Sunday, December 11, 2011

EU : In need of Life support

The big EU summit has happened, and like all the prior summit this one too comes with a lot of hot air.

The solution involving fiscal discipline for EU nations is good and noble and something that had become absolutely necessary. However, that is a very longer term solution and something where even the agreements are expected to signed only in the first half of 2012 !

And like all the prior EU solutions, there is very likely to be slip between the cup and the lip.

EU is like a patient in ICU – it needs life support (read liquidity injections) immediately, and lifestyle changes (fiscal discipline) in the longer term.

Just look at the demand for funds,i.e the amounts coming in for rollover (rollover just means that the governments and banks will take a new loan just to pay the old one).

  • Euro 200 Billion of EU sovereign debt due for rollover during Dec 2011
  • More than 2 Trillion dollars due for rollover in 2012, half of which is Euro government debt and the remaining is Bank debt
  • Roughly half trillion dollars of debt will become due every quarter in 2012.

Now look at the supply of funds

  • Pretty much nobody wants to loan to EU governments and EU banks. (Spanish and Italian yields nearly doubled over past one year !). Japan is reported to have sold off all its EU bondholding
  • ECB is not ready to act as a lender of last resort
  • China is indicating that It might help the EU, but nothing committed anything yet
  • The Euro 200 B of new funding mentioned in EU summit is still hot air.
  • The Euro 500 B of EFSF would fall woefully short and has just some Euro 50 B of committed funds till now.

What markets are expecting are a big ‘bazooka’ somebody to provide the kind  of backstop that Obama and Geithner did in 2008 and 2009 committing Trillions of dollars towards funding, guarantees and recovery programs.