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.