Melt UP alert – the reality of the great Eurozone rescue package

I heard a new market term on CNBC this morning. My view is that the new “Melt UP” call  may go down as a great damp market squib in very short time. Undoubtedly the institutions maintain significant cash positions whilst traders are having detrimental impacts on market moves these days but the euphoric rises that we’re seeing in global equity markets appear to be ignoring reality. I heard another market commentator say that Equity Yields are the new Bond Yields; after all it’s commendable but equity yields do average significant (repetition!) basis points improvements over anything in global fixed interest. In fact recent historic dividend growth has been commendable (repetition!) and investors are still clamouring for payouts BUT…….the threat of profits warnings and cuts hereon could be alarming AS…..western developed economies head towards (possible) negative growth territory. Contraction could indeed be the order of the day.

I’ve listened patiently to commentators on Bloomberg, CNBC, SkyNews & BBC this morning and NOT one single person has mentioned jobs. Only once have I heard any discussion regarding the big ? over GROWTH.So let’s quickly examine what Sarko, Merkel and the Barroso gang have come up with shall we? So the bailout fund, the EFSF, will be increased from Euros400bn to Euros1trillion. Well that’s easy! The printing presses are being oiled again as I write then. Secondly, Greek bond holders are being asked to take a voluntary 50% haircut (write off to bald people). Well that appears to be a good idea although most market observers were expecting a 60-70% voluntary hair cut all round which at least would have kept the barber shops busy, but I suspect that the markets have yet to take on board fully the impact of this for French and German banks. Further knee-jerk shocks are anticipated hereon. Finally the Eurozone banks are being asked to raise their Tier 1 Capital Ratios to 9% (from 6%) which implies that they will have to raise around Euros106billion (presumably from the markets).

In increasing order 13 German banks will need Euros5.2bn; 4 France banks will need Euros8.8bn (although this may increase significantly if there are Greek and other euro write offs); 5 Italian banks will need Euros14.7bn; 5 Spanish banks will need Euros26bn & this is the best part, 6 Greek banks need Euros30bn. This totals Euros84.7bn and there’s no mention of Portugal, Eire and the fringe EU members who will require a great deal more than the balance of  Euros21.3bn I think. There is no mention of the effects of zero to negative growth nor how to prevent contagion which will surely happen.In short last night’s feast was a Mad Hatters Tea Party with Barroso and Von Rompuy duelling for the position of the wizard.

Melt UP???? I think I’d rather BELT UP for the rocky ride to come.

Please leave a comment - we all like them