http://www.acting-man.com/?p=17987

„We Wish You A Long Life“ – Is A Hyper-Volatility Event Coming?

June 28, 2012 | Author Pater Tenebrarum

The Gray Swan Potential

An excerpt of a recent missive by Ray Dalio of Bridgewater was presented at Zerohedge yesterday. We have read the paper, but the salient point is in fact contained in the brief summary that discusses the probability that Germany won't 'blink at the last minute' and that the ECB won't suddenly discover its 'QE' printing press. Dalio concludes that in light of all this one should prepare for a 'fat tail' event – or in other words, a 'gray swan'.

Generally a 'gray swan' is considered a catastrophic financial market convulsion, a mass-correlated hyper-volatility event similar to the crash of 2008. A defining characteristic of the 'gray swan' is that it does not drop in on market participants out of the blue like the 1987 crash did (that was a 'black swan'). Rather, it is aforeseeable crash – the 2008 crash certainly qualifies as a gray swan in that sense.

Japan's mountain of fiscal debt is probably one of the world's biggest gray swans in waiting, but it's been such a long wait that no-one is thinking about it much anymore (which is to say, it is a gray swan that is getting slightly darker as time goes on). The euro area's debt crisis definitely has more imminent gray swan potential.

We are frequently struck by the fact that quite a few market observers in the Anglo-sphere don't really believe it is possible. For all the predictions of imminent doom (see Nouriel Roubini's latest dooming and glooming as an example), deep down nobody thinks it is going to happen. When push comes to shove, so the generally held view, then 'Germany will relent', or 'the ECB will print'.

But what if they don't, and why is everybody so sure of this? Dalio makes an important point about the ECB, which we brieflymentioned yesterday as well – namely, that its governing board is also split into major factions. Nothing will get done that has not the overwhelming support of all of them. Moreover – and this is our opinion, not a point specifically mentioned by Dalio – the ECB's governing council will simply not do anything that could be interpreted as a breach of the central bank's statutes.

Mario Draghi himself has made that crystal-clear not on one, but on several occasions. He even went as far as insisting that it is not the merely the letter of the law, but the spirit of the law that is to be adhered to. In short, don't expect any 'clever legal tricks' from the ECB. This does not mean that the ECB has fully deployed its interventionist tools just yet. There is conceivably a lot more it can do (more on that below) – but what it cannot do and won't do, is Fed or BoE-style 'QE'.

There is no mileage for bureaucrats employed by a supranational entity to stick their necks out too far, since they may be held liable if things go wrong. There would likely be forgiveness if things were to work out fine, but who can guarantee such an outcome? In fact our personal opinion is that the 'inflation solution' would in the end produce an even bigger catastrophe.

Then there is of course Germany – the supposed fount of magical solutions, held to be currently deploying itself erroneously as a roadblock. As the umpteenth (actually, it is the 19^th, to be precise) euro-group summit approaches, Angela Merkel has been doing what we have told our readers some time ago leading German politicians always do ahead of these summits – she's been lowering expectations. Only this time, she has been doing so even more forcefully than usual. The most colorful of these events was her meeting with the intensely bailout-skeptical members of her government's junior coalition partner, the FDP. Here is what she said and what they replied:

“But on Tuesday, ahead of the crucial European Union summit in Brussels on Thursday and Friday, she was clearer than ever in her rejection of debt sharing across the common currency area. During a meeting with parliamentarians from the Free Democratic Party (FDP), her junior coalition partner, she said there would be no full debt sharing "as long as I live."

[…] several FDP lawmakers responded by saying: "We wish you a long life."

(emphasis added)

Nothing we have heard or read over the past few weeks encapsulates the German stance more clearly or concisely. If she had said 'no debt sharing until the end of the universe', they would all have wished for the the universe to continue for many unperturbed eons.

In parliament, she also found very clear words, to the warm applause of at least her conservative supporters. Her speech in parliament was evidently held after she had read the summit blueprint developed by Messrs. Herman van Rumpoy, Manuel Barroso, Jean-Claude Juncker and Mario Draghi, which can be seen here (pdf).

“In a statement to Germany's lower house of parliament, the Bundestag, Merkel made clear that she will not bow to intense international pressure on Germany to agree to joint bond issues that would calm the euro crisis by stabilizing ailing euro-zone member states like Italy and Spain.

She said the blueprint for closer financial integration drafted by European Council President Herman Van Rompuy, European Commission President Jose Manuel Barroso, Euro Group President Jean-Claude Juncker and European Central Bank President Mario Draghi contained major shortcomings, and that she would seek support for her own ideas in Brussels.

