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Sunday, June 10

10th Jun - Weekender: Euro Crisis

Commentary on Spain's bailout news seems to think that even though the chosen figure of 100bn was to high side of the initial estimates, it will not be adequate and is more a "first step". Also, the other missing elements and the next flashpoints are looming large. 

The European crisis has entered an uncertain period. I know that many commentators, me included, have predicted an end to the procrastination and muddle through to be right around the corner, yet nothing has been done. The choice between a closer integration or a breakup has not been made, as everyone is gaming against everyone.

Yes, the Spain receives a bailout of 100bn, but it will eventually need 200-300bn and current rescue vehicles are not enough to fully backstop Spain and Italy. Yes, the bank jogs must be stopped, but without a full banking union it will be difficult to convince the payers (=Germany) it will be worth it. To end the crisis, the June meeting would have to agree on bank deposit guarantees, bank transparency and continent-wide banking regulation, full backstops of Italy and Spain, ECB's debt monetization and several other things as well. Of the ten or so items, leaving even one task undone would let the crisis to continue.

Of course, the above "ending the crisis" does nothing to address the current account imbalances arising from the differences in competitiveness between member countries. Transfer payments or introduction of national currencies are needed to do that.

I just don't believe there is any reasonable chance that the crisis could be solved - there are too many tasks, and too many vectors of interest, all pulling to different directions. Thus, we will see incremental work on the full task list, just enough to allow for more muddling through, while the underlying crisis keeps getting worse. This slowly but surely eats away the voters’ support to the politicians in deficit- and surplus countries, and makes an eventual solution even more improbable.

The muddle through will end at some point, but it will not be a happy ending.

Euro Breakup Precedent Seen When 15 State-Ruble Zone Fell ApartBB
It was a currency union of 15 states in 1992. Two years later, as budget deficits spiraled out of control, hyperinflation reigned and economies shriveled, just two members of the Soviet Union’s ruble zone were left.

A Dysfunctional NationJohn Mauldin / The Big Picture
European leaders launched the euro project in the last century as an experiment to see whether political hope could become economic reality. What they have done is create one of the most dysfunctional economic systems in history.

"Material Banknote Order Reinstated"ZH
…a material banknote order reinstated. This order was unexpectedly suspended in the fourth quarter of 2011 which negatively impacted the financial results of Landqart's operations in the first half of 2012.

The Euro Zone Crisis: Political and Economic PerspectivesEconbrowser
The euro zone was not, and still is not, an optimal currency zone. This was known as early as the early 1990's, as highlighted by this table from a 1994 paper

The euro’s 'guilty men’ are now steering Europe to catastropheThe Telegraph
Remaining in the single currency is no longer a rational choice for many countries – but will its creators listen?

Here They Come: Ireland Demands Renegotiation Of Its Bailout Terms To Match SpainZH
Ireland wants to renegotiate its rescue plan to benefit from the same treatment as Spain, which looks set to win a bailout for its banks without any broader economic reforms in return, European sources said on Saturday.

UniCredit’s Rosen Says Fiscal Integration NeededBB (mp3)

Moody’s tries to ruin our weekendalphaville / FT
warning that “recent developments in Spain and Greece could lead to rating reviews and actions on many of the euro area countries” — and offering a generally downbeat if less-than-original assessment of the euro zone’s future in general.

Moody's Warns Of Spanish Downgrade, Threatens AAA-Countries In Case Of GrexitZH

First Round French Elections: Preliminary ThoughtsMarc to Market
There are 577 seats at stake, meaning 289 seats are needed to secure a majority. If Hollande's Socialists do not achieve this by themselves, their first call for an ally will likely be the Greens.

Hollande About to Wreck France With Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It"Mish’s
Over the long haul, this will kill France's economic competitiveness while increasing unemployment.

The World Waits For GermanyForeign Affairs
Two years, three sovereign bailouts, more than a trillion euros in cheap ECB loans, and dozens of summits later, the latest developments in Germany suggest that Berlin is moving to solve the continent's crisis. But the country’s idea of a solution remains a system in which Berlin gets de facto and de jure veto power over national budgets in return for eurobonds. That misses the point: the crisis is not fiscal, but financial. It began, and it will end, with the banks.

Berlin is ignoring the lessons of the 1930sFT
Niall Ferguson and Nouriel Roubini: But before Europe gets anywhere near taking this historical step, it must first of all show it has learnt the lessons of the past. The EU was created to avoid repeating the disasters of the 1930s. It is time Europe’s leaders – and especially Germany’s – understood how perilously close they are to doing just that.

Bundesbank: the eurozone's secret dictatorThe Telegraph
German Chancellor Angela Merkel may be the dominant force in the eurozone but the Bundesbank, Germany’s powerful central bank, is the power behind the throne.

WolkenkuckucksheimKrugman / NYT
This is scary stuff. If top officials in Germany are this disconnected from reality at this late date, what chance does Europe have?

