I've taken a far closer look at the rest of the package and surprise, long on language and short on details! As a matter of fact I can't really make heads or tails of what this thing is and how it's going to work.
As we have said before, one could bet that the Euros would first cover their banks for reasons oft explained but that what was imperative was the absolute requirement that confidence be restored in Italy or else. Well, with nods and winks, slight of hand and outright misrepresentation, the banks have been "recapitalized" and yesterday we hopefully punched a whole in that little process but if people are prepared to accept the meal placed before them, that's fine with me. But what I can't understand is how anyone could have any confidence in what has been put forward as an Italian stabilization package when one looks and discoveres that the "reform" of the Italian pension system for example, will not be completed for almost 20 years. Italy has a trillion euros of debt that must be rolled in 18 months and there is no creditable plan as to how this will be accomplished. After the bank bail-out there is but 250 billion Euros in the bail-out fund with the stated intention to gear it up to 1 trillion. How? Well, that's a tale for another day. Further, should the fund be empowered, much of the resources will be allocated to a "first loss" guarantee to the purchasers of Italian debt (assuming there are some) which after all, is a form of a CDS about which one wonders how receptive the market will be to an instrument of this type after, as we have seen yesterday, a loss of 50% on one's exposure is not considered a "credit event." There is even talk of making the first loss provision "transferrable"--from what one may ask--and negotiable...should be interesting. One doesn't see bid/offered spreads in the 15-100 range very often, then again these are some of the brightest guys around.
The strange silence one hears is from the IMF. As we noted, the highly conflicted Mme. Lagarde now runs that shop but despite that fact (or because of it) one would have expected a more active involvment at this stage. The leverage is going to have to come from somewhere other than Euroland and the IMF is the obvious place with indirect support from those who have bunches of cash laying about--Russia, China etc. However, there is a small problem: when it becomes involved, the IMF generally imposes what is known as "conditionality," which means a nation--or in this case a group of nations--must present a financial plan with which the IMF must agree before resources are made available. To be sure, there is much political too-ing and fro-ing in all of this but there has to be some kind of a credible plan and as of right now there is nothing resembling a door leading to a tunnel at the end of which is a light. It's not going to take too long for the markets to figure this out and it is therefore imperative that some of the blanks begin to be filled in at the G-20. I get the uncomfortable feeling that there's some Yago in the middle of all of this...you know, "'Tis here but yet confused; knavery plain face is never seen til' used." Somebody is going to catch it in the neck on this one. I'm going to try to figure out who over the weekend.
Special thanks to Amb. Charles Crawford for the kind words on the blog the other day. He has a couple of most interesting efforts himself in his own name and in the Daily Telegraph on a regular basis. Trust me, He knows Europe...and a good deal else.
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