June 29, 2012 By gpc1981
‘Everyone in the media is viewing the
latest announcements out of the EU Summit as game-changers.
They are not.
One facet of the deal is that ESM/
EFSF loans to troubled countries will not subordinate private bondholders holdings. While this does serve the purpose of
allowing private bondholders to feel that should a country default, they might get their money back
sooner (as opposed to what happened in Greece)… it doesn’t change the more
critical issue of stopping defaults
from happening.
Indeed, if
Moreover, none of the measures
address the most critical issue pertaining to
As I have noted before, the European
Stability Mechanism, which everyone sees as the ultimate savior for the EU, does NOT exist
yet. Only four out of the required 17 countries have ratified
its legislation.
And the due date for ratification?
July 9th.
So we have less than two weeks for 14
EU members to ratify the ESM.
Another interesting fact about the
ESM…
You couldn’t make this stuff up if
you tried.
Another topic worth discussing is the
fact that EU leaders didn’t agree to increase the EFSF or the ESM. The simple
and obvious reason for this is no one has the funds to do this.
I’ve been saying this for months. No
one seems to be listening:
Another point,
and perhaps the most key one is that the ECB will now be using bailout funds to
help recapitalize EU banks. This move will ultimately end up hurting the banks
that seek funding from the ECB much as those firms which drew on the ECB’s LTRO1 and LTRO 2 schemes found themselves severely
punished in the credit and bond markets.
After all, requesting aid is
essentially a public admission that one’s bank is in major trouble. In this end
this hurts the bank seeking aid as everyone now knows that it’s on the ropes.
Indeed, as we saw with LTRO 2 (which
provided over €500 billion to EU banks), those banks that drew on the ECB saw,
at most, one month’s worth of gains before they were right back to where they
started in terms of share price and funding needs.
Oh, and none of this will go into
effect until December. Let’s hope
My take on this
whole mess?
1) The benefits of the
announcements (lower yields on sovereign bonds and higher share prices in EU
banks) will be short-lived.
2) None of these
decisions address the core issues facing the EU banking system: namely,
insolvency and excessive leverage.
3) No one in the EU
actually has the money to make these measures work (again,
Markets will stage a knee jerk
reaction to these measures. That reaction will see bank shares rise and yields
fall, temporarily. But this move will be short-lived, just as moves following
LTRO1 and LTRO 2 were. After all, these announcements are just more political
measures than anything else. And
So I would expect this rally and the drop in bonds to be short-lived. EU
leaders may have put off the Crisis by a few weeks (or perhaps even a month).
But they still haven’t addressed the core issues causing the Crisis: excess
leverage courtesy of hundreds of billions of Euros’ worth of garbage debt.
With that in mind, I would use this
rally to further prepare for the EU Crisis.
With that in mind, I’ve begun
positioning subscribers of my Private
Wealth Advisory for this very possibility. We’ve
already locked in over 30 winning trades this year by finding “out of the way”
investments few investors know about and timing our positions to benefit from
the various developments in
