The Ruling
Two must reads from Spiegel online as we approach the ESM ruling.
ESM Prime Time
ESM Action next? “…whatever it takes….”
From Spiegel. The court battle against the permanent euro bailout fund, the ESM, has become the largest in German legal history. Yet despite widespread concerns, fund head Klaus Regling is preparing for action. The most important question surrounding the fund, however, remains to be answered: Will it work?
Before that can happen, though, the ESM must still clear some legal hurdles. On Sept. 12, the German Constitutional Court will rule on lawsuits seeking to prevent the government of German Chancellor Angela Merkel from participating in the new bailout fund with its €700 billion ($880 billion) firewall.
Some 37,000 Germans have joined the complaint, making it the largest such case in the history of the court. Most prominently, however, the list of plaintiffs includes Peter Gauweiler, a politician with the Christian Social Union, the Bavarian sister party to Merkel’s Christian Democratic Union (CDU), former Justice Minister Herta Däubler-Gmelin of the center-left opposition Social Democrats (SPD), and a group of professors led by economist Wilhelm Hankel, a prominent critic of the euro. They all fear that joining the rescue fund necessarily means that Germany’s parliament would lose its constitutionally guaranteed right to oversee the budget.
The Greek Dilemma
It is almost hard to belive Greece is in crisis. Seldomly do we hear about the Greek mess in these market rally days.
The Greek situation must be adressed asap. What are the options though? Spiegel’s take on the Greek dilemma.
Will Greece obtain fresh aid or slide into bankruptcy? Those will be the fundamental issues at stake when Greek Prime Minister Antonis Samaras travels to France and Germany this week for meetings with French President François Hollande and German Chancellor Angela Merkel. Even though the talks won’t result in official decisions, the two most important politicians in the euro zone will know after these meetings just what they can still expect from Greece — and they will draw the necessary conclusions.
For the currency union as a whole, however, the Greek tragedy itself is merely a prelude to the real battle to save the euro. If Greece actually did go bankrupt or left the currency union, the main priority for the rest of the bloc would be to use every means possible to prevent a further dissolution of the euro zone — even if these means have some quite problematic aspects.
Paradiso by Lampa de Dashboard
Guest post by Peter Tchir.
Last call is approaching in Europe. It’s getting late, everyone is getting tired, the dance floor is crowded and people are making their move. I can’t get that image out of my head and I can’t help but think that Meatloaf, of all people, sums up where the market is right now:
GIRL:
I gotta know right now
Do you love me?
Will you love me forever?
Do you need me?
Will you never leave me?
Will you make me so happy for the rest of my life?
Will you take me away and will you make me your wife?
I gotta know right now!
Before we go any further
Do you love me?
And will you love me forever?
BOY:
Let me sleep on it
Baby, baby let me sleep on it
Let me sleep on it
And I’ll give you an answer in the morning
Let me sleep on it
How much has Germany MADE from the bailouts?
Guest post by Peter Tchir of TF Market Advisors.
Profits not “Costs” from the Bailout. For all the talk about how much the bailouts are “costing” Germany and other countries, they have so far been very profitable.
Minimal Cash Outflows
In the early days, the countries did provide some funds. They may also have to provide the IMF with money (though the IMF also seems to be able borrow
rather than demand actual funds). Since then, the ECB and EFSF have largely provided the funds. So in spite of all the talk about the “cost” of
bailouts, the structure has allowed the money to go to Spain, Italy, Greece, Portugal, and Ireland with minimal cash out the door.
Continue reading
Yes, for now but Merkel Knows the Dealing Isn’t Done
Merkel managed impressing investors on Friday. The question is, what is next? Spiegel on Merkel’s dilemma going forward.
Merkel launched her counterattack on Friday afternoon. In a post-summit press conference, she said one first has to sort things out after such a long night, and she tried to counter the impression that she had been out-maneuvered by Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy.
Merkel underscored that she had pressed to make sure that the rules of the ESM were adhered to. She said she had successfully defended the ESM’s preferred creditor status and that only a single exception would be made, for Spain. Likewise, she noted that, if at all, the ESM would only provide direct assistance to private banks after a long process of setting up a banking supervision mechanism, and that Germany would have several opportunities to exercise its veto during this process.
