The Euro Zone Bailout

[HenryTo]

Look for the leaders of the Euro Zone to unveil a plan to bring down lending/borrowing (inter-bank and otherwise) rates before the markets open. At this point, a government-led recapitalization of various European financial institutions is probably the leading candidate:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aL2AwkNk5BVo&refer=home

[HenryTo]

The mess that is the Euro Zone and the Euro.

http://blog.yardeni.com/2012/05/euro-mess.html

[HenryTo]

Merkel backs plans to increase the Euro Zone's "firewall" to €700 billion; but other countries remain uncommitted.

http://www.ft.com/intl/cms/s/0/a7535128-7763-11e1-827d-00144feab49a.html#axzz1qFsAlRI7

[rffrydr]

Here's some:

http://www.ft.com/intl/cms/s/3/af504786-2d5e-11e1-b985-00144feabdc0.html#axzz1hHkH0fNr

"Just" a few billion....for now. But china was supposed to be running from Europe like the plague!
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

I'd be interested in where Bridgewater thinks the $2T-plus in maturing debt that they KNOW will not be rolled-over is going to go? China? Russia????.... Treasuries?!!!.... oh, yeah, gold. Wait a minute....

It's going to be rolled; and what's not will get parked in, wait for it,... banks.
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Bridgewater on the latest Euro Zone bailout plans.

[HenryTo]

S&P places the Euro bailout fund on negative watch. Bailout fund will probably need to be bailed out at some point--by private investors. "Austerity" only gets you so far.
------------------------------------------------------------------------------------
S&P threatens euro zone, EU chief urges bigger fund

By Luke Baker and David Lawder

BRUSSELS/BERLIN (Reuters) - Standard & Poor's fired a second warning shot at the euro zone in 24 hours, threatening on Tuesday to cut the credit rating of its financial rescue fund as European leaders raced to find a political solution to their sovereign debt crisis.

German Chancellor Angela Merkel and French President Nicolas Sarkozy want to change EU rules to impose mandatory penalties on euro zone states that exceed deficit targets, aiming to restore market trust and prevent the crisis spiraling out of control.

Visiting U.S. Treasury Secretary Timothy Geithner said after talks in Berlin he was encouraged by recent moves towards fiscal union in Europe and stressed the central role of the European Central Bank (ECB) in tackling the crisis.

Citing "continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis," S&P put the ratings of 15 countries, including Germany and France, on review late on Monday for a downgrade by 1-2 notches.

The U.S.-based agency went a step further on Tuesday, placing the top-notch rating of the euro zone's 440 billion euro rescue fund, the European Financial Stability Facility (EFSF), on negative watch since it depends on the creditworthiness of the currency bloc's six AAA-rated sovereigns.

European Council President Herman Van Rompuy, who will chair a crucial summit of the 27-nation European Union this week aimed at turning the corner on the crisis, proposed giving a bigger permanent euro zone rescue mechanism the status of a bank that would allow it to access ECB funding.
Germany has so far opposed any such move, which it says would breach a treaty ban on the ECB financing governments.

Van Rompuy said tighter budget oversight sought by Paris and Berlin for the 17-nation euro area could be achieved quickly with only minor tweaks to the EU treaty that might not require full ratification procedures in many countries.

"To restore market confidence in the euro area, and to ensure the political sustainability of solidarity mechanisms, it is crucial to enhance the credibility of our budget rules (deficit and debt levels) and to ensure full compliance," he wrote in a report to EU leaders obtained by Reuters.
He also said the issuance of joint euro zone bonds should be a long-term objective, challenging another German red line in a text likely to be the object of heated negotiations.

S&P warned of slowing economic growth amid so much austerity, predicting a 40 percent chance of a fall in euro zone output.
A downgrade could automatically require some investment funds to sell bonds of affected states, making those countries' borrowing costs rise still further.

Merkel brushed off the threat, saying: "What a ratings agency does is its own responsibility." Her finance minister, Wolfgang Schaeuble, said the wake-up call was S&P's way of urging European leaders to act.

But Jean-Claude Juncker, chairman of euro zone finance ministers, said he was astonished by S&P's announcement, which he called "a wild exaggeration and also unfair" because it failed to take account of Italy's new austerity plan.

In Paris, Sarkozy's office said S&P had taken its decision last Tuesday, before both the Italian budget and the Franco-German plan for stricter budget rules.

POLITICAL COVER

Geithner met ECB President Mario Draghi in Frankfurt and Schaeuble in Berlin, starting a round of consultations with top European policymakers before the EU summit on Thursday and Friday, a sign that Washington shares the view that the event may be a decisive moment for the global economy.

