Why The Latest European Bailout, Aka "The Debt Buyback" Plan Is Also DOA, And Why The CDO At The Heart Of The Eurozone Is About To Become Extremely Toxic 

Over time many have wondered why the ECB, in order to "extend and pretend", does not simply do an episode of QE and monetize bonds outright? Well, in addition to Germany's flashbacks to hyperinflation which have so far kept Trichet from pursuing an all too aggressive bond buyback program in the primary market, the ECB does have the Securities Market Programme (SMP) which however since inception has bought only €74 billion (this week the number is expected to rise, or, if it doesn't, it confirms that now China is directly buying European bonds in the secondary market). The problem with the SMP is that it was conceived as a modest marginal debt buying program, never intended to surpass much more than a few dozen billion in debt. Alas, by now it is becoming all too clear that the ECB will need to monetize hundreds of billions of insolvent PIIGS debt in order to extend and pretend forcefully enough so that a new bailout is not needed every other week. But how to do it without monetizing debt on the ECB's books? Enter the EFSF, or the off-balance sheet CDO "at the heart of the eurozone" which according to the latest iteration of the European rescue package (Remember that most recent DOA plan to rollover debt? Yep - that's dead) is precisely the mechanism by which Europe's own open market QE is about to take place. "European Central Bank Executive Board member Lorenzo Bini Smaghi suggested the EFSF be allowed to provide funds for a buy-back of bonds from the market, where prices have in some cases fallen 50 percent from levels at which the debt was issued. "This would allow the private sector to sell bonds at market prices, which are currently below nominal value. At the same time, the public sector could benefit monetarily," Bini Smaghi told Sunday's To Vima newspaper in an interview." Translated: another market clearing perversion courtesy of the same structured finance abominations that brought us here. The problem, unfortunately, is that Moody's announced nearly two and a half years ago that the whole distressed debt buyback approach is... a dead end, and will lead to the same "event of default" outcome that all the prior bailout plans would have achieved as well (we correctly surmised that Bailout #2 was DOA, about a month before the "efficient" market did). Here is why.

Free Money Swiss Watch (And Franc) Style: RISK-ES Spread Closes 

From Friday: "The Treasury may be ceasing the incremental funding for its market manipulative ESF.... but not quite yet. Presenting the E-mini surge on absolutely no volume. According to Chicago floor traders, at least one bank bought 150 S&P contracts at very the close with one obvious purpose: ramp the stock market into the weekend. Luckily, for the observant ones this is merely another free money opportunity: the ES-RISK spread just soared and presents the latest compression opportunity." As of a few minutes ago, the free money opportunity, courtesy of Brian Sack and the now legendary stupidity of momentum chasers (yes, we'll gladly take their money) has just been cashed in, and brings us to n out of n profitable ES-Spread compressions.

The True Elephant In The Room Appears: Trillions In Commercial And Industrial Loans To Europe's Insolvent Countries 

With the market's attention over the past year exclusively focused on bank holdings of insolvent European sovereign debt, which as is now well known had been declining for months, many if not all forgot that banks also have credit exposure via far simpler conduits: retail and commercial debt. And as an analysis of the full disclosure in the EBA's second stress test exposes, banks are on the hook for literally trillions in various plain-vanilla commercial and retail loans to individuals and businesses. WSJ's David Enrich summarizes it best: "Friday's test results shed light on another potential problem for Europe's banks: huge piles of residential mortgages, small-business loans, corporate debt and commercial real-estate loans to institutions and individuals from ailing countries. As those economies struggle, the odds of rising defaults grow." Oops.





Fiscal Suicide; The Point of No Return

Posted by: ilene

Post date: 07/17/2011 - 17:07

This edifice blows apart once there are actually defaults and as importantly downgrades of the so called AAA debt structure.

 

 

 

 

 

Clowns to the left, Jokers to the right.

Posted by: ilene

Post date: 07/17/2011 - 16:43

"It’s a good cop-bad cop deal, a charade that they’re both playing." - Michael Hudson

 

 

 

 

 

Gold is Our Defense Against the Fiat Currency Graveyard 

Ireland's Debt Junked as Euro Crisis Spreads




The Beginning of the End of Europe 




Eurozone Hits The Fan:  Gold Price Surging & Silver Begins to Make a Move




A Run on the United States Government 



"Politicians just don’t get what is going on. They are living in a dream world where they are so wrapped up in themselves that they fail to realize (1) they are the problem, and (2) the emperor truly has no clothes."
- Martin A. Armstrong

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