Cyprus bail-in revisited: consequences for small economies

1. The news

European Commission draft documents leaked and released on the FT web site are offering a different picture from the previously released details of the bail-in.

First and foremost, in 9 days the bill has spilled over by EUR 6 billion amounting to a EUR 23 billion shortfalls to gap over a 3 years period. The additional burden falls on Cyprus, the total reaching EUR 13 billion.

Second, it will be entirely born by the deposit-equity swap at the new Bank of Cyprus (i.e. post acquisition of Laiki deposits), which nearly doubles to EUR 10.6 billion from EUR 5.8 previously: EUR 5 billion in 9 days (30% of 2012 EUR 17 billion GDP) is quite a number…

Third, Cyprus will sell “excess” gold reserves for a total consideration of up to EUR 400 million: I like the term “excess” in a world of ever devaluing fiat currency and “excess” represents 70% of its 13.9 t of gold! Since the leak, Cyprus has denied they intended to sale gold: what is contained in the report is an hypothesis, of course…

Fourth, bond holders under Cypriot law will be “encouraged” to roll over up to EUR 1 billion that mature until 2016, meaning that the EZ countries and the IMF will only provide EUR 700 million. In 2011 this “encouragement” was deemed by rating agencies (for whatever credibility they have) to lead to a selective default (rating agencies must have learnt from politicians rhetoric: one meets its commitments or one doesn’t; “selective” is bullshit), not talking about a credit event for CDS. Why what was meant to apply to Greece would not for Cyprus?

Fifth, like all assumptions made about Greece by the EU, the ECB and the IMF proved wrong, these will prove wrong for Cyprus: the economic situation will worsen much more than expected the 8.7% real GDP fall in 2013 and 3.9% in 2014. The debt/GDP ratio will go way above 130% in 2015, and not the 126% projected.

2. Cyprus other route

Cyprus lost its independence, like any over indebted country will, France included, not being able to meet its commitments.

To lose its independence, Cyprus had a better course of action: quickly negotiating joining a ruble zone and offering Russia a naval base in Cyprus plus offshore gas rights. Cyprus would have lost its independence but Cypriots would have been better of.

Geopolitically this would have been a coup for Russia: it will loose its naval base in Syria and would have replaced it with an even more strategically positioned one. Russia would also have enjoyed privileged access to Cyprus gas, further surrounding the EU. This also would have open the way for other disappointed countries with the EU to join the fray like Serbia; and eventually why not Greece. The Orthodox church is a powerful cultural and historical link between all these countries.

Cyprus cannot be kicked off the EU (well, European politicians and eurocrats are used to twist and carve treaties and laws to their own advantage), and therefore it would have allowed Russia to have a foothold in the house.

In any case, this would have been a trump card in the hands of Cyprus in its negotiating positions with the troika.

3. The future of small countries

The crisis has demonstrated that all countries in the EU are not equal in rights despite what is claimed (not surprising, it has always been the case: big boys bullying feeble ones). Rules do not apply the same way depending on size: France has hardly ever abided by Maastricht criteria, and always got away unarmed (we are nearing the end of it, since eventually facts are always right over rhetoric). Greece was slammed (they lied, so they got what they deserved), Cyprus walked over and Luxembourg is bullied.

Cyprus and Luxembourg are criticized for over relying on the financial sector. I do not know what makes Germany, France or the US to impose a business model to small countries whose size limits their ability to enjoy a well diversified economy. If they do not like money fleeing, they should offer a fiscal environment where money is happy at home: there is no tax haven if there is not tax hell. With France’s banks over 3 x GDP (more or less Cyprus post bail-in), the financial sector is much too leveraged. In the case of France, the media are increasingly reporting that young educated French national are going abroad to find a job (40-50,000 in 2012 – when one calculates the heavy cost of education and no return from those leaving the country, it will become unbearable at some point). These larges countries should first put their home in order before lecturing others. A few examples: Delaware money laundering machine where the beneficiary owner of a company does not need to be disclosed or the specific local laws that make it very difficult to get rid off an incompetent board or special protections against takeovers; France with its free zones, special tax treatment of Corsica or no income tax in French Polynesia to name a few; and what about the UK with the Channel Islands, The Netherlands with its holding tax efficient regime, etc.

