersch said. "If we observe that our interventions are undermined by a lack of efforts by national governments then we have to pose ourselves the problem of the incentive effect," Mersch said according to extracts of an interview with Italian daily La Stampa published today.
The ECB has issued an ultimatum to Berlusconi to get his house in order. The problem is that he can't. Not without stepping down and that will not happen. If the ECB will stop purchasing Italian bonds it will start a death down-spiral on the markets forcing Berlusconi out of power but paving the road to Italy default and economy collapse. We will see how far they will go with the threat and their bluff and how tenacious will be Berlusconi in his preservation fight.
And here is what an ECB ultimatum sounds like:

Asked if this meant the ECB would stop buying Italy's bonds if it did not adopt reforms it has promised to the European Union, Mersch, who heads Luxembourg's central bank, replied:

"If the ECB board reaches the conclusion that the conditions that led it to take a dec
ision no longer exist, it is free to change that decision at any moment. We discuss this all the time."

Since the ECB resumed its bond buying programme (SMP) around three months ago it has purchased some 100 billion euros of government bonds, a majority of which are thought to be Italian BTPs.

Mersch said the ECB did not want to become a lender of last resort to help the euro zone solve its debt crisis and said it was concerned that its job could be made more difficult by governments that "don't meet their responsibilities."

And the punchline:

"Our job is not to remedy the errors of politicians," he said.

Chaos and Anarchy in Athens

The situation is rapidly degenerating in Greece, in just one day after the surprise announcement of Papandreou indicting a a referendum on the EU bailout we have the following news:
One of Papandreou MPs has left the party and therefore is putting the Government vote of confidence on Friday at risk; voices are spreading of another possible defection bringing Papandreou's Party to a very thin majority.
Venizelos the Finance Minister was hospitalized it seems he found out by the media that Papandreou asked for a referendum, it appears the Greek Prime Minister kept his decision a secret from everyone even his Finance Minister.
The Health Minister has opposed the referendum saying it won't take place in contrast with his Prime Minister.
Papandreou has reshuffled the Army command appointing a new general as the new Chief Commander.
All this sound as full total chaos ready to be unleashed on the nation and the change in the army command could indicate anarchy and military mobilization ready to hit Athens' streets.

And to understand what we canexpect from today's High Stake Greek Gamble read the following From Zero Hedge:

The decision by Greek PM Papandreou to call for a referendum on the latest Greek bailout deal shows that Greece is becoming ungovernable. The PASOK leader made this decision because riots in the streets, increasing refusal by civil servants to implement the austerity measures and the likely loss of his majority in parliament made the survival of the government unlikely within weeks or months.
So Papandreou has gone for broke. He hopes that by winning a vote on the bailout plan he can shut up the opposition both in parliament and on the streets. But this high-risk strategy threatens to bring the whole house of Euro cards down.
At best, we face two months of uncertainty before the vote. The Greek parliament must approve the call for a referendum and the President must agree. And then it depends on how the referendum question is worded. If it is ‘do you want to accept the latest bail out plan’ then the answer will be a resounding no. If they word it so it says ‘do you wish to remain in the Euro zone’ then the answer will be a resounding yes.
At worst, Greece may not even make it to mid- January before there is a disorderly default. Parliament could defeat a vote of confidence in the government on Friday and Greece would be plunged into elections, with the opposition likely to win on a programme of ‘renegotiating’ the bailout plan so tortuously agreed with the Euro leaders.
Also the latest tranche of official funding from the EU and the IMF under the old Greek bailout plan could be frozen if the government falls. Under IMF rules, it cannot disburse a tranche if there is no government. The EU would have to step up to the plate and provide all the funding until the election or referendum is over. Without this money, Greece would be bankrupt.
And just imagine if Greece heads into two months of a referendum campaign with riots and demonstrations in the streets. A run on Greek banks — Argentina-style — would become very likely. It’s true that the rich and many corporations have already moved their euros abroad, but the populace at large would soon be running to get their euros under mattresses fast if they thought that Greece was set to default and leave the euro.
The Greek public debt ratio may be heading towards 180% of GDP next year without the bailout plan, but if Greece leaves the Eurozone with a no-vote in the referendum, a New Drachma devalued by 50% or more would double that debt ratio.
The optimistic scenario is that the Greek parliament backs the government and a referendum campaign is conducted on ‘staying in the euro’,  which is won. The Eurozone and the IMF continue to finance the Greeks over the next two months before the new bailout package takes over. The 50% haircut for the banks on their holdings of Greek debt goes through with over 90% involvement; the banks receive funds to  recapitalise; and the EFSF is enhanced with new firepower to inoculate Portugal, Spain and Italy from the Greek nightmare. And the G20 meeting comes through with new measures of funding to help Europe.
The more you think about, the less likely that sounds. More likely, the uncertainty will undermine the efficacy of enhancing the EFSF through adequate funding from a Special Purpose Vehicle. It will increase contagion for Italy and Spain, increasing the cost of ring-fencing. And a  disorderly default would trigger losses for the ECB itself on its holdings of Greek debt.