"I profoundly disagree with the stance taken in the report that precedence is given to mutualization, and that more control and enforcable commitments take second place and are phrased in very imprecise terms," said Merkel, to applause from conservative parliamentarians.

"There is a clear discrepancy between liability and control in this report, so I fear that the summit will once again talk too much about all kinds of ideas for possible joint liability, and much too little about improved controls and structural measures."

She said instruments such as euro bonds, short-term euro bills and a common debt repayment fund would be in breach of the German constitution in any case, and that she regarded them as "economically wrong and counterproductive."

[…]

In a clear signal to international partners to tone down their demands, Merkel said Germany's economic strength has its limits and that its scope to bail out other nations must not be overestimated. "Germany is the economic motor and anchor of stability in Europe but even Germany's strength isn't endless,"she said.

Merkel, who on Tuesday declared that Europe would not share debt liability "as long as I live," repeatedly stressed her opposition to euro bonds, saying: "The mistakes of the past must not be repeated. Politically enforcing equal interest rates after they didn't work well in markets would be repeating an old mistake."

She said she would push for the summit to agree to a timetable and a working method to decide on reforms of the euro's architecture. "Our work must convince those who have lost confidence in the euro zone, not by self-deception and sham solutions but by fighting the causes of the crisis," she said.

(emphasis added)

When Americans read something like this, they may often wrongly believe that she is merely placating her domestic audience. In part, she is of course – but the above is also reflecting what she has come to believe. Flip-flopping is not as common in German politics as seems to be widely assumed.

Allow us to repeat the decisive passages above with regards to debt mutualization:

It is 'against the German constitution', it is 'economically wrong and counterproductive', there will be 'no political enforcement of equal interest rates', and what is needed is 'fighting the causes of the crisis, instead of adopting sham solutions'.

First of all, the part about the constitutional obstacle is really all one needs to know, but secondly, what is there in Mrs. Merkel's opinion and assessment of the fundamental economic situation and the associated incentives that anyone could possibly disagree with?

However, there is so much dissension now in the ranks of the euro-group that a clear course probably won't be agreed to at the summit. We actually believe that if the German ideas – intensive structural reform coupled with strict control and enforceable commitments – were to be adopted unanimously and then quickly put into practice, the markets would become a lot less jittery. The problem is not necessarily that the German course is 'too strict', the problem is the lack of unanimity regarding the way forward and the slowness and uncertainty attending the ratification and implementation of agreements.

This is why dangerous looking charts like the ones below must give us pause.

Spain's 10 year government bond yield has broken out. The last two breakouts were followed by swift retracements – and with the exception of the November 2010 breakout that was the case with everyinitial breakout attempt. And yet, here we are, nearly at new highs - click chart for better resolution.

5 year CDS on Spain's sovereign debt (green line) are far above their previous highs already. Italy's have not yet bested their previous highs, but are perilously close to doing so as well. Greece (yellow line) is apparently about to go bankrupt for the second time - click chart for better resolution.

Below we show two charts – the S&P 500 index and the strongest major stock market index in the euro area, the German DAX. What is noteworthy is the divergence between them (a higher high in the SPX versus a lower high in the DAX) and the fact that the most recent decline from the highs has taken the shape of an impulse wave.

These divergences and the fractal shape of the initial declines at the very least spell 'danger'. It is always possible for divergences to disappear again and impulse waves can also appear in corrective structures. Still, this time the DAX has failed to appreciate noticeably in spite of a sharp decline in the euro. This is a marked difference from the aftermath of the market upheaval in the summer of 2010, after which the DAX climbed quickly to new highs for the move as the weak euro provided a tail wind for the shares of German exporters.

There are never any guarantees for specific market outcomes. Given the low expectations attending the summit, it is not inconceivable that almost any kind of agreement – even an obviously insufficient one – may become a trigger for a short term relief rally. On the other hand, it is precisely when divergences like the ones shown below are in place that the scene is potentially set for extreme outcomes in the other direction.

First the S&P 500 … - click chart for better resolution.

And here the German DAX for comparison purposes - click chart for better resolution.

