Eurozone’s shaky ‘breakthrough’ to prevent catastrophe now ensures the entire system will go down with a collapse

June 29, 2012 – EUROPE – European leaders reached a “breakthrough” deal early Friday to ease the recapitalization of struggling banks that should help draw the eurozone back from the brink of a gathering crisis. Under the deal, European leaders agreed to create a single supervisory body to oversee the eurozone’s banks which could use the single currency area’s rescue funds, the European Financial Stability Facility or European Stability Mechanism, to aid banks directly without adding to governments’ debt. European Union leaders are hoping for implementation of the agreement by July 9, an EU statement said. The deal means Spain’s formal request this week for eurozone bailout funds to recapitalize its troubled banking sector will not add to its sovereign debt. Madrid had feared the increased debt load would send its borrowing costs even higher. Ireland, which hopes to rework the terms of its bailout deal, and Italy, which like Spain is battling with spiraling government borrowing costs, could also benefit from the new deal. European Council President Herman van Rompuy announced the agreement, seen as a concession by German Chancellor Angela Merkel, after a marathon late-night meeting in Brussels, Belgium. “We agreed on something new, which is a breakthrough, that the banks can be recapitalized directly in certain circumstances,” he said. “The most important condition is that we have to put in place a single supervisory mechanism and second decision is that we are opening the possibilities to countries who are well behaving … to make use of financial stability instruments ESFS, ESM in order to reassure markets.” The deal is a big step toward a closer banking union across the 17-nation eurozone, which could be seen as a precursor to fiscal union. European markets responded positively to the news Friday morning and the euro currency strengthened appreciably. “It is imperative to break the vicious cycle between banks and sovereigns,” the eurozone leaders said in a statement. Their proposals should be considered “as a matter of urgency” before the end of the year, the statement said. –CNN

Zombie markets high on bath salts: The benefits of the announcements (lower yields on sovereign bonds and higher share prices in EU banks) will be short-lived. None of these decisions from the EU summit address the core issues facing the EU banking system: namely, insolvency and excessive leverage. No one in the EU actually has the money to make these measures work (again, Spain and Italy will provide 30% of the ESM’s funding). Markets will stage a knee jerk reaction to these measures. That reaction will see bank shares rise and yields fall, temporarily. But this move will be short-lived, just as moves following LTRO1 and LTRO 2 were. After all, these announcements are just more political measures than anything else. And Europe needs capital NOT politics at this point. So I would expect this rally and the drop in bonds to be short-lived. EU leaders may have put off the Crisis by a few weeks (or perhaps even a month). But they still haven’t addressed the core issues causing the Crisis: excess leverage courtesy of hundreds of billions of Euros’ worth of garbage debt. –Zero Hedge – Phoenix Capital

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