# The Big Euro Deal



## sags (May 15, 2010)

I thought I would start a thread for the Euro deal, as I think it might be on the news for a lot longer, have multiple twists and turns, unintended consequences, and who knows what.

We are making history here.........no?

So, I will start by saying I don't get a lot of it.

As I understand it, the Euro banks hold Greek debt.

The Greeks cannot possibly pay the payments on the debt, and the bond markets are demanding astronomical interest rates on the debt.

The default swap market (CDS) for 10 million Euros of Greek debt, were demanding a 6 million Euro downpayment and 100,000 Euros a month.

So.......the Greeks can't pay and Germany and France will bail them out.

As I understand it......the banks will take a 50% reduction in the debt they are owed. This will under-capitalize the banks, so the Europeans will recapitalize them back up again. A loan or gift........who knows?

Two questions so far:

1) Why do the banks pay for CDS insurers? And why don't they refuse the haircut and demand insurance from the insurers? The CDS market is rumoured to be more than 2 Quadrillion dollars.........with a Q. If the insurers can't pay out a few billion here and there......what protection do they offer on all that liability?

2) If the banks take a haircut, and then the governments give them back their money........why not just give the money directly to Greece?

Anyone who understands this, I would appreciate your comments.


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## ddkay (Nov 20, 2010)

Reality check, as of this morning

- There is still no concrete deal on the EFSF
- There is no implementation of leverage on the EFSF
- There is no funding source available for the EFSF, the EFSF has 13b EUR in it left

Almost every media outlet on the planet is spinning an "invitation to voluntary bondholder writedowns" as an "agreement to voluntary bondholder writedowns". That is NOT explicitly what the official EU Summit statement says. It's word play. This is going to end very badly eventually.

Sarkozy makes his begging phone call to paramount leader of the PRC Hu Jintao today. Let's see how that goes.


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## ddkay (Nov 20, 2010)

So. Many. Bailout questions - FT Alphaville


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## ddkay (Nov 20, 2010)

There's _still _no confirmation of Chinese financial support! What a bunch of hot air



> PARIS (Dow Jones)--French President Nicolas Sarkozy spoke by telephone with Chinese Premier Hu Jintao Thursday to inform him of the euro-zone rescue package worked out overnight in Brussels, Sarkozy's office said in a statement.
> 
> The two leaders also discussed the priority issues to be raised during the summit of the Group of 20 industrial and developing nations in France on Nov. 3 and 4, it said, and agreed to cooperate closely so that the G20 can give a positive impetus to global economic growth and stability.
> 
> ...


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## ddkay (Nov 20, 2010)

Harper weighs in...



> PERTH (Dow Jones)-- Canada Prime Minister Stephen Harper said Wednesday that Europe's new debt deal offers some optimism but he warned that the global economy is in real danger of a new recession unless coordinated policy steps are taken.
> 
> In a keynote speech in Perth at the Commonwealth of Nations conference, Harper urged fellow members of the Group of 20 advanced economies to strive towards agreement at next week's summit in France on tackling ballooning deficits and push ahead with planned new reforms of the financial sector.
> 
> ...


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## ddkay (Nov 20, 2010)

Cheers, eurozone... Now sovereign risk is higher than ever
27 October 2011 | By Anthony Peters, Capital City



> I congratulate the Eurozone leadership on reaching an agreement. That is where my congratulations end. One of the differences between democracy and dictatorship is that the latter justifies the application of any chosen means in order to achieve what it believes to be a desirable end, while the former subordinates the end to morally and legally sustainable means. In which case, democracy in Europe has just been buried. The eurozone leaders have just driven a coach and horses through democratic principles.
> 
> Let’s start at the beginning – Greek debt. To try to make anyone believe that the 50% haircut (more like being chopped off at the knees than a simple haircut) is a voluntary act is utterly despicable. Next they will have us marching down Unter den Linden in close formation to martial music carrying banners of our much beloved leaders.
> 
> ...


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## FrugalTrader (Oct 13, 2008)

DJIA futures are up over 200 points this morning.


