Europe Readying Yet Another “This Really Will Do the Trick” Bailout Package

Well, we are clearly in crisis mode. We are back to weekends being a period when you need to watch the news in a serious way.

And in another bit of deja vu all over again, the powers that be in Europe are readying yet another bailout plan, this one supposedly big enough to do the trick once and for all. The problem is that was the premise of several of the last grand schemes, such as the EFSF and the ESM. The market calming effect relatively short lived because analysts quickly pencilled out the programs were inadequate in size and failed to address the problems of lack of a fiscal mechanism at the EU level and the need to address the elephant in the room, bank solvency.

The program in the works claims address the underlying issue of bank solvency, but even the sketchy leak of this weekend reveals it falls falls short, both in concept and in size.

The new rescue program seeks to create a sovereign debt crisis firebreak at Greece, Portugal, and Ireland, when contagion has already put Spain, Ireland, and Belgium in the crosshairs. The high concept is leverage on leverage plus monetization: the EFSF, which is basically a CDO, would then provide the equity to a new fund, and the ECD would provide “protected ‘debt'” I’m not at all certain what the latter is supposed to mean; reader input is welcome. But this sounds like a CDO squared, with an unfunded equity tranche, as a legal/political cover for the ECB monetizing Euro sovereign debt. Nevertheless, this mechanism will allegedly allow for sovereign bailout program of €2 trillion.

Similarly, the size of the bank recapitalization program is in the “tens of billions”, vastly short of the €2-€3 trillion that some experts think is necessary. And note this is backwards: the debt needs to be written down directly (rather than trying to squeeze blood out of turnips via austerity) and banks recapitalized directly. Instead, the focus is (yet again) on bailing out the sovereigns, who will presumably still be expected to wear austerity hairshirts, which will worsen their debt to GDP ratios (even if this program does succeed in getting them cheaper debt in sufficient volumes).

The Eurocrats are going to be slow out of the gate. They want to launch the plan at the next G20 meeting, which is six weeks away, November 4. Mr. Market doesn’t care about the schedules of the officialdom, and is highly unlikely to wait that long.

From the Telegraph (hat tip Richard Smith):

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…

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.

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  1. Foppe

    Am I missing something, or did they skip the part of the announcement in which they finally tell us their plans for how to actually do something to clean up these banks they’re now protecting by creating “firebreaks”? I know — don’t ask too much all at once, it’s only been three years, etc.

    Anyway, I guess it’s nice that they Greeks will soon be allowed to write down 50% of the debt, though one wonders whether they’ve already contemplated doing something similar for Portugal/Ireland/everyone else.

    1. carrion bird

      Now we’re talking. Just make it a 70% haircut on Greek debt instead of 50%, wipe out the equity in a dozen European banks and eight or nine US banks, and haircut the banks’ junior debt, let’s say 30-40%, and the new leveraged fund will be more than adequate to protect depositors and counterparties.

  2. Psychoanalystus

    Psychoanalystus here, reporting from the economically depressed city of Paris, France. It is my great pleasure to personally leak the news that “Operation Run Bank Run” proceeded as planned, and as of 5 PM Paris time yesterday, Friday the 24th of September, I had successfully cashed out all my accounts with Societe Generale, that TBTF French zombie bank. However, I think you should all know the details of the operation, as you too may one day wish to engage in similar operations with your bank. So, let’s start from the beginning:

    Around 1 PM, Paris time, on Friday, I emerged from the subway, and presented myself to the Societe Generale headquarters, in the La Defense area of Paris. I presented my identification to a bank teller, and politely demanded that I get all my $50,000 Euros in cash, small German-printed Euros bills. The teller nearly had a panic attack, and while gasping for air told me that an “officer of the bank” will be with me shortly. Once she recovered from her panic attac, she invited me to sit in the waiting area, and enjoy the free pastries, coffee, and red wine made available to “valuable customers” such as myself.

    1:15 PM, Paris time. As I was enjoying my first glass of complimentary red wine, an Armani-wearing middle age man accompanied by two Russian-looking body guards walked up to me. The man introduced himself as Frederic Oudéa, CEO of Societe Generale, and rudely informed me that it will be impossible for the bank to come up with “all that cash” on such short notice, and that he needed at least one week to raise “that kind of money”. At that point I looked the bankster in the eyes, and said casually, “Oh, I certainly understand. No problem. But I hope you don’t mind if I call my friends at Al Jazeera and tell them what you just told me”. So, after mosieu Oudéa wiped the dust off of his chin (as his jaw just hit the floor) replied to me: “OK then, I’ll see what I can do”. I reminded him that I wanted my cash in small German-printed Euro bills. He replied that he was not sure they had many German-printed Euros on hand, but assured me that they don’t carry any Greek versions.

    1:35 PM, Paris time. While I was sipping on my second free glass of wine, my cell phone rang. A rather spastic, whiny voice at the other end of the line introduced itself as Nicolas Sarkozy, president of “the French Republic”. And by the way, I have no idea where he got my number from. His English was pretty rough, but as a psychologist, I could tell that he was bending over backwards to kiss my ass. He invited me over to his residence, the Élysée Palace, and said he’d love to play golf with me this weekend. I told him I’ll check my schedule to see if I can squeeze him in for a visit sometimes in the next couple of months, and politely asked him why was he calling me. He then began telling me about how France now fight for the freedom of the Libyan people and the spread of democracy in the Arab world, and then said that “the nation” needed all the money it could get in order to make sure that the “brave French troops” achieve victory in their fight for “Liberte, Egalite, and Fraternite” in the Arab world”. He kept repeating that defeat was not an option. So, trying hard not to laugh, I replied, “Look, mosieu, I am sure your brave French troops have gotten used to defeat by now, after the whoopin’ they got in Haiti and Algeria, not to mention World War 2. But if you’re calling me to change my mind about cashing out my account with this zombie bank of yours here, forget it. I want my cash, and I want it now! Is that clear?” At this point Mr. Sarkozy, proud president of France, started sobbing like a baby, and said that if I would be willing to postpone closing my account for another month or so, he was willing to let me have his beautiful wife Bruni for “a couple of nights” at my convenience. At that point, because I can’t stand hearing grownups sob like that, I had to hang up on him.