A Two Day Summit? Make That A Four Day Summit…

No-one is under more pressure at the euro-group summit than Mario Monti. We have previously discussedthe fact that he has lost political support at home, both among his grumbling allies in parliament (the Berlusconi-led camp is getting rather antsy, with Berlusconi himself lately sniping at Monti quite frequently), as well as among the increasingly restive electorate. Italy's political establishment is worried that more and more voters are flocking away from the main parties to small and often radical fringe parties – even fringe parties with no political program whatsoever, like Beppe Grillo's 'Five Star' movement. Deposing Monti may soon be regarded as a price worth paying, especially if he returns without any concrete success from the summit.

“Monti is facing even more political pressure on the home front. Italian borrowing costs have been rising dangerously in recent weeks and the prime minister's popularity, and political support, has been plummeting. Should he return from Brussels without clear successes, his government could topple — an impression reinforced recently by statements from former Prime Minister Silvio Berlusconi, who leads Monti's largest coalition partner, the People of Liberty. Berlusconi has recently said that it would not be a bad thing were Germany to leave the euro and also has indicated his party might back out of the governing coalition, which would lead directly to Monti's fall.

Monti, it would seem, has not been immune to the pressure. In a speech to parliament on Tuesday, he said he will continue to push his proposal for using the ESM to lower borrowing costs and that he would not go to Brussels to "rubber stamp" statements that had already been written.

He also said that he was prepared to stay in Brussels until Sunday night to get an agreement that will calm markets. Given the acrimony on the eve of the meeting, other EU leaders might be wise to extend their hotel reservations as well.”

(emphasis added)

The social mood in Italy is clearly rather negative at the moment – as evidenced by the MIB index hovering only a little bit above its 2009 crash low. In fact, we think that the chart of the MIB looks rather dangerously poised here. A break of the 2009 low would be a serious development from a technical perspective. There is however a positive RSI divergence on the weekly chart, so perhaps a breakdown will be avoided in the near term. It is definitely a situation worth keeping a close eye on in coming days and weeks.

Italy's MIB index is perilously close to its 2009 low - click chart for better resolution.

It is also noteworthy in this context that Spain's IBEX has already broken below the equivalent 2009 low and is now testing this level from below. In this case one must give due consideration to the fact that a potentially positive divergence between the two indexes now exists – as one has made new lows relative to 2009 and the other hasn't yet. However, the divergence is so small that it won't take much to erase it. Both indexes continue to look suspiciously similar to the Nikkei after its bubble peaked in 1989.

The IBEX has already broken below its 2009 low - click chart for better resolution.

Unfortunately for Mr. Monti, camping out in Brussels for four days may not really help his cause either. What he wants is some way of getting Italy's (and by implication, also Spain's) bond yields down to a level that Italy can live with as fast as possible. In other words, he wants to see some sort of forceful interventionist measures deployed. This is precisely what Germany is not likely to be willing to do, as it rightly fears that the reform momentum may be lost if market pressure is eased.

However, the German side may underestimate the volatility of the Italian political situation. Italy has not had stable government for a long time. Governments as a rule change in Italy at about four to five times the frequency seen in other major industrialized countries (there have been 63 governments since 1945). Berlusconi's reign was actually one of the most stable of the entire post WW2 era.

Imagine though what would happen if Monti were suddenly deposed after his return from Brussels. Would markets just sit still? If the 'Tremonti Plunge' was any indication, the answer is that they probably wouldn't.

As an aside to this, Italy has a problem that is very similar to Spain's with regards to its upcoming debt rollovers. They are heavily front-loaded as can be seen below:

Italy's annual debt rollovers in billions of euros. Even with the LTRO induced buying spree by its commercial banks earlier this year, there is still a big chunk of debt waiting to be replaced in 2012 – click chart for better resolution.

In light of all of the above, one simply cannot dismiss Dalio's 'fat tail' warning out of hand. It need not necessarily happen right after the upcoming summit, but it is a danger that will be with us for some time even if the markets greet the summit outcome with temporary relief.

The ECB – Departing Into the 'Twilight Zone'?

A recent Bloomberg article discusses the 'tools' left in the ECB's inflationary toolbox in order to combat the deleveraging cycle in the euro area. Allegedly Mario Draghi is about to take leave of the euro-zone in order to 'enter the Twilight Zone', a fabled territory of nutty monetary experimentation not even Heli-Ben dares to frequent.

“European Central Bank President Mario Draghi is contemplating taking interest rates into a twilight zone shunned by the Federal Reserve.

While cutting ECB rates may boost confidence, stimulate lending and foster growth, it could also involve reducing the bank’s deposit rate to zero or even lower. Once an obstacle for policy makers because it risks hurting the money markets they’re trying to revive, cutting the deposit rate from 0.25 percent is no longer a taboo, two euro-area central bank officials said on June 15.

