Thursday, June 28, 2012

Late Thursday Evening / early Friday morning news item from the 20th EU Summit and around the horn in Europe . Hopium is certainly alive and well today .....Items from Clusterstock , Zero Hedge and The Telegraph and The Guardian liveblogs

http://www.telegraph.co.uk/finance/debt-crisis-live/9363868/Debt-crisis-live-Markets-surge-after-EU-summit-deal.html


09.11 Fabrizio Gora tweets a picture of Libero's front page this morning, which is unlikely to please the German chancellor.
08.55 They say bad news comes in threes, and that'll ring true for Angela Merkel this morning. First Germany was knocked out of Euro 2012, then she was forced to back down at the EU summit and now German retail sales have dropped for a second month running in May. Sales unexpectedly fell 0.3pc from April.
and....

http://www.zerohedge.com/news/hardball-brussels



Hardball In Brussels

Tyler Durden's picture
Submitted by Tyler Durden on 06/29/2012 08:05 -0400



From Mark Grant, author of Out of the Box
Hardball in Brussels
In the last hour yesterday the equity markets rallied significantly on the basis of a 120 billion growth package for Europe that had been announced. The EU put out the headline like it was all new money but further investigation revealed that it was not. The growth package was mostly the amalgamation of schemes already in existence with the addition of some new money but not a significant amount. As the news behind the headlines was assessed the markets traded back down some in the after hour’s session. Then Europe’s leaders met and the evening got more interesting. The following is the basis of their decisions.
"We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution-specific, sector-specific or economy-wide and would be formalized in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment program. Similar cases will be treated equally.
We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalization of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.

We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilize markets for Member States respecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure. These conditions should be reflected in a Memorandum of Understanding. We welcome that the ECB has agreed to serve as an agent to EFSF/ESM in conducting market operations in an effective and efficient manner.”
Behind the Headlines
Apparently Mr. Rompuy had jumped the gun in making the announcement about the growth package late yesterday afternoon as Italy and Spain had not yet agreed to it. No matter, the markets took Mr. Rompuy at his word and rallied away and it was not until after the close that the truth came out. In fact, in the evening negotiations, Italy and Spain threatened to veto the growth measures if certain other measures were not agreed to which were to their benefit. From all indications it was here that Ms. Merkel blinked and was willing to make certain adjustments that are significant. For us the most important change is that the loans from the new ESM fund will not be senior to private debt holders. That is definitely good news for bond investors and a decision that I can applaud.
The other news on that front was that the funds for the EFSF and the ESM were not increased and that while some firewall is a deception of sorts as it does nothing for the troubled nations at all it is indicative, though a contingent and unfunded commitment, of the size of the capital available should further needs arrive for the troubled nations, including Spain and perhaps Italy. If there was one eyes wide open part of the negotiations and discussion it was that Italy may also need some assistance soon because this was hinted at time and again. The ECB will be handling the distribution of bond buying in the secondary and perhaps primary markets for sovereign debt but, unlike the Fed, the printing presses are NOT available as the money allocated to the EFSF and the potential ESM is all of the money that can be used for any bond buying programs. This, then, is a significant negative for the program as there is not enough money to really help out Spain, much less Italy, if it is needed.
Another change is that money can be lent directly to the banks and does not have to go through the sovereign but this change will not take place until the end of 2012 when some sort of European banking supervisory authority is established and there are no details on what that will mean except that it will be located in Brussels. The statements seem to indicate that the money for the Spanish banks will now go the nation of Spain and then its banks and then the money will be transferred off of the Spanish books at a later date when the new banking authority is established.
Now all of this has to go back to various Parliaments, including Germanys, which may cause some consternation as the “seniority” of the ESM has been relinquished which may cause some problems in Finland, Austria, the Netherlands and perhaps even in Germany. It is interesting to note that all of the dictums that have been announced deal with funding and that none addressed the structural or solvency problems of a Europe that is mired in recession.
There is also some good news in today’s release for Ireland which indicates that troubled banks in various nations may now be funded by the EFSF/ESM and not just the nation in which the banks are domiciled. Europe is going to consider EU wide funding which is good for nations such as Ireland and Spain of course but it is bad then for the nations that must provide the bulk of the funding indicating more debt that has to be taken on by Germany, Austria, the Netherlands, Finland et al. It is not exactly Eurobonds because it is limited in scope but it is a definite blink by Germany as hardball was played by both Spain and Italy and Ms. Merkel was outflanked in the end.
The final point that I would make today is that nothing is yet in place and is not even envisioned to be in place until the end of this year. In some sense it is a lot like discussing the ESM which is not yet in place either. All of the talk concerning removing the aid to the Spanish banks from the sovereign obligations of Spain will not happen unless this new banking authority is approved by the nations in Europe and there may well be some that don’t wish to turn over their sovereign banking powers to Brussels. What has been announced then is a plan, a scheme, that is some six months away from actualization if actualized at all. I would point out that there is a lot of risk between now and then and that Europe is quite good with coming up with all sorts of grand plans that somehow do not work out. In the meantime Ireland will still pay for her banks, Spain is going to get money but money lent to the country and not her banks, Greece now awaits the Troika and their report and then the decisions of the IMF and the EU on what if any changes might be made in their agreements and if any new money will be handed to Greece or if the funding will stop.
The EU has done a something I would say, made some progress, but what this something means is yet to be determined and it is one-half year away from implementation under the best case scenario and there will be plenty of challenges ahead in Europe during this timeline. The markets are rallying but the realization that nothing really was accomplished, meaning implemented, will drive the markets the other way soon I fear.
In Existence Now
In the final analysis Europe is quite exposed at this moment and may be for quite some time. The ESM, after the change in seniority status, must be re-affirmed in at least two countries that are the Netherlands and Finland and Germany has not yet approved it yet either. The EFSF has already spent $450 of its capacity on Greece, Ireland, Portugal and now $125 billion for Spain. The balance left in the fund is tissue paper thin and that is all that is in existence presently for any more problems in Europe.  Plans and schemes aside, the amount of money that could actually be used today is a drop in the proverbial bucket.

