At this stage very few people have any faith in the EU
SSR sorting out the crisis in the eurozone. After agreeing a bank bailout for Spain, there has been a series of downgrades from Spain itself to Dutch banks etc. Coupled with the outcome of the Greece elections the markets are beginning the to see the naked emperor. Just look at Spain and Italy’s bond yields this week.
Deutsche Bank’s is not satisfied with the situation in Spain and have no faith in the recapitalization of its banks. It sees the only solution at this stage as a controlled market crash with a large role to be played by the ECB.
we were somewhat disturbed to read Gilles Moec’s summary this morning, which points out the patently obvious: “Spain recapitalization: it’s not working.” Whether it is that Europe’s brightest minds forgot about the threat of subordination (promptly reminded by Zero Hedge hours after the formal announcement), and that the scars of the Greek cramdown are still fresh in the private sector’s mind, it does not matter: as DB says: “Unfortunately, the market reaction was clearly negative, with Spanish 10 year rate brushing past 7% for the first time since 1996. Two main elements probably explain the market reaction: first, the increase in public debt triggered by the recapitalization whose cost will stay on the sovereign’s balance sheet under the current rules); second the seniority attached to ESM loans, if this scheme is used as the final channel for the EU loan instead of the EFSF.”
Yes, it is “unfortunate” that Spain’s bailout plan was poorly planned, organized and executed. It is not unfortunate that some are still left who can do simple math and call out Europe’s failed plans. Which brings us to the present, where we find that even Deutsche Bank has given up hope for interim solutions, having realized that the market will no longer accept transitory, feeble arrangements. Instead DB is now formally calling for a big bang resolution, one coming from the ECB. Here is the punchline: “ECB has room for manoeuvre, but needs political cover for a ‘big’ policy” or said otherwise, “A shock is required to get a liquidity response.” In other words: Europe’s only real hope for even a stop gap solution… is a wholesale market crash, not surprisingly the very same conclusion that Citi reached on May 19 when they warned that only Crossover (XO) at 1000 bps or wider could push Europe into acting…
So in the case of a market crash, the ECB will loan directly to the banks via vLTRO.
It is possible in the context of more disorderly market scenarios that the ECB pre-empts the BLS to reengage the vLTRO policy which has, in Draghi’s view, already ‘broadly’ worked in similar market conditions.