Small to medium size countries where the financial sector allowed them to prosper are increasingly subject to bullying from large ones, the latter specializing in finding scapegoats for their own economic sins.

We are entering a world where democracy is much talked about as never before, but where reality contradicts the words. Small European countries beware, you have been warned.

Source:

European Commission: Assessment of the public debt sustainability of Cyprus

http://blogs.r.ftdata.co.uk/brusselsblog/files/2013/04/DSA-9-April2013.pdf

European Commission: Assessment of the actual or potential financing needs of Cyprus

http://blogs.r.ftdata.co.uk/brusselsblog/files/2013/04/Estimate-of-financing-needs-ESMT-art-13-v09042013-1.pdf

Reuters: Cyprus to sell around 400 million euros worth of gold

http://uk.reuters.com/article/2013/04/10/uk-cyprus-bailout-gold-idUKBRE9390NW20130410

The Bundesbank repatriates its gold reserves

Germany, the holder of the world’s second largest gold reserve, last week decided to repatriate some of its 3,400 tons of gold not already in its vaults to reach 50% in 2020.

What to make about this?

The FT continues its anti-gold stance along the lines of the barbaric relic and the WSJ cites the pressure of populism.

One may also point at a sensible move to make sure that real assets are held at home. If this is true, it tells a lot about the confidence of the Bundesbank with some of its counterparts…A remake, at the central banks level, of banks distrusting each other during the financial meltdown which led to a freeze of the interbank market?

The most interesting point is that the Banque de France will end up with no German gold and The FED will see its holding decreasing by 30%, for a total consideration of 674 tons or USD 36 billion at current market price, whilst the BoE will stay at the same level. This could be a barometer of Germany’s assessment of its counterparties quality.

Source:

Deutsche Bundesbank: Deutsche Bundesbank’s new storage plan for Germany’s gold reserves

http://www.bundesbank.de/Redaktion/EN/Pressemitteilungen/BBK/2013/2013_01_16_storage_plan_gold_reserve.html

Current account surplus is a key determinant to bonds market turnaround: Italy’s case

I am reproducing in extenso a market view published bay Horseman Capital which deals with the importance of current account in assessing the ability of a country to return to good fortune, i.e. when the bond market is turning around. In a previous review published in October 2011, Rusell Clark made a good case that returning to a current account surplus is key to the turning point in bond markets.

This espouses my views about France being the real sick man of Europe as exemplified by the graphs below (and see http://marketsandbeyond.blogspot.com/2011/10/who-should-be-single-rated-italy-or.html):

Let’s now read what Russell Clark has to tell us about current accounts, Italy and the bond market.

“Sovereign Debt – Italy

In my last note on Sovereign debt – sent out in October 2011 – I noted that in all the debt crises that I have looked at, the turning point occurs when the troubled country can turn its current account deficit into surplus. I noted that of the distressed peripheral countries in Europe only Ireland had achieved current account surplus, and hence we were buyers of Irish bonds.

Since then Irish bonds have recovered most of their losses of 2011, and the Irish government has been able to return to the bond market. This is during a period of sustained instability in the far bigger bond markets of Spain and Italy.

Italy

Italy has one of the biggest bond markets in the world, and financial commentators quite rightly point out that its size means that it would be difficult if not impossible to implement the same programs that have been used by the European authorities in Portugal, Ireland and Greece. Hence, in my view the future of the Italian bond market is probably a key determinant of the survival of the Euro in its current form.

Like the other troubled nations of Europe, Italy has been running a current account deficit for a prolonged period of time. There have been recent signs of improvement, but not enough to move Italy to a current account surplus. The Economist estimates that Italy will run a 2.4% current account deficit for 2012.