“The European recession is worsening, the ECB has to do more,” said Julian Callow, chief European economist atBarclays Capital in London, who forecasts rates will be cut at the ECB’s next policy meeting on July 5. “A negative deposit rate is something they need to consider but taking it to zero as a first step is more likely.”

Should Draghi elect to cut the deposit rate to zero or lower, he’ll be entering territory few policy makers have dared to venture. Sweden’s Riksbank in July 2009 became the world’s first central bank to charge financial institutions for the money they deposited with it overnight. The Fed rejected cutting its deposit rate from 0.25 percent last year. With Europe’s debt crisis damping inflation pressures and curbing growth, the ECB may feel the benefits outweigh the negatives.”

(emphasis added)

Yes, there actually is such a thing as central bank-administered negative interest rates. The so-called 'zero-bound' is not relevant for the central bank's own deposit facilities, where the excess reserves of commercial banks are parked (these reserves and the currency issued by the central bank represent the vast bulk of its liabilities).

We would note to this that not even a negative deposit rate will induce banks to lend out money by pyramiding deposits upon their reserves if their fear of loss of capital is great enough. We doubt the big German banks would suddenly fall over themselves to lend to credit-starved Greeks or Spaniards, for instance, just because they might have to pay a ¼ point penalty. After all, in Switzerland the entire yield curve up to the five year note has turned into negative territory recently.

If on the other hand the penalty rate becomes large enough (i.e., if the interest rate on central bank deposits is moved deeply enough into negative territory) to actually induce the banks to create new loans and deposits, then there is no telling what could happen in view of €830 billion in excess reserves considering the paltry reserve requirement of 1% (!) for demand deposits in the euro area. In theory, the banks could lever up their reserves by a factor of 100. We don't expect that to happen, we're merely pointing out that it would be possible in principle. So this has to be one of the more crazy ideas out there, since if it doesn't work, it will only reduce the liquidity buffers of banks, whereas in case it doeswork, it could kick off a major inflationary episode. That doesn't mean it won't be tried. In fact, this particular Bloomberg missive on the topic may be a 'trial balloon' leak in order to find out how the idea is received.

Meanwhile, Chicago Fed president Charles Evans is once again calling publicly for more money printing on the part of the Fed, so the two central banks could perhaps start a competition. Best hang on tight to your gold.

Few central bankers dare to venture in to the Twilight Zone…but Mario Draghi may

(Photo via the Web, source unknown)

A bunch of evil twilight zone central banker minions waiting to ambush innocent savers.

(Photo via the Web, source unknown)

Addendum: Greek Shenanigans and European Court Vacation Rulings

AFP reports that the Greek government is apparently in breach of its bailout commitments as it has failed to lower the headcount of its civil service. It has simply hired almost as many civil servants as it has fired.

“Greece breached the rules of its EU-IMF loan agreement by taking on some 70,000 public sector staff in two years, undermining efforts to reduce the state payroll, a report said on Sunday.

To Vima weekly said the hirings in 2010 and 2011 were highest in local administration, health, the police and culture, where the number of employees actually increased.

It cited a report from a permanent mission to Athens of the so-called 'troika' of international creditors, the EU, IMF and the European Central Bank, and data given by outgoing finance minister George Zannias.

An unidentified troika official told the daily: "While they legislated rules to reduce the number of civil servants, they were bringing people in through the window." The official added that over 12,000 people were hired by local councils even as a cost-cutting initiative merging municipalities was underway.

Zannias' report to the new government coalition after June 17 elections allegedly reveals that although over 53,000 civil servants retired in 2010, the overall number of state staff was almost steady at 692,000 people, To Vima said. In this case, most of the vacancies were filled immediately, the daily said.

Similarly, although another 40,000 staff left in 2011, the net reduction on the payroll was only 24,000. By this time, Greece had promised to only hire one civil servant for every five that left. But over 16,000 people were hired instead of the allowed 8,000, To Vima said.

Leave it to the Greeks to bamboozle everyone with doctored statistics until the truth can no longer be covered up.

Meanwhile, the sorry state of the sclerotic EU labor markets was solidified by a court decision that really boggles the mind.

“For most Europeans, almost nothing is more prized than their four to six weeks of guaranteed annual vacation leave. But it was not clear just how sacrosanct that time off was until Thursday, when Europe’s highest court ruled that workers who happened to get sick on vacation were legally entitled to take another vacation.

