Thursday, August 11, 2011

[Video] Good Top Down Analysis on Future Outcomes in Europe

As I stressed about 2 weeks ago, when the markets were focused on Italy, the real linchpin would be France.  While the equity market there had been hit along with the rest of Europe, the first real debt panic showed up, manifesting itself in the French banks, especially Societe Generale ("SocGen").   While I got the country correct, the form of this manifestation was not exactly the way I envisioned - I thought it would be more of a blowup of the sovereign credit default swaps and spike in bond yields as happened in Spain and Italy.  Instead there seems to be more worry about the debt held on French banks, especially if there is a downgrade from AAA on France itself.  LIBOR - a term we have not had to know much about since early 2009 - is back in the picture.

Whatever the case, France needs to be firewalled.  Futures are flying all over place this morning, just as volatile as the regular session.  There was a Reuters report (see here) this morning from an unnamed 'banking source' (could be a hedge fund shorting the French banks for all we know!) that an Asian bank had reduced credit lines to major French lenders.  Then about 15 minutes ago reports come out that France and Germany will meet either tomorrow (WSJ) or early next week.... and futures reversed sharply.  I do think ultimately the ECB will need to be open to bond buying of France, but without the explicit approval to 'print', the ECB will need money from somewhere to do the buying.  All that is left of any size is Germany of course.

Anyhow, interesting times.  This European analyst on CNBC this morning did a very good job describing the backdrop and potential outcomes as he sees it.

5 minute video

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