Many were disappointed that the EU Summit didn’t conclude with a hard number backstop for the ‘zone’s sovereign debt rolling over next year. We believe if you scratch the surface the bazooka is there.
The EU President, Herman Van Rompuy, stated in the wee hours of this morning,
As regards private-sector involvement, we have made a major change in our doctrine: from now on we will strictly adhere to the IMF principles and doctrines,” and added “or, to put it more bluntly, our first approach to PSI, which had a very negative effect on debt markets is now officially over.
We read this as an unequivocal backstop even if the official statement is not explicit.
If their PSI approach is over, that is bailing in the banks and bondholders who hold the questionable sovereign debt , the full blown bailouts, if needed, will continue. By explicitly stating PSI is over, the EU is implying the big bazooka will be there to fund any shortfalls in rolling over bond maturities.
The earthquake and severe aftershocks that has shaken even the German banking system and has increased global systemic risk has put the fear of God in the EU leaders. They now know what’s at stake but a wholesale bailout of the banks and bondholders is a hard sell to their domestic constituents and parliaments. Ditto for debt monetization and the German public.
The EU may have also learned an important lesson that the markets will surely test any number they put on the bazooka. The fiscal pact is a step in the right direction and clears the way for ECB bazooka if needed, in our opinion. Furthermore, many analysts were very skeptical after the details were released, yet the markets are up and sovereign spreads are slightly tighter. This is a good sign.
The structural problems are far from solved and the markets will be back to challenge the Eurozone’s resolve, but it does appear the fiscal pact has provided the fig leaf for some short-term relief, and, ironically may have camouflaged the bazooka, if you don’t look carefully. The markets may be up today because the numbers don’t add up.
Yes, Virginia, there just may be a Santa Claus rally this year and nobody believes it. We are fully aware of the S&P Grinch who could downgrade these countries next week. Should they?
A close above 1263.32, the 200-day SMA, on the S&P500 could set off the rampfest into year-end that we’re expecting. We’re mainly traders, can always could be wrong, and always use stops. Stay tuned.
(click here if chart is not observable)
Global Macro Monitor 
i dont understand this post. the IMF approach to PSI is on a case by case basis. there are plenty of cases where the IMF leads debt write-downs. the document says there wont be mandatory write-downs, not that there will NEVER be write-downs. this is a france-german compromise and the door remains wide open for debt restructurings. this isnt even close to a bazooka – its sarkozy propaganda. lets revist this post when portugal, spain, italy, et al miss their targets next year on horrible austerity led GDP numbers. i doubt the northern europeans will be in the mood to dump in more money when their economy are in recession.
Thanks for the post, DS… Markets are all about perception moving to reality. The dominant perception is that if the EU Summit concluded with no big bazooka, markets would crash. No bazooka, no crash. But it paved the way for one. Let’s revisit this at year-end and see if the S&P500 is higher or lower. That’s are test. Next year, you could be right.
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LOOK AT THE EXCHANGE RATE OF THE EURO …here :
http://finance.yahoo.com/echarts?s=EURUSD%3DX+Interactive#chart2:symbol=eurusd=x;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
And besides of having been declared imminent DEAD by ANGLOSAXONS many times .. the EURO has kept its value remarkably well .. one should say
TRY .. based on exchange rates( and prevailing interst-rates ) to make a CALCULATION.. HOW would a EUROPEAN or almost any other national outside the US have fared had he 10 years ago purchased for 100.000 USD 10 Year US Treasuries ?
And try to calculate how a US CITICEN would have fared had he purchased for 100.000 USD ..European Bonds ( except greek ofc )
in the first scenario the foreigner would have been standing with approx 100.000 EURO having lent approx 112.000 EURO to the US Gouvernment .. 10 Years ago… a LOSS of approx 12.000 EURO
… approx 16.000 USD ..MINUS .. after 10 years
in the second scenario the SMART US Citicen would have been standing with approx 225.000 USD having lent 100.000 USD to EUROPEAN Gouvernments . He would have more than DOUBLED his Capital !
CHECK IT OUT .. If You doubt.. use the exchange rates.. and use prevailing interest rates .. where Eurpean Rates have been a couple of percent HIGHER than US rates.. for all the time
When considering the relentless US APPETITE for BORROWING and MONEY PRINTING .and NO END IN SIGHT FOR THAT … .it is a solid BET .. that the next 10 Years .. could be as the preceeding 10 Years
SO .. where do YOU think … Your hard earned savings are SAFER ?
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