“The purpose of entitlement to paid annual leave is to enable the worker to rest and enjoy a period of relaxation and leisure,” the Court of Justice of the European Union, based in Luxembourg, ruled in a case involving department store workers in Spain.“The purpose of entitlement to sick leave is different, since it enables a worker to recover from an illness that has caused him to be unfit for work.”

With much of Europe mired in recession, governments struggling to reduce budget deficits and officials trying to combat high unemployment, the ruling is a reminder of just how hard it is to shake up long-established and legally protected labor practices that make it hard to put more people to work and revive sinking economies.

The workers originally won their case in a Spanish court, where they argued that collective bargaining agreements made a distinction between annual leave and sick leave that was recognized by Spanish law. The National Association of Large Distribution Businesses, known as Anged, appealed to the Supreme Court in Madrid, which then asked the Court of Justice for a ruling on how to apply European law covering working times.

The Court of Justice had previously ruled that a person who gets sick before going on vacation is entitled to reschedule the vacation, and on Thursday it said that right extended into the vacation itself.

“The point at which the temporary incapacity arose is irrelevant,” the court found. The ruling applies across the European Union of 27 countries.

A spokesman for Anged said the association was not able to comment because it first needed to study the details of the ruling.

Spanish unions have stepped up protests in recent weeks against attempts by Prime Minister Mariano Rajoy to ease restrictions on hiring and firing and otherwise overhaul labor laws.

The ruling does not apply to the 25 percent of the Spanish labor force that is currently unemployed.”

(emphasis added)

So in a way, you can only get legally sick during times when you should work, but not while you're on vacation. Should you get sick while on vacation, you will be deemed to have become sick during work. Except if you're unemployed, which enables you to get sick at any time you wish. This will open the door to massive sick-leave fraud, as there is no way for anyone to control whether illnesses during vacations are faked or not.

In all other places on Earth getting sick during a vacation is known as 'bad luck'.

and.....

http://www.zerohedge.com/news/finlands-proposal-cash-collateral

Finland's Proposal: Cash For Collateral

Submitted by Tyler Durden on 06/28/2012 13:37 -0400

Borrowing Costs

European Union

Eurozone

Finland

The strawmen are coming thick and fast from the EU Summit as they break for an evening snack. Between banking union 'plans' by year-end and ESM credit seniority exemptions for Spain, the Finnish Minister for European Union Affairs, Alexander Stubb, just suggested that EU rescue funds (ESM/EFSF) could potentially partly guarantee Italy's and Spain's bonds if the two countries provide collateral. Such 'covered bonds' reduced his country's borrowing costs during an economic crisis in the 1990s, and now "could be a solution which would bring down the interest rates of Spain and Italy." As Bloomberg notes, the proposal was "a halfway house" between no help at all for weaker eurozone members and full debt mutualization, and a response to those "trying to say that governments such as Finland, Germany and the Netherlands keep on (only) saying no." Unfortunately, as we are all too well aware, despite this being a "constructive proposal from the Finnish government", there is no quality collateral (and certainly trusting earmarks on tax revenue is unlikely to spur demand) leaving the only government asset worth thinking about - Gold - which leads us back to Germany's uber-solution the whole time. "At the end of the day, EU Summits are always some kind of compromise" Stubb added, by which we assume the periphery compromises its sovereignty (and gold) and the Core compromises its taxpayers.

and Merkel vs Hollande divide widening......

http://www.zerohedge.com/news/hollande-merkel-divide-appears-grow

Hollande-Merkel Divide Appears To Grow

Submitted by Tyler Durden on 06/28/2012 19:30 -0400

European Central Bank

Germany

headlines

France's 'happy' Hollande is out, apres-dejeuner, opining on what occurred today and where he stands. The critical items appear to be the growing divide between his immediate need for 'debt stability' measures versus his disagreement over the assumptive 'fiscal pact' that Merkel will require before any money leaves that nation's shores in its transfer-of-wealth way. Headlines via Bloomberg:

HOLLANDE WITHHOLDS ENDORSEMENT OF EU FISCAL PACT
HOLLANDE SAYS MUST FIND ALTERNATIVE TO ECB IN CUTTING YIELDS
DEBT STABILITY MEASURES NEED TO COME FIRST, HOLLANDE SAYS
HOLLANDE SAYS GROWTH MEASURES `AREN'T ENOUGH'

but its just not fair... sacre bleu...

