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Sunday, October 23, 2011 3:04 PM

EU is reporting "Progress" but None of it is Meaningful

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EU leaders are announcing "progress" but there is little progress to be found. Banks have "volunteered" to 40% haircuts but EU leaders want 50% minimum. Is that progress?

Germany won a major arguments with France, the latter wanting unlimited bailout access (printing) by the ECB. Since no one expected France to win that argument, that is not much progress either, except from the point of view we no longer have to listen to asinine proposals from France.

Otherwise the bickering still continues as to how best to leverage the EFSF when the best thing to do is not use leverage at all. As soon as leverage is used France will likely lose its AAA rating.

Then again France will soon enough lose that AAA rating anyway as it attempts to bailout French banks.

Otherwise, here is the misleading headline from Bloomberg: EU Sees Progress on Banks

European leaders outlined plans to aid banks and ruled out tapping the European Central Bank’s balance sheet to boost the rescue fund, inching toward a revamped strategy to contain the Greece-fueled debt crisis.

Europe’s 13th crisis-management summit in 21 months also excluded a forced restructuring of Greece’s debt, sticking with the policy of enticing bondholders to accept “voluntary” losses to help restore the country’s finances.

Bank capital needs -- estimated at 100 billion euros by a person familiar with the deliberations -- will be met first by banks themselves, then by national governments, the European officials agreed.

Only when national efforts fail can governments tap the main rescue fund, the 440 billion-euro European Financial Stability Facility, for cash to channel to banks.

“What I can tell you is that this only will happen under strict conditions,” Dutch Prime Minister Mark Rutte said.

Germany pushed through one of its main summit aims, defeating French efforts to bulk up the rescue fund by enabling it to borrow potentially limitless sums from the independent central bank. Policy makers are headed toward using the EFSF to guarantee government bond sales as a way to extend its reach. A second option is to set up an EFSF-insured fund that would seek outside investment in troubled bonds.

The goal is to complete the technical details within 24 hours, a European official said. The next summit will consider the two options as well as ways of getting the International Monetary Fund to boost its rescue role, the official told reporters.

After a year of sparring with the ECB over burden sharing for bondholders, Merkel was on the central bank’s side this time, sparing it from a role in financing state deficits.

What wasn’t decided is the fate of bond purchases by the Frankfurt-based ECB. The central bank has bought 165 billion euros of bonds, justifying the purchases as a way of smoothing markets and helping transmit its interest-rate decisions through the economy.

Central bankers have expressed reluctance to step up the purchases, which started with Greece, Ireland and Portugal last year and widened to Italy and Spain in August as those markets came under attack.

“One shouldn’t demand more from the ECB than it can achieve according to its statutes,” Austrian Chancellor Werner Faymann said today.

Central bankers are at the center of the dispute over writedowns for Greek bondholders. A reminder came on Oct. 21 when the ECB put a dissenting footnote into an assessment of Greece’s finances that envisioned writedowns as high as 60 percent.
The IMF wants haircuts of 60%, the bankers agreed to 40% voluntary cuts. Of course the haircuts are not voluntary and never were.

EU officials are still bickering over how to do a 100 billion euro bank recapitalization when four times that amount is needed.

Leveraged EFSF will not work, but EI officials are still arguing over how to do it.

Is this progress?

Odds are overwhelming there is not going to be progress. I'm on vacation, so I'm going golfing.

Mike "Mish" Shedlock
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