Politics has been and will be the constraint on the latest iteration of Bailout Europe 4.0. We at the Global Macro Monitor really want to see Europe make it, for markets to rally, and for all to make money.
But the latest bailout announcement, which includes a Euro 600 billion loan facility from the IMF, which, by the way, exceeds the Fund’s total lending currently around $400 billion, doesn’t pass the political smell test. There are also rumours swirling of a Eurobond. As usual, the news has sparked a nut cracking short covering rally with S&P futures up over 25 points.
We see several political reality checks on the latest deal rumours, however, because at the end of the day any large sovereign bailout is a bailout of the major European banks. The global public doesn’t want here about global systemic risk and we expect huge political pushback on this one. Imagine how this will play in the U.S. Presidential election.
1) 79 per cent of Germans oppose a Eurobond;
2) Occupy _______ will not be happy if taxpayers have to contribute more funds to the IMF to bailout European French and German banks;
3) Italians will not be happy with severe austerity imposed by the IMF, which will require massive labour reforms, including cutting pensions and wages;
The financial rivets are popping and the latest rumours of new deals could buy some valuable time. But we’re beginning to believe it’s too late for Euro as we know it.
Maybe because there is no magic solution — x/ hyperinflation — as the true end game is debt restructuring and the allocation of losses to those who caused crisis in the first place — i.e., the sovereign borrowers and private lenders – as it should be, no? Europe is running out of illusions, delusions, and quick fix short squeezes.
We’re also beginning to conclude the best solution is that the less indebted core countries leave the Euro for a new common currency. This would allow the old Euro with the highly indebted periphery to depreciate significantly, increasing the competitiveness of each country and effectively deflating the stock of debt in real terms. If Greece were to return to the drachma, their debt ratios would probably increase threefold and the recovery value of the bonds would likely fall to less 5 cents on the Euro, if that.
The U.S., U.K, and Japan should view what is happening in Europe as their Sputnik moment and motivation to get their own house in order. There is no doubt, at least in our mind, a version is coming soon to each these countries. Sovereign risk is all about confidence and the lesson of European crisis is that confidence is fickle and fleeting.
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