    1:55 PM, Paris time. My phone rings again (I was already on my third glass of wine by then), and guess who was at the other end? Yes, it was madame Christine Lagarde herself. No kidding. Oh yeah, it seems that the IMF got involved in my little cash withdrawal too. Madame Lagarde explained that her former boss, “Sarko”, called and asked her to call me and “help smooth this transaction over”. She proceeded telling me how important for the “developing world” was that I postpone my cash withdrawal, as my money was “right now, as we speak, helping poor Greeks everywhere feed their hungry families.” So I said, “Sorry, hun, no can do. I want my dough now. I mean pronto. Is that clear?!” At this point she too started crying, and between sobs I could make out that she was offering to spend the night with me. She said she guarantees her “services” to be first class, as she acquired “a lot of experience” from working with Dominique Strauss-Kahn. So I said, “Look, madame Lagarde…” at which point she interrupted and said “You may call me Christie”. So I continued, “Madame Lagarde, not that I don’t find you attractive, despite your grandmotherly gray hair and wrinkles, but I really am not interested in your ‘service’. I just want my cash. Is that clear?!” At this point “Christie” started calling me “an ugly American” and began hurling French obscenities at me, which thanks to my lack of French mastery, I did not understand. But I had to hang up on her anyway.

    2:15 PM, Paris time. My cell phone rings yet again. Caller ID indicated a German country code. With some hesitation I answered, only to immediately find myself being shouted at in a rough German-sounding broken English. Between the numerous German obscenities and threats to send me to a concentration camp in Poland, I did make out that this was Angela Merkle, chancellor of Germany calling me. Not that I don’t find frau Merkle’s cleavage attractive, but I decided to hang up on her before she too offered to sleep with me. Fed up with so many prostitutes calling me all in one day, I turned my phone off.

    2:35 PM, Paris time. Mosieu Oudéa, CEO of Societe Generale, showed up again, this time without his former KGB employees. He was wearing jeans this time, I guess to be more in tome with me. He was carrying a rather large suitcase full of cash, so he took me in the back room to allow me to count it. It took me almost an hour to count it all. As I expected, it was about 5,000 Euros short. So I looked the bastard in the eyes, and said, “Look here, you slimy bankster piece of trash. Cough up all the dough, or I’ll make sure this gets on Al Jazeera and Russia Today by evening news. Capiche?!” What Mr. Oudéa did next was most surprising. He emptied his own wallet of all cash in it, and then walked up to the 15 or so bank tellers on duty and asked them to do the same. He was still about $2,000 Euros short, so he gave me the keys to his Rolls Royce, pleading that I accept it and call it even, and promised he’d have the title transferred into my name by the end of the day. I thought it was a good deal, so I took him up on it.

    5 PM, Paris time. As I was finishing my fourth cup of coffee (to counteract the effects of the wine), mosieu Oudéa returned and presented me with the new title to his Rolls Royce, and the suitcase with 48,000 French-printed Euros in small bills. I thanked him for the wonderful service I received that afternoon, got into MY Rolls Royce, and drove back to my condo at Saint Michelle. Driving my new car was rather difficult, not only because of the wine I had consumed earlier, but also because the steering wheel is on the wrong side.

    Not knowing what to do with all that fiat cash I now had, this morning my wife and I went out and bought new Rolexes for ourselves, to be in tone with our new family vehicles. And, this afternoon, because we’re just a bunch of “ugly Americans”, we took our daughter to the Paris Disneyland, drank a lot of Coca Cola and ate at McDonalds. We had a blast!

    Merci, Societe Generale! Merci France! Je t’aime!

    Kind regards,

    PS – next week I’m driving my Rolls to Vienna so I can close my accounts with Raiffaissen bank too.

    1. F. Beard


      Please post at Max Keiser’s. They don’t believe in the lethality of cash withdrawals to the banking system.

    2. Ricardo

      that should be Raiffeisen, not Raiffaisen.
      Und at dat bank yoo vill encounter much more Gemütlichkeit when you close your accounts. They are just so happy that they are not the Bank Medici. And they are very good at putting on a brave face while the world falls down around them … they have done it for centuries.

  3. ReaderOfTeaLeaves

    But this sounds like a CDO squared, with an unfunded equity tranche, as a legal/political cover for the ECB monetizing Euro sovereign debt.

    I’m put in mind of Peter Pan, if you believe, clap your hands. . Good luck with that.

  4. Jack Payne

    Get your stuff on my Twiter timeline.

    Righ on. Great stuff.

    You’ve got to wonder: when, if ever, is that elephant in the room going to be noticed?

    What discombobulates me is the mad rush of European money over the pond to light here, in U.S. Treasury Bonds. As a “safe haven.” Aw, c’mon. Precious metals SHOULD be soaking up all these fright funds, but so much is flooding our treasuries that our 10-years’ were driven below 2%, and for the first time in about 60 years our 30-yrs were driven below 3%.