He will also meet the leaders of France, Italy, Spain, and EU institutions to press for decisive action to halt the crisis.

That could provide the political cover that the ECB needs to buy more bonds of ailing countries as a stopgap, preventing countries from running out of money if they cannot sell bonds on the open market.

ECB chief Draghi has signaled that a euro zone "fiscal compact" could encourage the central bank to act more decisively on the crisis. It has been reluctant to buy up debt from distressed euro states more aggressively, arguing doing so would take pressure off governments to fix their finances.

Investors cheered a plan announced on Monday by new technocrat prime minister Mario Monti, slashing its borrowing costs. Yields on Italian 10-year bonds fell below 6 percent for the first time since October 28.

Just last month, Italy - the euro zone's biggest debtor with 1.9 trillion euros of bonds outstanding - appeared headed for a crunch after the interest rate demanded by investors to lend to it soared above 7 percent, a rate at which other countries needed bailouts.

Were it not for his 30-billion-euro austerity plan, Monti declared, "Italy would have collapsed, Italy would go into a situation similar to that of Greece."

Goldman Sachs Asset Management Chairman Jim O'Neill told Reuters that Italian government debt yields now looked very attractive unless there was a "complete fiasco" at this week's EU summit. There would be no euro without Italy, he said.

Sarkozy and Merkel say they want treaty changes to be agreed in March and ratified after France wraps up presidential and legislative elections in June.

They won a boost on Tuesday when incoming Spanish prime minister Mariano Rajoy said he would support a new treaty. Although not yet in office, Rajoy is expected to meet Merkel and Sarkozy and outline his policies at a congress of European conservative leaders in Marseille on Thursday.

However, some other EU governments, notably Britain, Ireland and the Netherlands, are reluctant to amend the treaty, either due to eurosceptics at home or because they fear losing possible referendums on ratification.
If countries such as euro outsider Britain blocked a treaty change for all of the 27 EU members, the 17 states that use the common currency could proceed with an agreement on their own, Merkel and Sarkozy said.

S&P said it would conclude its review "as soon as possible" after the summit, making clear that it wanted to see political as well as financial solutions.

European stocks, bond futures and the euro recovered early losses after the warning, with analysts cautiously optimistic that the S&P move would spur European leaders into more decisive action.

Sarkozy and Merkel will send their own proposals to the EU's Van Rompuy on Wednesday, who would have preferred to avoid treaty change but is sounding out other governments on their receptiveness.

[HenryTo]

Euro bailout fund's structure very confusing. Realistically only 250B available and only if France and Italy contributes. My opinion: DOA.
-------------------------------------------------------------------------------
Euro bailout fund leveraging rules ready: documents

(Reuters) - Detailed operational rules for the euro zone's bailout fund, the European Financial Stability Facility (EFSF), are ready for approval by euro zone finance ministers on Tuesday, documents obtained by Reuters showed on Sunday.

The documents spell out rules for EFSF intervention on the primary and secondary bond markets, for extending precautionary credit lines to governments, leveraging its firepower and its investment and funding strategies.

The approval of the rules will clear the way for the 440 billion euro facility to attract cash from private and public investors to its co-investment funds in coming weeks, which, depending on interest, could multiply the EFSF's resources.

The bailout fund will also be able to offer partial protection for private investors on their purchases of euro zone sovereign bonds, like those of Spain or Italy, at primary auctions, boosting demand and lowering sovereign funding costs.

Euro zone leaders agreed on Oct 27 that the EFSF should be leveraged through the partial insurance scheme and the co-investment funds to around 1 trillion euros.

But the EFSF itself has played down that number as difficult in current market conditions of high aversion to euro zone debt exposure.

Outside investors have shown no concrete interest in investing in the fund, although some of said they would look closer when the operational details were made public, and analysts say it risks underwhelming the markets with insufficient firepower.

The European Central Bank, which is now buying bonds of Spain and Italy on the market to prevent borrowing costs for the two countries to get out of control, has been urging euro zone ministers to finalize the technical work on the EFSF quickly.

Officials have told Reuters that even once the details are agreed, the complexity of the mechanisms means the fund may not be operational until January.

That may be too late. With Germany rigidly opposed to the idea of the ECB providing liquidity to the EFSF or acting as a lender of last resort, the euro zone needs a way of calming markets, where yields on Spanish, Italian and French government benchmark bonds have all been pushed to euro lifetime highs.

PROTECTION CERTIFICATE

The documents specify that the EFSF would offer partial protection to investors buying a country's bonds at a primary auction of around 20-30 percent of the principal amount of the bond, depending on market circumstances.