and.....

http://www.zerohedge.com/news/europe-moves-e-tarp-goldman-selling-spanish-italian-and-irish-bonds-its-clients



As Europe Moves To An "E-TARP", Goldman Is Selling Spanish, Italian And Irish Bonds To Its Clients

Tyler Durden's picture
Submitted by Tyler Durden on 06/29/2012 07:16 -0400




Below is Goldman's quick take on the E-Tarp MOU (completely detail-free, but who needs details when one has money-growing trees) announced late last night. In summary: "We recommend being long an equally-weighted basket of benchmark 5-year Spanish, Irish and Italian government bonds, currently yielding 5.9% on average, for a target of 4.5% and tight stop loss on a close at 6.5%." By now we hope it is clear that when Goldman's clients are buying a security, it means its prop desk is selling the same security to clients.

From Goldman:

Moving Towards ‘E-TARP’
  • Last night, European leaders agreed on widely expected measures to support growth, took steps towards a “banking union”…
  • …and defined the terms of Spanish financial assistance programs for banks.
  • Market expectations were very low heading into the Summit and active risk-taking is still low.
  • In light of the decisions reached overnight, we think that an extension of a bull steepening rally in peripheral bond markets can occur.
  • We recommend being long an equally-weighted basket of benchmark 5-year Spanish, Irish and Italian government bonds, currently yielding 5.9% on average, for a target of 4.5% and tight stop loss on a close at 6.5%.
  • 1. A Move Towards ‘E-TARP’
    Last night, European leaders agreed to: (i) allocate funds amounting to roughly 1% of Euro area GDP to stimulate growth; (ii) delegate supervisory and resolution authority of banks to a federal authority, involving the ECB; (iii) allow the ESM to inject capital directly into banks once the common resolution regime is in place; (iv) assist in recapitalizing the Spanish banks (for which up to EUR100bn had been already committed) through the EFSF, and subsequently through the ESM, on a pari passu basis with existing bondholders; and (v) re-examine the Irish financial aid package with respect to the support to banks presumably along similar lines as those taken for Spain.
    The growth measures had been already widely expected, and most of the other initiatives will become operational only over the coming months. Disagreements on technical elements and delays can always emerge along the way. The ESM Treaty, for example, will have to be amended to allow for the possibility of recapitalizing banks directly. However, the political commitment to break the link between sovereign and bank balance sheets has been established and to our eyes this is very important. Funds to assist Spanish banks will be provided initially as a loan to the FROB. It is likely that banks that have received the funds will in the future be able to convert them into preferred stocks. On balance, the measures are supportive for Spain and Ireland, and in our view justify the rally in sovereign bonds and bank stocks this morning.

    The European negotiations continue today. The remaining issues on the table are politically intensive and involve a further integration of fiscal sovereignty against the partial mutualisation of existing liabilities. This part of the discussion is related to the draft legislation known as the Two-Pack, recently approved by the European Parliament. Depending on the outcome of the discussions, short-term measures to stabilize financial markets may be announced. According to the statement last night, the authorities intend to make use of the existing EFSF/ESM instruments in ‘a flexible and efficient manner’ to stabilize government bond markets, with the ECB acting as agent in the case of secondary market activity. The involvement of the ECB’s balance sheet at this stage has not been mentioned.

    As we discussed in the latest issue of the Fixed Income Monthly, market expectations were very low heading into the Summit, below our economists’ conservative views. Our sense is that active risk-taking is still low, and we think that an extension of a bull steepening rally in peripheral bond markets can occur. We would now crystallize our view by being long an equally-weighted basket of benchmark 5-year Spanish, Irish and Italian government bonds, currently yielding 6% on average, for a target of 4.5% and a tight stop loss on a close at 6.5%.