HOLLANDE SAYS ITALY-SPAIN YIELDS TOO HIGH, GIVEN THEIR EFFORT
BAILOUT FUNDS SHOULD BE USED FOR ITALY-SPAIN, HOLLANDE SAYS

and the piece-de-resistance:

EUROPE SHOULD HAVE MORE THAN MARKET ECONOMY, HOLLANDE SAYS
WE WILL RENEGOTIATE COUNTRY SPECIFIC RECOMMENDATIONS AND WILL ONLY IMPLEMENT WHAT WE AGREE WITH
When we said that the Spanish bailout inspired Syriza to push on with renegotiating all the Greek pacts, little did we know that Syriza itself would inspire all of Europe to gang up on Merkel. Problem is: Syriza failed as Germany sadly still has all the leverage aka money. The other beggars will be no more successful.

The market's response to this less-than-total-print-fest Summit resolution: ES -8 pts from late-day highs... given back well more than half the 'fat-finger' fiasco...

and the developing story of the day..... a few views - a couple of pieces from from The Telegraph

http://www.telegraph.co.uk/finance/debt-crisis-live/9360282/Debt-crisis-as-it-happened-June-28-2012.html

00.19 Bruno tells me that the eurozone leaders have resumed their talks.David Cameron and the rest of the non-eurozone leaders have retired for the night, and we're about to do the same.

Follow Bruno on Twitter for more live updates. He'll be soldiering on through the night...

See you in a few hours. Goodnight.

00.15 Meanwhile, French President Francois Hollande is trying his best to be diplomatic. He says that all 27 members agreed on a growth pact, but Italy and Spain would sign later.

He also mentions the countries' pleas for short term measures to calm markets. Spanish benchmark 10-year borrowing costs are currently at 6.85pc, while Italian benchmark yields are at 6.17pc.

Neither are sustainable over the long term.

and from ekath citing Reuters......

http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_29/06/2012_449608

Italy, Spain hold up growth pact over spreads initiative

Italy and Spain, battling searing market pressure in the euro zone's widening debt crisis, held up agreement on measures to promote growth at a European Union summit on Thursday to demand urgent action to bring down their borrowing costs.
Italian Prime Minister Mario Monti and his Spanish counterpart, Mariano Rajoy, refused to sign off on a 120 billion euro (96 billion pounds) growth package until EU paymaster Germany approved short-term measures to ease their cost of credit, officials said.
Hours later than planned, European Council President Herman Van Rompuy came out to announce a deal in principle on measures to stimulate infrastructure investment and give more capital to the EU's soft-lending arm, the European Investment Bank.
"There's no blockage, we keep on working and we move on,» he told a belated news conference, playing down reports of a row.
But Italy, Spain and some other countries said they wanted to see steps to allow euro zone rescue funds to buy their government bonds and support their banks before they would give final approval.
"There's an epic battle going on between those who seek immediate and unconditional solidarity and those who seek to fundamentally change the way European economies are run and put Europe on a course of stability, discipline and growth,» one EU official reported after nearly eight hours of debate.
Another said Socialist French President Francois Hollande, the strongest backer of the growth pact, had also raised concerns and sought a delay in introducing stricter measures to enforce EU budget discipline. There was no comment from the French camp.

Merkel cancelled a planned news briefing as the leaders argued over the EU's future long-term budget and the growth package. The 27-nation EU summit agenda was turned upside down with plans for euro zone leaders to hold a late-night discussion on the future of their troubled 17-member currency union.
It was the 20th EU summit since the sovereign debt crisis began in early 2010 after Greece disclosed its public deficit was far higher than previously reported.
Policymakers played down any prospect of a rapid solution to the turmoil which has forced Greece, Ireland, Portugal and now Spain and Cyprus to seek international bailouts.
As the leaders wrangled, Italy was beating Germany 2-1 in the Euro 2012 soccer semi-final, the underdog knocking the favourite out of the contest.
Reflecting public anxiety about the future of the single currency, European Parliament President Martin Schulz told the summit: «Today, people throughout Europe are casting worried eyes towards Brussels, towards this summit meeting, because they fear that our European project is one step away from disaster."
Positions were so far apart that even before Thursday's meeting began EU sources said there was the prospect of another summit in mid-July to try to bridge the differences.
In draft summit conclusions, subject to amendment on Friday, the leaders were set to ask the EU's top four officials to produce a detailed, time-bound roadmap to a genuine economic and monetary union by December.
But markets may not wait that long.
On the summit sidelines, deputy finance ministers were working on urgent measures to support Madrid and Rome, seen as too big to bail out, that euro zone leaders may adopt on Friday.
Italy's benchmark borrowing costs hit six-month highs at auction on Thursday, piling pressure on Monti to ease squeeze concessions out of Germany.
Rome and Madrid have been pleading for help but had received a cool response from Berlin and other capitals so far.
Three EU sources said work was focused on using the euro zone's temporary EFSF rescue fund and a future permanent ESM bailout fund to buy new Spanish and Italian bonds as they were issued to underpin their bond auctions.
The funds will have a maximum firepower of 500 billion euros once the ESM is fully stocked in 2013, minus 100 billion euros already earmarked to aid Spanish banks.
The sources said the preferred creditor status of ESM loans to Spain, which has spooked investors, was likely to be removed if Madrid issues covered bonds backed by state assets or tax revenues.