    All this in a desparate attempt to drive mortgage rates down STILL FURTHER, under the bizarre hope that this will bring buyers out of their unemployment and soup lines to buy more houses.

    Gheesh. Which end is up?

  5. Thomas Barton, JD

    This endless creeping incrementalism seems to be an approach to adapt the masses in Germany and France to a unified or bifurcated SuperTARP for the French and German banks. The problem has been known to be enormous for many months and when the history is written this final salvation of the French and German banks will be seen as the only feasible solution. No politician in Italy or Spain (especially with its staggering unemployment ) will be able to countenance the continued austerity and debt-servicing while Greece is given the necessary haircuts and default packaging. Of course this is a moderately rational approach and the emotional aspects of Nation states and the endless ego involvement will make this a huge mess. I hope that the Swiss people will at least imprison that UBS CEO who pathetically blames one man and risk management shortfalls for that historic loss, which is probably masking an order of magnitude greater loss which is par for the course for these US and Eurozone Bankster Weasels.

  6. Jim Haygood

    The high concept is leverage on leverage plus monetization: the EFSF, which is basically a CDO, would then provide the equity to a new fund, and the ECD would provide “protected ‘debt’” … this sounds like a CDO squared, with an unfunded equity tranche, as a legal/political cover for the ECB monetizing Euro sovereign debt. Nevertheless, this mechanism will allegedly allow for sovereign bailout program of €2 trillion.

    If I had to draft the prospectus for this offering, I’d default to this old chestnut:

    For supplying the town of Deal with fresh water.
    For trading in hair.
    For assuring of seamen’s wages.
    For importing pitch and tar, and other naval stores, from North Britain and America.
    For insuring of horses.
    For improving the art of making soap.
    For improving of gardens.
    For insuring and increasing children’s fortunes.
    For a wheel for perpetual motion.
    For importing walnut-trees from Virginia.
    For making of rape-oil.
    For paying pensions to widows and others, at a small discount.
    For making iron with pit coal.
    For the transmutation of quicksilver into a malleable fine metal.
    For carrying on an undertaking of great advantage; but nobody to know what it is.

    AH HA HA HA! This being a sovereign-sponsored issuance, no prospectus is required (governments don’t deign to follow their own prudential laws, whether in funding pensions or in issuing securities).

    But with the commitment of funds undetermined at the time of issuance (see final plank of above prospectus), no one can possibly model the cash flows and returns of this gigantic CDO or CDO-squared, as the case may be. It’s nothing but a blind speculation. It’s like buying Fannie Mae and Freddie Mac after they suspended financial reporting, on the grounds that they had an implied Treasury guarantee. How did that work out for the equity holders?

    Were the funds all to be invested in highly-rated solvent entities, the leveraged EFSF might provide solid if unremarkable returns. But the solvent entities don’t need the money.

    If the ECB’s investment policy of the past year is extrapolated, then the EFSF can be expected to invest in sovereign junk debt — the worst, most toxic, on-downgrade-watch, about-to-default debt. And you’re going to hand over your capital to a manager with this track record, who still records his existing deep-underwater holdings at cost? Hello, sailor!

    Should this debacle unfold as expected, then 20 percent equity won’t be nearly enough. As with 100% LTV Las Vegas mortgages of 2006 vintage, the default risks are highly correlated — it’s called contagion.

    Moreover, the expanded EFSF intrinsically mocks the defunct Maastricht 3/60 limits. With many of its members already near or over the 60% debt/GDP limit, equal sharing of the load within the eurozone is impossible … and unequal sharing will weaken the strong. Think of the Whymper party on the Matterhorn — the first to slip drags down the sure-footed on their shared rope.

    Fighting a debt binge with more debt is a formula for collapse, unconsciousness and coma. Bottoms up!

    1. Dan G

      I love how they talk of collaterized debt obligations and leverage like this language posseses some enchanted spell that only they understand, kinda like black magic.
      Levers and leverage are fantastic engineering tools, but in the hands of a banker, watch out. They take the huge rock of debt, and lift it high with their leverage. Then they swivel it over a bit, so that it no longer hangs just over their heads, but over the heads of the citizens. In this way when the debt comes crashing down on the peoples’ heads they are able to bail out and scamper away like rats with their bonuses.

  7. Jonathan Turley

    “Protected debt” probably means “debt protected by Credit Default Swaps with no cash backstop.”

  8. Hugh

    Nice analysis. This seems like more smoke and mirrors and its only purpose, although some may not like me repeating it, is to continue the looting. None of the underlying problems are addressed by it.

    Bank solvency and moral hazard. How can you even know how much it would take to recapitalize banks if you don’t take a long, hard look at their balance sheets and asset valuations? What difference would it make even if you did if you leave the same management in charge that bankrupted these banks in the first place? And do we still even know which banks are going to be recapitalized? What are the criteria for selection?

    Austerity. As Yves notes, you can’t get growth out of austerity. How can you expect the periphery to recover or pay back loans when plans like this one are determined to drive the periphery into depression?

    Trade. How does any of this change the core’s, especially Germany’s, mercantilist trade policies? I mean other than destroying markets in the periphery with the predictable blowback into Germany’s export sector?

    The euro. The problem here is that the euro is based on a monetary union but lacks a debt union. Without a debt union, there is no reason for periphery economies to stay in the euro and many reasons for them not to.