However, beneath the slowly improving current account numbers, Italy’s bilateral trade numbers are showing signs of big improvements. Italy has shown a dramatic improvement in its trade deficit with China, the EU and the US.

If Italy has improved the trade positions with three biggest economic regions of the world, why have we not seen better improvement in the Italian current account? The answer is apparent when we look at the break down of Italian trade by category. As can be seen below, Italy has improved its manufacturing trade balance significantly, but all the gains in this area have been lost due to increasing commodity (mainly energy) trade deficit.

Should we see lower energy costs, I believe we would see a significant fall in the Italian current account, potentially pushing Italy to a current account surplus. For investors looking to play lower commodity prices via a long position in fixed income, Italian bonds look attractive in my view.

Almost all of Italy’s energy needs are priced off the Brent oil price. In 2008, all energy sources were comparably priced, but since then we have seen large divergences, which have put Italy at a disadvantage. Should we see a convergence in energy prices, Italy should be a relative winner, and Italian bonds should also prove to be relative winners.”

Source:

Horseman Capital: Russell Clark – Market Views August 2012

www.horsemancapital.com

Trading Economics

http://www.tradingeconomics.com

Markets & Beyond: Who should be single A rated: Italy or France?

http://marketsandbeyond.blogspot.com/2011/10/who-should-be-single-rated-italy-or.html

 

Greece: August 20 will not be the day of reckoning

After The ECB rejected a proposal by Greece to delay 1 month a EUR 3.2 bn bond repayment, Athens issued EUR 5 bn worth of 13 wk T-Bills August 14, including non-competitive bids, which was bought by local banks on a meager 1.36 x cover ratio (the worst to date) which really shows that even short term financing is becoming difficult. These banks will probably use the T-Bills as collateral with the Greek central bank to access its emergency liquidity assistance (ELA).

Below is the current schedule of T Bills redemption until year end, i.e. EUR 15.2 bn.

The situation remains most precarious. The lack tax collection, in particular due to a continued fall in the GDP y0y and to some extent persistent fraud, does not bold well for the Greek budget. The debt is again on the increase with a sharp EUR 23 bn QoQ: after investors wrote-down EUR 105 bn in March, reducing the debt to EUR 280 bn, end of June it was back above EUR 300 bn at 304 bn.

The budget execution is rather dismay, revenues being 24% behind plan for the period January-July 2012. Looking at it in more details, the PIB item is again manipulated this year in the turn EUR 1.4 bn to present an acceptable bottom line picture.

Despite the debt write-down, interest payments remain as elevated as last year but in line with the budget.

With no GDP improvement in the foreseeable future, and the troika requesting EUR 11.5 bn additional spending cuts in order to provide further financial assistance, the squeeze will continue on the population. This being said, even if Greece does not abide by its commitments, I have no doubt that they will get additional financial aid from the EZ (In my opinion the objective is until the 2013 German elections, but I doubt markets will allow it without the ECB jumping in full gear by buying EZ sovereign debt in the primary and secondary markets with no limit).

Source:

Greek Ministry of Finance: Budget Execution Bulletins

http://www.minfin.gr/portal/en/resource/contentObject/contentTypes/genericContentResourceObject,fileResourceObject,arrayOfFileResourceTypeObject/topicNames/budgetExecutionBulletin/resourceRepresentationTemplate/contentObjectListAlternativeTemplate

Eurozone: This time is different, or is it?

Thursday, Germany lost twice against the Italians: once for the euro 2012 soccer cup semi-final and then, later during the night, when the Italian PM Monti’s (and Spanish PM Rajoy) blitzkrieg won over frau Merkel. He played tough by simply refusing to sign any agreement until Germany agreed that the eurozone must jointly back Spanish banks without Spain having to guarantee the deb.

1. The agreement

• setting up a single European supervisory mechanism for banks under the ECB control

• ESM allowed to directly recapitalize banks

• Possibility for countries which are complying with common rules, recommendations and timetables, to make use of the existing EFSF/ESM instruments to stabilise markets. Financial assistance to Spain will be provided without seniority status for the financing provided by the EFSF/ESM.

