As I stated on my Youtube channel earlier the EU summit would result in nothing more than a grandiose proposal to save Europe and its unified currency. Now the reality is settling in where people who are following this crisis realize that if there is a workable solution the current people in power are clearly not the ones capable of delivering. While the media amplifies this propaganda to the public performance indicators whisper the truth as economic growth slows around the globe. I almost believe these summits are really for the politicians to get together to figure out what their next press release will be knowing full well that there is no solution to the problem. The name of the game is the manage client expectations (the public) and buy as much time as you can until you are ready to leave office.
So let’s go through the results of the 19th euro summit focus on dealing with the financial crisis by focusing on the sticking points.
- “We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution-specific, sector-specific or economy-wide and would be formalized in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment program. Similar cases will be treated equally.”
This proposal is riddled with indicators that show political leaders have no real intentions on dealing with the underlying structural issues that are causing the problems. In addition, It sounds like a plan was slapped together without any real thinking in terms of viability as the union is lead by consensus where each partner is independent and not accountable to the the group for what they do.
- We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.
- “There was also discussion about whether one can remove the ESM’s preferred creditor status in general. That did not happen. There were some who wanted it removed in general, but quite a large number of countries said there was no way it should be removedin general.
- “We only agreed that because Spain is applying under the EFSF it should keep the same conditions.“
- “Secondly, regarding the banking recapitalization which Spain has requested, a request will be made with the EFSF. Once the ESM becomes available, then the application will be transferred to the ESM. The seniority of the bonds will not be changed. For Spain we won’t do what is otherwise applicable in the ESM regarding the preferred creditor status because the request was made through the EFSF, where such details do not apply.”
- We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilize markets for Member States respecting their Country Specific Recommendations and their other commitments including their respective time lines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure. These conditions should be reflected in a Memorandum of Understanding. We welcome that the ECB has agreed to serve as an agent to EFSF/ESM in conducting market operations in an effective and efficient manner.
- We task the Eurogroup to implement these decisions by 9 July 2012.”
The devil is always in the details of the language. While spin is used to make the situation look positive to push up markets the truth is that a high level plan has been hatched full of extremely complex tasks that have no possibility of being completed by the deadline set by themselves. July 9 is a key date where credibility is on the line. If this target goal is not met the markets will respond in kind to reflect what we already know, the EU is financially doomed. There are other cracks in this solution that is starting to show.
- Politicians are trying to figure out how to leverage two funds to manage the crisis so let’s take a look at those.
The ESM does not exist and requires funding from nations who are requesting a bailout. Germany has delayed a vote to ratify the agreement to allow the fund to recapitalize banks directly and there are other countries that oppose making changes to the current agreement. We should not count on the ESM until we hear this debt instrument (countries will have to borrow on the open market to raise money for the fund) is funded. Even when funded the ESM will not have enough firepower to handle the crisis, which is escalating quickly to trillions of dollars. This leads to another issue where there is no plan to increase the size of these funds, which in simple english means there is no plan to borrow more money.
This all boils down to a simple question. Who will buy the bonds that must be sold to put cash in these funds only to provide low interest loans to broke nations that have no intentions of getting their financial house in order? The Euro-zone does not have cash or collateral so some form of borrowing has to happen. What we have now is posturing and no substance and now that reality is settling in the markets are continuing their bearish descent.