    This plan isn’t a solution. It doesn’t even look like one. The goofy financing, the failure to address the basic issues, the lackadaisical implementation. It’s like seeing someone drowning and you tell them to imagine they have a life preserver not now but in 6 weeks.

  9. F. Beard

    Of course a bailout of the victims, the entire Eurozone population, would do the trick but to do that would be to admit that the entire population were victims of the bankers.

  10. Bruce

    Quick question. Where does the EFSF get it’s money? Does it actually make an upfront capital call? Or is it supposed to issue debt that is “guaranteed”? I am asking because if it’s the latter, and it’s being used to absorb PIIGS losses as it’s goal, how does it get rated, and even if it does get rated, who believes that and buys the debt?

    1. okie farmer

      Bruce, I have the same question about the IMF. From this morning’s Eurointelligence:

      “IMF wants to increase its ressources

      At its annual meeting the IMF launched a process that may well lead to an increase in its resources from currently €940bn to €1300bn, Frankfurter Allgemeine Zeitung reports. “Our credit capacity of €400bn may look comfortable today but it fades compared to the potential financing needs of endangered countries”, IMF MD Christine Lagarde is quoted. According to the paper Lagarde follows her predecessor DSK’s strategy for the fund to offer protection to as many countries as possible. The IMFC asked Lagarde to provide a report on the issue within the next year and a decision will be taken afterwards. One of the reasons for Lagarde’s push is that she wants to enable the IMF to be useful for short term liquidity shortages and to be able to shield concerned countries from contagion. Such a concept is part of a set of ideas that are being drawn up at the moment in the G20 context of the reform of the international monetary system. ”

      Can the IMF create money by issuing debt? There must be some restraints in place? I don’t know much about that outfit, obviously.

  11. Paul Tioxon

    Another technocratic tweek of the the channels of money, this time in Europe. M Auerbach on Irish TV showed a proposal for handling the insolvency problem by distribution of a TRILLION EURO on a per capita basis to forestall the crisis du jour. Of course, the moderator was not sure what pushing a button at the ECB was going to do other than summon Google or something. But, the long term problem, meaning beyond the attention span of Mr Market, the treaty negotiations toward a specific fiscal union, seemed also beyond the moderator’s grasp. Well, hopefully, Marshall and like minded folks will have more of a say in dealing with the immediate liquidity, insolvency and eventually political crisis.

    Here is a week end diversion from earlier in the year on a more theoretical, but I think for most of the readers here, a familiar line of analysis.

    Immanuel Wallerstein at the University of Nicosia

    He discusses the international economic crisis from a world system analysis point of view.

  12. joebhed

    The fact is real that we are broaching the Second Act of the Great Financial Crisis of 2008 – 2017.
    Or some other ending date, depending what happens in the meantime.

    The political and economic focus remains at the top level of these mechanistic macro-economic gyrations of an insolvent global monetary system.

    Thus, as the insolvency of the monetary system (more debts than money) forces the major banks to suffer extreme and intolerable losses, the institutional response will be, MUST be, to yet again shore up the banks for the simple reason that, if they fail, the real economy will grind to a screeching halt and there will not be a pint of liquidity to be found.
    The general fraud that is being perpetrated upon us is not contained in the lofty and undecipherable policy statements of Madame Legard and Monseur Trichet.
    The fraud is much more simple, such that it boggles the mind.
    The fraud is the broad understanding perpetrated among political economists that a national money system cannot have money – the national medium of exchange of commerce – without having debt.
    The Euro is not a national money system.
    Absent the money-creation power, the EZ has transformed that general fraud into a contracted reality.
    But the solution for this and other monetarily sovereign nations remains the abolition of debt-based money and resort to a public money system that must provide the circulating medium to the economy without debt.
    It’s all in Congressman Dennis Kucinich’s new Bill.

    The money system is insolvent.
    We need a new money system.

    1. Barbyrah

      “We need a new money system.”
      Whew! Thank you for ACKNOWLEDGING the inevitable.

      Excerpt from a pretty astute article in today’s Guardian, by David Graeber:

      “But the ultimate failure here is of imagination. What we are witnessing can also be seen as a demand to finally have a conversation we were all supposed to have back in 2008. There was a moment, after the near-collapse of the world’s financial architecture, when anything seemed possible.”

      “Everything we’d been told for the last decade turned out to be a lie. Markets did not run themselves; creators of financial instruments were not infallible geniuses; and debts did not really need to be repaid – in fact, money itself was revealed to be a political instrument, trillions of dollars of which could be whisked in or out of existence overnight if governments or central banks required it. Even the Economist was running headlines like ‘Capitalism: Was it a Good Idea?'”

      “It seemed the time had come to rethink everything: the very nature of markets, money, debt; to ask what an ‘economy’ is actually for. This lasted perhaps two weeks. Then, in one of the most colossal failures of nerve in history, we all collectively clapped our hands over our ears and tried to put things back as close as possible to the way they’d been before.”

      “Occupy Wall Street rediscovers the radical imagination”

      1. joebhed

        Thanks for that.
        There are a growing many out there that are recognizing that the failure is not any flaw in the functioning of either the marketplace or the financial system.
        The flaw runs much deeper than that, right down to the foundation issue of the monetary system itself.
        It is of failed design, and it is due to its functioning as designed that has brought us to global economic calamity.

        “The nation that can issue the bond can issue the bill also” – said Thomas Edison, great American inventor and technologist.

        One is debt – which we have come to trust.
        One is real money, which we have been taught to fear.

        This is the truism for moving forward.
        Any monetarily sovereign nation does not need debt to have money.

        So, what is the system for achieving debt-free money?
        The answer is available by following that Kucinich link.