• mobilizing around 120 billion euro for growth measures:

• A 10 billion euro increase of the capital of the European Investment Bank implying a lending capacity by 60 billion euro.
• The other 60 billion euro comes (i) from the reallocation of unused structural funds (55 billion), and (ii) from the pilot phase of Project Bonds to be launched this summer and targeted at key initiatives in energy, transport and broad-band infrastructure (4.5 billion).

• Adopting a Financial Transaction Tax by December

2. What’s next?

Ireland must rejoice since they now can lineup to require the same favorable treatment, which cost is put at EUR 64 billion.

European (read mostly EZ) taxpayers are on the hook thanks to the pan-EZ mutualization of the European banking sector rescue. Do not misread me, I strongly believe that for a monetary union to survive (if not thrive) the banking sector MUST have a single supervisory board and the costs must then be shared. However, we are mutualizing liabilities before having had any chance to mutualize benefits (and will probably share none, if any in the future) at nil cost for banks; in a capitalistic environment, the ones who rescue an ailing company take control: nothing near this simple and sensible criteria here… I also notice that no FDIC equivalent is set up to guarantee deposits with no limit on the number of accounts guaranteed one can hold.

The question remains: is this the first step towards the mutualization of sovereign debt? I cannot believe that Germany would carve in; if they do, the credibility of Europe would be jeopardized.

The direction towards fiscal integration is going ahead but many obstacles remain which let me think that the success is far from being certain (I am in fact very doubtful).

Fiscal union without social union will fail as the EZ failed (whatever politicians do to disguise it, it is a failure). The EU loves, and writes in many of its statements, the words “best practice”: ask the French if best practice is 67 years old retirement age, no minimal wage, 40h a week working time, etc.

What last week agreement achieved is reassuring markets for some time by reducing the amount of money Club Med countries will devote to save their ailing banking sector: Spain has gone from 100% down to 12%. Conversely, France is adding EUR 20 billion of liabilities. Remember my words for a rather long time, France is really sick economically and worse than Italy. Today, the French Audit Court is publishing a report that I will carefully read; the first comments are rather straight to the point: EUR 40 billion need to be found until end 2013 to abide by France’s commitments on deficit reduction…

Markets will however go back to the reality of the EZ: a monetary union with a widening competitiveness gap. NOTHING, I repeat nothing, of what was decided last week is addressing this gap; the EUR 120 billion to spur growth via infrastructure investments, particularly in distressed European countries, will take years to bear fruits and 1% of EZ GDP split over 5 or 10 years, with nearly nothing in 2012-2014, is not going to help them drive their way out of recession.

The core of the problem is still pending: lack of competitiveness of Southern Europe versus Northern Europe. As a matter of fact, French will never accept a 25-30% decrease in wages to become competitive again: understandably they will always prefer a currency devaluation than a salary devaluation (and no, the effects are not the same for the population concerned).

Conclusion

Yes, this time is different because Germany bent before blackmailing, but no, it is not different because the roots of the problems remain: lack of competitiveness and structural trade deficits that act as a drag on growth which is the only way out of the crisis. The necessary structural adjustments (lengthening of working hours, postponing the retirement age, reducing the share of the public sector in the economy, etc.) will only be accepted by the population if there is some form of growth. Austerity to bring public finances under control without devaluation is a death spiral – see Greece.

As reported by Bloomberg: “the EU’s two rescue funds may only amount to about 20 percent of the outstanding debt of Italy and Spain, limiting the ability to lower the nations’ borrowing costs.”, not mentioning France.

Source:

European Council 28/29 June 2012 – Conclusions

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf

Remarks by President Herman von Rompuy following the European Council

http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/131390.pdf

Bloomberg: EU Leaders Ease Debt-Crisis Rules on Spain

http://www.bloomberg.com/news/2012-06-29/eu-leaders-ease-debt-crisis-rules-for-spain-as-merkel-retreats.html

Greece, Europe and the rule of Law

On 23^rd February 2012, the Greek parliament passed a Law which at the time went mostly unnoticed in one of its provisios: the retroactivity of the CAC (Collective Action Clause) for Greek Law bonds. Greek bonds holders who do not accept the debt swap will be forced to do so.

