Submitted by Tyler Durden:"Greece is an exception in the Euro Zone" - Angela Merkel, December 9, 2011
"Exception from ESM Seniority only applies to Spanish aid" - Angela Merkel, June 29, 2012
It took about a year,
but finally Germany, with a little assistance from Merkel on Friday
morning, has figured it out. And is now blasting it on the front pages
of its various newpapers:
Translated:
Europe is coming for our money!
What else does Die Welt say:
When economic historians in a few years determine the turning point at which the euro zone turned into a debt community, they may refer to the last Thursday night. In those dramatic hours when Angela Merkel after massive pressure from Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy buckled - and agreed to an agreement whose scope is now very difficult to estimate.
Specifically, what is now painfully clear to everyone in Germany is
that if indeed Merkel's declarations over the past few days are to be
taken at face value, then Germay has just lost control over European
supervision: a topic very near and dear to all Germans' heart, as up
until this point money would be handed out only in exchange for
conditionality. A move whie Welt calls a paradigm shift: "To date the
Germans insisted that the €-aids come equipped with shackles. Money was
always associated with reform programs that were monitored by the Troika
of the EU, European Central Bank (ECB) and International Monetary Fund
(IMF)." That is now no longer the case. At least according to
conventional wisdom:
Precisely for this reason were countries like Portugal and Ireland long afraid to apply for assistance. Now dipping into the bailout pot will be far easier... The federal government has always stressed that any bailout will come with strict conditions. Now all has changed, partly because of pressure from the financial markets. Italy and Spain struggling with risk premiums at record levels. So far, however, they refused to implement emergency measures. That could now change. Monti has already cheered: "the Troika will never come to Rome."
Die Welt may be on to something: while in the case of the Spanish
bailout, the European action opened the door for proactive demands for
future assistance, what happened last week has also activated the
retroactive lever, and the cries for equitable EFSF/ESM treatment (where
there is no seniority for bondholders despite Citi's clear explanation
the EFSF and ESM will always have implied seniority
over other private sector bondholders no matter what promises
politicians throw around) will now come from all the other countries
bailed out by Europe. Because what kind of union is it if among the
countries in distress some are more equal than others. After all, first
it was only Greece who was an exception. Now it is Spain. Who will be the next exception?
But before we pretend to even answer that rhetorical question, we
already know how long it took Greece to demand the same treatment as
that offered to Spain: 24 hours.
From Kathimerini:
Athens to ask for EFSF deal to apply to Greece, too
The government is considering to ask for the European Council agreement of Thursday for banks to get direct funding from the European Financial Stability Facility (EFSF) to apply to Greece, too, even though the recapitalization of local lenders was agreed to be included in the state’s bailout agreement.
The issue was discussed, according to reports, during a meeting at the Prime Minister’s residence in Athens on Saturday evening, ahead of the visit of the representatives of Greece’s creditors from Monday.
And since in Europe now every beggar is empowered to be a chooser,
there is no stopping how much Germany will have to pay out of pocket to
keep the insolvent ones content.
Main opposition leader Alexis Tsipras urged the government on Saturday to press for local banks to benefit from the new system of direct recapitalization from the EFSF, or threaten to veto the European Union’s Treaty for Stability Co-ordination and Governance and refuse to accept the visit of the creditors’ inspectors in Athens.
Expect many more demands from Ireland and Portugal next. Also expect many more and far angrier headlines out of Germany.
All of this means, that as we calculated last July, with Germany no
longer able to kick the can, Merkel will soon have to front well over 30% of its GDP
and likely over 50%, just to keep the Eurozone alive. it also means
that, as we said last July, spreads of core European bonds will soar in a
great compression trade where the PIIGS become the core and vice versa,
an outcome that will anger Germany even more as it bring the implied
outcome of Eurobonds without Eurobonds ever having been activated.
There is however a catch: earlier today we speculated that
Merkel's move was merely one that puts the Constitutional Court, and
thus a broad referendum, in action. Already numerous parties are
demanding that the highest court scrap the ESM as it is both
undemocratic and unconstituional.
From Deutsche Welle:
The European Stability Mechanism (ESM) and the Fiscal Pact have been approved by the German parliament. But thousands of Germans have joined forces to take legal action against these measures.
The Euro Stability Mechanism's capital stock of 700 billion euros is intended to provide a buffer against the convulsions of the euro debt crisis. The 17 signatory states will each pay a proportional amount into the ESM - irrevocably and without restrictions - or set the money aside to be handed over, if required.
The signatory states came to an agreement on the ESM because, as is stated in the treaty, they are "committed to ensuring the financial stability of the euro area".
But opponents say that this should not be done at any cost, and using any means available. Dissenters are calling for more democracy, and there are a lot of them. More than 12,000 German citizens have joined "Mehr Demokratie" ["More Democracy"], the "Alliance for Constitutional Objections to the ESM and the Fiscal Pact".
They plan to file suits with the German Constitutional Court in Karlsruhe against the instruments being deployed to save the euro. Christoph Degenhart, a Leipzig-based expert on constitutional law, and Herta Däubler-Gmelin, a former federal justice minister, are spearheading the alliance, which also includes some of Germany's smaller political parties.
