Tuesday, September 27, 2011

The trading rumors are insane

Over the weekend and the last two days, rumors of a fix for the Euro Area's crisis have emerged, this one using the European Investment Bank (EIB) as the vehicle of choice.  In a nutshell, the ECB would capitalize the EIB with Euro 200 billion, then the EIB would borrow another Euro 1.8 trillion (9:1 leverage) that would the proceed to buy (maybe at face value) all the sovereign bonds sold to European banks (maybe insurance companies too) and issuing instead an EIB bond -- that would have the full faith and credit of France and Germany.

First off, this was reported in one news organisation (CNBC)  -- and the details are only now being worked out, first being how will this impact the credit worthiness of Germany and France?  BTW, this is exactly what the original U.S. bail out was suppose to be, except that because we were talking about mortgage back securities (of various level) it was thought too complicated to get a "reasonable market price".  Maybe with only four credits (Ireland, Greece, Spain and Portugal) it would be much simpler... What is not simple is the impact on the credit of Germany and France of guaranteeing Euro 1.8 trillion in new borrowing.  Somehow, this doesn't solve the problem since the Euro 200 billion in equity is almost not enough to insure that further losses will not occur.  It is generally accepted now that of the Euro 400 billion in Greek debt, the necessary write-off is around 50%, so that country alone would account for 100% of the equity injected into the EIB structure.

Despite all that B.S. the markets have seen a 500 point rally -- based not on fact, but on a possible "solution" to the European crisis -- that would allow everyone to further delay the inevitable; Finally, this solution doesn't address Greece's current Euro 8 billion shortfall in funding needed by October -- it only deals with what has been issued, not what needs to be issued.

Strange times 


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