Markets in Europe opened wish some hesitation about how well the latest bailout would work, but along comes Borges to kick-start the rally. He touched on all the right buttons.
He confirmed that EU officials are working on a bank-recapitalization plan. He suggested banks could use 100-200 billion euro. Where they get the money would be a more interesting question if they had a better clue how much banks would need. That seems a pretty big range given how long this crisis has been going on, but it is making the market happy as it has bank-recapitalization and co-ordinated effort – what else does the market need?
Borges also suggested that the IMF could invest alongside the ECB/EFSF on Italian and Spanish bond purchases. Well, that is a new source of funds. I guess the realization that the EFSF money has already been spent 4 times made everyone realize they needed a new plan. Now the IMF can participate in open market purchases and maybe prod investors into leveraging the EFSF as a bank?
No mention on how excited Americans will be to fund even bigger IMF outflows. I assume the current administration is supportive of sending our money to Europe and bumping up against the debt limit ceiling sooner, rather than later, but this could easily become a political hot potato. China will be a decent size contributor. I always had the sense that China likes to be in control, I wonder how excited they will be to participate in some new IMF scheme. Then Europe has to contribute more money. So German taxpayers will be giving money to the rest of Europe through this back-door. Italy and Spain will fund themselves – again. A bunch of smaller countries who mostly signed up so they could travel without border checks must be wondering what they have gotten themselves into.
Borges said Dexia would have its own solution. I guess that is good. A bunch of lines about Greece, EFSF, ECB, and Portugal that seemed confusing at best also seemed to help the market as the lines contained such keywords as “solution” “not a surprise” “ECB has a Central role” “EFSF needs to be a catalyst”
So the “Europe finally gets it” camp is happy again. They are seeing co-ordinated effort, stepped up rhetoric, and more money being thrown at the problem. It seems to me, that the more senior you are in the banking world, or more senior you were, the more likely you are to be in this camp.
The crowd that is wondering who will foot the bill remains dubious. Economic conditions continue to deteriorate globally. There is less willingness and less ability of the “rich” nations to fund the “poor” ones. There is even less willingness to fund the banks. It is great that Europe finally sees the problem, but they have waited too long. There is no group of countries left that is strong enough to support the banks and weak nations without getting dragged down themselves. It seems this camp is filled with lower level credit guys and some distressed debt people who just don’t see how the circularity can work.
The other thing that I have noticed is that the more involved you are in the markets, the more willing you are to believe that Europe can act as Europe. The more involved you are in European politics, the more concerned you are that European nations are becoming more nationalistic.
Anyways, we are back to rallying on headlines and sound-bites and hopes that “Europe Finally Gets It”. Maybe this time the details won’t disappoint. Actually, maybe this time we will get to the details, since so many of the last few rallies were based on rumors or plans that never even made it to the detail stage. In the meantime I will try and figure out how Italy providing money to EFSF so the EFSF can buy their bonds, how Italy contributing to the ECB which buys its bonds, how Italy providing money to the IMF to buy Italian bonds, and Italy working on plans to save Italian banks whose exposure to Italy is a part of their problem, fixes anything.