Europe's grand gamble risks failure without ECB
by Ambrose Evans-Pritchard - Telegraph

Europe's "Grand Plan" to save monetary union is, in broad terms, a settled matter, even if the usual theatrics were still dragging on into the small hours of the Belgian night.

Whether it proves any more successful than past efforts over the past two years is far from clear. The package is a huge gamble. If it goes wrong, it may accelerate contagion to core Europe, hastening the denouement so feared by EU leaders.

The EU's €440bn bail-out fund (EFSF) will be leveraged "several fold" – perhaps to €1 trillion – chiefly by insuring the first 20pc loss of new bonds by Italy, Spain and other debtors. This creates a two-tier market, instantly downgrading old debt to lower status.

The plan will "probably" be buttressed by an off-books fund that uses EFSF seed money to rope in the International Monetary Fund, China, Japan and Russia.

French President Nicolas Sarkozy said he would call his Chinese counter-part Hu Jintao on Thursday to garner support. Beijing will almost certainly impose terms, renewing its demand for open-door access for Chinese state firms investing in EU industry and for an end to Europe's veto on "full market status" for China under global trade laws.

First loss is a form of structured credit all too like US sub-prime debt. It concentrates risk. Those holding these tranches of debt take the hit, in this case creditor states.

The question is whether this will damage the standing of core EMU states, pushing the most vulnerable over the edge. France is already battling to keep its AAA rating. Standard & Poor's has warned that France and a string of others risk a downgrade of up to two notches if Euroland tips back into recession, as many fear. "The larger the EFSF, the faster the dominos fall," said Daniel Gross from the Centre for European Policy Studies (CEPS).

The risk is that the leverage scheme will accelerate contagion to the core. Jacques Cailloux, from RBS, said the plan is "very dangerous" unless the European Central Bank (ECB) is fully mobilised to back-stop the system.

Chancellor Angela Merkel again ruled out any such a role for the ECB in her Bundestag speech on Wednesday. She offered no hint of "fiscal union" beyond stricter policing of national budgets. There will be no move towards debt pooling, an EU treasury or fiscal transfers. "Breaches of stability culture must be punished more severely," she said.

Once again she warned that if the euro fails, Europe fails. "No one should think that a further half-century of peace and prosperity is assured. It isn't. We have a historic duty to defend and protect the unification of Europe that our forebears achieved after centuries of hatred and bloodshed."

She was brought back to earth by a volley of accusations that she had misled the Bundestag about the true implications of the EFSF. "You came here to say there would be no leverage, not three years ago, not three months ago, but three weeks ago. You denied everything," said Frank-Walter Steinmeier, the Social Democrat leader. Green leader Jürgen Trittin asked: "You said there would be no leverage. Why are you shying away from telling the people the truth?"

Mrs Merkel won the vote handily but Bundestag ferment over recent weeks and revolt in parts of her coalition suggests Germany is nearing bail-out exhaustion.

The summit has sketched bigger haircut for banks and private holders of Greece's €346bn debt, though it may not prove to be Mrs Merkel's 60pc target. The banking lobby has proposed a last-minute compromise to head off a hard default. So long as the deal is "voluntary", it does not trigger credit default swaps and is easier to control.

Such debt relief may not be enough to pull Greece out of its downward spiral. A leaked report by "troika" inspectors suggested such a plan would leave public debt at 130pc of GDP in 2020. Greece faces a politically poisonous decade of slump without a viable outcome at the end.

Investors will expect fresh haircuts elsewhere once the precedent is set, despite an EU pledge this will not happen. They have already burned their fingers once believing such a pledge on Greece. The risk is that investors shun all Club Med debt, knowing that the underlying North-South gap behind the crisis has not be solved by the summit package and debt-deflation policies are pushing Portugal, Italy and Spain into deeper trouble.

Europe's banks will be recapitalised for €100bn, first by private funds, then state funds, and only from the EFSF as a last resort. This falls well short of the €200bn figure first mooted by the IMF. Banks will have until next June to meet a core Tier 1 capital ratio of 9pc.

The draft said banks must "enhance capital" and "avoid a credit crunch" at the same time, a contradiction in terms. Lenders have already begun to shrink their balance sheets rather than dilute capital. The danger is a brutal contraction of lending, perhaps by €5 trillion, according to RBS. The view in the markets is that only the ECB has the credible lending power to contain the crisis, and on that score the summit did not advance one millimetre.