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## sags (May 15, 2010)

Lol..............investors are a hardy crew...........they party on..........

Thanks for the link ddkay, will read it this afternoon, when I have time to digest it all.

I read some on Tickerforum.....but they speak a different language there.

Insider lingo, I think.


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## andrewf (Mar 1, 2010)

Maybe I'm missing something, but this does not seem to solve anything. Maybe the pressure to come out with something, anything, is what induced the eurozone leaders to come to a such a nothing agreement. The market seems pleased. I'm just puzzled.


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## Four Pillars (Apr 5, 2009)

andrewf said:


> Maybe I'm missing something, but this does not seem to solve anything. Maybe the pressure to come out with something, anything, is what induced the eurozone leaders to come to a such a nothing agreement. The market seems pleased. I'm just puzzled.


I agree - what exactly did they agree on?


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## kcowan (Jul 1, 2010)

They agreed to kick the can down the road. And apparently they let the insurers off the hook for CDOs outstanding too.

Why are the markets rebounding?


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## Belguy (May 24, 2010)

God himself would not be able to resolve the European debt mess.

Mere mortals don't stand a chance.

The economic situation in the U.S. is even worse and more worrisome.

I look for a long period of high market volatility.


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## Cal (Jun 17, 2009)

I don't see any fixes yet either.

At best they are trying to bring the Greek debt down to the levels Italy is at right now, as based on GDP, by 2020...makes no sense, Italy is a concern too.

A solution would be great. I for one am not buying today!


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## Larry6417 (Jan 27, 2010)

I agree with Carney. A *best case* scenario involves several years of pain as the afflicted countries reform their economies. Also, I read in CNN that a majority of bondholders must agree to a "voluntary cut" in principal repayments or the deal would fail (and trigger CDSs). China is already considering decreasing U.S. bond purchases. Why would it consider purchasing even shakier sovereign debt?


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## ddkay (Nov 20, 2010)

Europe is telling potential EFSF investors that if things destabalise again and send Greece or Italy into another downward spiral they will cover the first 20% of losses


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## Belguy (May 24, 2010)

Europe is now face to face with what will turn out to be a lost decade.

As Kevin O'Leary said tonight, vacation there but don't invest there!!


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## Miser (Apr 24, 2011)

I must have slept thru macro economics but I can't see all the excitement about this Euro deal?
They are going to get Greece into a 120% GDP by 2020? This is a piss ant country.
Italy is at 120% right NOW! They are the # 3 economy in Europe.
No news on how to keep them at 120%.
USA will be at 100% on Hallowe'en.
Arranging deck chairs on the Titanic.


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## HaroldCrump (Jun 10, 2009)

Miser said:


> I must have slept thru macro economics


Should have taken political economy, not macroeconomics, for this.


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## sags (May 15, 2010)

I wanted to learn about derivatives, so I watched the linked video.

If it wasn't so dangerous and sad...........you would have to laugh at the profound stupidity of both the banks and the governments who let it all happen. Derivatives are nothing but "bets" between counterparties on the viability of specific securities. The "bailout" money went to the winners of the bets.

Incredible...........and some say the protestors shouldn't be at Wall Street?

http://www.youtube.com/watch?v=r66MMYyz9VI&feature=related


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## Causalien (Apr 4, 2009)

From my point of view...

Europe just basically declared that CDS is not a CDS. A material credit default event where the bond is written down by 50% is not considered default.

Now what does this mean for banks? Banks buy bonds and then buy CDS to insure that the bonds doesn't default. When your government tells you that the CDS no longer count. You are left with a huge exposure to bonds. It's like telling a retiree that the gov just amended a law where it nullified their life/medical insurance. But you've partied all your life and destroyed your body as much as you can to burn the candle and make something good, believing that life insurance/medical should have you covered as you retire.

