Sheer Panic; EU Revives Default, Buyback Ideas; New Strategy Coming "Shortly", No Timeline Set; Here's a clue: They are Clueless

Once again the best comedy show anywhere comes from the offices of the ECB and EU. Please consider EU Revives Buyback Idea as Crisis Hits Italy

As exploding bond yields in Italy and Spain brought the crisis closer to the heart of the euro area, Europe’s search for answers took it back to proposals that were scuttled by Germany earlier this year. After a nine-hour meeting, the 17 euro ministers issued a six-paragraph statement pledging to flesh out details of a new strategy to end the 21-month-old crisis “shortly,” without setting a timeline.

The decision to have another look at reinforcing the European Financial Stability Facility, the 440 billion-euro ($618 billion) bailout fund that was beefed up only last month, came after talks with bondholders over a “voluntary” rollover of Greek debt ran into a threat by credit-rating companies to put Greece in default.

Finance ministers offered varying interpretations of the commitment to explore a wider range of options. For Dutch Finance Minister Jan Kees de Jager, who insists on getting bondholders to roll over Greek debt, the pledge includes the possibility of the “selective default” opposed by the ECB.

Europe’s lunge back to basics came after Greek Prime Minister George Papandreou complained that a “cacophony” had sowed “panic” that overwhelmed the budget cuts that he pushed through his parliament amid street riots last month.

The uphill struggle for solvency in Athens was dramatized by data yesterday showing the central government’s deficit widened 28 percent in the first half of 2011, with spending surpassing targets and revenue falling short.

Rejected by Germany earlier this year, the buybacks would pare Greece’s debt burden of 142.8 percent of gross domestic product by enabling it to retire bonds at a discount.

In discussions that wrapped up last month, Germany blocked proposals to add buybacks to the bailout fund’s toolkit, opposing the use of taxpayer money to help countries like Greece wriggle out of their debt.

Finance ministers also signed a treaty to establish the European Stability Mechanism, which will replace the temporary fund in mid-2013 and include provisions for a private-sector role.

Euro-area governments will put 700 billion euros of cash and callable capital into the ESM, giving it the capacity to lend 500 billion euros. It requires unanimous government ratification to go into operation.

If that collection of inactivity, unbelievable promises, conflicting strategies, and blame placing does not show panic, what does?

Please note the buyback proposal involves German taxpayers. Think that will fly?

In a state of panic, who knows what the ECB and EU might consider. However, they sure could not agree to anything in a nine hour meeting other than to agree to announce a plan "shortly".

Here's a clue: They are clueless.

For additional commentary on Monday's events, please consider

• Bond Vigilantes Strike; Crisis in Italy Escalates; Portugal 2-Year Debt Hits 18.36%, Greece 31.34%, Ireland 17.83%; New Record High Spreads


• European Government Bond Spreads at Record Highs vs. Germany; 2-Year Spreads: Greece 30.09, Portugal 17.11, Ireland 16.58


• Invisible Elephant Now Visible; EU Ready to Tell Trichet to "Stuff It"; Help for Italy?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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