MF Global Domino Effect

There is a major financial hurricane coming and today's failure of MF as much as meaningless to the general media is a further tile falling on the board which could have big repercussions.




Reuters reports that "U.S. regulators are unhappy with the failure of MF Global Holdings Ltd to provide them with the required data and records, a source close to one regulator told Reuters on Monday. "So far they've been very disappointed with the cooperation in the fulsomeness of records and data from MF," the source said, noting regulators have been working with the firm since late last week. "They were supposed to be able to show us their books and they're supposed to be able to tell us what's what and where their customer funds are and how they've been segregated and protected and to date we don't have the information that we should have," the individual told Reuters." whatever MF is hiding is not something that will hurt it or much less its stakeholders.
After all the company is already dead. Whatever is on its books has huge impacts to those either behind the corporate veil, read Mr. Corzine or more probably other banks and Primary Dealers. And with even one simple affidavit still to be filed in Bankruptcy Court, the panic behind the scene is palpable.

From Reuters:

MF Global, which filed for bankruptcy protection on Monday, is the biggest U.S. casualty of Europe's debt crisis, and the seventh-largest bankruptcy by assets in U.S. history.

Regulators had expressed "grave concerns" about the viability of MF Global, which filed for bankruptcy only after "no viable alternative was available in the limited time leading up to the regulators' deadline," the company's chief operating officer, Bradley Abelow, said in a court filing.

U.S. regulators held a series of calls on Monday related to MF Global.

The Financial Stability Oversight Council, which is headed by the Treasury Department, received "a series of oral reports" from the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Reserve, according to one Treasury Department official.

No other details of the calls were provided.

So: just what secrets is the corpse of MF about to reveal?

EU Meeting Update

The release of the Troika report seemed to bring events this weekend in Europe to an early halt, according to SudDeutsche.

The Telegraph reports on some choice turns-of-phrase among the leading players, our favorite being:

"It was grim. The worst mood I have ever seen, a complete mess," said one eurozone finance minister.

SudDeutsche reports was in the Troika debt sustainability report (via Google Translate).

The numbers that the Troika on Friday evening on the debt situation in Greece is presented, have altered the agenda of the Euro-Finance completely. Really wanted the department heads to advise [if] they need to convince the country's private creditors to agree on a bigger discount on the bonds held by them, than the previously planned 21 percent.

But the "if" was suddenly a "how high?". Because the inspectors of the Greek lender describe in their "debt sustainability report," a scenario that far surpasses any fears. The country needs even under "normal" conditions, so if everything goes as planned with the reforming and saving, at least 252 billion euros , by 2020 to get back on its feet.