The only thing that will happen next, if insurance doesn't work, is dumping the bonds. Which will lead to a bank failure. Then contagion. Which is why the EFSF is needed to recapitalize the banks and the reason why Sarkozy is begging China for money. China has hinted about 50 to 100 billion dollar if 3 things are promised to them politically. A strategy that is made to separate the cozy relationship between EU and US. 

I won't be surprised to hear EU politicians comes back in a year blaming the fat cat of EU banks for buying toxic assets and making this mess so that they can get re-elected.

Shame that Angela Merkel did not use this opportunity to annex Europe like China is doing.


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## ddkay (Nov 20, 2010)

The big difference between EFSF and TARP, TARP forced banks to take money whether they needed it or not, freeing up cash for banks to put to use elsewhere. The EFSF is not forcing banks to take money, the EFSF doesn't even *have* money they can put to use yet. At least TARP was well capitalized and put to use immediately.

The equity market (probably now largely consisting of desperate fund managers) is trying to frontrun this "free money" that doesn't exist yet, the credit market (e.g. Italian BTP bond auction this morning) is still painting a completely different picture.

The only way EU can raise money is to print so they can buy distressed bonds through the ECB while banks unload them. But that never fixes anything. When the Fed began TARP and bought MBS distressed assets, did that stabilize housing prices? No, in most cases the housing market is still crashing...


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## Cal (Jun 17, 2009)

http://www.economist.com/node/21534849


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## ddkay (Nov 20, 2010)

China can help Europe without investing a single renminbi
28 October 2011 | By Nachum Kaplan, Capital City



> What would it take for China to use some of its vast savings to participate in the European rescue plan? That question was being asked repeatedly ahead of last week’s big – and ultimately disappointing – powwow on resolving Europe’s debt crisis and whether enough has been done to tempt the Chinese into participating in a rescue, say by helping to leverage up the European Financial Stability Facility (EFSF).
> 
> This is an odd question. If the rescue plan is bad then China would want no part of it. Conversely, if the rescue plan is a humdinger then it will not need Chinese money. If Chinese support is essential to the plan then it’s probably a fizzer.
> 
> ...


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## sags (May 15, 2010)

And so it begins.........MF Global loses bet on Euro debt and customers are moving on out. News like this makes investors jittery. It makes them take a long look at where they have "their" money.

http://www.reuters.com/article/2011/10/28/us-mfglobal-sgx-idUSTRE79R1BG20111028


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## Cal (Jun 17, 2009)

I am doubtful that the Greek referendum will result in a vote to agree to the current terms.


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## HaroldCrump (Jun 10, 2009)

Cal said:


> I am doubtful that the Greek referendum will result in a vote to agree to the current terms.


Depends on how the $1.4T question is worded.
For instance:

Question : Do you want the country to remain in the Euro?
Answer : Yes

OR

Question : Do you accept the austerity measures?
Answer : No

Same question, different answers


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## kcowan (Jul 1, 2010)

It is like putting the banking haircut to the vote of their shareholders!

(Or asking the US public if they agree to the terms of TARP.)


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## ddkay (Nov 20, 2010)

China supports more democracy than you guys:

*DJ China Vice Fin Min: Referendum Decision Is Up To Greece


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## sags (May 15, 2010)

China may offer a unique solution to the Greeks.

Default on the Euro banks, and we will lend you all the money you need in the future................................at a price of course.


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## Belguy (May 24, 2010)

I still scratch my head when I think about how Greek politics affects our retirement savings.

As a point of interest, population of Greece is 11.3 million. Population of Greater Chicago is 10 million. Greece is a pipsqueak!!

Anyway, you've gotta love globalization!!!

Just how many things can go wrong anywhere in the world that could potentially cause stock markets around the world to tank!!

Again, I can't remember the details but, a few years back, Argentina went bankrupt essentially and, while it no doubt had a major negative effect on Argentinians, it didn't affect North American markets much, if at all.

Now, when anything goes wrong anywhere in the world, the markets tank and take our portfolios down with them.

This is not your father's stock market. Times have changed.