EUR 205 bn were eligible for the debt swap:

Investors (well, banks) holding EUR 152 bn Greek law bonds accepted the offer (85.9%)

and EUR 20 bn of non-Greek law (69.9%), i.e. 83.7% for the aggregate.

The invitation period (to the public offer) for each series of PSI-eligible foreign-law bonds and of bonds issued by state enterprises and guaranteed by the Hellenic Republic has been extended until 9:00 p.m. (C.E.T.) on March 23, 2012. Note that not only content to renege on past contractual agreements on Greek-Law bonds, Greece is threatening to default on bonds held under foreign (Brtiish) Law if bondholders do not accept the terms of the bond swap agreed (read forced) on March 8.

I thought retroactivity of laws was the benchmark of totalitarian regimes, but no, it is happening in 2012 within Europe, in the birthplace of democracy. All European leaders are applauding to something they should utterly reject, but for futile self-political interest. There is one basic principle of democracies: the non-retroactivity of laws.

I feel that any investor would successfully challenge this before the European Court of Human Rights.

Source:

Hellenic Republic – Ministry of Finance: Press release PSI

http://www.minfin.gr/portal/en/resource/contentObject/id/baba4f3e-da88-491c-9c61-ce1fd030edf6

Eurobank EFG: Greece Macro-Monitor

http://www.eurobank.gr/Uploads/Reports/FOCUS%20GREECEPSI%20March%209%202012.pdf

ISDA: Unofficial translation of the Act of the Governor – Bank of Greece

http://www.isda.org/uploadfiles/_docs/Act_of_the_Bank_of_Greece_9_March_2012.pdf

Greece 2011 Budget execution and the (bleak) future

A year ago, European politicians were hailing the progress made by Greece stating that the nadir of the crisis was behind and difficulties ahead would be dealt with forcefully. As my readers may recollect, I did warn that the plan will fail and the Greek situation would worsen, the country being bankrupt.

Let’s see what happened in 2011 in the Greek Budget:

Note that the last column was the planned 2011 budget as of December 2010, whilst the column (5) contains the budget post-revisions.

A few remarks:

• Compared to the original plan, the budget implementation failed miserably with a EUR 5.5 bn wider borrowing requirement, i.e. a staggering +23%.
• A much larger gap would have been registered (EUR -3.3 bn) without deep cuts in military spending (EUR -1.3 bn.) and the Public Investment Program (EUR -2 bn) during the course of the year compared to the initial budget.
• Revenues were lower than in 2010 and EUR 5.5 bn less than in the initial budget, EUR 6.7 bn if it was not for a new line of revenues that “miraculously” appeared in November and December, registering EUR 1bn (“special revenues from licensing public rights”). Primary expenditures were contained but did not decrease enough to compensate.
• Interest payments were marginally higher than in the initial budget, but EUR 3 bn more compared to 2010.

As I forecasted early 2011 (and also in 2010) the situation has worsened, not improved. Greece is insolvent with a 155% debt/GDP, a 10% budget deficit/GDP (there are rumors that it would finally be closer to the 9.1-9.4% mark thanks to an emergency property tax representing a good EUR 1 bn –looks like a desperate trick to “improve” the picture of a desperate situation) and EUR 350 bn debt (not talking about high unemployment, dismay current accounts and trade balances, insolvent banking system, deposits going abroad, weak productivity, antiquated social welfare state, continued weak tax collection – whilst improving -, etc.). 

As of this Saturday morning, discussions with the financial sector are ongoing regarding the level of write-downs, or more exactly the strength of guarantees on the new bonds to be swapped with the existing ones.