  13. Doug Terpstra

    I can’t even pretend to understand this stuff, perhaps by design, but it seems that the perps don’t understand it either. Or, if they do, then their intent can only be heinous.

    Bits I do understand: the GF crisis was caused by excessive leverage, reckless debt, and dodgy insurance, triggered by a collapse in real estate and consumer spending. So now the solution is more leverage, more debt, taxpayer insurance of insurers, more taxpayer guaranteed mortgage lending, and new rigged trade agreements to offshore more jobs — all accompanied by a shredded social safety net, reduced public employment and austerity for working class consumers. Really? Who made this up?

    Hey, aren’t they the same people who caused the crisis in the first place? Bennie must be conferring with Bernie on how to structure Ponzi finance. Bernie says all we really need is more confidence, continued patience, and harder work on the plantation to turn this ship around.

  14. Typing Monkey

    the debt needs to be written down directly


    Instead, the focus is (yet again) on bailing out the sovereigns, who will presumably still be expected to wear austerity hairshirts, which will worsen their debt to GDP ratios (even if this program does succeed in getting them cheaper debt in sufficient volumes).

    Disagree. Nobody is going to lend to these sovereigns cheaply again for a very long time. The austerity will therefore exist regardless. Debt to GDP will drop, not rise, because debt will fall faster than GDP (after default, of course).

    I have no idea how the arb algorithms are going to handle companies having safer credit than their sovereigns, but this’ll get interesting, I think.

    The Eurocrats are going to be slow out of the gate. They want to launch the plan at the next G20 meeting, which is six weeks away, November 4. Mr. Market doesn’t care about the schedules of the officialdom, and is highly unlikely to wait that long.

    I will be amazed if Mr. Market waits for even a week.

    1. Yves Smith Post author

      The ECB is going to “monetize” their debt. That means they don’t need to go to market. Now I don’t think they plan to do that on an open-ended basis, so your point re marketability will become operative at some point, but not immediately.

      1. Typing Monkey

        Dumb question, but did you ever work with someone (or maintain close contact with someone) who was involved in a hopeless sort of financial endeavor like this on the international financial stage (eg: tequila crisis, Argentina crisis, Russia default, Asian flu, etc?)?

        I’m just really curious as to what all these people are trying to accomplish when they do something like this. Surely they know that this isn’t going to work for any length of time (I know it, and I don’t even have a background in finance or economics). They must also know that they can’t kick this can down the road much longer (their own imposed 6-week deadline suggests as much). So what do TPTB hope to get when they mention a “plan” like this, and do they even think about or plan what happens afterwards?

        I hope this doesn’t sound rhetorical, because it’s not meant to be. I’m just trying to figure out how this stuff works and how far ahead they are thinking.


        Well, we are clearly in crisis mode. We are back to weekends being a period when you need to watch the news in a serious way.

        BTW, am I right to assume, given all this weekend activity, that the Europeans are expecting one of their major banks to collapse early next week if they don’t act? After all, they would’ve been equally correct to panic last week or last month as well, and yet they didn’t exhibit the same sort of urgency.

        1. Jim Haygood

          I’m just really curious as to what all these people are trying to accomplish when they do something like this.

          Paul Blustein took a shot at this question in his 2005 book And the Money Kept Rolling In (pp. 203-204):

          In Argentina’s case, top international policymakers succumbed to the tendency to keep playing for time when disaster looms, hoping against hope for a shift to better luck despite the serious misgivings among many that the policy will work. Although playing for time can be an important objective of crisis management … the country’s would-be saviors engaged in time-buying exercises in 2001 that were based on far-fetched odds of success. This is not mere hindsight; plenty of well-founded argumentation was presented at the time that the approaches taken were futile and, by piling more debt on top of an already unsustainable debt load, would work against Argentina’s long-term interests.

          The IMF’s desire to skirt blame for the collapse consistently tilted its policymaking in the wrong direction, toward delaying the day of reckoning. The same holds for the Bush administration’s wish to differentiate itself from the Clinton administration. Finally, there was Wall Street’s voracious appetite for fee income, which helped inspire the megaswap, the ultimate exercise in time-buying.

          Today it’s ‘same silliness, different debt.’ Buy time to save the euro, though it can’t be saved in its present form.

          A seemingly absurd tilt toward more debt, when excessive debt is the underlying problem, arises from a global monetary regime in which debt (rather than an unencumbered asset such as gold) anchors the currency. Debt may not be money itself, but it can be monetized.

          Initially the premise of this system was that central banks would hold only the highest-quality sovereign debt, putting the asset side of their balance sheet beyond question in terms of credit quality. ‘Central bank independence’ was touted as the remedy for the feared pressure from parliaments to acquire more debt than was healthy, in a misguided effort to juice the business cycle.

          What’s happening today is far more insidious: the foundational commitment to backing currency with only debt of unquestioned soundness has evaporated, as central banks are now engaged to save the system by turning themselves into garbage barges, as the ECB has done under Trichet. Despite being enormously leveraged, central banks know that their main liability — currency — is unredeemable.

          Thus the next stage of the horror, which will play out over this decade: both the ECB and the Federal Reserve will become functionally insolvent, though they will use phony accounting to obscure the fact. In the ECB’s case, defaults of peripheral sovereigns will wipe out its capital. At the Federal Reserve, a rise in market yields (slow at first, then ascending with the fiery grace of a Saturn V rocket) will cripple the market value of the long-duration Treasury portfolio which Benny Bubbles is acquiring as we speak.