Italy and Spain would still have to request assistance, which they have been loath to do, and would be subject to fiscal policy conditions and international monitoring. But they might not be required to do more in austerity and structural reforms than they have already undertaken, the sources said.
Merkel was being urged at home to hang tough and reject all efforts to make Germany underwrite European borrowing or banks, which some of her partners say may be the only way to save the single currency.
"Nein! No! Non!» shouted a headline splashed across the front page of the normally sober German business daily Handelsblatt.
Monti was also under mounting domestic pressure to achieve results in reducing Rome's borrowing costs or risk seeing his technocratic government fall within months as the centre-right and centre-left parties that support him jockey for position before an election due in 2013.
Van Rompuy and European Commission President Jose Manuel Barroso have set long-term goals of creating a euro zone treasury to issue joint bonds in the medium-term, and establishing a banking union with central supervision, a joint deposit guarantee and a resolution fund.
Merkel insists that fundamental reforms to give European Union authorities power to override national budget and economic policies must come before any further shared liability.
Germany has enjoyed an export boom even as the crisis has spread, removing any sense of urgency among voters for radical steps to support other countries.
The euro hit a three-week low and world stocks fell as investors bet that this latest summit would fail to produce concrete measures to tackle the crisis, sending 10-year Spanish government bond yields above the danger level of 7 percent.
France's Hollande advocates joint «eurobonds», which would bring down borrowing costs for the weak because the pool of guarantors would include the strongest - principally Germany.
Germany does not want to use its credit rating to support others unless they share control of tax and spending powers first. Dutch premier Mark Rutte sided with Merkel in arguing against any early move to share liability.
"It's crucial for us to avoid taking measures that would ease pressure on southern Europe to reform. That is why I seriously question a rapid transition to a banking union, or eurobonds,» he told parliament in The Hague. «That would result in a sort of 'paracetemol effect' for southern Europe, like the effect performance enhancers have on athletes."
Finnish Europe Minister Alex Stubb told Reuters that Europe should prepared to live in a state of crisis for the rest of the decade. But he said a stronger and more resilient continent would eventually emerge.
"It is an existential crisis, but it's probably the best crisis we've had. It's forcing European leaders to take very difficult decisions and as we all know very few difficult decisions have been taken in a relaxed atmosphere,» he said.

and Bruno's piece.....

http://www.telegraph.co.uk/finance/financialcrisis/9363806/Debt-crisis-Italy-and-Spain-threaten-to-block-everything-at-tense-EU-summit.html

By Bruno Waterfield, in Brussels

11:46PM BST 28 Jun 2012

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The two countries blocked a flagship €120 billion “growth pact” as Mario Monti, the Italian Prime Minister, warned that there would be gridlock unless the EU mobilised its bailout funds to underwrite Italian and Spanish bonds.

As talks dragged on into the early hours of today, without any progress on long-term solution to fix the eurozone crisis, Herman Van Rompuy, the president of the European Council of EU leaders, tried to play down the deepest splits since the European debt crisis erupted two years ago.

“There are two countries who are very keen to make sure that there is an agreement both on the long term measures and on the short term measures, but I wouldn't say there was any blockage,” he insisted late on Thursday night.

During a bad-tempered summit, Francois Hollande and Angela Merkel clashed over the pleas from Italy and Spain with Gremany dismissing their fears as “scaremongering” by allies.

Arriving at the EU’s 19th eurozone crisis summit in the last two years, the French president opened hostilities with Germany by declaring himself to be on the side of Italy and Spain.

“I have come here to get very rapid solutions to support countries in the greatest difficulty on the markets even though they have made considerable efforts to restore their public finances,” said the French leader.