Another prominent critic is Peter Gauweiler, a parliamentary representative of the conservative Christian Social Union who has experience with lawsuits against euro bailout funds. He is fighting the bailout on two fronts: with a constitutional complaint, and with legal action against the federal government. He says, to date, parliament has not discussed the bill because important passages on the ESM are missing.
The Left party has launched a similar action against the government, and its delegates have also lodged constitutional complaints.
Also as we reported earlier, both Schauble and Weidmann would be
delighted if things get to the referendum stage. And in the aftermath of
last week's massive optical loss for Merkel, so will she. If it indeed
gets to a referendum, Mario Monti may be far less exuberant with the
outcome.
However, assuming that there was no grand master plan behind last
week's decision, here is, once again, our math from last July showing
just how much of Europe's bailout funding Germany has just footed. Keep
in mind the context then was just Greece, as Italy and Spain were both
"safe", now that is no longer the case. What hasn't changed one bit is
the logic behind the amounts that Germany will have to backstop between
Italy and Greece. To wit, from over 11 months ago:
- An extension of the EFSF to cover Italy and Spain would require a €790bn (32% of GDP) guarantee from Germany
This number is even bigger now.
And what is truly hilarious is that all of this was already at the forefrunt of debate last summer, when the EFSF was once again the bailout ex machina,
only then the world and capital markets were a little bit smarter, and
realized that there was simply not enough cash to cover the funding
needs of both countries. This in turn led to the whole 3x-4x leverage
debate that would bring the EFSF to €1 trillion: a plan which was scrapped some time in October and promptly forgotten once it was deemed unfeasible.
In other words we are right back where we started one year ago! Next
up: cue the debate over how to increase the funding ot the EFSF/ESM
bailout complex. Just like last year. And cue the 3x-4x bailout fund
leverage expansion discussions for August-September 2012, once again in
carbon copy replica of 2011, all only to be quickly forgotten. Because
institutional memories sure are short. And because there is just no more
money left.
So for all those who have forgotten last year's full mathematical
analysis (because math still trumps politican lies and empty promises
any day), here it is. All over again.
* * *
A funny thing happened in Euro spreads today. While the bonds of all
PIIGS countries surged higher in price (and plunged in yield) upon the
announcement of the second Big Bang bailout, the reaction in core
Eurozone credit was hardly as exuberant, and in fact spreads of the two
core European countries pushed wider by the end of the day, and over the
last week. Why? After all the elimination of peripheral risk should
have been seen as favorable for everyone involved, most certainly for
those who had been seen as supporting the ever more rickety house of
European cards. Well, no. Basically what happened today was a two part
deal: the i) funding of future debt for countries that are currently
locked out of the market (all the PIIGS and possibly core countries
soon) or in other words the "liquidity mechanism" which is being
satisfied by the EFSF "TARP-like" expansion, and ii) the roll-over
mechanism for existing holders of debt which "allows" them to
"voluntarily" transfer existing obligations into a "fresh start" Greece
which can then emerge promptly from the Selective Default state that is
coming from Moody's and S&P any second, and supposedly allow the
country to access markets as a non-bankrupt country.
For all intents and purposes the second can be ignored, because as
has been made clear over the past few days, and as will be demonstrated
below, the actual rollover from non-Peripheral banks will be de minimis,
the bulk of impaired debt being held by banks in the host countries as
is, and used as collateral with the ECB in the form of par instruments
for cash.
Now the second part of the mechanism was never an issue further
demonstrated by the plunge in net notional in Greek CDS as core banks no
longer needed to hedge exposure and instead opted to divest their
holdings. This is merely a red herring that attempts to confuse the
issues associated with the first, and far more important concept: the
nuances of the EFSF and its imminent expansion. And expand it will have
to, because in reality what is happening is that the net debt of the
countries will end up growing even more over time for one simple reason:
this is not a restructuring of existing debt from the perspective of
the host country! Simply said Greek debt will continue growing as a
percentage of its GDP, meaning it, and Ireland, and Portugal, and soon
thereafter Italy and Spain will be forced to borrow exclusively from the
EFSF. Therein lies the rub. In a just released report by Bernstein,
which has actually done the math on the required contributions to the
EFSF by the core countries, the bottom line is that for an enlarged EFSF
(which is what its blank check expansion today provided) to be
effective, it will need to cover Italy and Belgium. As AB says, "its
firepower would have to rise to €1.45trn backed by a total of €1.7trn
guarantees." And here is where the whole premise breaks down, if not
from a financial standpoint, then certainly from a political one: "As
the guarantees of the periphery including Italy are worthless, the
Guarantee Germany would have to provide rises to €790bn or 32% of GDP." That's
right: by not monetizing European debt on its books, the ECB has
effectively left Germany holding the bag to the entire European bailout
via the blank check SPV. The cost if things go wrong: a third of the
country economic output, and the worst case scenario: a depression the
likes of which Germany has not seen since the 1920-30s. Oh,
and if France gets downgraded, Germany's pro rata share of funding the
EFSF jumps to a mindboggling €1.385 trillion, or 56% of German GDP!
