Today the German Parliament approved the use of leverage without specifying an amount, thereby giving Chancellor Merkel an effective “blank check” on the amount.
In a nonbinding (on the ECB) resolution, the parliament seeks to halt ECB sovereign bond purchases. Unfortunately, the issue will be up to the ECB to decide, not Germany.
Given Italy has the ECB deck stacked, I would expect the purchases to continue in clear violation of the Maastricht Treaty.
Otherwise, the main news is talks are deadlocked with open issues regarding the size of the haircuts, whether or not the haircuts are voluntary, the amount of EFSF leverage, the size and timing of bank recapitalization efforts, and how much of the new Greek bonds will be insured.
That’s a lot of open issues.
Talks Suspended Following Deadlock
Bloomberg reports EU Talks With Banks on Greece Said Deadlocked
European Union talks with banks on bondholder losses as part of a second Greek rescue package are deadlocked and have been suspended, an EU official said.
The EU is seeking voluntary participation by banks, though a forced solution can’t be ruled out, the official said in Brussels today on condition of anonymity because the talks are private.
While policy makers and bankers are converging on a 50 percent writedown for Greece’s lenders, the disagreement centered on the specifics of the transaction. The dispute focused on how much of the risk of newly issued Greek bonds should be insured, the official said.
The Institute of International Finance, which lobbies on behalf of 450 financial firms, yesterday proposed investors make a larger writedown than the 40 percent the group offered last week, said two people with knowledge of the talks. The European Union is calling on investors to forfeit as much as 60 percent, a person familiar with the talks said last week.
To safeguard banks’ finances, EU leaders will set a deadline of June 30, 2012, for banks to have core capital reserves of 9 percent after writing down their holdings of sovereign debt, according to a draft statement prepared for the summit.
The reserves must be of the “highest quality,” according to the document obtained by Bloomberg News. Lenders are expected first to tap private sources to make up any capital shortfall and “should be subject to constraints regarding the distribution of dividends and bonus payments until the target has been attained.” The document doesn’t give an estimate of total capital EU banks must raise to comply with the rule.
Germany’s Parliament Approves EFSF Leverage
ForexLive reports Germany’s Lower House Of Parl Approves EFSF Leverage Models
Germany’s lower house of parliament, the Bundestag, on Wednesday approved with a large majority the broad outlines agreed to at the EMU leaders’ summit last weekend to enlarge the capacity of the European Financial Stability Facility (EFSF) without extending the guarantees underpinning the E440 billion fund.
Of the 596 parliamentarians present, 503 voted for the motion, 89 against it and four abstained.
In the motion, the Bundestag states that after the EFSF’s capacity has been enlarged “there is no necessity for the ECB to continue the secondary market program (SMP)” of bond purchases.
On Tuesday, Chancellor Angela Merkel said that Germany does not agree with a paragraph in the draft communique for today’s European summit that says the ECB is to continue its non-standard measures.
“Germany does not accept this sentence,” Merkel told reporters. “We are negotiating at the moment to get a statement from the European Central Bank on what it plans to do and then we will take a position on that.”
The Chancellor stressed that Germany “wants to see in the wording [of the communique] much more clearly what the European Central Bank wants to do…in order to prevent the misunderstanding that politics are expecting something of the ECB.”
Leverage Approved, Amount Open
Note the open issues in just those few paragraphs. There is no agreement on the amount of leverage, the method of leverage (the SIV model vs. the Insurance Model), or what the role of the ECB will be going forward.
It was the “blank check” provision that had the market giddy at the open, even though the greater the leverage, the quicker this mess is going to blow sky high.
Belgian PM Seeks Firepower Exceeding 1 Trillion Euros
Yahoo! Finance reports Belgian premier: bailout fund needs more than euro1bn
The prime minister of Belgium says the eurozone’s bailout fund should have a firepower of more than euro1 trillion ($1.4 trillion) to prevent the currency union’s debt crisis from spreading.
Yves Leterme said Tuesday “I think that effectively, it has to be able to intervene a good deal beyond euro1 trillion.”
He was heading into a crucial emergency summit of European leaders in Brussels.
At the summit, the leaders will seek to set up a complicated scheme to give the euro440 billion bailout fund more leverage, reduce Greece’s massive debt and strengthen banks across the continent.
Throwing Money with Leverage Never Solves Problems
Throwing money around with leverage has never in history permanently solved any problems but that does not stop Monetarist and Keynesian clown fools from trying.
Regardless, talks are so contentious now over resolution of all these issues they have been suspended. Bear in mind, these are easy issues compared to treaty changes that would allow ECB printing, eurobonds, fiscal unity, etc.
Whatever agreement is worked out (or forced upon Germany) is sure to cause serious resentment starting immediately. Moreover, the next set of meetings down the road on treaty changes (or still more leverage after this is quickly used up), will make this suspended meeting look like a birthday party in comparison.
Mike “Mish” Shedlock
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