The Big Bailout of the Eurozone (Another crisis coming? - Seriously)

[Denn Forever]

Poster girl for FG.

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[muppet]

http://blogs.reuters.com/felix-salmon/2011/12/06/the-eurozone's-terrible-mistake/

The euro zone's terrible mistake
DEC 5, 2011 23:36 EST
     
ECONOMICS | EURO | MORAL HAZARD | SOVEREIGN DEBT
The FT is reporting today that the new fiscal rules for the EU "include a commitment not to force private sector bondholders to take losses on any future eurozone bail-outs". If this principle really does get enshrined into some new treaty, it will be one of the most fiscally insane derelictions of statesmanship the world has seen — but it certainly helps explain the short-term rally that we saw today in Italian government debt.

Right now, the commitment is still vague:

Ms Merkel agreed that private sector bondholders would not be asked to bear some of the losses in any future sovereign debt restructuring, as she had insisted this year in the case of Greece's second bail-out. However, future eurozone bonds will still include collective action clauses providing for potential voluntary rescheduling of private debt.

Ms Merkel said it was imperative to show that Europe was a "safe place to invest".

You can safely ignore the bit about collective action clauses. They're part of the sovereign-debt architecture now, and taking them out would be far more trouble than it was worth: they have to stay in, no matter what. The important thing is that they won't be used — because if no one's going to ask bondholders to bear any losses, then they won't have any proposals to agree to.

The impetus for this completely insane policy seems to have come from the ECB, which genuinely seems to believe that bailing in private-sector banks, in the Greece restructuring, was the "terrible mistake" which caused the current euro crisis. Talk about confusing cause and effect: it was Greece's fiscal disaster which caused the restructuring and the necessary bail-in.

To understand just how stupid this is, all you need to do is go back and read Michael Lewis's Ireland article. The fateful decision in Ireland was to take the insolvent banks and give them a blanket bailout, with the banks' creditors all getting 100 cents on the euro. That only served to put a positively evil debt burden onto the Irish people, forcing a massive austerity program and causing untold billions of euros in foregone growth, while bailing out lenders who deserved no such thing.

Are we really going to repeat — on a much larger scale — the very same mistake that Ireland made? Does no one in Europe realize that this is the single worst thing they can do?

Markets reflect underlying realities, and up until now, the realities have been clear. Europe's periphery is sinking under the weight of too much debt, and the result will be inevitable pain for private-sector creditors. The best case scenario is that those countries bite the bullet and restructure their debt now, since to delay is to make any restructuring much more painful and expensive than it needs to be.

The worst case scenario is that the EU kicks the can down the road with one new bailout facility after another, until it eventually gives up throwing good money after bad and imposes the restructuring which was inevitable all along. In that case, as one hedge fund manager was explaining to me last week, private sector creditors get devastated: because the EU and the ECB and the IMF won't take any losses on their loans, all of the haircut, pretty much, will have to be borne by a private sector which accounts for only a fraction of the debt. So the private sector could end up with very, very little indeed.

Now, however, Angela Merkel has come up with another plan. The details aren't clear, but it seems to involve the EU guaranteeing the debts of its member states. Why this is acceptable while eurobonds aren't acceptable is a mystery: a mulit-trillion-euro contingent liability is hardly preferable to a couple of hundred billion euros of real liabilities. But there's eurologic for you.

The immediate result of this plan is that everybody will rush into the highest-yielding bonds in Europe, which is exactly what seems to have happened today. The other effect of the plan, however, is that every country in Europe is now effectively guaranteeing everybody else's debt. Which is more than sufficient to explain why S&P is minded to downgrade every country in Europe, up to and including Germany.

In order for markets to work, lenders need to suffer when they make bad lending decisions. If the Europeans didn't learn from Ireland, couldn't they at least learn from the Fed's much-criticized decision to pay off all AIG creditors at 100 cents on the dollar? Blanket guarantees at par are pretty much always a really bad idea — and this one, if it comes to pass, will be the biggest one yet. It won't end well.

[Orangemac]

So the Eu are going to guarantee all sovereign debt .

Plan B for Ireland,stop paying bondholders,EU will foot the bill and renegotiate deal with IMF until domestic deficit is small enough to allow return to market. Simples.

At the end of the day Merkel and Sarkozy are no different than Mattie McGrath, they are more worried about re election than doing the right thing.

[seafoid]

At the end of the day Merkel and Sarkozy are no different than Mattie McGrath

They drink wine rather than tea but other than that there is no real difference 

[thejuice]

So what are we likley to get out of today?

A common EU corporate tax?

A Referendum?

David Cameron getting kicked in the balls by Merkozy and then the arse by his fellow Tories?

[Denn Forever]

Has Cameron not Vetoed Britain signing the proposed treaty?  Boris Johnson is happy with him.

http://www.bbc.co.uk/news/world-16104089

Most EU members have agreed to press ahead with a tax and budget pact to tackle the eurozone debt crisis.

But a German and French attempt to get all 27 EU states to back changes to the union's treaties was dropped after objections from the UK.

Prime Minister David Cameron had insisted on an exemption for the UK from some financial regulations

[Fear ón Srath Bán]

It's now a two-speed (or two-tier) Europe, with the UK & Hungary opting out, and Sweden and the Czech Republic undecided (the question is, which tier is the faster?).

[Fear ón Srath Bán]

Correction, it looks like the British will be the sole exclusionists!

[AQMP]

Correction, it looks like the British will be the sole exclusionists!

Yes, it's fast looking like the Brits could be on their own here.  Cameron has either played a blinder or just made the biggest political error since Neville Chamberlain.  We don't know yet.  Problem is, neither does he!

[thejuice]

No referendum for Ireland it seems.

But what changes are being made and how are they going to affect us?

We have lost the control of corporation tax I assume.

[Fear ón Srath Bán]

Correction, it looks like the British will be the sole exclusionists!

Yes, it's fast looking like the Brits could be on their own here.  Cameron has either played a blinder or just made the biggest political error since Neville Chamberlain.  We don't know yet.  Problem is, neither does he!

Yep, "(British) Peas in our time"  (Getting coat...)

[Fear ón Srath Bán]

But what changes are being made and how are they going to affect us?

We have lost the control of corporation tax I assume.

Those are the big questions, and I get the feeling that if they concede to Irish requests for a reduction in the cost of the loans then everything will be on the table.

Meanwhile, a picture of a fart in a spacesuit (Merkel with her back to us in the photo):

[FL/MAYO]

This clip really explains it all in lay man terms

http://www.youtube.com/watch?v=yR0lWICH3rY&feature=youtube_gdata_player

[bcarrier]

Smoke and mirrors.

The changes being introduced have little or nothing to do with solving the euro crisis. M&S = the healy-raes.

[muppet]

Smoke and mirrors.

The changes being introduced have little or nothing to do with solving the euro crisis. M&S = the healy-raes.

The lions have escaped and are devouring everything in sight. The solution is to agree bigger fines for fellas who feed the lions too much?

This is yet another a stunt to try to create 'confidence' in the markets. It will work about as well as everything else they have done to date.

Our deficit is huge because they forced Lenihan/Cowen to prevent our private bankrupt banks from collapsing. Then they introduce sanctions for Governments who run large deficits? It just does't make any sense and the crisis will roll on...........