__________________
"Patriotism means being loyal to your country all the time and to its government when it deserves it."-- Mark Twain

"Inter arma silent Musae"--when the weapons speak, the muses fall silent.

An't nanum hearm deth, doth hwaet ye willath.

It is forbidden to kill; therefore all murderers are punished
unless they kill in large numbers and to the sound of trumpets. -Voltaire

Economic Left/Right: -3.88
Authoritarian/Libertarian: -4.36

Gold Rallies During “Risk-On” Trading

By Eric Fry
10/27/11 Laguna Beach, California – Why did the Dow Jones Industrial Average soar 162 points yesterday? And why is it rocketing another 300 points this morning?
Was it because Consumer Confidence for October plummeted from 46.0 to 39.8…or was it because the number of Americans who signed contracts to buy homes fell for the third straight month?
Neither, according to the newswires. The market is rallying because the deadlocked euro rescue plan became UN-deadlocked. Adding to the euphoria was a rumor that the Chinese would buy some of the European debt that would finance the rescue.
Bravo for that.


“After more than eight hours of hard-nosed talks between European heads of state, the International Monetary Fund and bankers,” the Associated Press reports, “the [rescue] deal foresees a recapitalization of hard-hit European lenders and a leveraging of the bloc’s rescue fund to give it firepower of 1.0 trillion euros ($1.4 trillion).”
This news kicked off a monstrous rally in Europe that vaulted most of the major stock indices 5% to 6% higher. We Yankees joined the celebration by bidding our homegrown stocks higher as well.


So for the moment, investing is fun again. But as your editor’s mother used to say, “It’s all fun and games until someone gets hurt.”


Today’s knee-jerk rally is fun indeed. But we’ve seen this show before…or at least a version of it.


Today’s European summit was the 14th such powwow in the last 21 months. And nearly all of them produced some kind of “breakthrough agreement” that thrilled investors for a day or two. But each of these relief rallies proved fleeting, as the “breakthroughs” yielded to deadlocks and bickering about the details of the supposed breakthrough.
The process of unifying 17 countries — while also unifying a variety of disgruntled, self-interested constituents inside each of those 17 countries — has made the rescue process a little bit like herding cats — or more like herding cats, chimpanzees, rhinos and rattlesnakes…all at the same time.


This time around may be different…but it may not. For starters, the breakthrough arrived only after German Chancellor Angela and French President Nicolas Sarkozy coerced European banks into accepting a “voluntary” 50% haircut on their Greek bond positions.


Around midnight in Europe, the European Banks’ representative at the summit, Charles Dallara, fired off an email stating categorically, “There is no agreement on any element of a deal.” But shortly thereafter, according to the AP, “Sarkozy said the bankers were escorted in ‘not to negotiate, but to inform them on decisions taken by the 17 and then they themselves went on to think and work on it.’ Luxembourg Prime Minister Jean-Claude Juncker said the banks’ resistance was broken by a threat ‘to move toward a scenario of total insolvency of Greece, which would have cost states a lot of money and which would have ruined the banks.’


Armed with this “voluntary” agreement, the rescue plan was good to go…and the markets were sprung to rally. So for now, it’s all smiles and high-fives.


Whatever the actual prospects for an enduring rescue package — “enduring” being something longer than a week — investors are growing tired of fear. So they are shifting into “risk-on” mode. Treasuries are selling off; the dollar is dropping; stocks are rallying. This is classic “risk-on” trading action — meaning that market participants are becoming slightly less skittish and slightly more eager to take some chances.
But here’s a curious data point: During the most recent phase of the risk-on trade, gold has also rallied. In so doing, gold has broken ranks with its “risk-off” companion: Treasury bonds.


Ever since the credit crisis of 2008, investors have flocked to both gold and Treasurys whenever macroeconomic conditions started looking a little dicey — i.e., “risk off.” As such, both assets tended to rise or fall at the same time. But during the last few weeks, when the risk-on trade was gaining traction once again, gold also rallied. Treasurys did not. Something has changed here. We’re not sure what it is but, as usual, we have a guess.
First, a little background…


Throughout most of the last four decades, the price of gold and the price of Treasurys traded inversely from one another. Whenever gold rallied, Treasurys fell, and vice versa. This “inverse correlation” as professionals call it, stemmed from the fact that T-bonds tended to thrive during deflationary periods, while gold tended to thrive during inflationary periods.