If the economy collapses further, state enterprises can not be privatized as hoped, nor do the reforms [produce the] € 444 billion needed to [please] the inspectors. So it is suddenly clear: the euro rescue fund EFSF is hardly sufficient for more countries to save, and his successor, the latest from 2013 operational ESM also not good.

Furthermore:


"It is clear that a substantial debt cut is necessary," however, said Swedish Finance Minister Anders Borg....

The Exchequer George Osborne sharply criticized the actions of the euro partners: "The crisis in the euro-zone causes major damage in many European economies, including Britain," he shouted in Brussels, adding: "We have had enough of short-term measures, it is enough ... with measures that bring us through the next few weeks. " Europe must tackle the causes of the crisis.

... The Luxembourg Foreign Minister Jean Asselborn announced immediately to resist. "What we need now is rest and no whip," he said.

A stronger economic cooperation is also possible on the basis of existing treaties. "It is important that we do not open another front," said Asselborn. "It can not be that domestic political considerations of even the greatest country outweigh everything."

It was clear that the reality of the size of loan required to 'solve' Greece alone will likely leave the cupboard bare:

Jan Kees de Jager, the Dutch finance minister, told colleagues: "We've got to get real. People are talking about new defences but with one gulp the whole €440 billion could be gone, leaving the eurozone with no protection at all."

Schaeuble-to-Everyone:

According to insiders, Wolfgang Schaeuble, Germany's finance minister, could not resist taking an "I told you so" approach - he had been, after all, the first to call for an "orderly" default for Greece 18 months ago, at a time when the cost of such a move was less than one third of the price today.
"Schaeuble is a man who does not mince his words, whose reputation for harshness and arrogance is well earned. He was, frankly, unbearable," said one diplomat.

And Baroin (France) to IMF swiftly followed by Lagarde (France/IMF)'s slapdown:

Francois Baroin, the young and inexperienced French finance minister,
attempted to hit back, complaining that the IMF's default medicine would hit
France the hardest; the country's banks are highly exposed and could
threaten its "untouchable" AAA rating.

But Mrs Lagarde, who had held his post until taking up the IMF job this
summer, "shut him up" by brandishing the report and pointing to it
its detailed figures. "She really slapped him down - and in perfect
English too, a language he cannot speak," said a diplomat.

We suspect many of the attendees (finance ministers) have not actually spoken to one another, read any serious research, or even attempted to comprehend the whole-versus-the-single sub-optimal decisions they face (until very recently) as their voluminous outbursts were incredible:

"Their shouting could be heard down the corridor in the concert hall where an orchestra was about to play the EU's anthem, Ode to Joy," said an incredulous EU official.

It did not stop there as the pointlessness of the meeting was highlighted as it became increasingly clear that the good old Franco-German comradeship may be fraying at the core and at the edges and without them.

Finance ministers - including George Osborne, the Chancellor - expressed frustration on Saturday that their emergency meeting could take no decisions of substance until Mrs Merkel and Mr Sarkozy had buried the hatchet.

"This Ecofin meeting has been reduced to an academic seminar, an exercise with absolutely no purpose," complained one finance minister. 

Paying the price

The third episode of Meltdown looks at how the victims of the 2008 financial crash fight back. A protesting singer in Iceland brings down the government; in France a union leader oversees the kidnapping of his bosses; and thousands of families are made homeless in California.

Dexia's nationalization and Greece de-nationalization

On many occasions in the last two years when it should have been time to let Greece go to greener pastures, Euro bureaucrats had cold feet and decided to keep the circus rolling for another show.
This time although it could be finally the right time to unload the burden and let Greece default.
Judging from today's comments the giant Euro Ponzi scheme is reaching the limits of manipulation and it could have been decided to start the end game.
 
ECB head Draghi says the bank in Europe have funding problems (aka a liquidity crisis), the Finland Finance Minister has said he does not want an expansion of the EFSF nor does he expect a solution on the collateral "row", saying a Deal on EFSF Collateral is uncertain, and lastly, Spain's Salgado has said there is no need of "quantitative amplification" of the EFSF.
In other words, with the EFSF meeting imminent, it appears that pretty much nobody aside from France, and some Economical PhDs, are any longer concerned about the domino effect, the Euro project or marginally of the necessity to keep Greece afloat.