The protection certificate would be detachable from the bond and could be traded separately, but the investor would have to hold bonds of the country before cashing it in.

The certificate could be paid if the bond issuer triggers a credit event under the full definition of the International Swaps and Derivatives Association. It would be paid in cash or EFSF bonds by a special purpose vehicle based in Luxembourg.

The documents also say that the protection certificate could be paid in case of a "modified sovereign restructuring," which is defined as a voluntary restructuring, exchange or debt buy-back or other event affecting a sufficiently high percentage of the private holders of one or more bonds.

This would mean that any Greek-type of voluntary debt restructuring would also trigger a pay-out of the guarantee.

The documents also says, however, that for the modified sovereign restructuring to be triggered, the total amount of bonds affected must reach a threshold to be specified -- presumably by euro zone finance ministers.

LIQUIDITY BUFFER

The documents also said that the EFSF would need to ready cash of around 10 billion euros to be able to react quickly to face the more urgent needs.

"The aim of this strategy is to provide EFSF with the necessary flexibility to carry out the new funding requirements through the issuance of short-term instruments," the document prepared for the finance ministers' meeting said.

This would allow the bailout fund to better manage lending needs through issuing short-term notes and then rolling them over into new short-term or long-term bonds.

"In addition, the issuance of short term instruments would allow EFSF to progressively achieve a permanent precautionary liquidity buffer which can be used to cover urgent and unexpected needs," it said.

"Loans and funding instruments could have different structures and therefore would necessitate the implementation of micro-hedge mechanisms," it said.

The EFSF could start regular, monthly auctions of bills, for example for 3, 6 and 12 months according to a calendar published quarterly with maximum monthly issuance of 20 billion euros.

"Furthermore, the issue of unsecured money market instruments as well as committed credit line facilities from banks are also required to complement the short-term funding for exceptional purpose," the document said.

The EFSF currently has a capacity of 440 billion euros but is already committed to providing assistance to Ireland, Portugal and Greece, and needs to set aside money in case it needs to help recapitalize European banks as well.

As a result, it only has about 250 billion euros available, not nearly enough to help Italy and Spain.

[HenryTo]

Goldman *finally* raises the possibility of a Euro Zone break-up.
----------------------------------------------------------------------------------
Euro zone countries could split, says Goldman Sachs exec

LONDON (Reuters) - Countries in the euro zone will find it increasingly unattractive to stay in the single currency, if there is a German-led fiscal integration, the chairman of Goldman Sachs Asset Management said in a Sunday Telegraph interview.

Portugal, Ireland, Finland and Greece could all pull out of the euro zone rather than operate under a single treasury, Jim O'Neill, whose division manages more than $800 billion (500 billion pounds) of assets, was cited as saying.

He also called on the European Central Bank (ECB) to show more leadership to reassure "worried investors."

"The Germans want more fiscal unity and much tougher central observation -- with the idea of a finance ministry," O'Neill said.

"With that caveat, it is tough to see all countries that joined wanting to live with that - including the one that is so troubled here (Greece)."

He added that only countries such as Germany, France and Benelux, were suited for a monetary union because their exchange rates were closely linked. But for others, it was questionable.

O'Neill said countries such as Finland and Ireland that are neighbors of non-euro zone countries -- the UK and Sweden -- might prefer to quit the euro, which would bolster the strength of the single currency.

He added that the Brussels bailout deal will not solve the crisis and that the ECB needed to buy bonds.

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.

Italy is seen as the next domino that could fall in the euro zone crisis, with yields on its 10-year bonds reaching 6.38 percent, close to the 7 percent threshold widely viewed as unsustainable.

A member of the ECB was reported on Saturday as saying it frequently debated the option of ending its purchases of Italian bonds unless Rome delivers on reforms.

O'Neill told BBC radio on Sunday that it will be "really interesting" to see how the markets react to the ECB's comments when they reopen on Monday.

He said the comments gave the impression the ECB was not an eager participant in trying to support the Italian bond market and bringing about stability.

"It would appear clear in that regard that they might also prefer a more of a unity type government to try and come up with a new economic policy for Italy," he said.

"But it is all very fragile and the markets are requiring a stronger leadership from within these countries as well as from the ECB."

[rffrydr]

[HenryTo]

FYI, following is courtesy of Stratfor:
-------------------------------------------------------------------------------------
Agenda: Issues Remain for the Eurozone Despite Its Grand Plan

Vice President of Analysis Peter Zeihan discusses the most important issues facing the eurozone and the chances of success for Europe’s grand plan.

