Thursday, October 27, 2011

The EU "Rescue" Plan: A Whole Lotta Nuthin

Long on political hot air and rhetorical concepts, short on details and achievability.  Eventually the EU will require a couple trillion more in money printing/currency devaluation and the EU banks will require a Taxpayer bailout.  That's the bottom line if you don't want to read the rest and I've linked the actual plan below.

The Euro Summit produced the outline of a Greece/bank "rescue" plan that really is a fantasy plan of action more suited for children playing “slay the evil beast” video games with their Wii. In effect it does nothing to reduce absolute debt levels, it does nothing to address the core economic and financial problems that created the EU insolvency in the first place and it offers no real concrete plan for raising the necessary capital to fund the "rescue" plan. In short, this plan of action is about as real as that of the 2008 bank bailout by the U.S. Government/Taxpayer, which has actually led to a much bigger version of the same problems left unattended in 2008. The bottom line is that the EU game plan - unless Sarkozy can bamboozle the Chinese into coughing up $100's of billions in support, will require more money printing and EU Taxpayer wealth transfer to the big banks.

As I dig into and digest the detail of this Greek/EU bank bailout outline, it becomes obvious that this plan is very long on form and very empty on real substance. In addition to the 2008 U.S. bank bailout, it is also analogous to the debt limit extension agreement by Congress and Obama, which outlined a game plan to reduce debt over the next decade starting a few years from now, but enables further current increases in debt accumulation and money printing.

Briefly, the plan calls for a "voluntary" 50% write-down of the Greek debt held by the banks. It is "voluntary" because if it were mandatorily enforced, it would trigger $100's of billion in Credit Default Swap OTC derivatives, which would potentially bring down the global banking system. The derivatives rule enforcement agency - ISDA - has ruled that a default event will not occur as long as the writedowns are "voluntary." In order to pave the way for this capital hit the banks will take, the plan calls for the banks to raise in the range of $150 billion in fresh capital. I'm not sure where they think this money come from but I'm guessing that's why Sarkozy is headed to China to get on his knees and beg for help. On the assumption that the banks won't be able to raise this money, we should fully assume that the money will have to be printed up by the ECB and guaranteed by the EU Member State Taxpayers.

In addition to the bank requirements, the EU Members will contribute 30 billion euros (approx $42 billion) in new debt issued to Greece. The Member countries are not writing down their existing Greek debt holdings and the plan assumes that the countries that have bought Greek debt will be paid off in full. Hmmm - that's just plain funny. The non-writedown by the Sovereigns is nothing more than a charade to make the taxpaying citizens believe they won't be paying for this. But in the end it just gives “the can” another kick down the road to money printing and wealth transfers. The plan also includes a $140 billion financing program for Greece to be partly funded by the IMF - that is, on a pro rata basis by Taxpayers in every country which are IMF members, which means primarily pro rata by U.S. Taxpayers.

Furthermore, the plan calls for the European Financial Stabilization Fund (EFSF) to be increased from its current $440 billion to roughly $1.4 trillion. This will be funded by the issuance of new EFSF bonds, which would be guaranteed by the EU. I guess the two biggest questions would be: First and foremost, who the hell would buy those bonds? Second, just how good is the guarantee? Without expounding on the obvious answers to those questions for the sake of brevity, the bottom line is that this mythic $1.4 trillion will, at the end of the day, ultimately have be fulfilled by more money printing by the ECB.

How will the EU pay for this? To begin with, the plan is based on the assumption that EU countries will be able to generate a considerable amount of economic growth and employment. Not sure how that will be accomplished, given that the entire globe is either slowing down or slipping into recession for the foreseeable future. The plan also requires a high degree of fiscal reforms, which so far to date appear to be next to impossible to achieve, notwithstanding Italy's bold move to raise the mandatory retirement age from 65 to 67 by 2026. In other words, beyond the flawed debt relief agreement, the real way to solve the problem of too much debt is to let economic activity produce the wealth required to pay off the debt incurred or force the parties responsible for creating the debt to take a big financial loss for making bad investment decisions. The EU plan offers neither, and realistically it will be fatal to assume that economic growth will generate the wealth required to discharge the catastrophic amount of debt that has been issued over the last 20 years by all Governments globally.

You can read the details of the plan here:  LINK

If you don't want to sift through that 15-page document, suffice it to say that it contains a lot empty rhetoric and absurd statements about austerity goals being established. I think the world has a better chance of seeing aliens from Mars than any of those goals actually occurring. For instance, the goal was set for Greece to reduce its debt to GDP ratio to 120% by 2020. This is a joke. Historically, whenever a country's debt to GDP exceeded 100% for any length of time, the country collapses. And Greece can't even pass measures to reduce its spending for a day right now. Short of more massive printing by the ECB, Greece will ultimately collapse. (By the way, the U.S. Treasury debt is on the cusp of exceeding 100% of GDP)

I could go on for a lot longer about how ridiculous - yet tragic - this latest Government financial chicanery has become. Suffice it to say that ultimately the ECB will be required to print a few trillion more euros and the European Taxpayers will be handed the final tab. I can guarantee you that the banks in some way will eventually be bailed out by the printing and the middle class.