But after the credit crisis of 2008 — when neither deflation nor inflation were the anxiety du jour — these two asset classes started tracking each other much more closely than usual. They became “flight-to-safety” assets, more than anything else. While very dissimilar, both assets satisfied a particular appetite for risk aversion — much the same way that Eggs Benedict and a bran muffin, though different, both satisfy an appetite for breakfast.


So what does the recent gold rally mean, given the fact that Treasurys are falling? Perhaps it means that investors are starting to brace for a different sort of risk. Perhaps it means that investors are beginning to anticipate a sustained inflationary response to the euro crisis — whether or not that response succeeds — or just a crisis.
In other words, either the governments of Europe rescue the euro with a massive inflationary effort or they fail, in which case the euro breaks apart and the most reliable money around would becomes the ancient money: gold.
That’s what you call, “Heads, I win; tails, you lose.”

__________________
"Patriotism means being loyal to your country all the time and to its government when it deserves it."-- Mark Twain

"Inter arma silent Musae"--when the weapons speak, the muses fall silent.

An't nanum hearm deth, doth hwaet ye willath.

It is forbidden to kill; therefore all murderers are punished
unless they kill in large numbers and to the sound of trumpets. -Voltaire

Economic Left/Right: -3.88
Authoritarian/Libertarian: -4.36

A 'kidnapping’, a car chase and an underwhelming EU summit - Telegraph

Quote:

In the early hours of Thursday, Belgian police finally lifted the security cordon around the summit venue after eurozone leaders headed for their hotels following 10 hours of talks. Just outside Brussels, police officers were having a more eventful night when a car tried to evade a traffic stop in the Orne-Thyle area in the south-east of the city. They gave chase and after a 150mph pursuit on the E411 motorway the driver was apprehended and, once breathalysed, found to be drunk. Subsequent enquiries discovered the unnamed motorist was a eurocrat, an EU civil servant. "Someone either got drunk celebrating the summit deal or had a few too many to try and make the time pass more quickly," said a Brussels source. Summit talks, scheduled to last two hours, had stalled over an EU demand that private banks take 50pc haircuts on Greek debt. At midnight there was the real prospect the negotiations would break down, threatening a market meltdown in the morning. But behind the scenes, negotiations earlier that afternoon in a Brussels office across the road from the summit venue between Vittorio Grilli, a senior EU official, and Charles Dallara, the director of the Institute of International Finance (IIF), had apparently taken a slightly sinister turn. "Dallara was playing hardball and walked out at one point," said a diplomat. "We thought it might be a good idea to invite him over to the summit venue rather than let him go home. We told him that it was so he could be consulted, but in reality we wanted him in our clutches. It wasn't really kidnapping – only nearly." As the talks dragged on, Mr Dallara continued to insist "there is no agreement on any element" of a haircut. This triggered further "hostage" tactics and the IIF boss was taken off to the EU president's office. "We put him in Herman Van Rompuy's office and mobbed up on him with Angela Merkel, Nicolas Sarkozy and Christine Lagarde," said the diplomat. "He had nowhere to go. It might have taken a few hours but he cracked. It wasn't an offer he could refuse." By 3am, the deal was done but the hundreds of journalists sat by their computers were not to know this as the clock kept on ticking with no announcements. "Help. Approx. 500 journalists currently taken hostage by European leaders," tweeted Stefan De Vries, a Dutch journalist for BNR Nieuwsradio at 3.38am. At just past 4am, the summit ended and within minutes, amid contradictory press statements, it became clear a deal billed as a grand bargain to save the eurozone might not live up to the hype. Geoff Meade, Europe editor of the Press Association and a veteran of 32 years of EU summits, remarked: "It was a long wait for an underwhelming result. We all know this piecemeal deal won't work for long and we'll be back for another summit. Not a reassuring prospect."

In theory I'd totally back chucking Greece off the back of the sledge. In practice I suspect that it's a "we must all hang together or assuredly we will all hang seperately" deal. Paradoxically getting rid of Greece would be a kind of signal to everyone else to give up on compromise.