    2. The Bill, Please

    We provide a summary of the costs of the financial crisis and the resources behind some of the policy measures taken. We focus on some of the Euro area countries, the US and the UK. The data should help reflect some of the most frequent questions we receive on topics such as: (1) what has country “x” done to improve its imbalances? (2) how much has the crisis cost? and (3) how much ‘burden sharing’ and solidarity has there been among the Euro area countries?
    3. Output costs
    Output costs have been not significantly dissimilar across the aggregate Euro area, the UK and the US. Output losses (measured as the cumulative sum of the differences between actual and trend real GDP in the three years since the beginning of the crisis, as a percentage of trend real GDP) have been 31% in the US, 25% in the UK and 23% in the Euro area. Within the Euro area, however, the dispersion has been substantial. Output losses have been 11% in Germany, 23% in France, 32% in Italy, 37% in Portugal, 39% in Spain, 43% in Greece and a stunning 106% in Ireland.

    4. Fiscal costs to restructure the financial sector

    Gross fiscal outlays related to the restructuring of the financial sector (including costs associated with bank recapitalizations, but excluding asset purchases and direct liquidity assistance measures from the Treasury) have been 4.5% of GDP in the US, 8.8% in the UK and 3.9% in the Euro area. Within the Euro area such costs have been 0.3% in Italy, 1% in France, 1.8% in Germany, 3.8% in Spain, 27.3% in Greece and 40.7% in Ireland. Central Banks’ balance sheets expanded significantly. Total assets held by the Fed as a share of GDP increased from 6.3% in August 2008 to 18.6% in May 2012. Over the same period, ECB’s assets/GDP increased from 15.6% to 31.6% and the BOE’s assets/GDP went from 6.6% to 23.4%.
    5. Fiscal imbalances
    From 2009 to 2011, the improvement in the primary (net of interest) budget balance to GDP ratio has been 1.8% in Italy, 2.2% in Germany, 2.3% in Ireland, 2.6% in France, 3.3% in Spain, 6.9% in Portugal, and 8.4% in Greece. By comparison, the primary balance to GDP ratio improved by 4.4% in the UK and 3.9% in the US, although from a weaker level than across the Euro area. According to IMF projections, the additional improvement in the primary balance from 2011 to 2012 will be 0.3% in Germany, 0.7% in France, 1.3% in Greece, 2.2% in Italy, 2.3% in Ireland, 0.3% in Portugal, and 3.0% in Spain, compared to 1.2% in the US and 0.5% in the UK. Even though debt levels are still elevated, the size of the fiscal consolidation implemented in many European countries has been quite remarkable and larger than the actual change in the primary balance. Controlling for the weak business cycle, the improvements in structural public balances in peripheral Europe have been impressive.

    6. External imbalances and competitive indicators

    The current account position as a share of GDP deteriorated between 2009 and 2011 in Germany (-0.2%), France (-0.7%), Italy (-1.1%), the US (-0.4%) and the UK (-0.4%). It improved in Spain (+1.5%), Greece (1.3%), Ireland (+3%), and Portugal (4.5%). Relative unit labour costs in the manufacturing sector, one of the competitiveness indicators produced by the OECD, show a decrease in costs by 1.5% in France, 7% in Germany, 9% in Spain, 24% in Ireland and 13% in the US. Costs increased by 3% in Italy and 8% in the UK between 2008 and 2011. Southern European countries certainly need to take further steps to improve their competitiveness positions. The conditionality associated with financial aid, and the limitations of sovereignty on public finances as part of the evolving Euro area governance architecture, can support this adjustment.
    7. Structural reforms
    A summary statistic does not exist to quantify structural reforms countries have taken. Moreover, institutional features of structural reforms differ widely across countries. But, Italy, Spain, Greece, and Ireland have all passed pension reforms. Labour market reforms that reduced firing and hiring restrictions and that reduced wages or tended to make wages more competitive and negotiable at the firm level have been passed in Italy, Spain, Greece and Portugal. Reforms that liberalized the goods market have been passed in Italy and Greece. Italy and Spain introduced debt-brake rules into their Constitutions. As our European economists have discussed in many reports, although Southern European countries have started to deregulate labour and product markets, the journey is just beginning.