This could have something to do with the fact that banks which were supposed to be in real danger with a collapse of Greece are already falling with or without a Greek default.

Dexia CDS is skyrocketing and the Sunday Times announced an imminent nationalization of the bank which hold assets amounting to 180% of Belgium's GDP. It appears Belgium will have to intervene soon with a bailout or total nationalization to prevent the institute premature demise.

At this point to avoid throwing away more money to a lost cause such as Greece it is retrenchment time for the ECB, with all the ideals of European unity being thrown out of the window.

A global financial tsunami

In the second episode of Meltdown, we look at how the financial tsunami swept the world. We hear about a renegade executive who nearly destroyed the global financial system and the US treasury secretary who bailed out his friends.
Henry 'Hank' Paulson, the former CEO of Goldman Sachs and later an economic advisor to the US government; refused to bail out global financial services firm - the Lehman Brothers. Paulson said it was not the role of government to save private businesses.
Lehman's failure had repercussions around the world. Millions of people lost their life savings. Pension plans were decimated.
Christine Lagarde, the French finance minister at the time and a close friend of Paulson's, publicly described Paulson's decision on Lehman "horrendous".
Markets from London and Paris to Shanghai fell. An epidemic of fear caused the world's major banks to stop lending, ending the year in protests and industrial action.

Portfolio: Preparing for Greece's Failure

Portfolio: Preparing for Greece's Failure


The financial news of the week again is about the eurozone and we are seeing lots of entities come up with lots of possible solutions about how to solve the eurozone problem. They all of course rest on what to do about Greece. The problem is, they are coming from the wrong angle. From STRATFOR’s point of view, Greece does not have a particularly bright future as a state before the eurozone crisis is taken into account.
Modern Greece has traditionally been supported by three pillars. First is shipping. As a culture that is mostly coastal it makes sense they would be very good at sailing; however, in the age of modern transport and super container ships, Greece simply can’t compete, and most of its ship building industry has long ago left for greener pastures in places such as Norway, China or Korea. The second pillar is tourism and this continues to be an option, but tourism by itself cannot support a modern state. The final option and the one that the Greeks have gotten the most mileage out of is leveraging Greece’s position. Typically to allow some external power a means of battling somebody in Greece’s neighborhood. When Greece achieved independence in the early 1800’s that external power was the United Kingdom who used Greece as a foil against the Turks. Later, the Americans played a similar role supporting Greece against the Soviets. In both cases massive volumes of capital came in to support Greece. However, in the post-Cold War era Turkey is a member of NATO, and while the Greeks might not get along with the Turks, nobody is looking to use Greece as a military foil against them. Greece no longer has a regional foe that it shares with anyone else. The closest might be the Turks again, but only if the Turks miscalculate their ongoing relationship with Israel or Cyprus and miscalculate very very badly.
Bottom-line, the various supports that have allow the Greek state to exist since the 1820’s simply aren’t there anymore and so the path forward goes like this: Greece is not salvageable. Greece simply can’t compete unless it is being given a constant, steady supply of capital from abroad that it doesn’t necessarily have to pay back. And even if that could be restarted, Greece can not emerge from its own debt load. It is simply too large. Greece has to be kicked out of the eurozone if the euro is to survive, but between here and there, first, a firebreak fund. The EFSF expansion has to happen because if you cannot sequester the 280 billion euro of Greek government debt that exists outside of Greece, then you’re going to trigger a massive financial catastrophe that the eurozone simply can’t survive. And so to prepare for a Greek ejection, you have to prepare a fund that can handle three things more or less simultaneously. First, you need about 400 billion euro to firebreak Greece off from the rest of eurozone. Second, you need about 800 billion euro in order to prevent a wide-scale banking meltdown, because the day that Greece defaults on that debt, the day that it’s ejected from eurozone, there will be catastrophic banking collapses in Portugal, Italy, Spain and France, probably in that order.
Third, the markets will go wild and the state that is in the most danger of falling after Greece is Italy. Using the bailouts that have happened to date as a template, any bailout of Italy would have to provide enough financing to cover all Italian needs for three years. That comes out to about another 800 billion euro. So until the Europeans have 2 trillion euro in funding stashed away, they can’t kick Greece out of the system.

