EU leaders reach crisis deal

Private investors have agreed to accept losses of 50 per cent on their Greek bonds, an official says, removing the last apparent roadblock to a broad European plan to solve the continent’s debt crisis.
At the emergency summit in Brussels, European leaders had already agreed to force banks to raise €106 billion ($A142.33 billion) by June - partially to ensure they could weather the expected losses on Greek debt.
Details of the deal are beginning to emerge, with French president Nicolas Sarkozy telling a press conference that there will be no Greek default.
He said that Greek losses for investors would be about €100 billion and that Greek debt will fall to 120 per cent of GDP - but not until 2020.
According to Mr Sarkozy, the bailout fund will set up "powerful firewalls" to prevent contagion.
EU leaders also neared agreement on boosting the firepower of the continent’s bailout fund in order to prevent larger economies from finding themselves in need of a rescue like Greece’s.
The leaders are under immense pressure to finalise their plan after multiple delays and half-baked solutions.
Market confidence was waning and fears were growing that the two-year-old crisis could push Europe and much of the developed world back into recession.But the third prong of their plan - finding a way to reduce Greece’s crushing debts, which are on track to top 180 per cent of economic output - had been proving difficult.
German Chancellor Angela Merkel told MPs in Berlin that the goal was to bring Greece's debt down to 120 per cent of economic output by 2020.
There were concerns that that would require losses that the banks weren’t willing to take on voluntarily. Having a voluntary deal is important because imposing losses on banks can trigger massive bond insurance payments that risk creating huge turmoil on global financial markets.
A European official said today that a voluntary deal had been reached.Another official confirmed that the banks agreed to take losses of 50 per cent of their Greek bonds.
According to Greece’s debt inspectors that would take the country’s debt to just above 120 per cent by 2020.
The officials spoke on condition of anonymity pending an official statement.A spokesman for the organisation that has negotiated on behalf of the banks said he would release a statement soon, without confirming the deal.
Australian share trading has been halted as the ASX deals with a trading glitch, leaving investors unable to react to earnings news and developments in Europe.
"It's risk on," said Bell Direct equities analyst Julia Lee. "I would expect the market to have traded up by 0.4 per cent by now if it could."
Australian markets have tracked the European-US dollar trade since the beginning of the month, she said, as attention turned toward Europe's bail-out troubles. The euro has gained 1 per cent against the greenback today on the news of the European agreement, or 1.4 US cents. Ms Lee said the Australian shares would probably be moving in line with that currency pair if they could trade.
"Risk currencies are gaining and risk assets are gaining," she said.
Also Asian stocks and US futures are moving higher, which would most likely lift local stocks.
At a press conference in Canberra a short time ago, Federal Treasurer Wayne Swan said the world must see a comprehensive plan from European leaders to deal with sovereign debt problems.
"We cannot afford any more stumbles or missteps from the Europeans. It's critical that we see a comprehensive plan announced by European leaders as soon as possible," Mr Swan said.
"It needs to be a durable and credible plan and it needs to be for the long term."
The world had paid a very high price for Europe’s failure to act over the past 18 months, Mr Swan said.
The federal government fears a recession in Europe could spread to the rest of the global economy.

EU summit/G20 to kick off the final phase of Maximum Intervention

Going into this weekend’s EU summit, the market is still making the bet that Germany will choose solidarity over fiscal discipline, the recent lowering of expectations from German government sources notwithstanding. This looks increasingly like an “all in” round of betting in a hand of poker – the market better hope it is right.
Da Vinci, scientist as well as artist, stated that simplicity is the ultimate sophistication. Using that as a vantage point for observing the current EU crisis, we will now predict (read: stick our necks out with little if any confidence in our powers of foresight) that we are on the cusp of a transition to a paradigm of “less is more”. This won’t be a sudden event. In fact, the current EFSF as SPV and partial insurance proposals read like CDO squared and cubed prospectuses that marked the final phase of the US subprime bubble. This bailout attempt will be the most complicated yet. But let’s boil it down to the simplest of facts here: the debt must be destroyed and this is the final effort that ironically marks the most frantic attempt to keep it alive, but also the first effort at getting to the root of the problem with Greek haircuts.

From here on out, we will see more extend-and-pretend measures, but the ratio of those measures to the inexorable necessity to destroy the debt and extend accountability for past bad decision making will shift more and more in favour of the latter. The cost for this will be a great deal of turmoil – perhaps 12-24 months of real pain, as entitlement expectations are gutted and uncertainty. # But the long term benefits of dismounting the hamster wheel of extend and pretend will be immeasurably for the greater good. This is forest fire economics, after all: apparent devastation as the old forest is partially destroyed, but that destruction is also a renewal that allows for a more fertile, better quality ecosystem to spring up in its place.

After all, there are three critical weaknesses in our global economy today:
  • A dependence on increasingly difficult to extract energy sources
  • Lack of risk capital as the public sector crowds out the private sector
  • Global imbalances from extreme globalization
So let’s stop applying all of our capital to a public sector that is only interested in making good on the debt of past mistakes because of the risk of instability and that continues to avoid the dire need for accountability and a rationalization of over-generous entitlement spending. Instead let’s consider how we can approach the future: with new private pools of capital aimed at tackling the challenges of a new economy that is also one of “less is more”, i.e, more activity based on new and fewer energy resource inputs. Let’s also look at how we can work against the imbalances created by globalization rather than continuing endlessly to add to them.

So forget EU summit and G20 - whatever they come up with will be more extend and pretend - the only thing we can hope is that we see some element of reality – haircuts on Greek debt - enter the discussion, which could, just could be the lead point of the wedge of reality that eventually pries us loose from the extend and pretend process and leads us more directly to Crisis 2.0 – the needed turning point upon which a better future hinges. Sometimes we've been called the “princes of darkness” on occasion because of gloomy outlooks, but lets look at the alternatives here and hopefully we can all agree that we need a proper sunset and bit of night-time before the dawn of a new and better day can begin.

Steen Jakobsen and John J. Hardy 
 
From: http://www.tradingfloor.com