    8. Costs of the Troika’s programs

    So far, the contributions paid to Greece, Ireland and Portugal as part of the financial assistance programs have been split as follows among Germany, France, Italy and Spain. These are the sum of bilateral loans and commitments to the EFSF.
    Germany has disbursed a total of EUR54bn: EUR3.5bn to Ireland, EUR4.3bn to Portugal and EUR46.7bn for Greece, of which EUR15.4bn is in the form of a bilateral loan.
    France has disbursed a total of EUR41bn: EUR2.6bn to Ireland, EUR3.2bn to Portugal and EUR35.1bn for Greece, of which EUR11.5bn is in the form of a bilateral loan.
    Italy has disbursed a total of EUR36bn: EUR.3bn to Ireland, EUR2.8bn to Portugal and EUR30.8bn for Greece, of which EUR10.1bn is in the form of a bilateral loan.
    Spain has disbursed a total of EUR23.9bn: EUR1.5bn to Ireland, EUR1.9bn to Portugal and EUR20.5bn for Greece, of which EUR6.7bn is in the form of a bilateral loan.
    Italy and Spain have jointly contributed as much as Germany to the financial assistance programs.

    9. Foreign banks’ exposure to Greece, Portugal and Ireland

    Between Q12010 and Q42011, banks reporting to the BIS reduced their exposure to the public sector and to banks of Greece, Portugal and Ireland by the following amounts (source: BIS)
    • German banks: a total of EUR52bn (or 96% of the bail-out funds disbursed so far)
    • French banks: a total of EUR48bn (or 118% of the bail-out funds disbursed so far)
    • Italian banks: a total of EUR5bn (or 15% of the bail-out funds disbursed so far)
    • Spanish banks: a total of EUR7bn (or 30% of the bail-out funds disbursed so far)
    • US banks: a total of EUR16bn
    • Spanish banks: a total of EUR32bn
    The financial assistance packages to Greece, Ireland and Portugal allowed a sizable reduction of the private sector exposure and a migration of liabilities from the private sector balance sheet to the official sector one. In the case of Greece, the committed amount of financial aid is EUR253bn, equal to 84% of the EUR300bn stock of Greek general government debt in 2009. Italian and Spanish banks reduced their exposure to Greece for a total amount of EUR3.2bn, while French and German banks reduced by EUR 39bn. These were about 5% and 48% of the funds the respective governments committed to Greece.
and.....

http://www.zerohedge.com/news/what-they-really-said-key-soundbites-last-nights-eurosummit



What They Really Said: Key Soundbites From Last Night's Eurosummit

Tyler Durden's picture
Submitted by Tyler Durden on 06/29/2012 07:30 -0400




Much has been speculated about who promised what at last night's summit, and who guaranteed that the ESM would do this, that and the other, as once again, just like last summer, the ESM is becoming the most universal Swiss army knife ever conceived (just pray it never has to be actually used). Here, courtesy of Reuters, are excerpts of what they all really said.
GERMAN CHANCELLOR ANGELA MERKEL
ON CONDITIONALITY FOR BOND-BUYING BY BAILOUT FUNDS:

"We have taken important decisions last night. First we agreed that if countries need the instruments to buy bonds on the primary or secondary market from the EFSF or ESM then the conditionality will be agreed as follows:
"The country report will be presented to the Commission on which basis we will agree a memorandum of understanding in which there will be a time-frame. The EU/IMF 'troika' will then supervise, as it is always usual in the EFSF and ESM, whether the conditions are met.
"That would be the case if Spain or Italy, with regards to their interest burden, make use of such instruments. Then this conditionality would apply, which we have agreed on precisely, according to the rules we have."

ON SPANISH SUPPORT:
"Secondly, regarding the banking recapitalisation which Spain has requested, a request will be made with the EFSF. Once the ESM becomes available, then the application will be transferred to the ESM. The seniority of the bonds will not be changed. For Spain we won't do what is otherwise applicable in the ESM regarding the preferred creditor status because the request was made through the EFSF, where such details do not apply."
EUROPEAN CENTRAL BANK PRESIDENT MARIO DRAGHI
ON THE SUMMIT RESULTS:
"It showed the long-term commitment to the euro by all member states of the euro area, and also it reached tangible results in the shorter term. The waiver of the preferred creditor status of the ESM (permanent bailout fund) for Spain is one of the results.
"The future possibility of using the ESM for direct recapitalisation of the banks which was something that the ECB had advocated for some time is also another good result.

"But we have to keep in mind that all these things should be, to be credible, should be accompanied by strict conditionality. This is essential, otherwise they will not be credible.
"Also, the Commission will present a proposal based on Article 127.6 of the Treaty for the creation of a single supervisory mechanism and within which the ECB will take up supervisory tasks for the banks of the euro zone."
Following are earlier comments by EU leaders before Friday's discussions:
FRENCH PRESIDENT FRANCOIS HOLLANDE
ON THE AGREEMENTS REACHED:
"There were three advances. The first is on the recapitalisation of the banks with banking supervision and with a calendar. The second is to allow easier solutions for Spain, which can be put into effect rapidly. And finally, there will be full use of the (bailout) instruments, the EFSF and the ESM, to give states that have made efforts the necessary protection in relation to interest rates."

