The Beginning Of The European Endgame
Peter Tchir of TF Market Advisors
I think this is one of the most important bits of news on the day. This and the fact that the Dutch finally said something – and it wasn’t positive.
I have been arguing that the solutions create contagion rather than prevent it. I’ve also argued that the ECB and EFSF and to some extent the IMF are all the same pools of money.
Now that Europe has actually tried to do some calculations, which it is apparent that up until last week, they hadn’t done, they are coming to the same conclusion.
On Friday the “haircuts” on Greece get serious. No more bogus high coupon principal protected notes – but real notional reductions of 50 per cent or more.
I believe the ECB has a portfolio of 55 billion of Greek debt. If average price was 80 then that is a 16.5 billion actual loss.
ECB, unlike our beloved FED, doesn’t want to just print money so they make a capital call on their members. Yes, the same members that back the EFSF.
How many of those members even remembered the ECB can call for additional capital (it’s why they are so happy to employ the double down don’t frown trading strategy).
The terms of ECB capital calls are worse than EFSF because they are joint and several. If countries don’t meet their obligations they don’t go away, they get passed to another country.
So as ECB loads up on PIIGS debt and losses or haircuts would be paid for by the non problem countries – in addition to their EFSF obligations.
Germany maybe has learned not to overextend and is scared to pile this (previously ignored) liability on top of it’s EFSF guarantees. At least EFSF is something they have control over.
France I think was planning on loading up the ECB with so much debt they would just capitulate and print money.