__________________
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Europe kowtows to the Chinese dragon – Telegraph Blogs

Quote:

Few things could be more bizarre, or humiliating, than the sight of eurozone political leaders kowtowing to the Chinese in the hope that a few crumbs might fall from the dragon's table to help prop up the newly enhanced European Financial Stability Facility. The Chinese threaten to extract a high price; security for their money, open access to European markets and freedom to buy advanced technologies (and there I was thinking they'd already stolen it all). They might also demand, though I have seen no evidence for this in published comments, that Europeans cease all open criticism of Chinese mercantilism, human rights abuse and anything else that tends to concern us over China's ever onwards and upwards rise to superpower status. A few facts and figures. At $12.2 trillion in 2010, the eurozone's gross domestic product is more than twice as big as that of China and its income per capita is more than four times as high. And yet there's the eurozone's emissory, Klaus Regling, going cap in hand begging for handouts. How can a region be so rich and yet apparently so poor at the time? It's a paradox which goes to the heart of the problem of global imbalances. What in effect is happening is that the Chinese earn far more than they spend. The consequent surplus in earnings and production is saved and exported. It's a funny old world that has some of the poorest people in the world lending to some of the richest to buy the goods they make but cannot themselves afford to buy, but that's the way it is. Whatever concessions the Chinese manage to extract from the likes of Nicolas Sarkozy, who's been on the phone to President Hu Jintao, they would be well advised to leave well alone. As the investment guru Jim Rogers said on BBC radio's Today programme, the EFSF is essentially a scam. It might buy a little time, but it cannot solve the eurozone's underlying problems. The bit of it the Europeans want the Chinese to invest in is a "special purpose vehicle" – appropriately known as a SPIV – which is essentially a piece of financial engineering to make the fund bigger than it really is. It's a confidence trick. It's also a surrogate for what the eurozone should really be doing to add liquidity to distressed peripheral nation bond markets – which is to give the European Central Bank the freedom to act as a central bank is meant to in its lender of last resort capacity and print money to ease the crisis (see this excellent piece by the economist Paul De Grauwe). Only the Germans won't allow it. They'd prefer to dance with the Chinese dragon than do the obvious. At best, they are going to end up badly singed.

__________________
Standard disclaimer: the disgusting statements contained in this post are the views of the poster, and unless specified do not represent the views of the moderators or the site's owners.

借尸还魂

__________________
Standard disclaimer: the disgusting statements contained in this post are the views of the poster, and unless specified do not represent the views of the moderators or the site's owners.

__________________
Standard disclaimer: the disgusting statements contained in this post are the views of the poster, and unless specified do not represent the views of the moderators or the site's owners.

Things That Make You Go Hmmm.... Such As An Empty Box Filled With Promises Of Money, And Europe's Soup Nazi

Submitted by Tyler Durden on 10/29/2011 23:53 -0400

Things That Make You Go Hmmm.... Such As An Empty Box Filled With Promises Of Money, And Europe's Soup Nazi | ZeroHedge

Some amusing weekend observations from TTMYGH's Grant Williams:

"The EFSF is basically an empty box filled with promises of money - many of them from the very people who are most likely to need to borrow that same money. Should they need to borrow the money, they won’t be able to make good on their promises so there will be less money for them to borrow. Now the brain trust running Europe have decided, in their collective wisdom, to apply leverage to the non-existent money in the empty box that they have yet to actually borrow, so it can backstop even more of the hundreds of billions of Euros of sovereign debt issued by countries whose finances are in such dire straits that they either require the kind of robust growth that is hardly likely to materialize any time soon or the forgiveness by the holders of that debt of a large part of it....

Of course, granting Greece the package they did this past week, the Eurocrats have rather incredibly found yet another corner into which to back themselves. You can hardly champion the ‘One Europe’ manifesto on the one hand but then, as the next country lines up at the counter, declare “No soup for you!” - but that seems to be the ‘plan’ at this stage."

Hmmm October 30 2011

__________________
"Patriotism means being loyal to your country all the time and to its government when it deserves it."-- Mark Twain

"Inter arma silent Musae"--when the weapons speak, the muses fall silent.

An't nanum hearm deth, doth hwaet ye willath.

It is forbidden to kill; therefore all murderers are punished
unless they kill in large numbers and to the sound of trumpets. -Voltaire

Economic Left/Right: -3.88
Authoritarian/Libertarian: -4.36

Full Barroso, Van Rompuy Letter Begging For G-20 Money


Submitted by Tyler Durden on 10/30/2011 11:06 -0400

Full Barroso, Van Rompuy Letter Begging For G-20 Money | ZeroHedge

With the question of who will fund the majority of the EFSF, or the €560 billion of the €1 trillion, still outstanding, and with China no longer the slam dunk "dumb money" everyone had expected it to be, Europe turns to the next biggest beneficiary of maintaining the ponzi - the entire G20 itself.