The schedule of T-bills maturing during the next 5 months is:

26wk	09-Aug-11	10-Feb-12	1,000
13wk	15-Nov-11	17-Feb-12	1,600
26wk	06-Sep-11	09-Mar-12	1,455
13wk	20-Dec-11	23-Mar-12	1,600
26wk	11-Oct-11	17-Apr-12	1,600
13wk	20-Jan-12	20-Apr-12	2,000
26wk	08-Nov-11	11-May-12	1,600
26wk	13-Dec-11	11-Jun-12	2,000
26wk	13-Jan-12	13-Jul-12	2,000

In March, add two 5 years bonds due for redemption:

5 yr	07-Feb-09	20-Mar-12	7,000
	05-May-09	20-Mar-12	7,433

Therefore, Greece will need to auction T-Bills next week and the following one to refinance maturing ones (which should go fine if nothing dramatic occurs with the discussions between banks and Greece on existing debt) and find EUR 16.5 bn in March, i.e. EU and IMF money.

To regain solvency, the discussions are centered around how much the financial sector would forgo, and the latest discussions are 70% of their current debt holdings, beyond EU/IMF rescue packages and drastic austerity measures. Would this be sufficient? No: Europe is at best growing flat, debts continue to go north and trade imbalances between countries are not reduced, and these imbalances are one of the reasons of the current crisis, themselves a result of the widening competitiveness gap between countries, with no currency adjustment possible within the euro.

This crisis cannot be solved by only reducing the stock of debt but also by improving cash flows, i.e. growth. Whether the financial sector forgoes 70% of its Greek debt pile (estimated at EUR 200 bn with themajority of it held by Greek banks and, in my view, a substantial chunk of thebalance with the ECB), this is just kicking the can down the road as it has been done for the past 2 years (well, really for the past 10 years). Let’s see the simple equation below:

GDP = private sector consumption + public sector consumption + (exports – imports). This is a very important equation largely overlooked by commentators.

For Greece all of theses items are negative yoy, according to the latest official statistics, and in many countries at least two items are negative: in the current economic environment there is no way that Greece (and others) can get out the over-indebtedness black hole. Greece and Club Med countries (France included) need to improve competitiveness to gain/regain a positive trade balance.

Growth based on retail demand in southern Europe was unsustainable with negative trade balances, and the potion to remedy to this situation will be very bitter indeed: a sharp fall in the standard of living. This is compound by the fact that within a state welfare, redistribution represents a substantial chunk of revenues for individuals, which these countries will drastically reduce to get their finance in order. To regain competitiveness, salaries/social transfers are to decrease by 15-35% - depending on countries - multiplied by the productivity differential with the main exporting countries. The euro is indeed a kind of gold standard where individual countries can no longer devalue their currency to adjust their lack of competitiveness and boost exports.

None of the European political sphere is addressing what is at the core of a flawed eurozone construction.

The table below provides the effort required to get Greece’s finances back under control: this is unsustainable since I do not believe official figures of a EUR 50 bn privatization plan, and will lead to social unrest to a scale not seen so far, the more so that the OCDE announced that the situation is worse in the tune of EUR 15 bn and the EFSF/ESM is not large enough:

“The current EFSF/ESM resources of € 500bn are not enough. Furthermore, the EFSF/ESM has not found it easy to raise funds at low yields even with guarantees.”…

Source:

Hellenic Republic - Ministry of Finance: various publications

http://www.minfin.gr/portal/en

The Telegraph: Eurozone bail-out funds not enough, warns OECD

http://www.telegraph.co.uk/finance/financialcrisis/9057597/Eurozone-bail-out-funds-not-enough-warns-OECD.html

OECD: Solving the Financial and Sovereign Debt Crisis in Europe

http://www.oecd.org/dataoecd/14/25/49481502.pdf
Markets & Beyond: European rescue package: truth and fallacy
http://marketsandbeyond.blogspot.com/2011/11/v-behaviorurldefaultvmlo.html

A week in Europe – 20 years after the Maastricht Treaty

Last week’s Brussels’ summit delivered what has been hailed in most media and the usual politician consensus as being THE grand plan that will save, the euro and Europe, nothing less. Let’s reviews what was announced:

