by Peter Tchir, TF Market Advisors
Full of Sound and Fury, Signifying Nothing
It feels so long ago that we woke up to so many stories about Europe pushing risk around (it was less than 2 weeks ago). Spain is allegedly in talks to get the bailout. ESM is on track to launch in October and Greece may get some government help. I’d like to get excited, but I just can’t.
I find the attitude in Spain particularly troubling. The last minute solutions forced upon by market weakness, followed by interminable delays, is just not working. It may be helping the stock market but it isn’t helping the economy.
This summer, when everyone was talking about Euro 2012 – the soccer tournament, not the collapse, the Spanish government got a deal to recapitalize the banks. Rajoy promptly got on a plane and went to watch the football. Here we are, 3 months later (or is it 4), and nothing has been done. In theory, Bankia was supposed to get money in July. It didn’t. There is at least 1 MOU, 2 Committees, and 10 new acronyms, but no actual money. In the meantime, Spanish banks continue to bleed deposits on a daily basis.
The situation in Greece is would be comical if it wasn’t so bad. Every round of new lending is delayed. The ECB and EU insist on getting paid when anyone with even half a brain can see that the debt burden is not sustainable. Rather than the extend the maturity on the loans made so far, drop the coupon, or even reduce the notional, the Troika has done nothing. Eventually they will do something because Greece and the Euro are in no position for a Grexit, but by the time they do, Greece will have gone through at least 6 months of economic woe while the politicians bicker. Neo Nazi parties have gained popularity, in no small part because of this futile attempt to pretend that the “bailout” was anything other than secured lending that Greece couldn’t handle. And maybe I’m the only one who remembers, but the banks were supposed to be recapitalized in March, after PSI, what happened with that?
Will OMT be MIA?
Then there is OMT. The ECB maneuvered as best as it could, “within its mandate” to come up with a plan that could squeak by. It isn’t ideal by German standards. It isn’t ideal by Spanish standards, but it had a chance of working. The problem is that the longer they delay implementation, the less likelihood a real workable deal gets approved.
The hardliners in Spain don’t want a plan like Greece got and the current state of the markets gives them confidence. As politicians they are likely to interpret current Spanish bond yields as a sign that they have done something right, rather than understand they are only trading halfway decently because of expected ECB intervention.
The hardliners in Germany don’t want a plan like Greece either. At least they have that in common, but the Germans want to go the other direction. They want to provide less aid and more restrictions than Greece got. So every day of delay creates more risk that Draghi’s “meet in the middle plan” meets real opposition.
The French seem to have no opinion which is scary in its own right. How can the second largest country seem to not care? I’m not sure I liked Sarkozy’s efforts, but Hollande seems invisible and completely oblivious to any risk to his own country’s credit.
The Finns continue to voice the most opposition, which is nice, but in all honesty, they are small enough, no one will care that much in the end, and when you think of a map of “Europe” most people leave out Finland anyways. They remain one of my favorites for being first to leave.
So, OMT, while likely to get done, might not. While meant to be long term, it may have so many conditions that nothing happens. Worse than that, even if the countries get some money, there is almost no indication that they will then focus on growth and coming up with a sustainable long term plan.
Is a Bird in the Hand Worth More than 2 in the Bush?
It doesn’t really matter if the birds are worm infested pigeons.
I am growing increasingly concerned that the OMT plan doesn’t take off. That Spanish bank bailouts don’t occur. I thought it was relatively low risk a month ago, and I’d now put it is a medium level risk.
But even if those events occur, what will happen? We will get a brief pop on the implementation, but since we have had so many rallies on the ECB plan, it isn’t likely to be much. We may even see some diffusion index readings that look good (it is almost physically impossible for each month to be worse than the prior month). That would add to stock gains if it happens, but the reality I fear, and now think is most likely is that Europe will squander the opportunity.
Rather than rushing to implement bank recapitalizations, take advantage of the cheap funding to do some balance sheet repair, and to implement some growth projects to kick-start the economy, they will bicker and squabble. They will argue over terms. They will wonder if they will pass the next inspection day. They will debate how to recap banks, and the entire efforts will have gone to naught.
Even in the U.S. it took a long time (and many 100′s of S&P points) before we hit bottom from the TARP announcement, and that was with intensive government intervention at all levels. I had been thinking that Europe was in March 2009, but I am growing more concerned by the day that it is just another October 2007 moment.
I am solidly bearish, across asset classes. The situation in Europe seems to be getting worse rather than better, and it is because of their inaction. Their willingness to put off until tomorrow, what could be done today is a real concern, and I don’t see that attitude changing. I thought it might, but I now don’t.
Next up, looking back at market performance during QE’s and trying to determine if QE drove the market or other co-incident factors were really what pushed the markets along. That is critical for any bear case here.
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