Below is the letter just sent out from the two Eurostooges in which they make it all too clear that money talks, or Europe walks. "We will implement these measures rigorously and in a timely manner, and we are confident that they will contribute to the swift resolution of the crisis. However, whilst we in Europe will play our part, this cannot alone ensure global recovery and rebalanced growth. There is a continued need for joint action by all G20 partners in a spirit of common responsibility and common purpose." Too bad Bernie Madoff went to jail before he could send out comparable letters to his own investors who by implication would have become "voluntary partners" with a gun to their head.

Full letter:

Joint letter of European Commission President José Manuel Barroso and European Council President Herman Van Rompuy to their G20 partners ahead of the G20 Summit in Cannes (France), 3-4 November 2011

Last night, on 29 October, European Commission President José Manuel Barroso and European Council President Herman Van Rompuy have sent a letter to their G20 partners in order to summarise and explain Europe's comprehensive crisis response ahead of the upcoming G20 summit in Cannes on 3-4 November 2011. The letter states: "We will implement these measures rigorously and in a timely manner, and we are confident that they will contribute to the swift resolution of the crisis. However, whilst we in Europe will play our part, this cannot alone ensure global recovery and rebalanced growth. There is a continued need for joint action by all G20 partners in a spirit of common responsibility and common purpose." They call in this context for a renewed collective G20 spirit. The two Presidents also outline the EU's priorities for the G20 summit and stress that the Union's overall objective would be "to help restore global confidence, support sustainable growth and job creation, and maintain financial stability."

Full text of the letter:

"Dear G20 Colleagues,

The decisions we have taken in our G20 Summits to date have been crucial in steering us through the global financial and economic crisis. We have acted firmly and decisively with a sense of urgency and common purpose. In the current economic situation, with world growth slowing and the global economic outlook deteriorating, we need to renew this collective G20 spirit. So our overall objectives for the Cannes G20 Summit should be to help restore global confidence, support sustainable growth and job creation, and maintain financial stability.

Within the EU, we are taking all necessary steps to ensure the stability and growth of the euro area. The euro is at the core of our European project. On 26 October we agreed on a comprehensive set of measures to restore confidence and address the current tensions in financial markets. These measures include:

*

a sustainable solution for Greece. Our agreement puts Greece on track to reach a public debt ratio of 120 percent of GDP in 2020. The solution includes a voluntary agreement for a nominal discount of 50 percent of Greek debt held by private investors. This will ease market pressure on Greece and allow the country to continue its programme of reforms. We aim at concluding work on a second financial assistance programme by the end of the year.
*

a significant further strengthening of the resources of the European Financial Stability Facility (EFSF), which depending on the specific set-up is expected to leverage up to around 1 trillion euros. The subsequent ratification of the new European Stability Mechanism (ESM) Treaty will provide the euro area with a permanent instrument to support financial stability.
*

a coordinated plan to reinforce Europe's banking system. We approved a coordinated scheme to recapitalise banks across Europe and we are working to design an approach for medium and long-term funding of banks. Banks will be required to temporarily increase the ratio of highest quality capital to 9% after taking account of sovereign debt exposures. Supervisors will ensure that banks' plans for recapitalization do not lead to excessive deleveraging or undue pressure on sovereign debt markets.
*

determined action to ensure sustainable public finances and enhance growth. Euro area Member States that are experiencing tensions in sovereign debt markets will make a particular effort in terms of fiscal consolidation and structural reforms and we will accelerate our growth strategy notably by using the full potential of our single market of 500 million citizens.
*

strengthening euro area governance. We agreed to put in place a set of concrete measures to strengthen economic and fiscal coordination and surveillance within the euro area, going above and beyond the recently adopted package on economic governance.

We will implement these measures rigorously and in a timely manner, and we are confident that they will contribute to the swift resolution of the crisis. However, whilst we in Europe will play our part, this cannot alone ensure global recovery and rebalanced growth. There is a continued need for joint action by all G20 partners in a spirit of common responsibility and common purpose.

