Gorilla's Blog

It’s taken a little more than 72 hours for the rest of the world to see that Euroland’s latest sovereign debt deal is a joke!

The Chinese and the Japanese certainly don’t seem very interested in buying more unsecured debt…

What’s actually needed is still the same thing that’s been needed the last 3 years: the ECB must be the lender of last resort and set a floor for sovereign debt prices.

Failure to do so means the markets will decide swiftly and negatively that the Eurozone is leaderless and pointless.

At that time, serious decisions about who stays and who goes must be made.

Gorilla says: “Farewell, Euroland, we hardly knew ye!”

The new Euroland debt deal is yet another attempt by failing leaders to kick the can down the road. Like the leaders, it is doomed to fail.

What’s missing from the agreement and absolutely essential to prevent the spread of contagion to the Eurozone core?

1) A clear statement that the ECB will be the lender of last resort and will maintain an explicit market floor for current and future sovereign debt.

2) A recognition that growth cannot be achieved through further cutbacks in spending at a time when demand is inadequate.

3) An admission that current ECB policies are wrong and must be corrected: a cut in interest rates to zero and a higher inflation target of 4-5%.

What’s in the agreement but not anywhere near sufficient?

1) The EFSF needs at least $2 trillion dollars and an ECB backstop to be credible. The debt exposure of the Eurozone banks is on the order of $11 trillion.

2) Bank recapitalizations will likely be on the order of $500 billion or more. Tier I capital at 9% is less than the ratio at Lehman Brothers on the day it collapsed.

3) Haircuts need to be much larger and more extensive. The Greeks have no capacity to pay back the debt at the new level, in 2020 or 2030; 80% is the minimum haircut needed, and 100% is frankly the only way Greece ever recovers. The Irish, Portuguese, and Spanish need writedowns of 20-40%. The French and Italians need an explicit ECB guarantee and market floor behind their debt.

So, this deal puts off the day of reckoning by at most another month or two. Next year may see new leaders in France and Germany, who certainly can’t be any worse than the ineffectual liars they have now. Without further stimulus and the end of crippling austerity, a double dip is likely.

Gorilla says: “And so the Euro continues its fall to earth, and a crash landing is still the most likely outcome!”

The new head of the ECB says one good thing, but fails to say what’s needed!

Yes, the bond buying will continue, much to the chagrin of the Germans!

But what needs to be said is that the ECB will be the lender of last resort for the Eurozone, will cut interest rates to zero, and pursue a higher inflation target of at least 4-5%.

If those things were said, we wouldn’t need to waste more time watching ineffectual and mendacious leaders announce absolutely nothing.

Gorilla says: “Draghi should not be a drag on growth!”

The ECB, where the debate now is between idiots who are worried about inflation and idiots who aren’t!

What’s needed of course is an immediate cut in interest rates, preferably to zero, and a raising of the inflation target to at least 4%.

Failure to do these things, when coupled with the utter folly of continuing austerity programs and providing no stimulus, assures the Eurozone will slip back into recession.

Gorilla says: “All the points in all the plans don’t amount to a hill of beans so far!”

M. Trichet, continuing along his way to obscurity, thinks it an urgent matter that Euroland’s banks be recapitalized.

But he doesn’t want the ECB involved in such efforts, they’re too busy waiting for the confidence fairy and protecting the continent from non-existent inflation!

The problem here, as elsewhere in this mess, is that there’s no lender of last resort.

The ECB needs to be buying PIIGS debt and sending a strong message that no insolvency will be allowed. They could help this along by putting a floor on bond prices, or raising the inflation target, or cutting interest rates to zero.

But that would mean M. Trichet admitting he has been wrong all along, and that’s anathema to most Frenchmen, not to mention the broader European elites.

Gorilla says: “In order to achieve something, you first have to learn something!”