The Summit Has Started

It is nearly impossible to follow all the news and decide what is moving the Euro from here to there. The one thing that seems clear is that plans should have been in place long ago and it seems th Finance ministers are flying by the seat of their pants. Angela Merkel's most notorious statement to the German Lower House in getting them to vote to give her negotiating authority was, "We shouldn't take another 50 years of peace on the European continent for granted", that's pulling out the big guns of hyperbole, but may not be that far from the truth at some point as former Core countries like France have now become the target of bond vigilantes just like Greece, Ireland, Portugal, Spain and Italy.

If the S&P downgraded the US over its ability to work together regarding the debt ceiling, what would they do to European countries, it would be much easier to imagine if the EU was more akin to the United States rather then 17 or so sovereign nations using the same currency, but it doesn't look good for France.

As far as the banks seeming resistance to take hair cuts on EU member countries (mostly PIIGS) bonds, this creates two dilemmas. 1) Their is no credit event triggered in which the banks take write downs from anywhere between the originally agreed 21% to the now talked about 50-65%, this would blow out banks capital reserves and many weaker banks would fail.

#2) A Credit event is triggered and the banks get some form of insurance relief from Credit Default Swaps meant to protect their bond holdings, the problem is many of these banks have written the swaps and sold them, so they take an immediate hit. In either case, it seems almost inevitable that the EFSF has to bail out banks and the current $110 billion is a drop in the bucket compared to the over $1 trillion dollars in exposure, BUT NOBODY KNOWS FOR SURE because after 3 bank stress tests in the EU, the EU still doesn't know which banks have exposure and how much. How they can form a recapitalization plan which is riddled with mines is a pretty scary question when they don't even know what they are up against. Why don't they know this by now?

Furthermore, we are certainly going to hear how the member state are committed to raising the $440 billion dollar EFSF leverage, but I would bet a dime to a donut that there is NO specifics as to how, because they simply don't know. As one finance minister warned on Sunday, Greece alone could swallow the entire EFSF at this level. And don't think that Ireland, Portugal and eventually Spain and Italy will expect the same bondholder haircuts that Greece will likely receive.

While it seems that the PIIGS are the ones at the mercy of the ECB/EU/IMF/Troika, the core nations like Germany and France realize, it is in fact the PIIGS that hold all the cards.

What a mess.