• A new concept of fiscal rule (“fiscal compact”) is introduced whereby the budget deficit cannot exceed 0.5% of GDP and this rule will be enshrined in national constitutions. An automatic correction mechanism will be triggered if the ratio is deviating from this level.
• Sanctions will be automatic when a country breaches the Maastricht Treaty criteria of fiscal discipline (maximum 3% GDP/budget deficit and 60% debt/GDP), but for a qualified majority of EZ members, and will be monitored by the Commission and the Council.
• The private sector (read banks and insurance companies) will no longer participate in the cost of bailing out European countries beyond Greece.
• The ESM will be brought forward to July 2012 and in case of emergency a qualified majority is set at 85% (subject to Finland Parliament approval). Together with the EFSF, it will amount to EUR 500 bn to be reviewed in March 2012.
• Up to EUR 200 bn will be provided by EU members to the IMF via bi-lateral loans to reinforce its intervention means (to be confirmed within 10 days of this agreement), including EUR 1500 bn from EZ countries.

This plan, like all the other ones designed over the past 19 months, will fail:

• The text, like the previous ones, contains a lot of waffle: many words but nothing immediately concrete whilst the liquidity crisis is hurting right now and the solvency one is round the corner, all final decisions and details being pushed back to March 2012. The objective was once more to kick the can down the road…
• The fiscal compact falls short of a true fiscal integration. And without it, the ECB (the Bundesbank) will not finance European sovereign debt until the very last minute if any, i.e. when the cost will be horrendous for European citizens.
• Rules are tightened to curb future debt but nothing is done to resolve the current insolvency of banks and over-indebted countries. The crisis is now, not next year or in two years time.
• EUR 500 bn is nowhere near what is required: EUR 1-2 tr (Euro-area governments have to refinance more than EUR 1.1 tr of debt in 2012 plus aprox 300 bn of new debt without the potential bailout of a few banks).
• The private financial sector is lo longer accountable for its mistakes increasing moral hazard.
• There is no guarantee that the sanctions to be imposed on deficit countries will have any effect since they know that it is doubtful the would be thrown out of the EZ (otherwise Greece should have been kicked out over a long time ago); the only efficient threat of sanction is for countries to loose their voting and vetoing powers with the EU institutions and put such countries under tutelage. Politicians do not care about other (financial) sanctions.

The three main roots of the crisis are not addressed:

• Unbalanced financing of sovereign debt deficit: The EU does not lack savings but Northern investors are rightly reluctant to finance Southern Europe. Domestic retail investors should be called upon with attractive enough terms.
• Unbalanced trade: the competitive north increases its competitiveness vis-à-vis the south which has a growth model based on consumption, which is not viable long term and showed its limits.
• Lack of growth, itself a result of the absence of fundamental social and economic reforms in Southern Europe.

The ECB is the only institution with the means to backstop European sovereign debt and provide unlimited liquidity to banks. This must be accompanied by deep structural reforms including pushing back the age of retirement (at least 65 years and probably beyond if no sharp improvement in the fecundity rate of Europeans), lengthening the weekly working hours to at least 40h and probably 42h without a commensurate salary increase and drastically reducing the functioning cost of government and local authorities by reducing the number of civil servants or their salaries (its increase rate should be limited to a maximum of 50% of the GDP growth rate).

The alternative is debt restructuring or outright default.

As it stands today, the grand plan lacks credibility.

Markets also seem very skeptical…

Source:

European Council: Statement by the Euro area Heads of State or Government

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/126658.pdf

European Commission: Economic Governance in graphs

http://ec.europa.eu/europe2020/priorities/economic-governance/graph/index_en.htm

Bloomberg: Euro Leaders Push Budget Rigor 20 Years After Maastricht With Onus on ECB

http://www.bloomberg.com/news/2011-12-09/euro-states-to-shift-267-billion-to-imf-as-focus-shifts-to-deficit-deal.html