If You Have Something Up Your Sleeve…

Should Europe wish to demonstrate to the world that it is not about to come breaking apart, now is probably the time to do so.

Despite the well-received Italian bond auction, the results were not rosy. Yes, Italy managed to raise all the money it needed; I suppose if you thought Italy would raise less money than what it needed, this is some consolation. However, at points the yields on their bonds pushed way past 7.5%. And demand was “sufficient,” not “strong.” They had 1.5 times volume for bids. Keep in mind that most successful auctions tend to see 3-4x volume.

So really Italy is hanging on the edge of the cliff.

Today, we have ministers of 17 countries meeting to discuss what can be done. And from the sounds of it, all the usual garbage is on the agenda. Euro bonds, treaty changes, forcing out weak countries, and of course finalizing the EFSF…if this is all the EU can offer, then things are going to get darker soon.

Any bond offering that comingles liability of weak countries with the strong is going to absolutely decimate the only two strong countries in the region; France and Germany. Really, France is already toppling. Germany cannot support all of Europe on its back. A Eurobond or an elite bond means the fall of Germany, not the salvation of the others.

Forcing out the weak nations could be very messy. I suspect the euro would drop precipitously and you would also have huge logistic problems. Plus, it makes it look like the EU is starting to break up; not good for trying to issue loans denominated in a failing currency.

I don’t want to hear talk about a treaty change either, unless it accompanies other more immediate and useful measures. How long did it take the EU just to set up the EFSF? Do you know when they started talking about that dumb thing? It was May of 2010. Remember?

And it still isn’t finalized. We’re 19 months from the initial agreement to create a simple fund to loan money to European countries, and the damn thing has barely made loans to two of them. There is also no talk on the funding of the more robust tasks that Europe has set the EFSF to handle.

If the EU decides to try and implement treaty changes as their thoroughbred race horse, then I fear the markets will tank in a drop that causes one to look on 2009 with nostalgia. Whatever these morons are saying, you won’t get treaty changes finalized until any time before January 2013. You’ll be lucky even then, because with Europe’s track record 2014 looks more convincing.

Half of Italy’s debt alone will have come due by then.

The EFSF itself seems to be the bread and butter of this meeting, and I hope for all our sakes that it isn’t a total wash. I don’t enjoy watching the potential destruction of the financial markets and I really would love to see things pan out. But you’ll notice I’m keeping some large hedges against that outcome because, frankly, I don’t believe the European’s are competent.

But what really needs to happen, as we all know, is for the ECB to become a lender of last resort.

More than that, the ECB and the Fed need to work together, or else Europe’s progress will be our undoing. If we could get an announcement like that then I could actually commit to being optimistic.

Listen up, all of you. You keep telling me how Europe can easily correct this problem just by printing money and making a few “structural changes.” I don’t buy the structural changes bit, because we’ve advanced so far that Europe’s obligations are going to go off like bombs no matter what they do. But they definitely do need to print money or else we’re going to watch a continent go offline.

Now you’re committed to a rally because “no central bank has ever refused to print money.” Fine. But that appears to be exactly what this central bank is doing right now. The EU has been pretty insistent on not doing much of anything for the last two years.

If the EU wants to be around in another 3 months, then now is the time to step up. Don’t talk about what they can do to fix their problems. Start actually using a few of these solutions. Because the bond market isn’t interested in listening to this tripe any longer. It is loudly signaling that if Europe doesn’t do something, then they’re on their own. And Europe cannot afford to be on their own.

Europe is supposedly set to “finalize” the EFSF today. Maybe they should quit “finalizing” programs, and start “implementing” them. I mean, they want us to believe that they can get a handle on their problems.

Well then, prove it.

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