Monday, November 28, 2011

According to a report, the European commission is planning to propose bank debt guarantees.

Goldman Sachs calls for $25 billion in equities to be bought in pension rebalancings by month-end.

The eurozone's economic union and banking system, a house built on pillars of sand -- that is, too much sovereign debt, reckless leverage and incredibly unrealistic unmarked-to-market accounting by the banking industry -- are now in jeopardy.

Given the disparate economic, political and legal interests in the E.U., the regimes of some monarchs and prime ministers have been toppled, but the heavy policy lifting lies ahead.

The lesson learned in the American economic crisis and Great Decession of 2008-2009 and now in the eurozone crisis of 2011-???? is that debt cannot grow beyond the ability to service it. Obviously.

A period of subpar economic growth is the best outcome for the eurozone. At worst, the European economies' downturn will be far deeper, bank credit will be restrained, the euro could vanish, currency and trade wars might erupt, and the European banking system could collapse -- or a combination of these factors could occur.

The only practical solution in Europe appears to be going the route of the U.S. and our Fed three years ago and embarking on its own brand of massive European-style quantitative easing.

Risk markets are losing their patience. The eurozone situation is approaching a major climax. This is by far the most important story to follow in the coming days and weeks. U.S. economic data muddles along. If Europe took care of business quickly, global stock markets would rally sharply. The S&P 500 could possibly make a run at the bull market highs. Unfortunately, there is a major ongoing political crisis in the region.

It is the rapidity of the loss of confidence and the quickness with which European sovereign bond yields have risen that have served as 2011's sword of Damocles hanging over stocks. The world's markets have broken down under the weight of the eurozone crisis in a punishing and incessant display of selling over the past two weeks. As a result, our stock market is now discounting recession.

It is now up to Europe to forcefully address, arrest and reverse the negative credit trends that have taken hold of our markets with forceful policy (easing and the implementation of euro bonds).

As Zero Hedge's Tyler Durden writes, the outcome looks binary -- either policy is implemented and the world's risk markets experience a sharp rally or the absence of policy to stem the European debt contagion leads to a bear market.

History shows that our world's leaders rise to the occasion in the face of crisis. It happened (and worked to correct the impending doom in our credit markets) in the U.S. in early 2009, when all seemed in chaos.

I don't know whether La Stampa's report on Sunday that the IMF is preparing a 600 billion euro loan for Italy is credible, but I do expect that the market's recent deterioration itself will likely pressure Europe's leaders into more forceful policy. As a possible precursor to more proactive, powerful and more timely policy, the eurozone countries appeared to be moving toward an accelerated path of fiscal integration over the weekend (that would bypass the cumbersome process of treaty changes). Reuters reported that this path demonstrates the seriousness that politicians are taking the growing debt contagion. Hopefully, as The Wall Street Journal reports, "Some within Berlin say a new binding fiscal regime might just be enough to justify ECB action." Other measures, such as an EFSF partial guarantee of a portion of eurozone sovereign bonds, appear to be on the table as well.

Tomorrow's meeting of financial ministers might hold some additional clues as to the timing of policy responses as documents that formalize the EFSF leveraging will be completed and ready for signatures. And the Dec. 9 Leaders summit might have more information.