Photo: Bloomberg TV
Jefferies’ David Zervos is out with his take on last night’s European bank bailout.Remember, the gist is that the European bailout mechanisms will be able to recapitalize banks directly with little need for government oversight.
His title says it all: Germany Loses, Spoos Win (Spoos being slang for S&P futures).
The key closing line from the Summit, he says is:
“We welcome that the ECB has agreed to serve as an agent to EFSF/ESM in conducting market operations in an effective and efficient manner.”
And he adds…
So what does all this mean? The ECB’s balance sheet has been opened up via the ESM to directly recapitalize the European banking system. And that my friends is a game changer!! Oh yes, they finally figured it out – separating bank financing from state financing is the key to lifting the systemic risk cloud that has been hanging over the entire GLOBAL financial system. Having an effective backstop, and resolution structure, for bad European banks is all we wanted. Was it really that much to ask for? No one wanted to see the entire Irish state saddled with the cancer that had infected the Irish banks. That was insanity! And here in the US we don’t care if Europe has structural growth problems or labour market inefficiencies. If everyone Frenchman wants a 35 hour work week so be it! And we don’t need European growth for global growth. But what we can’t have is a European banking run with systemic global ramifications. When the top 6 banks in the US have 300 TRILLION in OTC derivatives, much of which is linked to the European banks, we will have serious problems if the European banking and monetary system breaks. That card however has just been taken off the table. The ESM, with access to the ECB balance for leverage, is a fiscal backstop (with a printing press) for the resolution of bad European banks. Hallelujah!!!! This is a huge step in the right direction for the global reflation trade.