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## Argonaut (Dec 7, 2010)

"Europe Shares Rally on Greek Government Collapse Talk"

http://www.cnbc.com/id/45145145

Great headline. If it was down they would have the same reasoning.


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## Four Pillars (Apr 5, 2009)

Argonaut said:


> "Europe Shares Rally on Greek Government Collapse Talk"
> 
> http://www.cnbc.com/id/45145145
> 
> Great headline. If it was down they would have the same reasoning.


Lol - true.


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## CanadianCapitalist (Mar 31, 2009)

Belguy said:


> Again, I can't remember the details but, a few years back, Argentina went bankrupt essentially and, while it no doubt had a major negative effect on Argentinians, it didn't affect North American markets much, if at all.


You must have forgotten the Asian Financial Crisis that started in Thailand. 

http://en.wikipedia.org/wiki/1997_Asian_financial_crisis


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## andrewf (Mar 1, 2010)

This is why I hate X caused Y financial reporting. The economy is mind-boggling complex. Some copywriter trying to assert causation when all we see know is coincidence is annoying.


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## Larry6417 (Jan 27, 2010)

*To lighten the mood...*

I read an EU debt crisis joke a while ago.

A Greek, Irishman, and a Portuguese walk into a bar and order a round of drinks.

Q: Who pays for the drinks?

A: A German.


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## m3s (Apr 3, 2010)

A Greek bought me a coffee today. Seemed backwards. To be honest I don't think the rest of the world is too far behind, but the media has no foresight now does it. Many Euro countries are close and it's not like Canada could bail out the US.


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## Homerhomer (Oct 18, 2010)

mode3sour said:


> A Greek bought me a coffee today..


That's because he is hoping you will pay for his car tomorrow ;-)



mode3sour said:


> Seemed backwards. To be honest I don't think the rest of the world is too far behind, but the media has no foresight now does it. Many Euro countries are close and it's not like Canada could bail out the US.


I fully agree, Greece is the flavour of the month but there are many countries in dire straits, and they will be much, much bigger problem than the tiny Greece.


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## jcgd (Oct 30, 2011)

I heard the pm cancelled the vote.


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## andrewf (Mar 1, 2010)

This is getting to be a bit keystone kops.


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## Cal (Jun 17, 2009)

In a way it is funny that Greece is getting all of the press....the media should be keeping a closer eye on Italy if they are really looking for something to be concerned about.


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## gibor365 (Apr 1, 2011)

Argonaut said:


> "Europe Shares Rally on Greek Government Collapse Talk"
> 
> http://www.cnbc.com/id/45145145
> 
> Great headline. If it was down they would have the same reasoning.


I suppose that some big guys - insiders were aware that referendum will be cancelled....


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## ddkay (Nov 20, 2010)

It has more to do with the double-punch ECB rate cut + bond purchases.Asset prices are inversely proportional to interest rates. Which is why IMO buying everything you can get your hands on when interest rates are close to 0% might not be the best idea..


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## gimme_divies (Feb 12, 2011)

Cal said:


> In a way it is funny that Greece is getting all of the press....the media should be keeping a closer eye on Italy if they are really looking for something to be concerned about.


Lets not forget that the USA is not Mr. Penny-Pincher either. Funny how a vote passes for more debt and suddenly all problems go away.


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## Belguy (May 24, 2010)

How did the world get into such a financial mess and who is to blame?

I find the entire matter to be incredible--that it could even reach this stage!

Even if we get past the Greek situation, how are they going to stop the much bigger Italian time bomb from exploding in our faces?

I have often quoted the unidentified person who warned that "God himself would not be able to resolve the European debt problem"!

We live in interesting times!!

(Composed while still hiding under the bed!)


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## marina628 (Dec 14, 2010)

Belguy it will get crowded under the bed soon


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## Miser (Apr 24, 2011)

If your young enough you'll get to watch this all play out in the USA.
There will be no beds left to hide under.
Gold fer me.


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## el oro (Jun 16, 2009)

Belguy said:


> How did the world get into such a financial mess and who is to blame?
> 
> I find the entire matter to be incredible--that it could even reach this stage!
> 
> ...