In Cannes we should aim for ambitious outcomes on eight priorities:

1) Restoring growth and tackling global macroeconomic imbalances. The EU's main contribution to Cannes is the above-mentioned package to ensure the stability of the euro area. But more needs to be done at the global level. Many of the distortions underlying the large pre-crisis imbalances are still to be addressed – including undervalued exchange rates in key emerging surplus economies, and insufficient domestic savings in some advanced economies. In Cannes, we need to adopt an ambitious Action Plan to address the short-term vulnerabilities the global economy is facing, and to strengthen and rebalance global growth over the medium-term. The discussion of the various risks to the global economy must be balanced, and all countries must take action. Given the ongoing tensions in global markets, we also need to continue to ensure sufficient resources for the International Monetary Fund to address crisis situations in a coordinated and comprehensive manner.

2) Making tangible progress on implementing the financial market reform agenda. Our internationally agreed financial market reforms must be implemented in full while ensuring a level playing field among all G20 partners. The EU is honouring its G20 commitments and has already launched the legal process for implementing the Basel III agreement. We look to all other G20 partners to deliver in this area and together we should accelerate work to advance on other agreed reforms, such as Over-The-Counter and commodity derivatives – where the EU is already moving – and bank crisis prevention and resolution on which proposals are currently being finalised. And further work is needed to extend the framework agreed on Global Systemically Important Banks to all Systemically Important Financial Institutions, effectively regulate shadow banking, and quickly move towards a single set of high quality globally accepted accounting standards. It is also time to make the necessary changes to the governance of the Financial Stability Board so as to underpin its monitoring function. At Cannes we should also make a clear commitment in support of the Global Forum's work on non-cooperative jurisdictions. The European Commission has recently presented a legislative proposal for a financial transaction tax in the EU. The introduction of a global financial transaction tax should be explored and developed further.

3) Making the International Monetary System more resilient. The current international monetary system, despite certain identified shortcomings, has on balance more than proved its worth in terms of global economic and financial integration. But there is scope for improvement and reform to strengthen economic surveillance by the International Monetary Fund. We should agree principles to guide G20 members in the management of capital flows and a roadmap for broadening the IMF Special Drawing Rights to facilitate the internationalisation of key emerging market currencies. Improving the cooperation between Regional Financing Arrangements and the IMF developing the Fund's toolkit to support countries during systemic stress are among the measures that we now need to address as a matter of priority.

4) Boosting trade as the most effective way to support global growth. We together with some of our partners have worked very intensively on the WTO Doha Round, but it is clear that the Round will not be concluded in 2011. This is depriving the global economy of a significant boost, and risks encouraging protectionist measures. We therefore want the G20 to commit to a roadmap for an active WTO negotiating agenda, in particular for least developed countries, as well as on broadening the scope of issues being considered by the WTO in order to address new global challenges. The G20 should renew its anti-protectionism commitment taken in Toronto and agree to ensure a global market and open trading system for raw materials that is sustainable and transparent and free from distortion. Cannes should also send a strong message to the WTO December Ministerial to finalise Russia's WTO accession by the end of this year.

5) Enhancing the social dimension of globalisation. As reaffirmed by G20 Labour and Employment Ministers the Cannes Summit should underline that employment and poverty reduction are at the centre of global economic policy coordination. Youth and female employment must feature among our top priorities.

6) Ensuring Food Security and Promoting the G20 Development Agenda and Innovative Financing. We need to address the global food security challenge by fully endorsing the Action Plan on Food Price Volatility and Agriculture agreed by G20 Agriculture Ministers. The G20 Development Agenda has become an important part of the G20 and we welcome this year's focus on food security and infrastructure. We look forward to discussing the report by Bill Gates on Financing for Development.

7) The G20 needs to tackle further the global climate and energy challenge and continue its fight against corruption. The G20 Summit will be an important opportunity to push for a successful outcome of the Durban Climate Conference (COP 17) and we welcome the initiative taken by the G20 to conduct further work on mobilising resources for climate change finance.

8) Improving global governance. Finally, we look forward to discussing the report on global governance by Prime Minister David Cameron.

The stakes for Cannes are high - for the credibility of the G20 and for each of its members. In the EU we have demonstrated our commitment to do everything necessary to restore confidence and growth. We look forward to a very constructive round of discussions with our G20 partners next week as together we take the necessary decisions to make a step change on the path of global economic recovery.

