Best of the Week
Most Popular
1.UK House Prices BrExit Crash NOT Likely Despite London Property Market Weakness - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit Implications for UK Stock Market, Sterling GBP, House Prices and UK Politics... - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - Nadeem_Walayat
7.UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - Nadeem_Walayat
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.The Stock Market is Reading it Wrong! - Chris_Vermeulen
10.Breakouts Galore in Gold and Silver - Jordan_Roy_Byrne
Free Silver
Last 7 days
Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - 28th July 16
FOMC Interest Rates and Their Impact on the US Economy - 28th July 16
The State Of The Economy - 28th July 16
Elliott Wave Crash Course - 3 Ways the Elliott Wave Principle Enhances Your Trading - 28th July 16
Japan's "Helicopter Money" Play: Road to Hyperinflation or Cure Debt Deflation? - 27th July 16
Monetary Zika - The Insidious Nature of Credit Expansion - 27th July 16
Gold and Pork Bellies - 27th July 16
Silver Is Insurance Against The Worst Part Of This Depression - 27th July 16
Don’t Buy The SPX Hope Stock Market Rally! - 27th July 16
Bitcoin $650 Still in Play - 26th July 16
Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - 26th July 16
The Forex Markets Are Getting Exciting! - 26th July 16
Underpriced Silver Is the “Rip Van Winkle” Metal - 25th July 16
Declines in Multiple Market Indexes - 25th July 16
Retailers Are Doomed as Most Americans Are Too Poor to Shop - 25th July 16
Here’s One Currency That Could Go to Zero - 25th July 16
Stock Market Top is Expanding - 25th July 16
Silver Manipulation – Because They Needed the Eggs - 25th July 16
Silver Market COT Stuns: What's Going On Here? - 24th July 16
Gold Demand Remains Stable During Sector Weakness - 24th July 16
Sernova, Diabetes and Haemophilia - 24th July 16
Russia: Tensions, Turmoil, and Western Hubris - 24th July 16
Soybean Commodity Price to Soar Again - 23rd July 16
SPX Stock Market Uptrend Continues - 23rd July 16
Gold And Silver – Debt Addiction Will Carry Precious Metals Higher, Guaranteed - 23rd July 16
Pokemon Go - How to Play, First Use, Balls, Stops, Catching Pokemon's... Great Excercise! - 23rd July 16
7 Signs That the Gold Market Remains Resilient - 23rd July 16
Basic Income in The Time of Crisis - 23rd July 16
Silver Bull Faces Correction - 22nd July 16
The Serious Warning No One’s Talking About - 22nd July 16
Stock Market Insight from Greed, Volatility, and Put/Call Ratio - 22nd July 16
What Will Happen To the Stock Market When Interest Rates Rise? - 22nd July 16
How to Escape the World’s Biggest Ponzi Scheme - 22nd July 16
Addicted to Debt - We Can’t Borrow from the Future Anymore - 21st July 16
Not Everything Is Bullish for Gold - 21st July 16
Don’t Get Sucked Back Into the Stock Market - The Big Picture Hasn’t Changed - 21st July 16
Silver – Caught Inside - 21st July 16
Forex: "The Markets Are Getting Exciting!" - 20th July 16
China Economic Troubles - Is Kyle Bass Finally Getting His Revenge? - 20th July 16
Why Lithium Will See Another Price Spike This Fall - 20th July 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

Another Euro Zone Crisis, Another Backdoor Taxpayer Bailout?

Interest-Rates / Eurozone Debt Crisis Dec 12, 2011 - 02:49 AM GMT

By: EconMatters

Interest-Rates Best Financial Markets Analysis ArticleExactly 20 years to the day after the creation of the European Union (EU) and the Euro currency, German Chancellor Angela Merkel successfully secured an historic agreement from all 27 current members of the EU, except Britain, forging a deeper economic integration in the euro zone on Friday, 9 Dec.


The Euro crunch summit also came away with an agreement to provide up to 200 billion ($268 Billion) in bilateral loans to the International Monetary Fund (IMF) to help it tackle the crisis, with 150 billion euros of the total coming from the euro zone countries.

The date that the European Stability Mechanism (ESM), capped at 500 billion ($666 billion), operation was also pushed up, the pledge to make private investors absorb losses in any future bailout for a euro nation is also to be scrapped.

While this new pact might be better to prevent future such sovereign debt crisis, others (including the US, and the IMF) view is that the summit has failed to adequately address the more immediately and urgent issues.

Ticking Euro Debt Bombs

Euro zone has to repay or roll over more than 1.1 trillion euros, around $1.5 trillion, debt due in 2012, with about 519 billion, or $695 billion, of Italian, French and German debt maturing in the first half alone, according to Bloomberg.  (See Graphic below from Spiegel with a shorter time frame sans Germany).

Graphic Source: Spiegel.de, 29 Nov. 2011

With Euro Zone sovereign bond yield spiking to record levels, probability is quite low for Italy and Spain to refinance next year at a sustainable rate going forward as there's not an effective backstop firewall

Germany, France would most likely need to pay a much higher interest rate due to this debt crisis contagion.  Belgium is no GIIPS yet, but its sovereign bond interest rate is closing on the 7% threshold that could require external bailout aid.

Graphic Source: Spiegel.de, 29 Nov. 2011

European Banks Need $153 Billion in Fresh Capital

There are also problems at the heart of the European banking system.

According to the European Banking Authority (EBA) in London (from BusinessWeek),
"....Banks in the European Union must raise 114.7 billion ($152.8 billion) in fresh capital as part of measures introduced to respond to the euro area’s sovereign-debt crisis."
Back in July, eight European banks failed the regularly scheduled stress tests with a combined capital shortfall of 2.5 billion. And things have deteriorated since then.  The updated figures from EBA take into account bank's sovereign holdings through the end of September.

Step-by-step Is Killing The Euro Zone

Europe, even with the aid from the IMF, would have a very difficult time covering between the sovereign debt rollover and shoring up the banks capital structure.  Essentially, the 'step-by-step' crisis solution as described by Merkel is a killing the Euro Zone.

The European Union of course is fully aware that markets are unlikely to be in the forgiving mood without some 'bazooka'.

The inaction could suggest
  1. The actual 'hole' is a lot more substantial than figures floating in public out there.  Kicking the can down the road as far as possible is probably the only viable option in the short-to-medium term
  2. Politics truly trumps economics as Germany could be using this crisis as a cudgel to gain power and control over the EU and on the global stage.  This also seems to indicate Germany has plenty of resource for this step-by-step waiting game.  
Another Backdoor Taxpayer Bailout Across the Pond?

Germany is reportedly still against the idea of a collective Euro Bond (although Italy's Monti seems confident that Germans would eventually see the light), and does not like the European Central Bank (ECB) embarking on large-scale bond purchases, like the U.S. Federal Reserve have been doing, either.

One of the messages out of the crunch summit is that private investors would not 'absorb losses in any future bailout for a euro nation,' which could suggest banks would get 100 cents on the dollar of the future troubled sovereign debt of Italy and  Spain, etc.

So we could also be looking at yet another backdoor taxpayer bailout of the banks -- similar to the U.S. Fed's '$1.2 trillion secret loan to banks, with repayment optional) --so banks would support buying the European sovereign bonds, while keeping the banking financial system afloat.

Somebody, somewhere has to put up the money and take the loss of the Euro Zone, and it does not look like EU would rise up to the occasion.  Eventually the markets would get past the Euro crisis and the world would move on.  But it seems the European taxpayer, just like their American counterpart, could end up being the last hero standing saving the global financial system, along with the world as we know it.

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2011 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife