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Europe Crisis: Problem Solved or End Of The Rally?

  • Written by Syndicated Publisher No Comments Comments
    October 27, 2011

    A deal has been reached. While many decisions are yet to be made the agreed upon deal looks something like this:

    • A “voluntary” haircut of 50% on Greek debt
    • Bank recapitalization set at 106 billion euros
    • EFSF will use leverage to get to at least 1 trillion Euros
    • Leverage will be via a combination SIV plus Insurance plan
    • Banks get an additional 21 billion Euros in “official aid”
    • The ECB is going to continue to buy Italian bonds come hell or high water

    A group of 70 European banks will need to raise 106 billion euros in the next eight months.

    Recapitalization Breakdown

    • Greek banks need 30 billion euros
    • Spanish banks need 26.2 billion euros
    • French banks need 8.8 billion euros
    • Italian banks need 14.8 billion euros
    • Remaining countries 26.6

    Banks that fail to raise enough capital on the markets will first tap national governments, falling back on the EFSF rescue fund only as a last resort.

    The above details pieced together from EU Sets 50% Greek Writedown, $1.4T in Fund and Impasse on Greek Debt Relief Threatens EU Crisis Summit Deal

    The fuzziest point in the deal is in regards to what banks get the additional 21 billion Euros in “official aid”, with what strings, and where the money comes from.

    Good News for Bears

    Although many details are yet to be resolved, the bulls got everything they wanted except endless printing by the ECB. However, the sad fundamental situation remains unchanged

    1. No structural problems have been solved
    2. Banks most assuredly need more than 106 billion in recapitalization efforts. The idea that French banks only need to raise 8.8 billion is preposterous.
    3. No investors in their right mind will fund Greek and Spanish banks to the tune of 56.2 billion euros
    4. The haircuts were not voluntary

    Instead of the rumor mill of potential actions working to lift the market 24 hours a day for three straight weeks, it will be up to the EU to make the plan work. However, the plan won’t work because of point number one above: not a single structural problem has been solved.

    Although this rally may run for a while longer on fumes of past rumors and blind hope, it will eventually wear itself out.

    Bear market rallies tend to end on good news. What more good news is coming?

    The bulls got nearly everything they wanted, putting an end to torture by rumor. What could possibly be better news for the bears?

    Mike “Mish” Shedlock

    Images: Flickr (licence attribution)

    About The Author

    Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.  Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

    You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.  Every Thursday I do a podcast on HoweStreet and on an ad hoc basis contribute to many other sites.

    When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.


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