ON THE IMPORTANCE OF WHAT EU LEADERS DECIDED:
"It is very important that we put into motion procedures for immediate action - something that was much hoped for. Bank supervision for a recapitalisation of the banks will take a bit more time, but this will be a lasting move in the right direction.
"We defined a vision for the euro - for economic and monetary union - saying what we will do together, and there will be greater solidarity at each step in integration. The banking union was the first illustration of this."
LITHUANIAN PRESIDENT DALIA GRYBAUSKAITE
ON IMPACT OF EURO ZONE DEAL ON SHORT-TERM BOND SUPPORT:
"We are heading for a future where we will need very general supervisory bodies to look more carefully, more strictly, and (which are) more responsible for the financial sector and banking sector, and that's where we are heading.
"I hope that in a very few weeks, the euro zone leaders will be able to find a concrete mechanism for how to control the not-very-well-behaving banks and to help them."

and.....
http://www.zerohedge.com/news/latest-e-tarp-mou-sends-spanish-bonds-back-monday-levels



Latest "E-TARP" MOU Sends Spanish Bonds Back To Monday Levels

Tyler Durden's picture
Submitted by Tyler Durden on 06/29/2012 06:53 -0400



In the aftermath of last night's bombastic European announcement coming in the late night hours, in which Europe has virtually promised the kitchen sink, one would imagine that the response for the biggest beneficiary, Spanish bonds, would be far more dramatic. Instead after ripping 60 bps tighter in a kneejerk move, the yoyo reaction has seen bonds slide wider ever since, and the result being a SPGB level last seen... on Monday. Why is the market not more enthusiastic? Because what happened last night is nothing short of the second Greek bailout announcement from October, which followed a similar pattern: a late night announcement by Europe that Greece is saved, followed by a brief rip of a rally, only to give it all back, and to require global central bank intervention one month later. Because what really happened last night? Merely promises. We will not dwell much on the fact that the ESM has yet to be ratified by the paying countries, that the ESM will now have to be scrapped in its current format, and resigned by all 17 member countries since the seniority provision is somehow scrapped: an event that amounts to a cramdown exchange offer, that while everyone is talking about the uses of funds, nobody has uttered a peep about the sources, that Germany has yet to say what the German conditions will be or whether the revised deal will even pass the Bundestag, that the deal is contingent on the formation of a "effective single supervisory mechanism is established, involving the ECB" which in Europe is next to impossible, and that finally the whole "arrangement" is nothing but an Memorandum of Understanding - the weakest form of non-binding agreement possible. Which is why we are just a little skeptical and that today's E-Tarp is merely the latest catalyst to be faded.

Spanish bonds responding and going back toMonday levels.


And again, the key part from last night's actual announcement:
"We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution-specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally."

Finally, as usual, Einhorn will be right:


and....





http://www.businessinsider.com/5-holes-in-the-eu-summit-agreement--eurusd-rally-endangered-2012-6

( Half life of the break through at the latest Summit will be what ? )

This late night European Union Summit had some achievements. France, Italy and Spain insisted on focusing on measures for the current crisis, and not only long terms visions. The leaders agreed on allowing the bailout mechanism to directly recapitalize banks – a move that allows lifts the burden off Spain. In addition, the ESM will have no seniority, thus expected not to scare off private investors.
Spanish yields are falling and EUR/USD reached high resistance before retreating. Will this rally last? Or is this another short-covering rally like the post Greek election rally and the post Spanish bailout rally? Let’s see the decisions:
  2. Bank Recapitalization by ESM – it could happen: The word “could” is important to note. This is not decisive enough. There are additional conditional words in the statement
  3. .
  4. Dependency on a supervising mechanism: Direct bank recapitalization depends on establishing a body that will supervise over the banks. Germany insisted on this. While it makes sense, this slows down implementation and is contradiction to the urgency also expressed in the statement

  7. ESM not ratified: It’s important to note that these changes to the ESM require ratification by the 17 member states. Not all of them have approved it. One country that hasn’t approved it is Germany – the supreme court delayed the ratification.

  9. Directly paying banks is harder to sell: Solidarity with struggling countries has some political support, but taking taxpayers’ money and directly funding foreign banks? This might be a good solution for the markets but the public in many countries will not like it.

    1. Bailout mechanisms fall short: Spain is the euro-zone’s fourth largest economy. When it draws its contribution out, the burden on other countries will be larger. If Italy needs help (this is certainly feasible), the burden will be even larger.

