Based on the European Union summit European banks are going to take 50 percent haircuts on their Greek debt ... the 440-billion euro European Financial Stability Fund will be leveraged up to 1 trillion in a couple of different ways (if they can find the money) ... and banks will be backstopped with around 100 billion Euros in additional capital –from where?
When you look at today’s action in the European Bond market, you see that real-money investors just aren't buying the happy talk. They apparently don't believe European politicians can afford to do what they say they can do.
Italian 10-year yields have surged up around the 6 per cent level again, closing in on the highs they set several weeks back. Spanish and Portuguese yields are also climbing. And the difference between yields on French and German debt just exploded to an all-time high. This is all happening after the European Central Bank started buying PIIGS bonds in a futile attempt to prop up their prices and after the outlines of the latest bailout schemes were leaked to the market.
Have they failed to come up with a bailout that actually works?
The peripheral European countries are virtually broke. The only way they can survive over the long term is if their debt burdens are slashed dramatically. At the same time, countries like Germany and France can't afford to spend hundreds of billions of Euros bailing out their neighbours without destroying their own balance sheets!
Plus, the circular nature of this bailout fund is downright ludicrous! You have countries like Italy and Spain borrowing money and putting those funds into the bailout fund ... so it can turn around and spend that money buying up those countries' bonds . . . Does that make sense to you?
Does that sound like a plan that can actually work over the long term?
Bond investors sure don't think so, because the yield on the EFSF's own outstanding bonds are climbing, a sign that the fund's AAA status is slowly coming into question.
Does all this sound that we have turned the corner?
Despite yesterday’s rally, to me it all suggests that we haven't seen the worst for shares.
