Euro Zone Conference Notes: Has Anything Sustainable Been Achieved?

by: Karl Denninger

I'm listening real-time to the "conference" this evening... these are "first blush" comments...

They're throwing the kitchen sink at this, but it's not real money for the most part - it's "guarantees." Exactly how they get the rest of the €600 billion is open to question. Only €60 billion is "real money."

The intent is to play "Bazooka" on the speculators, and the instant reaction in the futures here in the US was ridiculous - +2% immediately on the re-open in all three primary indices, (DOW/NAZ/S&P500) and a similar amount in the Russell. While this sounds awfully good, it is in fact not even a 61.8% retrace of the plunge from Wednesday to the low on Thursday. Yeah.

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The move in the Euro, which is where this is aimed, is less amazing.

Not even back to the middle of the channel. Gee, that's impressive - NOT.

They keep referring to "Article 122", which is intended to deal with WAR and similar things - that is, incidents beyond the control of a given nation-state. But taking on too much debt (or lying about your debt) is not beyond one's control - it's a choice. Doesn't matter in this case, obviously.

What's also interesting is the repeated references to "consolidation" of finances in member states. This appears to be an oblique reference to a demand for these nations to cut the crap with their budgets, which means an end of running huge deficits. Again, as I said before in my earlier Ticker, if they truly force everyone to stop the "borrow-and-spend", the euphoria of the market will soon give way to some pretty simple math - subtraction, specifically, of whatever was being "supported" in GDP in each of these nations from their respective GDP forecasts.

If is clear from the conference that this is exactly what they are talking about being forced on all Euro members, beginning right now and to be completed - that is, back to no more than 3% fiscal deficits - within the next 2 years.

They're also making repeated reference to setting this up as an SPV, which means there will be zero transparency or accountability. Bullish? I think not. How long before the speculators figure that one out?

Betcha it's not long, and they start to probe this thing.

Second, the ECB is apparently going to intervene in the government security market. This means "QE" which in turn will trash the Euro, not support it. As soon as the market figured that out, much of the gap that had previously been in the Euro (up) came back off.

My money is on this ramp job not holding up all that well, and further, I am now seeing some blood coming in the Euro cross and recovery in the dollar.

How we open Monday isn't really important. How we close is. As I noted in the video this weekend I am expecting a nasty bounce, and that bounce may go on for a while, but that's not the key element in play here - it is whether anything sustainable has been achieved.

Again, I think the big news is the formal announcement that Euro-zone nations are going to be forced to stop deficit spending. That accounts for 10% of GDP in many Euro nations (as it does here), and if that is cut back to 3% you will immediately wind up with a -7% GDP print! Even over two years it's 3.5% of GDP annually, and that's not going to be pleasant.

Remember, the markets have priced in a "V" shaped recovery - a strong, positive GDP environment worldwide for the next several years. That's simply not going to happen, assuming the Euro Zone actually enforces what they were talking about Sunday night, even on a nominal (that is, including government "borrow and blow") basis.