Read more: Portfolio: Preparing for Greece's Failure | STRATFOR

Super-sized EFSF and Greece Default

Germany's economic elite has said it would agree to an EFSF expansion and hence installation of European firewall, but at a price: a "controlled" default by Greece and 50% haircuts for private bondholders (good for German banks who have already offloaded their Greek bonds).

This means that a second "Lehman" moment is indeed here!
So as part of this new strategy, here are the three key components of the plan to "firewall" contagion, via the Telegraph.

Sources said the plan would have to be released as a whole, as the elements would not work in isolation.

First, Europe’s banks would have to be recapitalised with many tens of billions of euros to reassure markets that a Greek or Portuguese default would not precipitate a systemic financial crisis. The recapitalisation plan would go much further than the €2.5bn (£2.2bn) required by regulators following the European bank stress tests in July and crucially would include the under-pressure French lenders.

Officials are confident that some banks could raise the funds privately, but if they are unable they would either be recapitalised by the state or by the European Financial Stability Facility (EFSF) – the eurozone’s €440bn bail-out scheme.

The second leg of the plan is to bolster the EFSF. Economists have estimated it would need about Eu2 trillion of firepower to meet Italy and Spain’s financing needs in the event that the two countries were shut out of the markets. Officials are working on a way to leverage the EFSF through the European Central Bank to reach the target.

The complex deal would see the EFSF provide a loss-bearing “equity” tranche of any bail-out fund and the ECB the rest in protected “debt”. If the EFSF bore the first 20pc of any loss, the fund’s warchest would effectively be bolstered to Eu2 trillion. If the EFSF bore the first 40pc of any loss, the fund would be able to deploy Eu1 trillion.

Using leverage in this way would allow governments substantially to increase the resources available to the EFSF without having to go back to national parliaments for approval, which in a number of eurozone countries would prove highly problematic.

The arrangement is similar to the proposal made by US Treasury Secretary Tim Geithner to the eurozone at the September 16 EcoFin meeting in Poland. Gathering turmoil in financial markets has convinced Germany to begin work of some kind of variant of the US plan, despite having initially rejected the notion as unworkable as threatening to compromise ECB independence.

 The proposal would be hugely sensitive in Germany as its parliament has yet to ratify the July 21 agreement to allow the EFSF to inject capital into banks and buy the sovereign debt of countries not under a European Union and International Monetary Fund restructuring programme. The vote is due on September 29.

As quid pro quo for an enhanced bail-out, the Germans are understood to be demanding a managed default by Greece but for the country to remain within the eurozone. Under the plan, private sector creditors would bear a loss of as much as 50pc – more than double the 21pc proposal currently on the table. A new bail-out programme would then be devised for Greece.

Europe's Dilemma: When to cut Greece out of the Eurozone

Finally, Greece default is no longer a taboo, but in the last days it has been finally given real consideration with plans being devised to try and make it as soft as possible.
Europe should have let Greece default 1 years ago and it would have been much less costly to the EU and maybe would have prevented a Domino effect.  The reality now is that Europe needs to abandon the existing perimeter and fall back to a more defensible position.  Europe doesn’t need to collapse, but it does need to retreat to a core, stronger position, where it can dig in its heels and defend itself, how deep the retreat will be is going to be defined by events in the following weeks.
Contagion was a concern back then in regards to Ireland and Portugal, now it is a reality.  Only the darkest of the doom and gloom crowd believed that contagion could really spread to Spain and Italy, yet now we have reached that point.