          Nothing overt will happen — mundane citizens lack standing to force an insolvent central bank into mandatory reorganization. Central banks will soldier on, with the aid of creative accounting.

          But the system has irrevocably changed, having submitted to the worst form of political depradation: wrecking central banks’ own soundness, in a desperate attempt to save a debt-choked system which is built on an astounding vulnerability: that government bonds (essentially promises of future taxation) can anchor a monetary system in a period of demographic decline. With both monetary and social welfare schemes incorporating long-term Ponzi elements (i.e., assuming ever-rising population and wages), the real economy cannot sustainably thrive until this manifestly broken ad hoc system is replaced.

          1. Blissex

            «that government bonds (essentially promises of future taxation) can anchor a monetary system in a period of demographic decline.»

            That is a very good point, but it also extends and is sort of overriden by a bigger one: the desperate greed of older voters in these demographically declining countries to elect politicians who promise tax-free capital gains for older voters and lower prices thanks to more imports or lower wages for younger non-voting immigrants.

            That has been the mechanism that has broken the first-world economies.

            But longer term I suspect that first-world economies have been largely resource-constrained, with real economic activity bumping against a ceiling of resource availability, where resources, mainly oil, have been kept cheap by real-economy recessions.

            As to this the demographic decline of first-world economies has an advantage: the resource ceiling will be less important.

  15. Faith Inda System

    “You are watching the BS-TV network.
    And now a word from our sponsors:

    “Bour jour! Je sui Mme. LeGarde and I’m here with Timmy-G down at the Titanic Patio and Outdoor Furniture Clearance Barn. We’ve got our Gucci High Water Boots and Life Vests on, and we are in the final days of Big Deck Chair Clearance Event going on here at our Central Bank locations in Brussels and New York. We are rearrangin g Deck Chairs like crazy and we are wheeling and dealing and spinning like never before! IF you want to load up on Floating Deck Chairs, or Underwater Deck Chairs, Timmy and I have got a deal for you!!! Bring your credit card, your Collateral ized Debt Obligation , your Underwater Mortgage, your Zimbabwe Dollars! Whatever you’ve got, We’ll take it now in these FINAL DAYS!! The band is playing and we are sinking quick so…..Don ‘t miss out on this once in a Lifetime opportunit y! This offer won’t last long!”

    And now lets return to our movie, “FAITH IN THE SYSTEM, CONFIDENCE IN THE SYSTEM.””

    1. Hope and Change 4evah

      And here’s a special offer for the well-connected bankers. Bring down your kids monopoly money and we’ll exchange them for brand spanking new 3 month treasuries yielding 11%–a special issue that only you can take advantage of.

    2. Jim Haygood

      Now lets return to our movie, “FAITH IN THE SYSTEM, CONFIDENCE IN THE SYSTEM.”

      … and strike up the band on the foredeck, as they saw through that soul-soothing old spiritual, ‘NEARER MY GOLD TO THEE.’

      Ah ha ha ha …

  16. Dan G

    Central banks are bent on destroying their respective countries’ currencies, and thereby lowering the standard of living for almost all; except for themselves, and their paid for politicians that allow them to get away with it.

    1. Typing Monkey

      thereby lowering the standard of living for almost all

      To the contrary, I think that these problems stem from the CBs’ short-sighted attempts to prevent recessions while encouraging booms.

      One of the most difficult things far an amateur like me to do in the markets is to distinguish between the crooks who screw you deliberately and the incompetents who screw you inadvertently. Sad as it may be, I think that Bernanke is likely in the latter camp.

      1. Dan G

        I hear what your saying; however, the belief in a structually flawed system, regardless of any noble intentions in the case of the central planners, is consciously and unconsciously tainted with their own desperate attempts to salvage the status quo banking system. They will refuse to reinstae Glass Steagull, or let banks fail as they should in a free enterprise system. They should know better, but the thought of fixing anything by making serious structual changes is beyond them. It is analagous to citizens having the gall to question 9/1; How dare anybody question the inherent structure of the system.

  17. frank

    The interesting concession the Germans are demanding is that Greece officially defaults and stays in the Euro. The write down would be 50%. This significantly impacts the French banks given their substantial Greek holdings and is the reason for the recapitalization of the French banks through sales of stock from public and private (read French government) investors. It appears to me that the Germans are trying to ring fence the French banks from going down and taking all of Europe with them. Remember it is IMF’s Lagarde (from France) that is on the record stating the banks are undercapitalized. Merkel et al are pushing on Sarkosy to pony up to the bar.

    The Germans are banking on the austerity programs in Spain and Italy along with the new funding to keep these PIGS from going over the edge. That is wishful thinking but a problem to deal with futher on down the road.

    None of this will stop the EC from going into recession.

  18. LRT

    “Mr. Market doesn’t care about the schedules of the officialdom, and is highly unlikely to wait that long.”

    Yves, what do you think is likely to happen, concretely? I agree that we seem to be approaching a really big credit or market event of some sort but find it hard to see what it will be. Are you expecting a stock market collapse? Or a failure to refinance a large chunk of sovereign debt? Or the failure of some critical financial institution? Or maybe all of the above….

    Its quite amazing to watch this unfold, at every point the Euro authorities seem to be overtaken and surprised by events. Presumably there are much larger financial movements under way that we don’t know about.

  19. yoganmahew

    I agree entirely that it is too late to stop contagion. Indeed, what contagion? Does poor economic performance infect? Does a boom built on debt infect?

