Saturday, May 8, 2010

Goldman's View On Europe Bailout Plan #42 - "Unlikely To Calm Markets"

We now know that the European Union, as part of its most recent ridiculous idea for a global eurozone bailout, is planning on soon issuing its own bonds and thus becoming a defacto Treasury. How the hell it plans on doing this is simply beyond comprehension, but it certainly involves a lot of "financial innovation"... ergo - enter Goldman Sachs, from whom it would need a ringing endorsement to proceed with its plan. Alas, the just released note from Erik Nielsen is anything but favorable. (and yes title is a ref: Douglas Adams - the EU has the answer, if only they could find the question now).

The heads of state of the 16-member Euro-zone met last night to finally and formally approve the Greek package (the IMF’s part will be approved tomorrow Sunday in an extra-ordinary Board meeting in Washington.) The Euro-zone leaders used the occasion to issued a broader statement (below).

  • On Greece: The money will be there for the May 19 payment. The Greek PM reiterated his “total commitment” to the policy reforms agreed. My comment: Good, but entirely expected news. I maintain my view on the risk to the program and its implementation.
  • On the present broader crisis: “All the institutions of the euro area (Council, Commission, ECB) as well as all euro area Member States agree to use the full range of means available to ensure the stability of the euro area”. My comment: Note the words “the full range of means available” – they may hesitate before pulling out the really big guns, but it’ll happen if needed.
  • More specifically, the Commission will propose a European stabilization mechanism to preserve financial stability in Europe, which will be submitted for decision to an extraordinary ECOFIN meeting tomorrow Sunday. There’ll also be a proposal for stronger governance to be presented on May 12 My comment: They’ll try to finesse the messy process of get help to Greece. They may try to pool their money more formally, but it’ll still have to come from individual country borrowing (and hence national approval processes) as opposed to a common bond. Also, there won’t be any money for unconditional disbursement. I suspect that the governance stuff could refer to punishment of those who slip on their fiscal policies, e.g. suspension of payments from the structural funds. There will be nothing in terms of surrendering fiscal authority or other dramatic stuff.
  • Finally, they agreed to accelerate their work on financial regulation.

All in all this is good news, but it is unlikely in itself to calm markets; its all too “slow-burner” stuff. But what it will do is to provide sort of a fig leaf for the ECB to introduce exceptional measures, just like the Greek package (and the ECB’s own “approval” of it) made it possible to suspend the ratings agency from determining access for Greek sovereign securities. I am not sure what exactly the next ECB measures will be, but I would rather suspect an announcement probably already tomorrow, maybe along with the Ecofin decision, on additional measures. It could be the mega-loans to the banks rumoured yesterday, it could be a FX-swap arrangement, or “simply” a re-introduction of 12-months repos along with an easing of haircuts. I rather doubt that it’ll be outright purchases of sovereign debt at this stage.

Stay tuned.

Erik F. Nielsen

Chief European Economist

Goldman Sachs

(from ZeroHedge, May 8, 2010)

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