We finally got to see the whole Euro "solution" today. Save for one pesky little detail. I offer Christine Lagarde's comments from her South American tour, where she exclaimed: "If circumstances require, the G-20 will commit the resources that are necessary for the IMF to play its systemic role,” she said during a joint press conference with Brazilian Finance Minister Guido Mantega in Brasilia today. “That gives you a range that is almost without a cap, without a limitation.”
She even gave some numbers, which shed some light on the current level of IMF firepower: Lagarde has indicated that the $390 billion the IMF currently has available for lending may not suffice should the global outlook worsen. The Washington-based lender to nations will probably cut its global growth forecast next month as the European crisis roils financial markets and slows output, spokesman Gerry Rice said.
Not to worry though, for the emerging economies are positioning for their ride to the rescue. There is just one small condition (to quote from the article):
Mantega reiterated his country’s willingness to make a contribution to boost the IMF’s war chest, depending on continuing changes to give emerging markets more say at the institution. An amount hasn’t been decided, he said.
Brazil, Russia, India, China and South Africa, the so-called BRIC nations, may gain a big role in the IMF if they provide aid to the euro region, said Thomas Mirow, who heads the European Bank for Reconstruction and Development. “This is an ongoing trend, that the emerging economies and countries need to get a big role at the IMF, and of course if there would be a necessity to get additional funding for the IMF for Europe, that would probably accelerate this process,” Mirow said in a phone interview yesterday from London.
The Head of the European Central Bank, Mario Draghi, has acknowledged the need for desperately hoped for ECB intervention in the crisis. Interestingly, the only mandate the ECB has, that of controlling prices, has rendered the cover the ECB needs, as the acknowledgment of the potential of deflation rears its ugly head in Europe.
When we add this new variation of spice to the stew of Angela Merkel's steadfast demand for "more Europe," in the form of new fiscal rectitude, we have the totality of the European solution. I do not believe any of the weeks actions or news was accidental. That tells me the situation may have indeed become desparate, as the rumors of impending doom for a major European bank, or two may have been very close. Save the one pesky detail mentioned above, namely the re-capitalization of the banks, the plan looks to be complete.
Oh well, why sweat something so inconsequential? Don't you remember? It was just Tuesday that the Fed, ECB and a few other Central Banks rode in to town with the liquidity support impetus -- you know, the one where they collectively caused a 50-basis-point reduction in the OIS rates the banks depend on for their short-term liquidity needs.
Of course, that this had nothing to do with repairing the basic solvency issues at the root of the European bank's travails, as a result of owning so much suspect sovereign debt, is besides the point. The equity markets seemed to appreciate the gesture. Lest we forget, the S+P 500 put in its best single day performance since the emergence from the '09 bottom.
See, if you are Germany, desperately trying to maintain the decade-plus imbalance the Euro have advantaged you, anything you can do to foist this charade on the World is fair game. Limit the ECB's firepower by prohibiting monetization of the issue, continue to deny the possibility of a eurobond, cajole the profligates into austerity and dangle the carrot of increased say-so regarding the IMF to the G-20 up-and-comers, lever the EFSF to whatever is possible, and you just might have a way to really kick the can a long way down the road. And get others to pay for the folly the euro always was. A neat trick if she can pull it off.
Unfortunately (or fortunately, depending on where you sit), the destruction of the euro will be guaranteed, as of December 9, when this misdirected effort gets codified, by edict, in Europe. Some cobbling together of the EFSF, ECB and IMF, and their respective capital contributions, is apparently the ultimate solution for the Sovereign Crisis we have all been living these past months, or past two years, if we're honest about it.
None of it will work for the medium or long term. It simply is not addressing the main issues of:
- Fundamental imbalance in the euro.
- Continuation of unsustainable debt service for the peripherals.
- Comprehensive bank recapitalizations. The EZ, meaning Merkel and Sarkozy, actually believe this is manageable because the banks do not take any meaningul hits on the sovereign exposures. And none -- read that zero -- on CDS exposures.
- Passage of the necessary treaty amendments under the so-called fast-track mechanisms Merkel and Sarkozy plan on foisting on the entire eurozone.
- Fostering growth in the face of austerity for all.
- Some G-20 members, like the U.S., heading into a contentious election year, having political and popular resistance to assisting the IMF in the face of domestic economic difficulties.
Other than these details, this should all go swimingly. Based on the Friday morning rally in Europen equity markets and the positive follow-on in U.S. equity futures, investors should beware of the equity markets in the coming weeks. They just may finally wake up to the reality of the situation. A very big sell-off would not be a surprise -- sort of a "sell the news" strategy. In fact, my disclosed wager still stands. I remain long SPXU and EPV, just in case reality prevails.
Disclosure: I am long SPXU, EPV.