    There are, at the moment, three problem scenarios in European sovereigns (mirrored, no doubt, within the US in various states):
    1. An unwillingness to generate enough tax for spending plans – Greece and Italy.
    2. Unsustainable credit booms that led to a one-time increase in government revenue (through property and consumption taxes) that resulted in government over-spending, even though the budgets during the boom were balanced – Ireland and Spain.
    3. Trade liberalisation destroying a narrow economy – Portugal.

    Of these, only Portugal is really a sympathetic case. While Ireland and Spain sufferred from unfettered capital flows within the eurozone (boosted by interest rates set for Germany and France), Portugal has been sold out by european trade ideology.

    1. Blissex

      «1. An unwillingness to generate enough tax for spending plans – Greece and Italy.»

      More precisely, these are kleptocracies (Greece much more so than Italy), thus the unwillingness to tax insiders.

      «2. Unsustainable credit booms»

      These like in the USA were engineered to redistributed income from immigrants and voters with less property to voters and campaign donors with more property. Because of the ferocity of the demand from most properties voters for tax-free capital gains.

      « that led to a one-time increase in government revenue (through property and consumption taxes) that resulted in government over-spending, even though the budgets during the boom were balanced – Ireland and Spain.»

      And the UK! Never forget the apocalyptic amount of “money” that went into the UK debt/housing boom and the bailout of UK banks.

      The UK so far has been hit less because it has been supported by oil export revenue and royalties. But UK oil production is going down fast, and Scotland is about to secede taking whatever remains with it.

      That’s why the Tory government have decided to aim for a substantial reduction in living standards for most of the populace via extended periods of high unemployment and reducing imports by driving down substantially the real value of wages.

      The graph that described the past and the future of the UK economy:

  20. nickj

    “recapitalisation” – this is the new word for bailing out the banks at the public’s expense, no?
    I hope lots of big banks go under. Lehman’s went and i didn’t feel a thing. If the banksters won’t run the payment system send the army in and make them run it at gunpoint.

  21. Bill G

    All of these programs do 3 things:
    1)Promise a financial magic pill that permits governments to continue to spend beyond their means forever
    2)Creates fees for bankers
    3)Elevates the interconnectedness of the financial system and increases the consequences of an individual default through manufactured contagion.

    Our nations are lead by sociopaths.

  22. Howard L

    2008 US bailout: Not a sovereign crisis but a bad debt transfer from the banks to the taxpayer, combined with a recap. of the banks. The sovereign included many backstop guarantees for the banks.

    2011 Euro crisis: This crisis combines a sovereign crisis(Ireland,Greece), a bad debt crisis, a rigid currency crisis, a complicated political crisis, and an interconnected banking crisis. Attempts at a solution will be an order of magnitude more difficult. Of course austerity policies will only exacerbate the above issues.

    Howard L

  23. Cam Hui

    “Recapitalisation” may mean nationalization and going Swedish: Wipe out the shareholders, make bondholders take hair cuts – sort of a GM solution.

    In that case, the plan is a positive for the European banking system. It isn’t clear, however, how such a plan is being financed. The mechanism by which the enlargement of the EFSF through leverage is unclear to me.

    The devil is in the details.

  24. Joel

    Some great comments above. The Europe situation is fascinating, like a car wreck. Granted there is no solution, is there even a conceivable outcome at this point? It’s like a mobius strip or maybe the Klein 4 group for you math guys out there, various endless paths to nowhere. And wtf does Timmý G’s latest catch phrase “catastrophic risk” mean? Is it the risk of a catastrophe? Is it just huge risk? Or maybe the risk of what happens after the catastrophe that’s sure to come?

  25. Namazu

    This is sort of like arguing about what colors unicorns come in, but how does taking only the first 20% loss make something an “equity tranche?” Is there a unicorn tranche to handle the remaining 80%?

  26. dbk

    The Greek press has published the name of the lawyer/law firm Greece has retained to oversee the technical aspects of default: Lee C. Buchheit of Cleary, Gottlieb (NYC). He handled the technical details of Iceland’s default. There are a couple papers available on the web (.pdf) which give some idea of where the Greek government might be heading under his guidance. The haircut predicted by the press was 50%, but perhaps that’s just the percentage du jour, and the general feeling is that the formal announcement will come after the G20’s meeting in early November. On another note, this explains somewhat better last spring’s appointment of Eleftherios Venizelos as Minister of Finance; though not in finance, he’s generally regarded as the country’s top constitutional lawyer.

  27. Philip Pilkington

    And once again the ECB write the check.

    As for the leveraging of the money ponied up, maybe I’m wrong but it seems to me that the ECB issues money that is then leveraged — but leveraged on the basis that, well, if anything happens the ECB will again write the check.

    Why do this at all? Not sure, really. Maybe to bamboozle the politicians into thinking that base money is kinda sorta not being created and that the plan is not ‘inflationary’.

    If it’s come to this to convince the powers that be that a blatantly non-inflationary plan is not, in fact, inflationary… well, then buckle my britches, we’ve just entered the twilight zone!

  28. jal

    Re.: recap

    The World Bank … The IMF … are both trying to get a fund set up to re-capitalize banks.

    Meaning, they want to create a fund to leverage to the moon and it then would be the final bag holder for all the bad loans that they will recognize as good as gold,( hehehe), then the investors into that fund will lose their investments, which would be very little compared to their bad loans that they put into it.

    Isn’t leverage good!!!
    A winning formula!!!

    1. Jim Haygood

      Their words don’t match their actions. From the New York Times-Titanic:

      At the root of the discussions is a widening view on the part of credit ratings agencies as well as European governments that the banks that funded Greece’s borrowing binge during the previous decade must accept a larger loss on their bond holdings than currently proposed.