Yours faithfully.

Herman Van Rompuy José Manuel Barroso

Further information on the EU at the G20, including an online flip book with facts and figures: President Jos Manuel Barroso - European Commission - Diary

__________________
"Patriotism means being loyal to your country all the time and to its government when it deserves it."-- Mark Twain

"Inter arma silent Musae"--when the weapons speak, the muses fall silent.

An't nanum hearm deth, doth hwaet ye willath.

It is forbidden to kill; therefore all murderers are punished
unless they kill in large numbers and to the sound of trumpets. -Voltaire

Economic Left/Right: -3.88
Authoritarian/Libertarian: -4.36

Greece Default Swaps Failure to Trigger Casts Doubt on Contracts as Hedge by John Glover - Bloomberg

The European Union’s ability to write down 50 percent of banks’ Greek bond holdings without triggering $3.7 billion in debt insurance contracts threatens to undermine confidence in credit-default swaps as a hedge and force up borrowing costs. As part of today’s accord aimed at resolving the euro region’s sovereign debt crisis, politicians and central bankers said they "invite Greece, private investors and all parties concerned to develop a voluntary bond exchange" into new securities.

If the International Swaps & Derivatives Association agrees the exchange isn’t compulsory, credit-default swaps tied to the nation’s debt shouldn’t pay out. "It will raise some very serious question marks over the value of CDS contracts," said Harpreet Parhar, a strategist at Credit Agricole SA in London. "For euro sovereigns in particular, the CDS market is likely to remain wary."

Politicians and central bankers came to a last-minute agreement after banks, the biggest private holders of Greece’s government bonds, were threatened with a full default on their debt, according to Luxembourg Prime Minister Jean-Claude Juncker. ISDA General Counsel David Geen said his organization considered the agreement to be voluntary, even if there may have been "a lot of arm twisting."

Stopping Contagion

Leaders in Brussels agreed to boost Europe’s rescue fund to 1 trillion euros ($1.4 trillion), to recapitalize banks and get a commitment from Italy to do more to reduce debt. The talks were regarded by many investors as a last-ditch attempt to stem the sovereign crisis, while preventing the contagion to Spain, Italy and Portugal that they feared a default-swaps trigger would cause. The involvement of the Institute of International Finance, which represents lenders, helped progress toward an accord that the EU could portray as non-mandatory.

This approach threatens to affect banks that use credit- default swaps to hedge their holdings of government bonds, forcing them to look at other ways of laying off risk. "It punishes the banks that were well-hedged and managed, and I think it’s just starting to sink in as to what this might mean," said Peter Tchir, the founder of hedge fund TF Market Advisors in New York. "Bank hedging desks are definitely now trying to re-evaluate" their use of default swaps, he said.

Deutsche’s Hedges

Deutsche Bank AG (DBK), Germany’s biggest lender, used credit- default swaps to help cut its net sovereign risk related to Italy to 996 million euros ($1.4 billion) as of June 30, from 8.01 billion euros six months earlier, Chief Financial Officer Stefan Krause said July 26. The Frankfurt-based lender said this week it has since increased its risk associated with the nation’s debt as it stepped up market making.

"If they find a way to avoid a trigger event in the CDS, then people will doubt the value of credit-default swaps in general, leading to more dislocations in the market," said Pilar Gomez-Bravo, the senior adviser at Negentropy Capital in London, which oversees about 200 million euros. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Schaeuble, Speculators

German Finance Minister Wolfgang Schaeuble is among European politicians who have expressed concern that the contracts have worsened the euro region’s troubles. Speculators can use them to benefit as a nation’s creditworthiness declines because the price of the insurance they offer rises. ISDA’s Geen, speaking today on Bloomberg Television’s "InsideTrack" with Erik Schatzker, said that the agreement probably won’t trigger the swaps because it’s voluntary, despite the possibility of some "coercion."

The matter "is borderline," he said, adding that whether to trigger credit-default swaps on Greece is a matter for ISDA’s Determinations Committee. Default swaps still rallied on optimism the agreement means the euro region is a step closer to resolving its crisis. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments declined 46 basis points to 288 as of 2 p.m. in New York, the lowest since Aug. 31.

That’s still almost 100 basis points higher than at the end of last year. The Markit iTraxx Financial Index linked to the senior debt of 25 European banks and insurers plunged 37.5 basis points to 204, JPMorgan Chase & Co. prices show.

