via (title unknown) by Tyler Durden on 10/24/11
As usual, JPMorgan's Michael Cembalest cuts to the wick of the problems facing European leaders. This time with a rather sad analogy to that head-in-the-sand abomination of a bird called the emu. The Economic & Monetary Union (EMU) and its plethora of finance ministers, leaders, and bankers appears more and more similar to its aviary analogy. Cembalest notes, Europe's long-awaited sovereign and bank bailout package will soon attempt liftoff; we will know more after yet another summit on Wednesday. There are flaws that may weigh this emu down, as annotated in the picture below. Why is this so important? Bank recaps in Sweden ('92), the US ('92, '08), Japan ('99) and Asia ('98) were close to marking the bottom of the equity market cycle….but were not designed using the equivalent of the "Goal Seek" function in Microsoft Excel.
And for completeness, Cembalest's framework for comprehension of just how far this can will be kicked based on EFSF, ESM, bank recaps, and Greek haircuts suggests:
The bottom line is that the proposed package appears to just about cover contingent funding needs for Spain and Italy through 2013, assuming that Germany and France recap their own banks and don't draw on the EFSF to do so; and assuming that T-bills do not need any backstop. IMF participation would further increase the EFSF's potential capacity. Throwing 2014 into the mix, adding Belgium, or requiring a larger (more realistic) bank recap makes the math more difficult, and results in coverage ratios close to 1.0x. The best scenario is the one where all countries are assuming to return to debt markets in 2013, the 20% first loss guarantee works and the IMF helps out.
Doesn't exactly exactly seem like the can will be kicked far given the magnitude of sponsorship but then the US knows all about financially engineering a short-term solution no matter what the long-term cost may be. We hope the EU leaders heads will emerge from the sand soon enough and in keeping with our discussion last night on whether they really know what the problem is, we hope the addiction of debt as a solution for debt is destroyed sooner rather than later.