As you can see, the stock markets love this plan. Gold and silver are up big as well, but for different reasons. When the lipstick wears off this pig, the markets will begin discounting the realities as outlined above and will make another upside down U-turn and head a lot lower. I fully expect when this occurs, most of the paper money that floods out of the global stock markets will, instead of flooding into near zero percent U.S. Treasuries, will flood into physical gold and silver and drive the price of each to much higher levels from here. And if gold and silver go up by X, the mining stocks will go up by 3X.
A year from now those who added to their gold/silver/mining stock positions will gratefully look back at the opportunity that has been presented by this latest price correction.  Those who have not bought any gold or silver up that point will either jump in and chase it higher or dig their head further into the sand and pretend to not see their collapsing wealth or the growing financial disaster surrounding them.


  1. Sick of everything?..then...


    I'm getting word (via Twitter) that the Oakland branch of "Occupy Wall Street" has finally done what I recommended as the only course of peaceful action that will matter:

    They have called for a GENERAL STRIKE November 2nd.

    Why will a General Strike work?

    Simple: It attacks the government in a lawful, peaceful manner in the one way they cannot counteract: It cuts off their funding!

    You can't tax what doesn't happen, basically. This is the people's way to peacefully withdraw consent to being governed.

    You buy nothing, you perform no work, you do nothing that is taxable.

    The implicit threat is that you cut the legs out from under the government's ability to fund itself. This is an entirely lawful action and I said in 2008 that this was the appropriate thing to be doing.

  2. Dave do you think whats going on now with cds and isda will ultimately bear down upon etf's and gold swaps?

    Credit Default Swaps Useless as Hedge Against Default; CDS on Greece a Purposeful Sham; Derivatives King Always Wins

    As a result of labeling 50% haircuts "voluntary", Credit Default Swap contracts have proven to be useless when it comes to protecting against sovereign default. The serious implication is investors will need to find another way to hedge.

    First Step in a CDS: Protect Yourself from the ISDA Cartel

    This isn’t the first time investors have been burned in the sovereign credit default swap market. Hedge funds Eternity Global Master Fund Ltd. and HBK Master Fund LP thought they purchased protection against an Argentina default and sued when J.P. Morgan refused to pay off on Argentina credit protection contracts they had purchased.

    Language Arbitrage: You’re Not a Sucker, You’re a Customer

    Banks that play this game call it “language arbitrage.” Anyone that bought sovereign credit protection on Greece after accepting ISDA “standard” documentation without modifying the language now finds that they are on the wrong side of an “arbitrage.” An arbitrage is a riskless money pump. In this case, it means that money has been pumped out of credit default protection buyers with no risk to their counterparties, the financial institutions that ostensibly sold them credit default protection on Greece.


  3. (Dave)

    Short answer: Yes. I've always thought ISDA was ultimately bogus. I used ISDA swap docs back in the 1990's on high yield swap trades. I basically filled in what i wanted to fill in in key spots.

    I also ultimately have always expected that any potential large-scale swap defaults would be monetized and avoided. That's exactly what happened in 2008 here and what is happening now in Europe.

    The entire globaly financial system is one big joke.

  4. Hey brother, do you have a COIN to spare with me ? ...

    Ciao Dave, buon Ognissanti !


  5. Ciao Marco,

    LOL. Che è una moneta grande!

  6. about that general strike....

    Rioting Across America - The Great Depression

  7. governor, senator, real world....

    MF Global Taps Credit Facility, Burns Through $2 Billion In Quarter

    What is probably the biggest take home here is just how much of a
    capital drain European exposure (and we are confident MF was
    "hedged".... just like Morgan Stanley) can become, and how quickly a
    firm can become completely insolvent. As a reminder, the firm reported
    $710 million in cash as of June 30. Obviously all of that cash must
    have been burned through if the firm also not only tapped but
    exhausted its $1.3 billion in revolvers in the past quarter (which
    have rating associated rate step ups, which don't take too kindly to a
    junk rating). Net result: $2 billion in cash (or about 9 times its
    makret cap) burned in 4 months primarily due to "hedged" European

    As for whose problem MF is now, according to the recently launched
    credit facility, JPM is admin agent on at least the smaller $300
    million credit facility. Which means that it is now a counterparty
    risk to Jamie Dimon. In other words, and we would not put it past
    them, Goldman may have pulled a Dexia and AIG on MF Global, with a
    spie in collateral calls, in the process sticking Jamie Dimon with the
    bill. Whether or not Goldman would dare to do this to the firm of its
    former CEO is a different question... But one most likely answered
    with a resounding yes.

  8. Great write-up Dave. Pretty much sums up what I was thinking about this EU deal. We'll take a few more laps around the track and be right back where we started, just with less energy in the tank.

  9. Agreed Dave, the global economy is a joke. And the Bozo the Clowns we elect too represent us are the biggest jokes of all.

  10. Thanks for the observations & analysis Dave.

    Far as I can tell the bankers behind the politicians don't actually have a solution other than propping up the system piecemeal and overseeing the continued bleeding of the public to support the corrupt status quo.

    Their wet dream is of course the NWO goal of consolidated financial systems, hence their politician/bureaucrat puppets mumbling about "fiscal union" every so often.

    Make no mistake, these folks are very dangerous.