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Limits of “Extend and Pretend” Tested

The extend and pretend charade in Europe is out of magic dust to sprinkle around. It is becoming increasingly apparent that there is no way out of their problem and that their words are merely smoke. Peter Tchir says:

They are running into legal roadblocks, death spiral scenarios, the reality that once they give the money to the PIIGS that the power reverts to the PIIGS, that everything is circular and self-referencing, that debt markets in the end can decouple from CDS markets, that Germany and France are going to see borrowing costs spike (even after the ECB rate cut), and that there are so many holes to plug – bank capital, bank bonds, PIIGS debt, Belgium debt, something about Dexia that no one even remembers, voters are against it, Greece isn’t going to fool anyone, etc.

Anyone who follows this play acting must be getting tired of the repetitious shenanigans attempted in Europe. David Rosenberg inconveniently reminds us of the progress that has been made (not):

… when you go back to the opening months of 2010, it was all about Greece and the prime goal was to prevent contagion to Portugal and Ireland. We know how that went. Then that fall, the risk was Greece, Ireland and Portugal and this was when the term PIG was coined. At that time, the goal was to protect Spain and Italy. And we know how that went. Then just this past July, the crisis moved beyond just Greece, Ireland and Portugal to include Italy and Spain (and this is where PUGS was coined). At this point it was about preventing contagion to the banks, but nothing has worked. The contagion has merely spread, and this is not the first time a late-day press release or policy announcement was leaked to juice the market. So, we are still living in a world were levering up is somehow deemed to be a solution to a world of excessive credit and all this will do, again, is just kick the can down the road.”

Europe’s latest plan appears to have unraveled and the Mastrich treaty itself may be in jeopardy. Mish described their options thusly:

Assuming the “Leveraged EFSF” idea is now dead, not only is there no bazooka, there is no pea shooter either.

Conditions in the US are little different, although it is not as apparent to as many quite yet. Our supply of smoke and mirrors is finite and reaching the exhaustion point as well.


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