Solving a Sovereign Debt Crisis by Issuing More of the Same

by: Karl Denninger

One wonders if people think before they write in the mainstream media:

May 10 (Bloomberg) -- Asian stocks, U.S. index futures and the euro surged as European policy makers unveiled a loan package worth nearly $1 trillion and a program of securities purchases to end a sovereign-debt crisis.

The solution to a debt crisis is... more debt?

A loan is a debt, you know. So we're going to solve a sovereign debt crisis by issuing more debt. And we will get people to buy this (new and additional) debt because... we're pretty?

The most-amusing part of this is that nations seriously in debt and without a pot to piss in will be "contributing" some of the money to fund the debt. Spain, for instance, has pledged to do so. Where is Spain going to get the money from? Will they sell bonds at 8% to fund a loan at 5%? That's a very nice idea.... let's see, we lose 3% on those deals. That ought to help Spain's fiscal situation, don't you think?

“EU finance ministers have rushed to ‘shock and awe’ the Markets,” Mitul Kotecha, head of global currency strategy at Credit Agricole CIB, wrote in a note to clients. “The package will likely lead to stabilization of markets in the next day or so but the question further out is whether it will lead to a sustained improvement in confidence.”

It's shocking all right. Indeed, it's stunning that anyone would believe that a nation or group of nations with too much debt could solve its problems by taking on more. Not even Dubai was that dumb - they instead forcibly restructured theirs, at least for a while. That makes sense - you don't pay what you can't, and you use the threat of outright default to get people to go along with some sort of reasonable means of restructuring existing obligations.

This action is also something that inspires awe - at the arrogance and hubris of the ECB and EU, both of whom are incapable of transferring this debt around (after all, someone would have to assume it), which makes this rather different than the game that our Federal Reserve and government played in 2008 and 2009.

See, we took the debt of the banks, Fannie (FNM) and Freddie (FRE) - debt that threatened to blow these institutions to Mars - and transferred it, either directly or by subterfuge (that is, we made legal lying about how much you had and how much it was worth) to the US Government - that is, the taxpayer. Since the US Government wasn't having trouble placing its debt and in fact managed to sell $1.5 trillion (more or less) of it in the last year, this "worked" in a fashion, at least for the time being.

But the EU and ECB have no such place to turn. The ECB has no funding capacity of its own, and neither does the EU. The IMF does, but the IMF has never been known for losing money on their deals, which means their transactions inevitably come with severe austerity measures and super-senior status.

This package was calculated to bring about a market reaction similar to what our Federal Reserve and Congress did in 2008 and 2009. The problem is that the ECB and EU are not similarly situated, in that they don't have (in the opinion of the market) a solid balance sheet to lever up upon. Indeed, the problem is within the sovereign balance sheets upon which the EU and ECB rest, and as such this little "program" announced Sunday evening leads me to wonder:

Do they really think the markets are stupid enough to fall for this line of Ouroboros nonsense?

I guess we shall see if, in the coming days, the markets discern the truth of where the funding has to come from, and that in point of fact it is the very nations that are in trouble that have to - somehow - manage to both cut their fiscal deficits and sell more debt (which increases those deficits) to fund their package.

Indeed, I suspect Bernanke and his pals "re-opened" the swap lines not because of current dollar funding problems (there aren't any) but because he knows this won't and can't work, as unlike in the US there is no strong balance sheet to which the debt can be transferred and then refinanced at a lower rate, unlike in the US.

This ought to be a show worthy of lots of popcorn and plenty of violence in the markets - both ways. For Sunday night at least, the violence is in the upward direction.

We'll see how long it lasts.

PS: I thought both Bernanke and Geithner said the crisis was behind us?