The EU’s Camouflaged Bazooka

By Global Macro Monitor

Many were disappointed that the EU Summit didn’t conclude with a hard number backstop for the ‘zone’s sovereign debt rolling over next year. We believe if you scratch the surface the bazooka is there.

The EU President, Herman Van Rompuy, stated in the wee hours of this morning,

As regards private-sector involvement, we have made a major change in our doctrine: from now on we will strictly adhere to the IMF principles and doctrines,” and added “or, to put it more bluntly, our first approach to PSI, which had a very negative effect on debt markets is now officially over.

We read this as an unequivocal backstop even if the official statement is not explicit.

If their PSI approach is over, that is bailing in the banks and bondholders who hold the questionable sovereign debt , the full blown bailouts, if needed, will continue. By explicitly stating PSI is over, the EU is implying the big bazooka will be there to fund any shortfalls in rolling over bond maturities.

The earthquake and severe aftershocks that has shaken even the German banking system and has increased global systemic risk has put the fear of God in the EU leaders. They now know what’s at stake but a wholesale bailout of the banks and bondholders is a hard sell to their domestic constituents and parliaments. Ditto for debt monetization and the German public.

The EU may have also learned an important lesson that the markets will surely test any number they put on the bazooka. The fiscal pact is a step in the right direction and clears the way for ECB bazooka if needed, in our opinion. Furthermore, many analysts were very skeptical after the details were released, yet the markets are up and sovereign spreads are slightly tighter. This is a good sign.

The structural problems are far from solved and the markets will be back to challenge the Eurozone’s resolve, but it does appear the fiscal pact has provided the fig leaf for some short-term relief, and, ironically may have camouflaged the bazooka, if you don’t look carefully. The markets may be up today because the numbers don’t add up.

Yes, Virginia, there just may be a Santa Claus rally this year and nobody believes it. We are fully aware of the S&P Grinch who could downgrade these countries next week. Should they?

A close above 1263.32, the 200-day SMA, on the S&P500 could set off the rampfest into year-end that we’re expecting. We’re mainly traders, can always could be wrong, and always use stops. Stay tuned.

  1. Oz says

    I’m sorry I just don’t believe in this logic.  “Explicitly stating PSI is over”??  The Europeans realised a long while ago its important to try and instil confidence in the markets – that’s the one thing they have been consistent in.  They have no desire to “camouflage the bazooka” – if they really had one they would be proudly waiving it around for the world to see.

    This is what its been reduced to – desperation… 

    “come on, please buy Italian bonds, please buy EFSF bonds…we promise you won’t ever face a loss…don’t worry that we said that about Greek bonds 6 months ago – we “get it” now, we mean it this time…we have a bazooka hidden out back…but we won’t show you or even describe what it looks like in any detail…”

    Are markets going to call their bluff?  Yes – cause that’s what markets do…

    1. Anonymous says

      In the official statement there is mentioned PSI is now sharing the same standards with IMF. IMF does not have got PSI in their books. The only way under the circumstances is that IMF refuses to loan funding for the troubled entity. This way the writedowns follow automatically.

      The catch is that this considers ESM, launching July 2012. Now, running EFSF is not mentioned, but stating Greek-style haircut is unique. Additionally, all new EZ gov bonds would include Collective Action Clause. I guess that the statement couldn’t use any shadier wording.

  2. StreetEYE (@streeteye) says

    What’s in Von Rompuy’s wallet? Talk is cheap, show us the money. 

    I need to feel you, Herman, Angela, Herman et al.

  3. kris says

    IMF does not deal with banks, only with countries. It’s in their charter, as per Carl Weinberg of High Frequency Economics.
    Why is all this IMF talk?

Comments are closed.

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