Groupthink on Carry, Subordination, and Secondary Market Yields
Guest post by Peter Tchir of TF Market Advisors.
A boring start to the day as the market briefly attempted to rally but has since settled back to mixed. U.S. stock futures are up a touch, CDS indices across the board are basically unchanged, while Spanish and Italian bond yields drift lower once again. High Yield remained strong yesterday, particularly the ETF’s, one of the few signs of resilience yesterday.
The market will likely chop around based on headlines, which is painful enough to endure, but repeatedly reacting to the same headlines has hit new levels of annoyance. One of the EC members, whose career depends on keeping the Euro big and bureaucratic, comes out with some self serving piece of hopium and the market rallies. Merkel or some other high ranking German says Nein for the 1000th time, ahead of negotiations and we sell off. So and so says something and the market responds, regardless of whether that person is Hollande, or some backbencher from Austria.
Maybe we will see some strong data in the U.S. and we can attempt a “decoupling” rally here, but the reality is we are likely to be driven far more by rumors and stories out of Europe.
What Happened to the “Carry Trade”?
Remember when the carry trade was going to save Europe. That LTRO2 was great because all the banks were going to load up their sovereign’s bonds and ride carry to prosperity while at the same time ensuring that sovereigns could sell all the debt they wanted? Coming into LTRO2 the market had latched on to that idea. It was impossible to read a report or listen to the financial news without being told what a great idea the carry trade was.
How I became Perma Bull
Guest post by Peter Tchir of TF Market Advisors.
The term “perma” seems to get attached to anyone who has an opinion for more than a couple of weeks, but yes, I have changed my view on Europe. By the end of LTRO2 when most of the world was bullish we were bearish. It was painful for a bit, but we saw the signs as early as March 2nd, and accelerating by March 16th that Spanish debt was struggling. We remained bearish for quite some time but gradually shifted to a bullish bias. Too early as we had to ride it down further, but got more bullish on the back of two main catalysts – Grexit and JPM.
How did Grexit Make Me Bullish?
The fact that Europe was finally starting to face up to the possibility of Greece exiting became a positive for me. The people I have spoken to at the German Ministry of Finance and senior Greek politicians all admitted that until recently almost no time had been dedicated to what a Greek exit would look like.
In spite of all the negotiations around the bailout, neither side had taken a serious look at what it could mean. Both side were living in a world of assumptions about how it would play out that had no basis in reality. Germany somehow had this vision of not having to make good on all its guarantees, that the ECB would get paid, and the “firewall” would stop contagion. All of those are laughable assumptions yet basically is what the “core” of Europe believed. So on June 2nd when we wrote our widely read Why a Grexit would make Lehman look like childs play piece, the basis for the bullish view was formed.
G-20 and ESM
This is what we call short of funds.
G-20 pressure mounting on Merkel, full article here.
Chart Spiegel.
Know your ESM and the EFSF
With the Greek weekend coming up, let’s brush up the definitions of the fancy ESM and the EFSF. From TF Market Advisors.
There is so much confusion about the ESM or EFSF funding costs. How it works, how it affects countries, etc. Here is how it works.
€1 Billion of EFSF Borrowing
The EFSF sells bonds to the market. They have already issued €109 billion of bonds, so they are a meaningful issuer and buyers at this stage understand how it works. The bonds are backed by “guarantees” from member countries with an “overcollateralization factor”.
The key is that for every €1 billion of bonds issued, you get a billion of guarantees from useful countries. Yes, Spain and Italy are included. Yes, technically if Spain or Italy receive money it is circular, but ultimately they are pretty irrelevant. Investors buy EFSF bonds and are getting paid more than if they invested in France directly – the weakest of the high quality guarantors. If you invested €1 billion split among the 5 best issuers in this ratio, you would expect to earn 1.01%. By investing in EFSF you get 1.82% and yet your risk is more than covered by those top 5. Yes, there is a risk that they don’t come in on their guarantees, but at same time you are getting almost double the spread of investing in countries outright and pick up the throwaway guarantees for free.
So now you can see how EFSF funds, how irrelevant Spain and Italy are too it, and that it is likely sustainable when it is so much cheaper than direct investments in the top countries (especially if people don’t think there will be an FX event in Europe).
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