Italy and Spain are now trading almost where Portugal was a year ago before being bailed-out. Italy is the biggest loser in the recent turmoil and it is leading stock market losses with an incredible -33%.  How much easier would it have been for Italy to withstand a Greek default when it’s 5 year bonds were trading at Bunds + 134 instead of Bunds + 407. 
Let’s just admit it is gangrene and that it has already spread farther than is safe, but it is still better to cut off an arm to save the body.  If we keep waiting it may not be possible to save the patient.  The patient is getting weaker by the day, and being blind to that is just as big and just as dangerous as letting Greece default now.

EU is morally bankrupt and financially insolvent

Breaking news on Italian newspapers are quoting a decision of Brazil, Russia, India and China to coordinate massive purchase of Euro bonds to save Europe from assured disaster.
Although international newspapers are more sceptical of this possibility as reported by Reuters below.


From Reuters:

BRIC major emerging markets are considering ramping up holdings of euro-denominated bonds in a bid to help European countries mired in a sovereign debt crisis, newspaper Valor Economico reported on Tuesday, citing a monetary official.

Valor reported a decision could be made at a Sept. 22 meeting of finance ministers and central bank presidents from Brazil, Russia, India, China and South Africa in Washington.

Brazil's central bank declined to comment on the story. The source in the report was not identified.

It could be a trick to avoid stock collapse and earn some time as it was a trick yesterday's news of Chinese intervention on the Italian sovereign market.
True or not, this is an historic event, for the first time since Middle Ages Western powers are the rescued and not the saviours just this idea is destined to change the arrogant and obsolete mindset of the European population at last.
If BRIC countries will rescue Europe they will try to capitalize on this emergency as much as possible, they will try and pull concessions and strategic industries and infrastructure control in exchange for their money, the fire-sale of Europe will start and in a matter of few years the geography of power will be completely upturned with Europe finding itself under debt indentured service.
Interesting how Europe is getting back to the same debt dynamics of World War II, this time though not due to bombardments, war and destructions, we went into debt for villas, sport cars and luxury items we could not afford but we wanted just the same, for greed and arrogance, for short-sightedness and stupidity.
BRIC countries are aware as the ECB is aware that it is impossible to go on buying Italian, Spanish, Greek, Irish and Portuguese bond indefinitely to keep alive zombie economies and profligrate populations unwilling to pay the price of their recklessness.
Europe can posticipate the inevitable default but will be faced with an hefty bill for selling its soul in exchange for few years of mitigated decrease of standards of living.
The default will arrive maybe not this year but in 1-2 years if BRIC countries keep this insanity alive but when it will unleash Europe will be just a shadow of what is now, voided of power, wealth, dignity and prestige, just a leech.
There is another risk though which is worth consideration, as Chinese sources mentioned yesterday we do not trust buying Italian bonds if the ECB is unwilling to do it.
Effectively when the central European bank in unwilling to risk why those countries should?
The reality is that the EU has surrendered and it has effectively declared the breakup of the Euro, for the EU to leave the shielding of its periphery to external actors is an effective declaration of surrender.
It means that BRIC countries will sustain those economies until an orderly breakup can be arranged or other events will unfold.
Either way BRIC countries get access to a strategic European periphery.
Let us not forget that only 1 year ago for the EU it was a shame even to consider an assistance from the IMF on the Greek crisis, now with Italy and Spain at stake the IMF with Lagarde is silent, IMF does not even meddle anymore in this issue which gives us 1 or 2 thoughts on why Strauss-Kahn was liquidated.
With half of the developing world coming to rescue of Europe there is no embarrassment at all, either the situation is so desperate that shame is no longer in the equation or a trap is being set for the developing world to bleed assets in Europe before orderly default will occur just for strategic considerations.
Probably it is both but one thing is sure the degeneration of the EU is set to leave a very painful mark in the years to come.