Oh No, There Won't Be EU Defaults?


Really?  Then what’s this?

The lenders being tested include 14 from Germany, six from Greece and four from the U.K., the Committee of European Banking Supervisors said in an e-mailed statement. EU banking regulators have told lenders that their planned stress tests may assume a loss of about 17 percent on Greek government debt and 3 percent on Spanish bonds, according to two people briefed on the talks.

Uh, a loss on government bonds held to maturity eh? 

That would only happen in the event of a default by both governments!

I have said repeatedly that there is no possibility that the previous trajectory on government spending could be maintained.  Various European officials, including Trichet, have repeatedly said there would be no “default” or “restructuring” of Greek debt.

Well, which is it?

And if the ECB has taken in all the Greek debt that the banks can puke up to it (it has), and the premise of the “stress tests” is that there will be a 17% haircut, how is the ECB going to handle the losses on those bonds?

There are two possibilities:

  1. Puke ’em back up to the banks and make them eat ’em (ha!)

  2. Swallow and monetize.

Neither is a good thing for the stability of the Euro zone.  The former trashes bank balance sheets, the latter trashes nations that weren’t involved in the overspending to a degree that their government debt was not impugned, such as Germany.

“This sounds like the softest option possible,” said Stephen Pope, London-based chief global equity strategist at Cantor Fitzgerald. “If that is the indicator how stringent the stress tests will be, then they aren’t worth too much.”

Oh.  So the definition of “stress” is kinda like our definition – let people lie, and try to suck them into the market to support bankrupt firms – in this case, bankrupt banks.

That often works – for a little while.  But it doesn’t work forever because solvency doesn’t suddenly appear from insolvency.  That’s sort of like trying to unscramble an egg.

Best-a-luck to the European banks….. and those who believe whatever BS comes from the so-called “stress tests.”

The Market-Ticker