We have the feeling that we needed a surgery and we got a counseling session. The “landmark” deal announced in the early morning hours (EU time) yesterday, is full of uncertainties and ambiguities. Moreover, it seems that is another band-aid that seems to kick the can down the road, rather than address the main causes of the EU crisis.

The deal does not specify the sources of the new funds. In addition, it assumes that the EFSF will be leveraged four or five times, but it fails to tell us who will do that. Moreover, it makes assumptions that may become the cornerstones of disappointments (such as that China in the midst of its own problems will invest in the EFSF paper, or that the Greek privatization scheme will raise even more money than originally envisioned when the Greek stock market has lost 75% of its value in the last 10 months). Furthermore, the deal assumes that the ECB will keep buying bonds and continue its non-standard liquidity operations, something that is the equivalent of trying to defy the law of gravity, while it does not tell us how much money they EFSF still has in its vault. It seems to us that the markets once again reacted emotionally and not rationally.

The EBA (European Banking Authority) told us that EU banks only need €106 billion for their recapitalization. Now, we need to recall that it is the same EBA that conducted in 2010 and in 2011 the EU banks’ stress tests, and had banks pass those “tests” with flying colors. Among those who passed the stress test last July was Dexia, that declared bankruptcy three weeks ago and which was nationalized by France and Belgium, before even the Greek haircut.
Hence, we question that recapitalization figure, unless the definition of primary capital and the bond markdowns in the balance sheets of institutions are compromised.

The deal announced assumes that governments will contribute to the recapitalization needs, which means higher deficits and downgrades in the foreseeable future.

As the Wall Street Journal reported: “Top European Central Bank officials were particularly skeptical. Jens Weidmann, the president of Germany’s powerful Bundesbank and a member of the ECB’s governing council, warned that Europe’s leaders were embracing the same kinds of financial instruments to boost the effectiveness of their bailout fund that many blame for causing the financial crisis that began in 2008.

The deal promises relief for Greece in 2020 and victoriously proclaims that the Greek debt-to-GDP ratio will be 120% by then! Who told them that such a debt-to-GDP ratio is sustainable? Moreover, isn’t it exactly where Greece started two years ago? Does that mean that all the measures and the additional debt that Greece took over in the last two years meant and were for nothing? What happened to the victorious proclamations that with the imposed austerity measures the debt will become sustainable? Weren’t these the same groups who told the markets those stories?

Could all these be an effort to contain Greece in a box for the sake of dormant assets that could be awaken in the near future? And, why don’t the Greeks make an accounting entry in their national accounts for the claims of over €500 billion they say they have against the Germans? Couldn’t that accounting entry in their national books wipe out the debt, create primary surplus, and actually also create paper assets that have been used so extensively for credit creation?

Where are the growth prospects in the pronounced deal? Isn’t it the vicious cycles of recessionary gaps – reinforced by the austerity measures – that prevented the Greek economy from materializing its targets? Are we certain that the PSI (private sector involvement) of 50% will materialize this time? Why didn’t Mr. Dallara of the IIF (the negotiator on behalf of the banks) commit to the 50% haircut?

The deal actually cuts the Greek debt by only 30% (since institutional bondholders such as the ECB and the IMF are excluded from the haircut). Moreover, it burdens Greece with even more debt in order to pay off the old debt! Where does all this end? Furthermore, the deal makes a mockery of the insurance bought against the possibility of default (CDSs), hence it confiscates to that extent an “asset” by nullifying its power.

The deal envisions the recapitalization of some banks (primarily Greek, Italian, Spanish, and few French and German). However, no one talked about the heart of the problem, which as we have been pointing out for several weeks now, is the inability of the banks in the EU to roll over their paper and get financing through unsecured bonds. Close to 1.1 trillion dollars needs to be re-financed in the next 12 months, and the signs are not that encouraging. Finally Bloomberg published an article on it, see link below.


We are of the opinion that financial repression will accelerate after the fanfare blows away, as EU banks will remain well-undercapitalized, and as Italian and French banks start feeling renewed tremors, while recessionary pressures will keep building up throughout the EU land. In the midst of all these, the Euro remains well over-priced while China – the place where the EU has placed its hopes for funding – may start becoming even more attractive in terms of shorting it. We predict that the EU banks by year’s end will bid up liquidity offers from the ECB, and at that point we will sing again,

Ode to hard assets that are no one else’s liabilities!