      Wolfgang Schäuble, the no-nonsense German finance minister, suggested as much in a tough speech delivered to international bankers at the Institute for International Finance over the weekend. He argued that because bankers had made bad lending decisions, they shared the blame for Greece’s predicament and should also share in the cost of resolving it.

      Noble words indeed! I, too, support bank accountability!

      But what would ‘sharing the cost’ look like? Let me be brutally blunt: if banks laden with Greek debt can’t recapitalize themselves with securities issuance, then governments should protect their depositors, while letting the afflicted banks’ equity and bond holders EAT SH*T … full stop.

      That’s not the plan, though. Continuing from the Times-Titanic article:

      Olli Rehn, the European Union’s monetary affairs commissioner, said Saturday that there was “increasing political will” among European leaders for a new effort to soothe investors.

      The facility is designed to make as much as €440 billion, or $600 billion, in loans to troubled nations and banks. Mr. Rehn said officials were discussing a plan to multiply the firepower of the E.F.S.F. so that it could instead insure a few trillion euros in loans.

      So ‘sharing the cost’ means banks take their losses, then are made whole with taxpayer-subsidized loans?

      That’s not accountability. It’s crony capitalism. And it stinks to high heaven.

      Sad to say, the only way for pickpocketed taxpayer victims to get their stolen money back will be to speculate in markets driven skyward by the flood of bank-rescue leveraged fiat capital. Long stocks, short AAA sovereigns, roughly.

      1. Blissex

        «So ‘sharing the cost’ means banks take their losses, then are made whole with taxpayer-subsidized loans?

        That’s not accountability. It’s crony capitalism. And it stinks to high heaven.»

        Sure, but for different reasons.

        In defence of banks, and in particular of French and German banks lending to importer countries, there is a very powerful argument indeed: that they were just doing what their governments instructed them (informally) to do.

        Because loans to Greece etc. were in effect liar loans, encouraged by the German and French etc. governments as a form of vendor financing to support job-creating German and French export sales.

        In countries like the UK, Japan, France, Russia, Germany, and the USA big banks (just like oil companies) have been traditionally tools of government industrial policy and national champions.

        They are allowed ostensible private ownership and management and profits and bonuses accrue generously to their owners and managers as long as they behave, don’t cause trouble and carry out government policy, which is often not overtly stated.

        But when the moment becomes critical, governments dust old laws and drop pretences, and nationalize or run the banks more or less directly. Sure, individual bank owners and management try to influence the government by buying politicians, but it is clear who is really in charge.

  29. frank

    This is a MUST READ.

    If the Germans don’t come to the party look out below!
    The French banks are toast and so are the rest of the PIIGS.

    The collateral spillover will be very hard, if not impossilbe to contain.

    It is unfortunate that no major statement was produced tonight from the G20. Tomorrow will be a bad. The EURO is headed to 1.15 with the dollar.

  30. Fiver

    Funny how the package has to be big enough to be credible, but not so big as to be incredible – at least for the moment, again and again.

    I think we’re still in profound denial re the scope and duration of the deeper problems of which the financial crisis is symptomatic. The mere fact of notional hundreds of trillions in derivatives of itself tells us we just maybe left Reality out on the curb. Speed of light money, 24/7 connection to/dependence on a global hornet’s nest, lost in hydra-headed feedback loops of terrible policy, bad news, worse policy, bad outcomes…. we’ve thrown long-term thinking overboard entirely as people’s memories are obliterated and history erased with distraction then re-written by the highest paid noise. There is no longer any such thing as a “long term stability” anyone paying attention actually believes in, yet we all pretend not to notice.

    The biggest mistake we could make is to try to keep this predatory debt wreck on this particular road as it leads straight into something far more readily identified as fascism. “Whatever it takes” to maintain THIS is simply not worth it.

  31. A Real Black Person

    An economy can’t import MUCH more stuff than it exports. I mean, it could, but it would become very obvious that it was a parasitic economy based on colonialism rather than free market principles. The opposite, I think, applies to a country that exports much more than it imports, particularly if its economy is based around the exportation of raw goods. A over-exporting country, in that situation is most being bullied by a militarily stronger country whose true currency is violence. Eventually, the over-exporting country will lack the raw goods (like lumber, or nutrients in the soil, or clean water,) to sustain its population and will implode. The colonizers will retreat and move on to another area to sate is desire for natural resources, if there’s clearly nothing worth defending.

    Colonialism has a long history in the West. The Greeks and Romans were famous for outsourcing all the practical work that needed to be done to slaves so they were free to persue intellectual endevours.
    In contemporary times, the West uses overseas labor, illegal immigrants, and foregin oil to support its many non productive sectors in its economies. If overseas labor, illegal immigrants*, and foreign oil were to reduce their roles in the West’s economies, living standards would drop precipitously, however that’s exactly what globalization askes of the West: more equitable distribution of the world’s resources. Consumer debt, and lately, government debt is the West’s way of denying this reality. The reality is that human socioeconomic activity isn’t organized around shared values or nationalism anymore but by the path of capital and educational attainment. In other words, life for the average person is increasingly shaped by access/re lationship to capital and occupation.

    *If a large portion of the domestic workforce in America became willing to work for what illegal immigrants and oversea labor are working for now, there would be less demand for illegal immigrants and migrant labor. Of course, with oil being less plentiful, demand for human labor could increase in a vain attempt to make up the shortfall.

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