Colin: As leaders of the G-20 countries prepare for their summit in France, the richest sovereign wealth funds like those of China, Abu Dhabi and Norway are being asked to risk billions of dollars of their surplus cash in the so-called grand plan to allay Europe’s debt crisis. But can that plan work?

Colin: Welcome to Agenda with Peter Zeihan, who is with me now. Peter, they call this a grand plan, but will it do the trick?

Peter: No, this summit is basically a placeholder. None of the core issues in terms of a potential Greek default, a potential Italian catastrophe or banking crisis have really been addressed.

Colin: So but will it enough to keep the euro alive?

Peter: For at least the next few weeks until the next crisis. There were three elements of the plan that was agreed to at the late-night summit. The first plan was a bank recapitalization of about €100 billion. Unfortunately a third of that is specifically for Greece and that is before you consider any sort of Greek government write down so you don’t have a lot of volume going into it. In fact, for countries like Austria and Belgium who have a couple of banks already in receivership, the entire amount of money for the recap is only to do with the specific banks. All of the broader problems of overcrediting, housing markets, pensions problems, none of those were addressed. You really need to do at least 300 or 400 billion recap if you are going to be very serious about this.

The second section was the Greek write-down of 50 percent, which has been agreed to in principle but they have not figured exactly which bondholders are going to be having to do the write-down. Keep in mind that there is €400 billion in Greek government debt and only €100 billion of it is going to be released in some way. So you have got a considerable number of creditors out there who somehow are going to escape, and now they have got to figure out which ones are and which ones are not. That is going to be quite contentious, it is going to take a few weeks.

Colin: And then the third issue, of course, is the fund itself.

Peter: Right, the bailout mechanism, the European Financial Security Facility, they have agreed to put into place some sort of leveraging system, although they are going to be working the details of that out later. The problem, of course, with the leveraging system is it actually increases the chance of financial risk. What is necessary, if you are actually going to resolve the eurozone crisis, is you need state guarantees of a large enough volume that no one can bet against it. Leverage systems are designed to be bet against.

Colin: All right, well let’s deal with those three points. First of all, let’s deal with the Greek one, because it is dependent, really, on a lot of private investors investing in Greece and losing their money, taking a 50 percent haircut, which they had not expected. Are they going to agree to that?

Peter: Keep in mind that the banking sector in Europe is not nearly as independent as it is Anglo-America. You have got the states, who have the banks beholden to them, they are able to twist the arms of the bank executives and force them to do things they would not otherwise do. Banks just are not willing to challenge the regulators, and so you probably will be able to get a significant buy-in that is voluntary, although not very voluntary. The problem is what you do, for example, about the debt that happens to be on the ECB books? What do you do about the debt is held by the pension system? What do you do about the debt that is being held by the Greek banks?

Any three problems there lead to a break in the ECB’s credibility, greater pension responsibility for the Greek state or greater bank recapitalization need for the Greek banks, all of which eventually falls back into the bailout needs. And so they have not really cut the needs of the Greek state to finance, they have just moved around the specific responsibilities. The headline number is the same.

Colin: Two things also about the banks. First of all would be further stress tests, but stress tests so far have been a bit of a joke, haven’t they? Why should we think that they are going to be any different next time? And then secondly, what about the deleveraging that is inevitably going to occur as a result of this, which will actually make it harder for people to borrow money, which will slow the European economy, which is not what really is intended?

Peter: There is a bit of good news in this. €100 billion recap is a step in the right direction. Moving up to a capital adequacy ratio of 90 percent is actually a very strong move in the right direction. It is vastly overdue, probably by five years. It is not yet anywhere near as far as they need to go, but least there has been a step in the right direction.

The problem is that this is a bank recap that is entirely driven by the needs of the write-down. In fact, a write-down of the Greek debt is expected to cost the banks about €100 billion. That is exactly the same value of the recap, and now states are going to have to find ways outside of Greece in order to make up the difference and that is definitely going to cost them the ability to make loans. In fact, a couple of the restrictions that were put on the banks as conditions of the recap were no bonuses and no dividends. That might sound reasonable until you think that this is going to require the banks to raise money but not to promise any dividends. It is one of those things that sounds great in principle, but in practice unfortunately does not work out very well.

Colin: And then coming to the issue of getting this fund up to 1,000 billion euros. As we approach the G-20 meeting in Cannes, there is talk that they should put pressure on sovereign wealth funds to divvy up a lot of this fair cash and risk it in this great enterprise, and there are rumors that China may be thinking about this. But it is a big step isn’t it? Why should rich countries just throw their money into this in the hope that they might get something out of it?

