Deutsche Bank Calls For Big Bang Solution From ECB

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At this stage very few people have any faith in the EUSSR 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.


Source: ZeroHedge


Greek Interactive Election Poll

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Click on Reuters link for an interactive view of the latest poll for the Greek election. [Interactive Poll]


What Is Next For Greece?

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In all probability Greece will hold elections as it seem very unlikely now that a coalition can be formed. What has not been discussed is on May 15th Greece has bond redemptions worth €450 million which are governed under English Law. These were the bonds that refused to be restructured earlier in the year. The big question, with no government in place what happens to the repayment of these bonds and will Greece end up defaulting on them?

New elections have been mooted for some time in June but the new Government faces the prospect of putting together medium term spending plan for 2013/2014 which is due to be delivered to the Troika for June 30.

ZeroHedge write as follows

Timeline of events for Greece

The next weeks are crucial for Greece, as political paralysis could threaten the new program, potentially triggering tail risk scenarios that could eventually result in an exit from the euro area. New elections in June (10 or 17 June) appear very likely, but it remains unclear whether these would deliver a government that implements the agreed-upon program, or even a government at all. At this stage, based on media reports, in our view two options still appear to be on the table: a coalition led by New Democracy that allows for further muddling through, and, with similar probability, a government led by Syriza that refuses the Troika program and eventually is forced by a collapsing economy to exit the euro. A low probability scenario would be a temporary exit, as that would implicitly include support from the EU.

 If Greece was to leave the Euro what would the consequences be?

Before Greece decides to default and eventually exit the euro, the country could face the temptation of closing its budget deficit by using IOUs to pay salaries and fund a bank recapitalisation, which risks establishing a shadow currency. How long Greece could be within the euro and live with its own internal currency is an open debate. The main issue in our view, would be that this domestic shadow currency would not enable Greece to fund its current account deficit, making it likely that Greece would default on its external debt (about €370 billion including portfolio and other foreign investment liabilities).

In the event of a default and an exit scenario, Greece must reintroduce its own currency and ensure the proper functioning of its banking sector. Failure to meet its payments would put Greece into default position, the effects of which could in our view result in the following:

  • Deposit flight would be very likely (not only in Greece but possibly spreading to other peripheral banks). Indeed, Greek banks have already lost 30% of heir private sector deposits since their peak in late 2009.
  • Greek banks would likely require an immediate recapitalization and face a liquidity shortfall, given that Greek debt would no longer be eligible as collateral for ECB operations (through Target 2 Greek NCB owes about €109bn to the ECB; although the ESCB holds c.€50bn of government bonds directly through the SMP). And, the ECB would likely veto the Emergency Liquidity Assistance (another €60bn) following a default, again making an exit from the euro area likely following a default.

The consequences for the other eurozone countries would mean a downgrade as Fitch has already threatened if Greece leaves. Although this might not affect Portugal and Ireland for the moment because they are in a program with the Troika it would have massive implications for the other eurozone countries hit with a downgrade.

ZeroHedge writes of actions needed should a Greek exit and default happen.

Given the contagion risks to large countries, the piecemeal approach with limited commitment would have to be replaced by the “full bazooka.”

  • The ECB could cut rates to 0.50%, and renew its liquidity provisions (most likely in the form of another 3-year LTRO); The ECB would probably have to commit to buy unlimited amounts of Spanish and Italian government debt to stop contagion to these countries. This commitment would have to be supported by all remaining euro area countries to be credible and require a renouncement of the ECB’s effective senior creditor status.
  • Major central banks could open currency swap lines to avoid funding problems in major currencies, as during 2008/09, but possibly at lower costs.
  • Banks would have to be ring-fenced, via deposit guarantees and capital injections, over and above the ECB’s liquidity support described above. This would possibly entail state injection of capital (even if only in the form of promissory notes), ie, nationalization, or European money (euroization). The deposit guarantee would have to be backed jointly by euro area governments to be credible.
  • A European funded bank recapitalization, a European deposit insurance scheme, as well as the ECB’s purchases of government bonds would require further surrendering of fiscal power to the European Commission.
  • Capital controls would potentially need to be introduced between the euro area and the rest of the world. Such controls are allowed under special circumstances that could threaten stability, and the scenario under consideration clearly qualifies.
  • Going forward, the fiscal stance as well as other economic policies (such as industrial policy) would have to be redesigned at the euro area level to ensure growth could kick start as quickly as possible

