The REAL European Solution? The Markets Must Think So!

Includes: ERO, EU
by: Stanley J G Crouch

After all the torment and turmoil we have all experienced throughout these past months, regarding the Euro Crisis, we finally have closure-- or so it seems. The rumors surrounding an IMF intervention, are still being dispelled by the IMF itself, yet have been given credence by the meetings in Brussels with European Finance Ministers, as they called for IMF support in the face of the reality of the limitations on the EFSF's firepower. (Source: Bloomberg)

Now we have abject denial from the IMF, again as per Bloomberg.

All this in tandem with the coordinated actions of multiple central banks, including the ECB and Federal Reserve, which provided a boostof liquidity to hard-pressed European banks. Of course, 'risk-on' was back in a big way on Wednesday, as markets rose dramatically. The Dow Jones rose almost 500 points and Asian markets followed suit at their openings on Thursday.

The three primary elements are as follows:

IMF Support Facility For Italy And Spain

Although the article cites the Italian daily La Stampa as the source of reporting that an IMF led credit facility is in the works for Italy, German Finance Minister Schaeuble was reported to have relayed an IMF role in support for BOTH Italy and Spain in an interview in Berlin today. A number of 600 billion Euro was bandied about. This facility would apparently give support to Italy's government while it attempts to reform the fiscal and structural shortcomings Italy has come to be known for. The IMF would lend Italy funds at rates between 4% and 5%, provided the government adhere to, as yet undefined, constraints. We can assume something similar is in store for Spain.

Of course, as with every bit of the endless suggestions emanating from the players in the Euro 'fix', there is little to nothing resembling finite detail. Among the questions are:

  • What about the 'others', namely Greece, Portugal, Ireland, and...?
  • What will the 'terms' of the funding facility be?
  • Who will impose and monitor those terms?

There are many other questions that come to mind. We will simply have to wait and see.


Minister Schaeuble apparently also let it be known that the EFSF will play a key role in the solution for the eurozone. Although its finances are in question, especially after the debacle its last funding auction turned out to be, the EFSF is still slated to be the 'guarantor' of up to 30% of participants sovereign debt, according to the report. Again, the specter of terms and conditions were alluded to by Mr. Schaeuble, but little in the way of detail was offered. Given the total of 440 billion Euro apparently in its coffers, even though the 'net' figure is closer to 240 billion Euro, and Nicholas Sarkozy's renewed reference to up to 1.4 trillion Euro of firepower, we now hear from Brussels that a reduced form of leverage is in the plan. Hence the 'supplement' provided by IMF going from wish to necessity. The obvious, and most critical, question remains:

Exactly how will the EFSF 'lever-up', especially in light of the markets' resounding verdict on its last attempt at straight debt, just two weeks ago?

As a minor aside, the EFSF had to resort to purchases in 'the hundreds of millions' just to end up raising under 4 billion Euro. And this effort at rates about double those of its AAA rated peer, Germany!

This should all be very interesting, to say the least.

"More Europe"

As I and others had suspected, Angela Merkel's proclamation of the phrase, "More Europe' did, in fact, portend something meaningful regarding the ultimate 'fix' being fashioned for the eurozone. What is apparently at hand is the actual fiscal unification of the eurozone. A strict mechanism will be offered, again according to the reports emanating from Minister Schaeuble's interview, whereby the individual nations in the eurozone will agree to very strict and codified fiscal mandates. There will also be mechanisms to deal with enforcement, funding, and a host of other details pertaining to the maintenence of this modified pact.

Minister Schaeuble expressly said, and Ms Merkel has intimated, that the necessary 'revisions' will be 'fast-tracked' and are not at all daunting from an approval perspective. In fact, he referenced the Lisbon Treaty and postulated that only one section (Section 14) needed to be ammended in order to have the desired reforms become sacrosanct. This should all be put forth at the EU Summit on December 9, the latest of important European 'deadlines'. Among the questions here are:

  • How will these initiatives garner the required unanimity among the seventeen members of the eurozone, when de-facto sovereignty is being ceded to the, as yet, undefined mechanisms and oversight parties? Is a simple 'supplement' to Article 14 really all that is required?

  • How will the de-facto ceding of sovereign powers of the magnitude of fiscal controls sit with each nation's parliamentary bodies, nevermind the populous?
  • Where does all this leave the ECB?
  • What about the greater European Union, as the ten non-Euro members in the EU are equity stakeholders in the ECB?

Again, there are many more questions left to be answered. The biggest unanswered questions concern the banks. Despite the joint ECB / Federal Reserve facilitation of liquidity lines inherent in the effort to lower the OIS spreads, the banks remain in peril. How will they be recapitalized and who will fund the massive amounts required.? Nary a word on this aspect, from anything we can yet discern. All of the murkiness very typically European, I am afraid.


At this point, you really have to hand it to the powers that be in Europe. Given what we think we now know, the level of consistency is downright remarkable.

That is, once again, we lack details on all of it. Hey, but why not? So far they have all avoided an abject market melt-down of epic proportions. In fact, this week's action of robust recovery in 'risk-on' trading levels may have emboldened the players in the euro 'fix'. The markets are telling them they need not worry, rush or provide details-- so far this week, that is!! What is a bit of volatility along the way, if the markets turn back down?

Based on the futures for the S+P, openings in Asian equities and the level of the Euro on Sunday evening, the strength exhibited on Monday, the follow-on Tuesday and the absolute meteoric rises in Europe and the U.S. on Wednesday, the markets look like they are ready to give them another reprieve.

We will see how long this one lasts!!

Disclosure: I am long SPXU, EPV.