FT Reports Europe To Sacrifice Its Banks To Bailout Sovereigns - Under €100 Billion In Bank Recap Funding AvailableIt's 3pm: do you know where you last hour of trading bailout rumor is? Today, the Guardian passes the baton back to the FT, which however has released a report which when digested will be very negative for the zEURo.qq. It appears that in order to accommodate more funds for sovereign bailouts under the total max EFSF guarantee cap, as reported on several occasions yesterday by Zero Hedge, only €100 billion will be set aside for bank recapatialization. There is a problem with this number: it is predicated on the European Banking Authority's estimates of capital shortfalls of between €70-90 billion, the is the same EBA which 4 months ago said Dexia was in sterling health when it passed the 2nd Stress Test in pole position. As a reminder, Goldman predicted a €1 trillion capital shortfall, while Credit Suisse said €400 billion. No matter: the EU will come out with a number from its lower colon, just to make the residual maximum sovereign debt "guarantee" notional appear that much bigger. Too bad, however, that in the process it will once again crush Europe's banks which the market will suspect, rightfully so, that they are undercapitalized even post the recap, anywhere between 90% and 75% and will have to accelerate their asset liquidations to fund themselves one more day in lieu of a functioning interbank liquidity market. And so the risk flaring will shift from Europe's sovereign to Europe's banks, and their main proxy in the US - none other than Morgan Stanley which repeatedly refuted it has any exposure to France... but said nothing about its gross (gross because counterparties will blow up fast and furious) to French banks. End result: this is very bad for Europe because it means they have finally done the math and realize that to get the €2 trillion or so in EFSF insured capital they have to sacrifice their banks. Alas, there is no outcome that saves both the banks, and guarantees future European sovereign issuance under the currently contemplated structure. None.
It appears that any hope for a quick resolution (not like one was even available) over the weekend may have just been jettisoned. According to FAZ, the German parliament, which made it all too clear wants to be heard in all future European bailout instances courtesy of the constitutional court decision in early September, has just announced it wants to be heard, this time for real, and decide, on any EFSF expansion facility and specifically the usage of more leverage to fight already unbearable systemic leverage. To wit: "Before the meeting of Heads of State and Government of the Euro zone, which will decide on Sunday in Brussels on the guidelines ("Guidelines") of the euro rescue fund EFSF, the federal government is faced with demands from parliament. The fractions from the CDU and FDP want to discuss this Thursday in special session on the voting behavior of their representatives on the Budget Committee, according to the Law on the Participation of the Bundestag, Chancellor Angela Merkel (CDU) in Brussels to rely on an affirmative vote of the Committee." Unfortunately for Merkozy, their despotic and tyrranical measures according to which they represent the will of the people yet really all they do is preserve the viability of insolvent French banks, will no longer fly.
We have gotten to the point when the nanosecond there is even a whiff of "risk off", everyone hits the Sell button at the same time. Observe Crude. And, yes, volume was involved.
The European headlines continue to roll in. As far as I can tell, they either hired someone to play devil's advocate, or for the first time since at least July they actually tried to translate some of their words into action. They are running into legal roadblocks, death spiral scenarios, the reality that once they give the money to the PIIGS that the power reverts to the PIIGS, that everything is circular and self-referencing, that debt markets in the end can decouple from CDS markets, that Germany and France are going to see borrowing costs spike (even after the ECB rate cut), and that there are so many holes to plug - bank capital, bank bonds, PIIGS debt, Belgium debt, something about Dexia that no one even remembers, voters are against it, Greece isn't going to fool anyone, etc.
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