Tuesday, November 16, 2010

Eurozone's Big Boys Hold the Aces?

Nils Pratley of the Guardian reports, Eurozone's big boys hold the aces:

Markets tremble in the face of Irish resistance. It was a reasonable reaction since even the European Union's top officials seem unable to agree on the size of the threat. Herman van Rompuy, European president, said the eurozone was in a "survival crisis" while economic affairs commissioner Olli Rehn insisted that "it's not a matter of the survival of the euro." Find the consistent message in those statements if you can.

It looks as if the EU officials are trying to hit two impossible targets at once – crank up the pressure on Ireland to accept a bailout while simultaneously reassuring the wider world that the debt crisis will not spread to Portugal, or at least not to Spain.

Investors will tolerate such confusion only for so long. They understand that verbal gymnastics are part of the process of forcing a resolution but, in the end, markets want to see a deal. Germany, France and European Central Bank appear to have agreed that Ireland needs a bail-out to prevent a loss of confidence in the eurozone. If they cannot then impose their will on a junior member of their club, the crisis enters new territory.

Sympathy for Ireland is entirely justified, however. The country is fully funded until next summer, as its government keeps reminding us. Its politicians are entitled to seek the best possible terms and brinkmanship is entirely understandable. The focus will be Ireland's freedom to set taxes. The ultra-low corporation tax rate of 12.5% is the symbol of Ireland's economic freedom and a cause of resentment in Germany and elsewhere. Hard bargaining might secure a marginally more freedom.

Ultimately, though, the big boys of the eurozone hold the aces. The wholesale markets are virtually closed to Irish banks, who can fund themselves on a day-to-day basis only because the ECB provides liquidity. That is why it seems inevitable that Ireland will bow to the pressure to accept a bail-out package.

It may be dressed up as a recapitalisation of the broken banking system but that's merely a detail since Ireland continues to stand behind its promise to support its banks. That die is now cast.

A succession of eurozone finance ministers have sought clarity from the Irish government on its plans to resolve the banking crisis. Meanwhile, the Bangkok Post reports that Europe and the International Monetary Fund announced the launch of an urgent mission to Dublin to finalize emergency support for Ireland's devastated banking sector:

EU economic affairs commissioner Olli Rehn said plans in gestation for days would have "an accent on restructuring Ireland's banking sector".

Dublin had "committed" to explore shelter, he said, after tension on the bond market that reflected the mounting market uncertainty over the country's financial prospects.

"We will act in a determined and coordinated way if necessary to ensure the stability of the eurozone," said Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro finance ministers who must validate an application for support from partner states.

The Irish government would have to decide on financial aid, with inevitable strings attached, within "days," said Juncker.

Cowen had insisted to lawmakers in Dublin's Dail that the unfolding discussions were about seeing how "irrational" markets could be "taken out of the equation".

Ireland should not become "enslaved" to ruthless traders, he argued.

In Washington, the IMF said a "short and focused consultation" would have as its goal "to determine the best way to provide any necessary support to address market risks."

US Treasury Secretary Timothy Geithner has said Europe would be well advised to act "very, very quickly."

Not too quickly, after all, big US banks and their big hedge fund clients are absolutely loving this volatility. They get to profit from all the 'market mayhem'. I've seen this movie so many times, I can write books on it. While European "big boys" continue to vacillate, looking like a bunch of incompetent fools, traders and hedge funds are just setting themselves up for the next leg up.

Continue buying the dips. Just like last November's Dubai scare was way overblown, so is all this nonsense of a 'eurozone crisis' because of Ireland's banking woes. There will be plenty of fear mongering, but behind all these rumors, some big funds are setting up for the next leg up. And you can mark this post -- that's how confident I am that this is just more nonsense to feed the real big boys running the big banks and top hedge funds.

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