Greek Swaps Rally

The cost of insuring Greek debt fell. Credit-default swaps backing $10 million of the nation’s bonds for five years cost $5.6 million in advance and $100,000 annually, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That implies an 85 percent chance of default assuming investors recover 32 percent of their holdings.

The probability is down from 90 percent yesterday, when the upfront cost was $6 million. The net notional value of default swaps outstanding on Greece has fallen from $5.3 billion at the start of the year, according to the Depositary Trust & Clearing Co., which maintains a warehouse of trading data. The total is a fraction of the $390 billion Greek bond market.

Greek bonds soared and the euro strengthened. The yield on the 10-year note dropped to 23.35 percent, from 25.32 percent yesterday and compared with 12.5 percent at the end of last year. The 17-nation common currency gained to a 1 1/2-month high of $1.4232 from $1.3906 yesterday, adding to its 6 percent advance this year.

Hedging Tool

Tchir of TF Market Advisors said be doubts whether the Greek debt exchange’s likely failure to trigger credit-default swaps means the contracts have become useless as a hedging tool. "Whoever agrees to this is making a business decision that it’s worth doing," he said. "They’re clearly being coerced into it and, I’m sure, threatened with all sorts of regulatory actions just to make their life difficult if they don’t agree. But there’s really nothing to stop them from saying no."

ISDA too rebuts suggestions that the swaps not paying out means they don’t work as a hedge in a statement on its website. "It has always been understood that the restructuring definition cannot catch all possible events," according to the statement. "If a creditor is hedging using CDS, and declines to participate in a voluntary restructuring, then the creditor would still hold its original debt claim and its CDS hedge."

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"Patriotism means being loyal to your country all the time and to its government when it deserves it."-- Mark Twain

"Inter arma silent Musae"--when the weapons speak, the muses fall silent.

An't nanum hearm deth, doth hwaet ye willath.

It is forbidden to kill; therefore all murderers are punished
unless they kill in large numbers and to the sound of trumpets. -Voltaire

Economic Left/Right: -3.88
Authoritarian/Libertarian: -4.36

Quote:

Jubilation about the German deal to save the euro could prove short-lived if fresh news of Greek tax evasion gains wider currency. There are more Porsche Cayennes registered in Greece than taxpayers declaring an income of 50,000 euros (£43,800) or more, according to research by Professor Herakles Polemarchakis, former head of the Greek prime minister’s economic department. While German car workers may take pride in this evidence of their export success, German taxpayers may be less keen to bail out a nation whose population appears to take such a cavalier approach to paying its fiscal dues. Never mind all that macroeconomic talk about deficit distress, many Greeks are still plainly riding high on the hog. Something can’t be right when the modest city of Larisa, capital of the agricultural region of Thessaly with 250,000 inhabitants, has more Porsches per head of the population than New York or London. Perhaps the penny – or the euro – is already dropping, because Professor Polemarchakis writes that Larissa “is the talk of the town in Stuttgart, the cradle of the German automobile industry, and, particularly, in the Porsche headquarters there”, since it “tops the list, world-wide, for the per-capita ownership of Porsche Cayennes”. “The proliferation of Cayennes is a curiosity, given that farming is not a flourishing sector in Greece, where agricultural output generates a mere 3.2pc of Gross National Product (GNP) in 2009 – down from 6.65pc in 2000 – and transfers and subsidies from the European Commission provide roughly half of the nation’s agricultural income. “A couple of years ago, there were more Cayennes circulating in Greece than individuals who declared and paid taxes on an annual income of more than 50,000 euros.” Hard to believe? Don’t take my word for it. The report in Athens News will add to fears, expressed by leading economist George Soros and others, that last week’s deal to save the euro can only buy a little time – not a permanent solution. China may also question why it should support economies that pay their unemployed more than most of its workers earn. Binding such widely differing cultures as Greece and Germany together was always going to be a problem; not least because of diverging attitudes to such financial fundamentals as work and tax. Now, ahead of this week’s G20 Summit in Cannes, some euro-enthusiast must be sent to the cradle of culture to explain that deficits will balloon unless all taxpayers pay their fiscal dues. I nominate Vince Cable.

Fast cars and loose fiscal morals: there are more Porsches in Greece than taxpayers declaring 50,000 euro incomes – Telegraph Blogs

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