Euro-Zone Summit Gets The Band-Aid Ready

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Source: Wall Street

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close MySpacedel.icio.usRedditFacebookFarkViadeoOrkut Text The euro-zone debt crisis is over. Most of the banks are sound, and there will be a summit meeting on Thursday to solve any remaining problems. Believe that and you should bid madly for the Spanish bonds that will come to market on Thursday.

Never mind that the stress tests that most large banks passed were about only a tad more stressful than the derisory last round, which found Irish banks to be in great shape right before they went bust. It seems that the banks were not asked anything about the stability of their deposits and other funding, or how they would survive a default by Greece, Portugal or other countries, and were allowed to include sovereign debt on their books at well above market values. All of this against the background of stern warnings from the International Monetary Fund, which told a meeting of the G-20 that capitalization of European banks "remains relatively low" compared with U.S. banks, and that their funding plans for 2011 are inadequate.

The failure to ask the banks how they would cope with sovereign defaults is particularly important given that we know that Thursday's heads-of-government summit will likely trigger a Greek default.

Germany has won. Private creditors are to "volunteer" to take losses on their holdings of Greek sovereign debt, the quid pro quo German Chancellor Angela Merkel has been insisting on for her agreement to continue to bankroll the Greek bailout. The route to this conclusion is a typically convoluted one. Officials will meet for "technical negotiations." That will produce a blueprint to reduce Greece's $500 billion debt burden. That blueprint will then be put before the heads of the 17 euro-zone nations on Thursday. The heads will then come together and approve the blueprint, leaving it to their officials to work out the details, which will determine just how much Greece's debt burden—now heading for 150% of GDP—will be reduced. If all is agreed, approval of a second bailout package for Greece should follow.

The credit-ratings firms will then declare Greece to be in at least "selective default." Bidders for the €3 billion ($4.2 billion) of Spanish bonds to hit the market, and the larger offerings from Belgium and Italy still to come this month, will be certain of what until now was only a possibility: They might end up on the queue at the euro-zone barber shop, next in line for a haircut now that Ms. Merkel has routed the European Central Bank and established the principle that private investors will share the pain of defaults

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