Governments are a large part of the problem. Why should they think long-term? Elected officials are only motivated to think as far ahead as the end of their terms. This is how you get skyrocketing sovereign debts. 

And why are governments bailing out the banks? They're primarily bailing out the banks that sell government debt to keep this dying financial system alive for a little bit longer. Bailing out these banks allows the government to keep selling debt (living beyond their means, breaking out more credit cards) at the expense of the taxpayer. The rest of the Euro countries got pissed off that Greece nearly went to a vote. Why? Because likely the people would have voted against the bailout. These governments are not working for the people. Either they should issue the Eurobond (unlikely) or let some members default (delaying the inevitable) if they actually want to keep the Euro currency as it is.

This is a slow-motion train wreck happening before our eyes. Hopefully China is smart enough not to attempt a bailout on Europe so we can keep the sequence at Europe -> Japan -> USA. 

Gold is my long-term hedge against this situation and so my only fear is my financial institutions pulling an MF Global. I considered opening a futures account with MFG before... regulators need to do their jobs.

On the bright side, everything will be resolved soon enough


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## Belguy (May 24, 2010)

Please clarify what you mean by "soon enough"!! It seems to me that the economy has been struggling for a few years now and it only seems to be getting worse!

How many more years of this will it take before we come out of this chaos into more 'normal' times of moderately and steadily rising markets?

Maybe future generations of investors will experience better times.


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## Lephturn (Aug 31, 2009)

How many years do you think the US and world economy has been living beyond it's means? 30 years? To me that means we could be flat to down for just as long. We haven't even seen the big crisis yet - the big economies are still vastly overspending and creating debt. The day of reckoning approaches and it ain't going to be pretty.


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## Belguy (May 24, 2010)

Then why do some posters on this forum accuse some of us of being too negative?

Who's right--those who see several years of anemic growth (at best) ahead or those in the 'glass half full camp'?

Some seem to feel that, after a short slump in the markets, things will just get back to the way that it used to be with a secular bull market!! Are they dreaming in technicolour?


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## marina628 (Dec 14, 2010)

I think there is a nice balance in the forum ,it always takes some poster like Belguy to keep our feet on the ground.Personally for me I have been been worried about putting too much into the markets right now so I have been paying down the mortgages on our rental properties.This will result in a higher Income to declare but I am not prepared to risk the money in the markets and cannot see the point to hold cash @ 2% when I am paying mortgages higher than that .


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## Belguy (May 24, 2010)

Paying down mortgages is a good thing--I guess. Sadly, I have never had that opportunity.

I am 67 and still living in my mom's basement. This is because I have been a long time investor in the stock market and am still waiting for my ship to come in.

Buy, hold, and continue to live in your parents' basement!!

This doesn't count as whining I hope!!


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## Homerhomer (Oct 18, 2010)

Belguy said:


> Then why do some posters on this forum accuse some of us of being too negative?
> 
> Who's right--those who see several years of anemic growth (at best) ahead or those in the 'glass half full camp'?
> 
> Some seem to feel that, after a short slump in the markets, things will just get back to the way that it used to be with a secular bull market!! Are they dreaming in technicolour?


LOL

1) There is no accussations of some of you of being too negative, there is however a sence of being tired of YOUR (not some of you, just you), whining and complaining for the sake of whining and complaining.

2) Right are poeple who are content with their investment approach and the results they have been able to achieve, wrong are the once who complain about their mediocre results, don't listen to kind advice, blame everything around them but themelves for subpar results.

3) You are wrong, there is no feeling that things may quickly get back to secular bull, there are many folks on this fine forum who see long and turbulent times ahead of us, me included, your interpretations of the sentiment is the issue. Dreaming in technicolor, no, you just like patronizing, despite your failures as an investor (in your own words, I personally don't see nothing wrong in earning 5% annually in difficult markets being a passive index investor) you think only your approach is correct, the others are dreaming. In a nutshell what I wanted to say you are simply rude.


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