The Europarliament, ECB and IMF may have won their Pyrrhic victory
today... But what happens tomorrow when every German (in a population of
82 very efficient million) wakes up to newspaper headlines
screaming that their country is now on the hook to 32% of its GDP in
order to keep insolvent Greece, with its 50-some year old retirement
age, not to mention Ireland, Portugal, and soon Italy and Spain, as part
of the Eurozone? What happens when these same 82 million realize that
they are on the hook to sacrificing hundreds of years of welfare state
entitlements (recall that Otto von Bismark was the original welfare
state progentior) just so a few peripheral national can continue to lie
about their deficits (the 6 month Greek deficit already is missing Its
full year benchmark target by about 20%) and enjoy generous socialist
benefits up to an including guaranteed pensions? What happens when an
already mortally wounded in the polls Angela Merkel finds herself in the
next general election and experiences an epic electoral loss? We will
find out very, very shortly.
Below is Bernstein's full breakdown:
Continuation of the current strategy with a materially enlarged EFSF and private sector participation in liquidity support
Despite the failure of the current strategy, there is still a
theoretical option of an extension of the current liquidity support with
a materially enlarged EFSF that would also be buying government bonds
in the secondary market. We believe this is the least likely option
given the size of the fund required to achieve the objective.
An extension of the EFSF to cover Italy and Spain would require a €790bn (32% of GDP) guarantee from Germany
This strategy is not only unlikely to succeed but would also run into
some serious structural difficulties. To cover 100% of the roll-over
for Greece, Portugal, Ireland, Spain, Italy and Belgium as well as an
allowance for bank support at 7% of the banks' balance sheets until the
end of 2013, the support mechanism(s), would need to be able to deploy a
total of €2.4trn in available funds.
Assuming the Greek Loan facility and the EFSM remain in place, the
EFSF would have to increase its deployable funds from currently about
~€270bn to €1,450bn.
Given the 20% overcollateralization requirement on the current EFSF
structure and the fact that countries that receive EFSF support are not
able to provide valid guarantees mean that in order to create a €1.45trn
funding capacity, the total fund would have to be €1.7trn. The guarantees to be provided by Germany would have to be €791bn or 32% of GDP.
There is a legitimate question whether in particular Germany
would see the point of committing that kind of support to a concept that
has so far been extremely unsuccessful. It also would expose
Germany to a worst case scenario of a French downgrade. Without France,
the guarantee need would rapidly move towards the whole of the €1.7trn.
As the market is getting increasingly concerned about
France, the odds are heavily stacked against an extension of the EFSF as
a pure liquidity support mechanism.
If Banks were to participate in a liquidity expansion their contribution would be minimal
Within the current strategy one of the open questions is whether or
not the private sector can participate by providing liquidity to the
periphery countries. We believe this to be a fundamentally marginal
discussion despite its enormous political importance.
Based on the stress test data released on Friday, we find
that whilst the banks account for the majority of the very short term
paper, their total share of the funding requirement into 2013 is just
23% and 16% of the total EFSF.
The question is how big the private sector participation could be.
Taking the "French proposal" as a guide, the private sector
participation would reduce the size of the EFSF by €137bn or 9% of the
€1.45bn EFSF funding, assuming 70% of the debt is rolled over, 30%
collateralization and 75% of banks participate.
The problem with this private sector participation so far has been
the risk that this may be regarded as a default by the rating agencies.
As a consequence the banks would have to write down these exposures to
market prices. This exercise would lead to reported write-downs for the
European banking sector of €75bn, 0.55 times more than the liquidity
support that the EU is seeking. And in particular in Portugal and Greece
the fallout of the MTM losses far outstrips the increase in liquidity.
Even more importantly, more than half of these losses would
occur in the banks of the periphery countries themselves. In the absence
of an open market for these banks, the losses would have to be made up
by the governments themselves and subsequently added back to the EFSF
utilization.
And there you have it: the cost of the euro not plunging today as a
result of the ECB not proceeding with outright monetization, is that
Germany is now the ultimate backstopper of all of Europe's risk. And
while before, when the EFSF was just over €400 billion or so, the market
could largely ignore the risk, a €1.5 trillion "upgrade" certainly
changes the equilibria dynamics. In an attempt to avoid the appearance
of inviting inflationary pressures on Trichet's central bank, Germany
has directly onboarded the risk associated with terminal failure of this
latest and riskiest "bailout" plan and in doing so may have jeopardized
anywhere between 32% and 56% of its entire annual economic output. One
wonders if the risk of runaway inflation is worth offsetting the risk of
a plunge into the worst depression in the nation's history? It sure
isn't for the Fed.
The most ironic outcome would be if the eurozone, in an attempt to
prevent further contagion at the periphery, simply invited the
vigilantes to bypass Italy (recall how everyone was shocked that instead
of attacking Spain, it was Italian spreads that got destroyed in a
manner of days), and head straight for the country on whose shoulders
lies the fate of the entire EUR experiment?
Is Atlas about to shrug and topple the entire oh so heavy house of cards?
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