How many Euro-salvation plans have been put forth by now? More than fifty? More than one hundred? I am not sure, but I can tell you that the latest plan will fail too, because Europe’s politicians remain one or two steps behind the markets. Today the Euro folks put forth a plan to leverage bailout funds from its European Financial Stability Fund (EFSF) by appealing to private investors with a guarantee on newly issued bonds by troubled countries – but the guarantee comes from the Eurozone. Apparently, officials have not recognized that investors are selling Euro paper like there’s no tomorrow. Who’s going to hop up to buy this new paper if they won’t buy the deeply discounted paper already in the market? At least this plan was prefaced with a comment from “a person familiar with the matter” that the amounts discussed would not be enough to save all the troubled countries.
Attention has turned to the IMF and the ECB, with finance ministers now saying that money from these organizations will be necessary to turn back this crisis. Why is this a surprise? We made the point weeks ago that there is not enough money to save all the derelicts in Europe, unless countries who believe they have not been involved in this crisis – China, the US (read “IMF”) – chip in. With every country husbanding its own problems, no one wants to chip in.
And while Euro fiscal integration is a great idea, their markets will fall apart before it can work. It took the US decades to develop a truly integrated federal/state system, and given the way things have been going, we doubt the Euro folks can come up with an agreement about where to go to lunch next, let alone how an interlaced fiscal system would work.
We remain convinced that defaults are necessary, and nearer. In the Spring of next year, several European countries will need to roll over debt. Perhaps someone will finally default, providing a road map for investors, but that’s probably just wishful thinking. More likely, we’ll be stuck with the same IV drip we’ve been experiencing for months now: a little help here and there, but only enough to prolong the pain.