    The big achievement is removing the seniority from the ESM – this means that private bondholders will not be afraid to invest in these bonds. The official sector had seniority in the Greek debt restructuring. In fact, the ECB made a big profit on Greek bonds while the private sector had an effective haircut of around 75%.
    Yet again, it seems like the leaders had a hard time making a real breakthrough and that they scrambled to reach an agreement that would satisfy markets. We’ve seen that before with the Spanish bailout announcement – an announcement full of holes that had a sole and unsuccessful intention to stabilize markets.
    EUR/USD rallied to the 1.2624 line  which was January’s low and a critical resistance line. It then slid back and is now trading at 1.2560. This can still be viewed as a healthy correction: the pair rallied all the way from the 1.2440 line.
    However, this may not last. The market may see the holes soon enough.

    and....

http://www.zerohedge.com/news/full-eu-summit-statement-all-its-conditional-wishy-washy-glory


Full EU Summit Statement (In All Its Conditional Wishy-Washy Glory)

Tyler Durden's picture
Submitted by Tyler Durden on 06/29/2012 01:30 -0400




The early Friday morning release of an entirely conditional 'plan' for a 'plan' that will likely require the ESM contracts to be torn up and a new contract to be re-ratified (by ALL members - including Finland and Germany), due to the stripping of the ESM seniority via the EFSF 'workaround', was high-fived by any and all EU leader still standing. Is it any wonder (given the conditionality and ratifications required) that the best the market could manage, on what is now obviously nothing but yet another watered-down talking-point ridden 'promise-of-more-to-come' plan (as opposed to the impossible becoming possible as Ireland's Kenny so eloquently described it), is a 1% pop in US equity futures.
"We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012.When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibilityto recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution-specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.


We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.



We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member Statesrespecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure. These conditions should be reflected in a Memorandum of Understanding. We welcome that the ECB has agreed to serve as an agent to EFSF/ESM in conducting market operations in an effective and efficient manner.


We task the Eurogroup toimplement these decisions by 9 July 2012."


and......




http://www.guardian.co.uk/business/2012/jun/29/eurozone-crisis-live-summit-spain-wins-concessions


10.29am: German publication Der Spiegel's certainly clear on who lost at the euro summit, with the headline:
How Italy and Spain Defeated Merkel at EU Summit
Carsten Vokery writes:
Angela Merkel took a tough stance ahead of the EU summit, insisting she would not make concessions. But Italy and Spain broke the will of the iron chancellor by out-negotiating her in the early hours of Friday morning. Germany caved in to demands for less stringent bailouts and direct aid to banks.
10.18am: Back to Brussels where a German official is talking about the change to the terms of the bank bailouts, which means bailout funds will not have seniority over other creditors. This alteration will apparently be limited to Spain's banking bailout.
Traders are sceptical about that clause anyway. One analyst writes:
Loans to Spanish banks will not be senior to other bondholders.
- sure, in the legal documents perhaps. BUT like ECB/IMF interventions, subordination will remain assumed
He lists some other flaws he sees in the headline results from the summit...
Direct re-cap of banks.
- this can only happen once a move to a pan-euro supervisory regime has happened. It doesnt look to us that the initial EFSF/ESM assistance to Spain will be direct. Of all the bank/sovereign loops, the most significant is in Spain, so the headline is not as good in reality.
EFSF/ESM secondary bond purchases.
- no available funds until the EFSF issues bonds or the ESM is paid into. yes, the ECB will act as the buying agent, but its unlikely they will be too active before a funding programme is in place for the EFSF. Also - for any such purchases an MoU would be needed. We expect Italy to resist such a move (hence Monti's comment about hoping the threat of bond purchases will be enough in itself).
10.10am: In the Eurozone annual consumer price inflation held steady in June at 2.4%, in line with expectations.
Inflation is now is at a 16-month low, leaving the door open for the European Central Bank to cut interest rates.
Live blog - Greece flag
10.06am: Data coming out of Greece shows that retail sales dropped 13.5% in April, compared with the same month last year. That is actually an improvement from March, when retail sales dropped 16.2%.
Inflation has also eased very slightly with producer price index inflation at 5% in May, compared with 5.1% in April.
9.51am: Gary Jenkins of Swordfish Research is cautiously optimistic about the agreement out of the eurozone summit.
These steps are the obvious ones to take to try and restore some confidence in the market in the short term. Alone they do not solve the underlying problems but they might buy a bit of time which is probably about the best they can do right now. Obviously the bailout funds as they exist are not large enough to fund the likes of Italy over the medium term and the challenge remains to encourage the private sector to invest alongside them and on that point they have at least removed some key obstacles.
It will be interesting to see if they can make any progress towards a proper fiscal union on day 2. The problem might be that if you give politicians much needed access to liquidity that their incentive to give up sovereignty recedes somewhat. Or maybe I am just a cynic.
9.40am: UK services sector stagnated in April, weighed down by a slump in retail sales. Output of the services sector was flat, compared with a 0.6% increase in March.The main drag was a 2.4% slump in retail sales.
The Office for National Statistics also put out data on productivity, which fell 1.3% in the first quarter, on a per hour basis.
Live blog - Japan flag
9.31am: And just to bring everyone down a bit, Japan's industrial output fell the most in May since the March 2011 earthquake, partially hit by weak demand in Europe for Japanese cars.
Production declined 3.1% in May from April, the Trade Ministry said in Tokyo today.
The data showed clear signs of the risk to Asia from the eurozone crisis. Production of transportation equipment, including automobiles, slumped 11.1% in May, the biggest drag on output overall.
9.10am: Our European editor Ian Traynor reports from Brussels, where eurozone leaders have come to an agreement after apparent deadlock last night, sending markets soaring (see 8.34am).
Ian Traynor
European leaders pulled back from the brink of disastrous failure in their attempts to rescue the euro early this morning, throwing a lifeline to the weakest links in the eurozone by agreeing to shore up struggling banks directly, remove disadvantages for private creditors, and move quickly towards a new eurozone supervisory regime for banks.
Amid bad-tempered drama that continued through the night, Italy and Spain stunned the Germans by blocking progress on an overall deal at a two-day EU summit in Brussels until they obtained guarantees that the eurozone would act to cut the soaring costs of their borrowing.
The tough negotiations were deadlocked for hours, prompting the departure from the summit after midnight of the 10 non-euro countries, including Britain and leaving the eurozone leaders to fight it out. After 14 hours of wrangling, they emerged with a three-point statement rewriting the rules for the eurozone's new bailout regime in a way likely to soften the draconian terms that have accompanied the rescue programmes for Greece, Portugal, and Ireland over the past two years.
The leaders said a new eurozone banking supervisory system should be established as a matter of urgency, by the end of the year and that once it is operational, the eurozone new permanent bailout fund, the European Stability Mechanism, would be able to recapitalise failing banks directly, without the loans going via governments as at present and adding to national debt burdens. The shift had been demanded particularly by Mariano Rajoy, the prime minister of Spain.
The new supervisory system is likely to come under the authority of the European Central Bank. Under plans being mooted, the new banking regime is to entail pooling eurozone liability for guaranteeing savers' deposits and a common resolution fund for winding up bad banks. But the statement mentioned neither of these two points which are controversial especially in Germany which is reluctant to accept responsibility for the conduct of other countries.