Source: ZeroHedge

Dutch Government On Verge of Collapse Over Austerity

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Reported earlier in the Washington Times, that the Dutch Government is on the verge of collapse after disagreeing on austerity measures. The minority government was in discussion but Geert Wilders who is anti-EU was dead set against the cuts. This is a major embarrassment for the Dutch as they pushed for austerity in Greece knowing how harsh it was on the Greek people and knowing how damaging it was to the Greek economy.


THE HAGUE, Netherlands — The ruling Dutch minority government was on the brink of collapse Saturday after anti-EU lawmaker Geert Wilders torpedoed seven weeks of austerity talks, saying he would not cave in to budget demands from “dictators in Brussels.”

New national elections that will be a referendum on the Netherlands’ relationship with Europe and its ailing single currency are now all-but-certain.

But before Prime Minister can tender his resignation — possibly as early as Monday — he must consult with allies and opposition parties on how to run a caretaker government that will have to make important economic decisions in the coming weeks and months.

“Elections are the logical next step,” Rutte said.

Opposition leader Diederik Sansom of the Labor Party joined others across the political spectrum in calling for new elections as soon as possible.

Austerity talks began in early March after the Dutch economy sank into recession and forecasts showed the 2012 budget deficit will reach 4.6 percent — well above the 3 percent limit mandated by European rules. Dutch politicians have strongly demanded that Greece and other countries meet that target.

Rutte leads the free-market Liberal Party in a minority coalition with the center-right Christian Democrats with outside support from Wilders’ Freedom Party. The outspoken Wilders is widely known for his anti-Islam and anti-EU opinions, including calls for Greece to return to the drachma and the Netherlands to leave the euro.

Rutte said negotiations had been rounded off Friday to deliver a “balanced package” of cuts, but Wilders walked out after discussing the package with his Freedom Party.

Will their credit rating take a hit from this? Already it’s under pressure.

The collapse of talks could endanger the Netherlands’ coveted AAA credit rating and drive up its borrowing costs.

The Netherlands is one of only four nations using the euro that has the top rating, though it already is under review by rating agencies. Central Bank President Klaas Knot said last week borrowing rates would rise by 1 percent if the Netherlands’ ratings are cut.

Once considered one of Europe’s strongest economies, the Netherlands is suffering from high levels of personal debt, mostly mortgage related.


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Only Three PerCent of EU Citizens Now Have Left-wing Governments

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Daniel Hannan writes in The Telegraph that after Spains election result only 3% of EU countries have a left wing governement.He believes that the European Union is making its constituent nations poorer, less democratic and less free. 

Spain could easily go the way of Portugal and Greece, and Rajoy’s task is all the harder because, as long as Spain remains in the euro, the pain will not be accompanied by any obvious gain. Years of unleavened austerity loom, and voices from the PP’s own statist tendency will start to demand that ministers ‘do something’ – meaning ‘spend more’.

One of the curiosities of contemporary Europe is that, while people keep voting for Rightist parties, nothing much changes. Only three per cent of EU nationals now live under Left-led governments (those in Austria, Cyprus and Slovenia – I don’t think we can count Greece any more).  Yet spending continues to rise (except on defence), bureaucracies continue to grow, powers continue to shift from national capitals to Brussels. Which brings us up against a hard truth. As long as most laws come from Brussels, and as long as economic policy comes from Frankfurt, it really doesn’t matter how you vote.

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