Put Some Lipstick On This Pig And Sell It – The EU Statement

Posted by on Dec 9, 2011 in Uncategorized | No Comments

Markets initially sold off across the board but have recovered somewhat this morning.  Credit is weaker across the board with MAIN, SOVX, and FINS all wider on the day.  Financials are underperforming and adding to yesterday’s losses and are back to their widest levels of the day.  Italian and Spanish bonds are lower again.  Italian 5 year yields almost hit 7% but have improved a little bit.

Stock futures have bounced back to positive but have been reasonably volatile and seem surprisingly strong in face of weak credit markets and pressure on the banking sector.

It seems strange that the person everyone is most concerned with is Draghi.  What a strange world when policies that potentially change Europe really don’t matter much to the markets, all that matters whether this is enough for Draghi to change his mind from yesterday.  I wouldn’t bet on that.

So what did we get:

A New Fiscal Compact

I thought a compact was a make-up kit or small car, but it turns out it also means a general accord or consent (learn something new every day).

General government budgets shall be balanced or in surplus (anything better than a deficit of 0.5% is considered a surplus).  What is a “general” budget?  Is that primary or overall?  Are there “special” circumstances?  Somehow I don’t think this will get us balanced budgets.

Each country will be required to create some legislation that “automatically” forces them to have a balanced budget.  So nothing is actually in place, and I bet this won’t be as easy as it sounds.

“Member States shall converge towards their specific reference level, according to a calendar proposed by the Commission.”   I really don’t know what this means, but “converge towards”  “reference level” and “calendar proposed” doesn’t sound particularly solid.

The rules of “Excessive Deficit Procedure” will be reinforced.  “There will be automatic consequences unless a qualified majority of euro area Member States is opposed”.   So they don’t define the consequences but did define how they can be waived.  Not exactly a strong statement either.

Budgets have to be shown to the Council and the Commission and there are pledges to work further towards fiscal integration.

This section was underwhelming at best.

Stronger policy coordination and governance

Blah blah blah.  Some platitudes and a commitment to hold at least 2 Euro Summits a year.  Yes, Euro Summits are part of the solution, I feel better already.

Strengthening the stabilization tools

This is where it at least gets a little interesting.

The “EFSF leveraging will be rapidly deployed through the two concrete options agreed upon by  the Eurogroup on 29 November”.  Calling what they have documented already as “concrete” seems a stretch.  Why the mention of leveraging?  Seems to me like they are trying too hard.  Shouldn’t it have been sufficient to say EFSF?  Sounds like they don’t believe it, so they figured writing the word leveraging would make it more real.

ESM will go into place once 90% of countries have ratified it.  The target is July 2012.  More votes.  I guess it is okay that ESM is coming into place earlier, but with EFSF not even launched yet, but about to be “rapidly deployed” it doesn’t seem that exciting.  The AAA countries are pushing for this because EFSF relies on their guarantees so they support all the funds, whereas ESM has paid-in capital so other countries can contribute.  Yes, Italy can put in paid in capital to the ESM so that the ESM can buy Italian bonds.  Problem solved.  It does help if France pays in capital before they get downgraded to AA+ (or lower) as that impacts the EFSF much more than ESM.

“The EFSF will remain active in financing programmes that have started until mid-2013 as provided in the Framework Agreement”.  So yes, the EFSF will function as has been stated over and over.  Nothing exciting about this at all.

They will “reassess the adequacy of the overall ceiling of the EFSF/ESM of Eur 500 billion in March 2012”.  This is interesting.  First it confirms that the combined “firepower” of the two vehicles won’t exceed 500 billion.  They will both be in operation but the capital available to them is 500 billion in total.  Some people have been estimating that they will both function with 500 billion for a total of 1 trillion.  That is clearly not the case.  It is encouraging that they may look to increase this total in March 2012.  That is a long way away in this market, and it makes the assumption that they will have the ability to do it if they choose to.

Oops, I got ahead of myself.  “during the phasing in of the paid-in capital, we stand ready to accelerate payments of capital in order to maintain a minimum 15% ratio between paid-in capital and the outstanding amount of ESM issuance and to ensure a combined effective lending capacity of EUR 500 billion”   Can’t they ever make anything simple?  So there is a phase-in period?  So rush rush rush, accelerate implementation of ESM, then have a long drawn out “phase in” period?  What is the 15% thing?  If ESM is supposed to have paid in capital, why is it contemplating issuance?    Hmmmmmm.

“the provision of additional resources for the IMF of up to EUR 200 billion, in the form of bilateral loans, to ensure the IMF has adequate resources to deal with the crisis”.  So the EU is bailing out the IMF?  Or the EU is giving money to the IMF so it can bailout the EU?  If the EU has the money why not lend directly, or wait, better yet, pay off some of the debt!   Watch this carefully.  I have to assume that it is better credits lending money so it can be funneled to weaker countries.  This should be credit NEGATIVE for the better countries.  I think this could impact yields over time at better countries, and may also be enough to see some ratings downgrades.  Again, I’m really confused why the IMF is involved in this.  Why they can’t do bilateral agreements within the EU is bizarre, and if anything, we have learned that whenever there are unnecessary steps or seemingly bizarre steps, it hasn’t worked out well.

The ESM can have a “qualified majority” of 85% to make some emergency decisions.  Remember, the ESM needs to be approved still, and I would think some countries may be very reluctant to have “paid in capital” at risk that they can’t veto. (this clause is already qualified as subject to confirmation by the Finnish parliament).

They end it with “we welcome the measures taken by Italy, we also welcome the commitment of the new Greek government, supported by all parties, to fully implement its programme, as well as the significant progress achieved by Ireland and Portugal in implementing their programmes.”


Nothing really new here or unexpected or earth shattering or even approved.  The bilateral loan thing is new (subject to confirmation) but something about that seems too bizarre to get excited about.  If they have the EUR 200 billion lying around to lend, why use the IMF.

In the end I don’t see much here.  I cannot imagine we are going to get any new support from the ECB on the back of this.  I don’t think this is enough to get the rating agencies to take the countries off of watch.  Nothing has been really agreed to.  I’m not even sure that if everything is implemented it is enough to avoid some countries getting downgraded.

Since I started reading this, markets have improved a bit, but once again, as people read more and get past the headlines and the lipstick, this is very disappointing.  The UK has taken a further step away from the EU and may have opened the door for more countries to take that step over time since everything that was “agreed to” still needs to be ratified and implemented and defined.