Peter: Well first things first, the countries that they are going to, for the most part, are not rich. Of all places that Klaus Regling, who is the director of the EFSF, is going to visit in the next few days, Japan is the only one that I would actually consider to be rich. A lot of the other states do have considerable currency reserves but they are not wealthy states.

Regling is in China right now, and his initial talks with the Chinese about tapping their currency reserves have not gone well. The Chinese were polite, they received him, they listened to what he had to say, but there were absolutely no promises of new money. Regling says that about 40 percent of EFSF bonds that have been issued at this point have been purchased by East Asian investors, but keep in mind that that is with a 100 percent sovereign guarantee. With the direction that the Europeans are taking this leveraging question, at most the sovereign guarantee is going to be 25 percent. And so the Chinese, the Japanese and anyone else who thinks they have a vested interest in the success of Europe, they have to be asking why would I put my money into a system that the Europeans are not willing to back?

Colin: And why would they put money in the system when they have a billion (or more, in the case of China) poor, who look at this and say why are they spending their money on Europe? Why aren’t they spending it on us?

Peter: Well, the Chinese do not have to worry about elections, so the dissatisfaction of people in the countryside is probably not a major concern for the Politburo. But remember for the Politburo, their currency reserves are their rainy day fund. That is what they use when their system starts to crack and fall apart. It is difficult to see them putting more emphasis on Europe than they put on themselves.

Colin: Quick question before we close about the politics of all of this because Bild, which is a very popular German newspaper bought by the masses, has a big headline, “Celebrate Merkel,” as if this is a great triumph for her. Well yes, she has pushed her will through over people like Sarkozy, but it is not yet a triumph is it?

Peter: The eurozone has not been saved, this is not even more than baby step on the road to saving Europe. But let’s go back a few years. As recently as 2003 the French were still calling all of the shots in Europe. It was not until this chancellorship that we have actually had our first post-reunification government that has no ties to the pre-unification years. That is only two years old, and now for the last three European summits of substance Merkel has come in with a plan that everybody else has disagreed with, and yet she has managed to push it through anyway. That is where the EFSF came from, that is where the changes the EFSF came from, and that is where this summit came from. And what the Bundestag approved the day of the summit, and what Merkel took with her to the summit, is what eventually became the European plan. So leaving aside the issue of whether it will work, Germany is in charge. And Bild is right, celebrate.

Colin: Great, thanks Peter very much. Peter Zeihan there, ending Agenda for this week. I’m Colin Chapman, thanks for being with us. Bye for now.

[rffrydr]

http://www.thedailymash.co.uk/news/international/euro-debt-crisis-to-be-solved-with-200-billion-opinions-201110244457/


_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Hear Ye, Hear Ye, it's the "All or Nothing Trade"......

http://www.reuters.com/article/2011/10/13/idUS373756088220111013


Three out of three commentators on bloomberg this morning are bearish the european Bazooka. Considering how that idea of Paulson's faltered here maybe we shouldn't get too exited about its rejection there.

It seems the eurocrats just can't square the circle: french, back against a CDS wall, wants to monetize while Germans go apoplectic over that concept. The most bullish of them say there won't be a "solution" until Germans are broken (china crash fears can work for us here, now). Additionally, the banks won't agree to more than 21% on Greek debt.

Maybe.

I'm hangin' tough, bullish. But it won't be an "All" come monday. Probably ALL and NOTHJING

Dexia will be the start of one warchest. Stealing equity has just got going. And tax, transaction tax here and now. Then there's structure. And one thing we forget is that the ECB is really independent in way the FED never has been. They literally can do almost anything they want. It's our german prejudices that hold us back. But they resigned

The circle will be squared when the market comes back. This will begin not when there is a "solution"...but when shorts take the cake and money has nowhere left to crawl.
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

...well, they're left with the "bad bank" so they'll be swimming with the sharks form awhile. As somebody said today, they've cut out the healthy flesh to save the patient from the cancer. The metaphor doesn't work but the restructure will. This will also end up being a backdoor financing of the bailout program reversing a decade of "liberalization." Europe may get a taste for this recap biz--a whole new definition of "corporate raider."
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Dexia bondholders get a reprieve:

http://online.wsj.com/article/SB10001424052970203499704576623004025515180.html

[HenryTo]

Germany now considering a plan to take over toxic bank assets. It is still in a very early stage, though, as lawmakers will only start discussing this plan in the final two weeks of this month:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aVZmxkR02mwE&refer=home