Here’s What’s Going to Happen

So the G20 has “told” the eurozone that they have to get their act together by next Sunday or else. There is a lot of talk of the potential dire consequences of the euros (i.e. Merkozy) failing to bring forth a comprehensive and convincing plan complete with a clear vision of the endgame for the eurozone debt crisis. Therefore they will deliver whatever they are able to, which won’t be very much. Next weekend we will be presented with a plan to recapitalise European banks, announce “voluntary” haircuts of 50%+ on Greek debt, along with a timeline for the much needed treaty changes which eurozone leaders hope to follow in order to move the eurozone to a closer integration of fiscal authority.

There will be some other meaningless distractions thrown in to distract from the lack of meat brought forth, but at the end of the day it will essentially be a plan to nationalize/pseudo-nationalize scores of banks. In return for taking a European Lehman scenario off the table, the eurocrats will extract pounds of flesh from the banks in the form of financial transaction taxes/bank capital taxes, lower leverage ratios, and various other forms of government intrusions into the private sector. Oh and don’t forget, existing shareholders will be hopelessly diluted by the government capital infusions.

Last week equity markets rallied on the combination of euphoria that the possibility of a European style Lehman was taken off the table and a brutal short squeeze/chase for performance. However, nothing has changed in the sense that Europe is still undergoing a painful private/public sector debt de-leveraging cycle and still faces years of harsh austerity measures. In case you didn’t know, the combination of fiscal austerity and financial sector de-leveraging certainly does not lead to economic growth. In summary, it’s time to curb your enthusiasm and prepare yourselves to be disappointed yet again by European leaders. After all, they are not superhuman and cannot create money out of thin air – only the ECB could do such a thing and they appear to be wholly unwilling to even entertain such an idea. As Peter Boockvar so succinctly explained it last weekEurope will either have to write down the debt, pay it off, or inflate it away. ECB will not allow it to be inflated away, they don’t have money to pay if off, so the only alternative is to write it down.

Further Reading:

Reuters- G20 tells euro zone to fix debt crisis in eight days

WSJ- G-20 Leaders Press EU for Plan on Debt

Bloomberg- Merkel Says U.S. Reluctance on Financial Transaction Tax ‘Not Acceptable’ 

Bloomberg- EU May Impose Limits on Commodity Swaps, High-Frequency Trading

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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