The rift between eurozone members widened when Mark Rutte, the Dutch prime minister, supported Germany. He said the only way Spain and Italy could emerge from the crisis was “to bite the bullet” and to “reform their labour markets, to make savings and reforms”.

Both Spain and Italy are vetoing any decisions until the eurozone shows them “solidarity” because they have implemented EU austerity measures, but have still seen substantial increases in the cost of their government borrowing on the bond markets. On Thursday, Spanish bond yields passed the critical 7pc mark again.

EU officials have confirmed that the two countries had demanded the use of eurozone bail-out funds, worth €740bn (£593bn), to buy new Spanish and Italian bonds to ease borrowing costs at debt auctions over the summer.

The moves have run into opposition from Germany ahead of a vote in the Bundestag parliament today, where Mrs Merkel requires a two-thirds majority of MPs to ratify the creation of a permanent eurozone bail-out fund.

In order to prevent a parliamentary rebellion over the new fund, which means an extra contribution of €168bn from German taxpayers, Mrs Merkel insists that help for Italy or Spain be attached to strict conditions, seen as politically toxic in both Rome and Madrid.

The temperature of the debate was raised after a senior German official close to the chancellor poured scorn on the demands being made by the Italian and Spanish.

“We would warn against exaggerated scaremongering,” said the official.

Mario Monti, Italy’s technocrat prime minister, is demanding help to bring down borrowing costs currently at 6pc, near crisis point, in return for pushing through controversial pension and labour reforms.

Unless he can show progress, Mr Monti, could face a rebellion in the Italian parliament, tipping Italy into political turmoil that would deepen its borrowing problems, plunging the eurozone into its worst crisis yet.

and the German response......

http://www.zerohedge.com/news/eurobeggars-continue-be-choosers

Update: Germany Just Said, You Know It, Nein; Eurobeggars Continue To Be Choosers;

Submitted by Tyler Durden on 06/28/2012 18:28 -0400

Update: NEIN

GERMANY WON'T ACCEPT NEW ANTI-CRISIS INSTRUMENTS - GERMAN SOURCE *DJ

Maybe the Italian football team should have bent over just a little.

* * *

Today's edition of the Eurosummit is over. There was some news, however, as always happens, there is a twist:

EU LEADERS HAVE AGREED A GROWTH PACKAGE OF 120 BLN EUROS BUT ITALY AND SPAIN NOT PREPARED TO SIGN OFF ON IT - EU OFFICIALS - *DJ

ITALY WON'T SIGN ONTO GROWTH PACT UNTIL BOND BUYING DEAL

So beggars continue to be choosers, as Italy and Spain will not agree on getting aid (!) until Germany relents on buying their bonds. There was a reason why in the summer of 2011 we said that as the Game Theory equilibrium shifts to defection, he who defects first, defects best. Well, Greece is now leaps and bounds ahead of everyone as the global ponzi unravels. And so the posturing for second place is now on. We can't wait for the official German response, to both this, and to the loss by Italy in Euro2012.

EU leaders have agreed a package to stimulate growth in their economies, but Italy and Spain have refused to sign up to it because they want Germany to approve short-term measures to ease their borrowing costs first, EU officials said.

European Council President Herman Van Rompuy announced the 120 billion euros ($149 billion) deal at a news conference, saying it would consist of more capital for the European Investment Bank and project bonds for infrastructure.

But Italy, Spain and some other countries want the euro zone to agree steps to help bring down their high borrowing costs first, including steps to buy their government bonds in order to bring down yields.

"We're in favour of the growth pact and there is a deal on the content, but before we sign it we want a comprehensive deal including short-term measures," a Spanish government official said.

Another official said that France, the strongest backer of the growth pact, had also raised concerns about a deal in part because it does not want stricter measures on budget restraint to be introduced as soon as planned.

Essentially what Spain and Italy are saying is that someone has to buy or else. Well, someone will buy. At the right price. Dear PIIGS: here is a very simple lesson in economics:

What we also learned is that all that matters is tomorrow, the long-term is irrelevant. Which it is: when the Ponzi collapses one only hope to live day to day.

Peak idiocy.

Catharsis Ours

Thursday, June 28, 2012

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A Two Day Summit? Make That A Four Day Summit…

The ECB – Departing Into the 'Twilight Zone'?

Finland's Proposal: Cash For Collateral

Hollande-Merkel Divide Appears To Grow

Update: Germany Just Said, You Know It, Nein; Eurobeggars Continue To Be Choosers;

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