Diary of a Financier

The Euro’s Excellent Adventure at Either a Headway or Headwall

In Economics on Wed 26 Oct 2011 at 08:51

Are we there yet?  Almost.

Emerging from a Eurozone summit back on July 21, French President Nicholas Sarkozy promised the world that he and his fellow leaders had devised a solution which marked a “historic turning point.”  Three months and thirteen such summits later, European leaders have disclosed no such remedies.

After deferring their reckoning past the last two weekends, the EU-27 & EU-17 have finally lassoed all their heads-of-state for a symposium of epic proportions.  We should have some answers this evening, else the Eurocrats suffer a vote of no-confidence at the hands of capital markets. (They should be so lucky as to face the fate of an incompetent American Congress.)

Nomura sets the stage with a terrific synopsis of today’s agenda:

We expect a headline heavy day with Europe driving market sentiment.

Following the conflicting announcements yesterday, it appears that both the EU-27 (starts at 13:00 EST) and the EU-17 (starts at 14:30 EST) Heads of State meetings are going ahead today, even though a corresponding meeting of Finance Ministers has been deferred until afterwards.

Markets will be looking for a broad outline on the plan for (i) the Greek PSI, (ii) bank recapitalisation and most importantly (iii) the leveraging for the EFSF. The small print is most likely to come later in the subsequent ECOFIN (the group of Finance Ministers) meetings.

Latest reports suggest haircuts on Greek debt of 40-60% (according to the Greek newspaper Ekathimerini for every €100, investors will get €15 in cash and €35 in 30yr bonds with a 6% voucher) and bank recapitalisation of around €108bn.

On leveraging the EFSF, we think markets expect a combination of the following (i) the use of EFSF funds to offer partial protection of the peripheral issues in the form of insurance certificates and (ii) the creation of a special purpose investment vehicle (SPIV) sponsored by private and public sector external funds (e.g. sovereign wealth funds) to support market purchases.

However, each of these proposals has flaws, and while some agreement could trigger a relief rally, it is likely to be a short-lived one in our view.

I recall the words of Ralph Waldo Emerson, “it is easy in the world to live after the world’s opinions; it is easy in solitude to live after your own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.”

–Romeo (hattip Business Insider & The Big Picture)

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