So Much Hope, So Little News
Research for Online Investors

by John Dalt

10/10/11

The market is full of enthusiasm this morning because French Prime Minister Nicolas Sarkozy and German Chancellor Angela Merkel met yesterday to discuss recapitalizing eurozone banks.  The discussions assume Greece sovereign debt is worth less than the 79% agreed to in July or an outright Greek default.  So what is Greek debt worth?  50% of face value, or less?

Marking down Greek debt more than the 21% haircut agreed to in July, puts most of the eurozone’s banks in need of recapitalization.  The Greek government could decide not to meet the European Commission and International Monetary Fund’s (IMF) targets for budget deficits and pull out of the eurozone.  The Greeks could decide to return to their own currency, the Drachma.  What would their euro denominated debt be worth then?  This would start the snowball rolling down hill, engulfing eurozone banks as it gained momentum.

Never has so much hope been placed on so few facts.

The French and German leaders vowed to take action…but not what action they were going to take.  Kind of like, I am going to fix the flat tire so we can go on vacation, but I don’t have a spare.

France wants to use the European Financial Stability Facility (EFSF) to recapitalize their banks so the French government does not have to do it.  Since Germany is the largest contributor to the EFSF, this in effect requires German taxpayers to borrow money to recapitalize the French banks.

Merkel wants banks to raise the money privately in secondary offerings or borrowing with their governments backstopping them after that.  The EFSF would only be used when the sovereign government was not able to meet their country’s banks financial needs.

In other words, each country stands on their own.  Why is this important from Germany’s perspective?  They don’t want to pay to recapitalize other country’s banks.  Germany and France both are carrying a debt to GDP in excess of 83%.  Germany does not want to raise their public debt so France would be saved from raising theirs.

Late news is out that the Eurozone Summit has been postponed to Oct. 23.  European Council President Herman Van Rompuy announced the delay was to allow time “to finalize our comprehensive strategy on the euro area sovereign debt crisis.”  The market’s swooned in mid-afternoon trading.

We are in a headline driven market, be careful with one ear to the wind.

Quote:
Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusions of counsel, until the emergency comes, until self-preservation strikes its jarring gong – these are the features that constitute the endless repetition of history.”—Winston Churchill

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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