The statement added that in drawing up the terms for up €100billion for Spanish banks, private creditors would enjoy the same status as the bailout fund in the event of a debt rescheduling. Previously the fund enjoyed "seniority" over private investors.
9.01am: Already the contradictory statements are emerging from the summit. Financial reporter Fabrizio Goria (@FGoria) writes:
Monti says no troika for EFSF/ESM, now Merkel and Holland say access to bailout funds to be reviewed by troika... Who is the liar?
Soccer - UEFA EURO 2012 Semifinals - Italy vs. GermanyMario Balotelli of Italy. Photograph: Wu Wei/Xinhua Press/Corbis
8.47am: And just a reminder of the man who booted Germany out of the euro.... championships last night.
As the FT markets editor Chris Adams (@chrisadamsmkts) put it:
This week's double winners: Spain and Italy. Stitch up Merkel at EU summit and boot out Germany to make final of #Euro2012
After Italy beat Germany 2-1 in Warsaw, Italian prime minister Mario Monti was asked whether he expected they would go on to beat Spain in Sunday's final. He deadpanned:

8.43am: German retail sales edged down for a second consecutive month in May, falling by 0.3% . The declines come after the strong increase in March (+2.1%), so that monthly average sales in Q2 so far were 0.8% higher than in Q1. Sales of cars and related service, which are not part of headline retail sales, increased by 1.4% in May.

Christian Schulz of Berenberg writes:

Indicators of consumer confidence in Germany have held up despite the latest wave of the euro crisis. The fundamental situation of German households remains benign. Disposable income rises as wages increase and fuel prices fall. The labour market may have slowed but employment keeps rising and mass unemployment is becoming a distant memory. Despite stable private consumption, Germany's economy is likely to take a hit to growth over the summer. Uncertainty over the outcome of the eurozone crisis will hurt business investment and exports suffer from austerity in important markets.
Live blog - market up
8.34am: The stock markets are also rallying on the back of the agreement out of the most recent eurozone summit. We'll wait and see how long this lasts.

8.26am: For now though, the bond markets appear to be impressed.

The yield on Spain's 10-year bonds (effectively the interest rate) dropped 44 basis points to 6.47%. The yield on Italian 10-year bonds is down 30bps at 5.89%.

The impact on shorter-dated debt is even more dramatic, with the yield on Spain's two-year bonds down 86bps at 4.64%. And on Italy's 2-year debt, down 63bps at 3.96%.

