Tuesday, September 27, 2011

Rosenberg: If This Leveraged European Plan is True, The Euro Has to Be A Gigantic Short Here; Desperation

From David Rosenberg today: "No doubt the market wants a solution. And it wants massive amounts of money thrown at the problem, regardless of who pays (so long as it's not the banks holding the debt!). But a proposal, as we have seen, is one thing — getting it in place and approved is another. How big is it? How flexible is it? What will it buy? What are the dilution risks for the recipient banks? Is it legal, specifically under the German Constitution? These are all important questions.

Not only that, but it is surreal actually that the markets could rally on a leak to a CNBC economics reporter on a plan that is still bereft of details (classic shoot first, ask questions later ... like the ballyhooed rumour of China stepping into the fray with a bailout package for Europe). So if this leak is true, Europe is going all in with leveraged bets that will water down the credit quality of both France and Germany. So what this means is that there will be no strong fiscal credits left (the euro has to be a gigantic short here) in the region".

"If my reading of history is accurate, the experience with SPVs hasn't been so successful. The blown opportunity to let Greece default, ring fence it, and have individual countries support their banks I think would yield much more desirable results, even if painful over the near-term. And there are more complications. So the EIB will take the beaten-up PIIGS bonds off the banks' balance sheets? But at what price? Par? Market? Somewhere in between? The banks don't take a haircut at all on this? And if this is all an attempt to prevent banks from taking a hit, I just can't see how German taxpayers are ever going to be willing to bailout Spanish banks. This all smacks of desperation to me and I think there would be a taxpayer revolt in both Germany and France over it".

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