Europe.......the saga goes on!

Following up on from earlier in the week the press reports that the EU (not just the eurozone countries), but all 27 member states will agree to a stabilization fund to help weaker members in dire straits. 

So far so good, I suggested the ECB buying Greek, Portuguese, Spanish and Irish debt in the open market in significant size, however unappealing that may be, was the only solution to stop the rot right now. Having the EU guarantee issuance of bonds jointly and severally to then use the proceeds of buying up the debt of the weaker nations a huge spreads - Greece 10yrs at bunds +1000 - would work equally as well, it might not even have the QE stigma, which is probably a good thing.

Here is the rub - the proposed size of €60 bill reported on Bloomberg et al - if that is to be believed, at first glance I thought there was a ‘0’ missing, is completely and utterly insufficient. Have they learnt nothing from the last week’s reaction to the Greek bail-out package? As a €110 bill was deemed insufficient for Greece, why does anyone think that€60 bill will make any difference whatsoever?

If that is indeed what they come up with tonight - press conference to be scheduled at 6pm - then my suggestion is that the € will make new lows against the dollar and the yen and European stock markets will get hammered as well as the club med bond spreads and CDS making new highs.

Having read this month’s GMI which has a great deal of coverage of the Spanish situation (the author lives in Spain) the Spanish housing problem alone could use the €60 bill to bail out the Spanish lenders with them still asking for more. This analysis is my own but as the Spanish banks are not realizing any losses on 1 million empty units, just offering them at the old prices as they cannot afford to take the losses, when repossessed and continuing to keep developers alive that should be foreclosed as in not to show even more property on their own books. A quick back-of the-envelope calculation: 1 mill empty houses and flats at a conservative average valuation of €200,000 mortgaged at 80% or €160,000 with a value of €100,000 (no-one is even looking at property with 30% off so 50% should be the start of getting anyone interested) would equate to a loss of €60,000 per unit or - wait for it - €60 bill. Maybe that’s how they came up with the number? I know some of these properties are owned without mortgages, others are mortgaged less, but probably others are mortgaged more and some developments are completely worthless as they have been constructed without proper building permission and will be bulldozed and the land will be worthless as it will not have planning permission and probably not get it. So as it was a back-of-an-envelope calculation it may not be entirely accurate, but it gives you an idea of the size of the problem. Oh yes, I almost forgot: Spain is out of recession with positive growth of +0.1% in Q1.

What about the UK? With a budget deficit higher than any other larger nation and no government - I know the old team is still warming the seats for whoever may be taking over and that Alistair Darling is in Bruxelles today with the other EU finance ministers discussing the above mentioned bail out fund, but he has no real mandate without speaking to George Osborne and Vince Cable. Is the UK going to be the next in line for some real punishment? Well, if there is no deal between the Conservatives and the LibDems in the next day or two, then I would say that chances are we’ll see gilt spreads (against bunds) already at the highest since 1998 go higher, sterling will get pummeled against the dollar, the yen and the swissie.......

It looks like it could be a fun week!!!!

Europe

What a mess - this is the result you get after a €110 billion bail-out of Greece? 3 days later we are 5 big figures lower in €/$ (after the pop on Sunday night following the bail-out). Greek and Portuguese CDS spreads are hitting all-time highs, Spain’s prime minister is calling it madness that his country could be compared to Greece........!

Sadly the first casualties of the demonstrations in Greece have been incurred with 3 dead in Athens - and it does not look like it is about to stop.

Martin Wolf has a great piece in the FT today explaining both why Greece has no real option but to accept the austerity measures required, because the alternative is even worse, in at least the short term, but also that he doesn’t believe it will ultimately work.

The German professors are launching their lawsuit against German participation in the bail-out of Greece on Friday - the outcome from the constitutional court is always uncertain - so there is also plenty of political risk.

While Rome is burning politicians are arguing, thinking they have all the time in the world - they obviously didn’t learn a thing from having dithered all through Q1 with the Greek aid package, which may have been capped at €30 billion had the money been available immediately. Now even €110 billion is not enough and Portugal looks increasingly like they will also be in need of a bail-out. 

Even more interesting is reading that Portugal, Ireland, Italy and Spain are all contributing, and not in small amounts, Italy has been out announcing that their potential €15 billion commitment would not be financed through new issuance of BTPS, but rather drawn at the treasury - if they could just print the money I’m sure they would, which brings me to the point that the only thing that could stop the fire right now is a massive QE program from the ECB, focused on the countries in need of support i.e. The PIIGS. 

When it is obvious that the bail-out package only last so long and the country in question is effectively shut out of the capital markets (Greek 2 year debt at 15%) - the purchase of these bonds by the ECB would help in more ways than one, but it won’t happen any time soon, as the ECB doesn’t like the idea and the Germans probably like it even less......so wait and maybe the program will have to be €500 bill instead of lets say €250 bill today. 

It doesn’t pay to wait!!!!!!!

The € would take a bath, not that it isn’t already, but maybe it would help the European economies to have €/$ back to parity or even below. The ‘fantastic’ German retail sales -2.6% y/y and new car sales -32% y/y could surely do with being more competitive in the rest of the world, even if everyone is looking for an export led recovery.

However, a double-dip looks more and more likely - something that historians of the future will have field day analyzing and dissecting the causes of - political error?