8.23am: And the BBC's Robert Peston suggests the Germans might have something to say about their taxes being channeled directly to Spanish and Irish banks (see 7.45am).
8.08am: Let's have a look at what the analysts are saying about the eurozone agreement. The focus seems to be on whether the bailout funds are big enough to keep down borrowing costs. Marc Ostwald of Monument Securities, for one, is highly sceptical:
While there may be some temporary sense of relief that the summit has not descended in to acrimonious discord, what has been thus far agreed is nothing more than sticking plaster. One presumes that the agreement to allow the ESM to buy government debt effectively puts the ECB's SMP programme to bed, though what happens with its existing holdings may be a point for some debate. There will of course be plenty who point out that the EFSF/ESM simply does not have enough capacity to buy Italian and Spanish debt indefinitely, let alone directly recapitalise eurozone banks.



The dissent within Merkel's CDU has already been voiced by one arch critic of the ESM, Wolfgang Bosbach, who has said: "If the ESM is approved today" in Germany's two chambers of parliament (as has been agreed), "the currency union widens to become a liability union." Bosbach also said: "The liability union will become a transfer union" because euro members will continue to violate deficit rules, he said.
Michael Hewson at CMC markets writes:
The EFSF is soon to be wound down and needs to raise its funds on the open market, while the ESM doesn't exist yet, though its biggest contributor Germany should ratify it today in the German parliament. The problem with that is the fund has a maximum capacity of €500bn and that includes Spain and Italy's contribution, so it could well run out of money quite quickly.

Nothing has been agreed on a roadmap to a fiscal compact, a banking union and further fiscal integration meaning that while this may have given a short term pop to markets there still remain a lot of unanswered questions and the fear is that Monti's intransigent tone may well have damaged relations irreparably in the longer term, especially with Germany.
Holger Schmieding of Berenberg bank highlights the role the European Central Bank must play to provide some stimulus to the region following the summit.
Whether or not it will calm markets for long will likely depend on the ECB, in our view. Last October, when the ECB merely reacted to an EU summit with a 25bp rate cut, turmoil intensified shortly thereafter. But last December, when the ECB rewarded a new summit agreement on a strict fiscal pact with a major liquidity infusion on top of a rate cut, markets calmed down for some four months.
As discussed before, letting the EFSF or ESM buy Spanish or Italian bonds could backfire badly. These funds have very limited resources. Official market interventions work if and when they impress markets. Stepping in with limited resources is an invitation to markets to speculate against them. The fear that the EFSF/ESM funds could soon be depleted could further spook markets. But if the ECB were to massively support EFSF/ESM interventions (or an EFSF/IMF credit line, they could be very successful. Over to you, Mr. Draghi.
7.45am: Good morning and welcome back to our rolling coverage of the eurozone debt crisis. After Italy's shock win over Germany in the football last night, has it also won some concessions with the summit agreement reached this morning after 13 hours of talks?
Italian prime minister Mario Monti is certainly hailing it as a triumph and couldn't resist slipping in a dig about the football when he spoke to journalists this morning, saying: "It is a double satisfaction for Italy."
Here's a quick take on the agreement. The basic points are:
• EU leaders have agreed to use the eurozone's bailout fund to support struggling banks directly. This will initially be used for Spain's banking bailout but could also be used for Ireland.
• A eurozone-wide supervisory body for banks will be created.
• ESM loans to Spanish banks will not have seniority and so will not push other bondholders down the pecking order.
• Countries that want the bailout fund to buy their debt (therefore lowering their borrowing costs) will not be subject to Greek-style monitoring programmes. (That's the second win Monti was referring to).










http://www.zerohedge.com/news/juncker-hoped-more-italy-and-spain-get-band-aid

Juncker 'Hoped For More' As Italy And Spain Get (As Yet Unquantified) 'Band-Aid'

Tyler Durden's picture
Submitted by Tyler Durden on 06/28/2012 23:03 -0400



Early morning (drunk-dialing/texting) headlines from the EU Summit that there has been some short-term measures approved in terms of the removal of the seniority preference for ESM/EFSF rescue fund recaps of Italian and Spanish banks(though no details of the levels of dilution, cram-downs, or amounts have been discussed). The market, being as thin as it can be, is ripping higher on this realistically 'not much' news - though clearly someone 'blinked' a little. Headlines via Bloomberg:

  • *EURO LEADERS RENOUNCE SENIORITY ON SPAIN LOANS
  • *EURO LEADERS AGREE TO OPEN FUNDS WITHOUT AUSTERITY PROGRAMS
  • *BANKS CAN RECAPPED DIRECTLY WITH AID FUNDS, VAN ROMPUY SAYS

But it's not all free-money and unicorn tears:

  • *MERKEL SAYS EU LEADERS TO CONTINUE WORK ON LONG-TERM MEASURES
  • *JUNCKER SAYS WOULD HAVE `HOPED FOR MORE' FROM EU SUMMIT


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