Bailout Lite? There's Really No Such Thing; €30 Billion Needed? It's Now €100 Billion; Contagion of Economic IdiocyMish’s
Then within six months, possibly as soon as the money is handed over, more problems will surface, more meetings will take place, and still more money will be stolen from Spanish taxpayers and handed over to the banks and bondholders.

Pressure Mounts on Spain to Request a BailoutWSJ
Good background article written before the bailout news

Bank of Spain inspectors question the viability of BMN Bank Group Mish’s
The BMN group is bankrupt and it is "virtually impossible" to pay back money to the Fund for Orderly Bank Restructuring (FROB). Clearly the alleged orderly restructuring process is not so orderly.

The Spanish Cross Of ForbearanceMark Grant / ZH
The real number, if you look at the Regional debt, the needed aid for the banks, the contagion at the already infected two major banks is somewhere around $400 billion which is not present in the EFSF; there is not enough “promises to pay” left in this fund.

Spain Blinks: Accepts €100 Billion Bailout Via EFSF/ESM; FROB to Receive the MoneyMish’s
Once again, this is the wrong approach. Bondholders should have been wiped out. Instead, Spanish taxpayers will be put on the hook for another hundred billion euros. If another hundred billion euros is all it takes, I will be amazed.

Spanish bank bailout unlikely to succeedeconomistmeg
Unfortunately, it is very unlikely to succeed in drawing a line under concerns about Spain’s solvency. In the absence of economic growth, a bailout for Spain’s banks will be followed by a bailout for the sovereign as well.

Here Are The Main Outstanding Items Following The Spanish BailoutZH
Where will the money come from? - Where will the money go? - What happens to Spanish sovereign debt? – Precedent - Market reaction

Welcome to Fantasy Island, I’m Your Host, Mr. RajoyTF Market Advisors
In the end, Europe is ultimately just going t have to print a lot of money, forgive a lot of debt, or find more ways to lend cheaply to the weak countries, but that might not bother the market for a period of time.

JPM Tries To Explain Why The Bailout Train In Spain Will Lead To Much More PainZH
JP Morgan: our banking analysts have suggested recapitalization needs may ultimately run to €150bn…The request for support has at least three negative consequences: It implies some degree of subordination of other holders of Spanish sovereign debt. It provides a clear demonstration of the limits of the ability of the sovereign to raise funds on its behalf. And it crystallizes banking losses accruing to the State which it had hoped to avoid.

‘The Eurogroup supports the efforts of the Spanish authorities…’alphaville / FT
Just the Eurogroup statement

Spain Seeks $125 Billion Bailout as Bank Crisis WorsensBB

Why didn’t Europe bail out Spain’s banks directly?Felix Salmon / Reuters
…it’s unclear how much of the money is going to come from the ESM rather than the EFSF. That might seem like a niggardly distinction, but it’s an important one: the ESM has preferred-creditor status, which means that it’s senior to anybody buying Spanish sovereign bonds.

Spanish Bank Rescue: Will the Treatment Make the Patient Worse?naked capitalism
The endless stopgap measures have kept the Eurozone limping through its sovereign debt/banking crisis far longer than I thought possible. But the seeming success of bare minimum moves may well have conditioned the authorities to continue on that path. If so, it will prove to be their undoing.

Spain (finally) requests assistance for its banksKiron Sarkar / The Big Picture
This is a positive first step, but there are far more (serious) hurdles to deal with eg EZ wide deposit insurance, EZ banking union, far too small EFSF/ESM (will need more funds from EZ countries, which is unlikely – the other alternative is to grant the ESM a banking licence which, in my humble opinion, is more likely) etc, etc. Finally, will this be it for Spain – unfortunately, I very much doubt it. Spanish banks will require more funding and, most likely, Spain itself;

Citi Matrix Outcomes: If "Disorderly Grexit" Then "VIX At 80"ZH
Three scenarios discussed: 1) Managed Grexit with firewall in place but insufficient to remove EMU break up risk or risk aversion 2) Managed Grexit with firewall implemented in response to Grexit 3) Disorderly Grexit with excessive volatility in other markets

On the (marginal) advantages of the Greek bank jogalphaville / FT
Perversely, as Greece reaches a “nothing to lose” point, the bank jog also exerts a positive influence on its prospects, as it implies a shift of wealth from Europe to Greece if and when the drachma is introduced and depreciates sharply.

$7 Million a MinuteBruce Krasting
The question of the hour is, “Can the SNB continue to intervene at this pace?” My answer to this is, “Absolutely not”…The only option left for the Swiss is exchange controls. They will make it very expensive to own Swiss Francs.

Eurozone citizens moving billions to SwitzerlandSober Look
This confirms that not only do we have a run on periphery banks, with cash moving to Germany, but deposits are rapidly moving abroad as well. And Switzerland has become the main beneficiary