By Tom Luongo - February 20, 2024
After a mostly peaceful Security Conference in Munich over the weekend, Estonian Prime Minister Katja Kallas let the real purpose of all the recent hysteria over Ukraine funding out of the proverbial bag — Eurobonds.
Kallas was handed the bully pulpit to make the argument for $110 billion in Eurobonds be issued by the EU Commission to spend on arming Europe for the future and supporting Ukraine. It just sounds like more of the same that we’ve heard for two years now. More money for Ukraine. More war spending.
But this is a far more complex and nuanced issue than just making sure the West fights Russia to the last Ukrainian. This is ultimately about shoring up the EU’s fundamental weakness. It is an economic bloc with a common currency whose political authority is mostly powerless to control the value of that currency.
For this reason the EU leadership, nominally Davosian in their agenda, has been working their political machine towards giving the EU Commission that power through bond issuance and a centralized taxing mechanism.
They did this after COVID with their SURE Bonds, which they issued in 2020 to legitimize this process. I covered this in a long article in October last year when this very issue came up. Then ECB President Christine Lagarde made it public that they want to create a Eurobond Index to give these SURE bonds greater visibility in the vain hope someone will buy the next round of them.
There is also a major push happening offscreen for these bonds to become indexed next to everyone else’s, i.e. to more easily sell them to Muppet investors, through the imprimatur of them being official and backed by the full faith and credit of the EC. Of course, the initial investors in them have lost their ass as the bulk of them were issued when the ECB was at -0.6%. (See Here).
The ECB just held rates at 4.5%. The bond math doesn’t work. So, the EU got the last big lot of blood and treasure after the COVID operation from its investor class, who are now sitting on massive losses. Some of these investors, of course, were the member central banks themselves.
Don’t believe me? A €7 billion 0.1% coupon SURE bond maturing in October of 2040 is now trading at a yield of 3.867%. Now that doesn’t look so bad until you grep the price of that bond, which is trading with a bid/ask spread of 0.54/0.55… or a 45% loss.
This particular SURE bond has recovered in price back to around $0.61, after one of the biggest rallies in sovereign debt markets in history to end 2023. But that’s also just the quoted price. There is no price discovery on these, as there’s only on trade a week actually happening in Frankfurt where these things are listed.
They aren’t a market. They are, however, a massive political tool. Because they gave the EU Commission the ability to levy taxes to pay the 0.1% coupon on them. It’s the government tax and spend equivalent of “just the tip.” It’s only a small surcharge on your grocery bill… or whatever.
One problem is that the initial investors in these things are still sitting on 40% losses. If the first round are selling at a 40 to 50% discount what coupon are they going to have to offer to get anyone to buy the next round? nd it’s part of the reason why there is such urgency to get central banks to lower rates.
The EU can’t afford to raise the capital it needs to complete its fiscal integration plans with the ECB forced up to 4.5% to keep pace with Powell’s FED. They need these rates back near zero to fund their grand dreams of a hydrocarbon-free totalitarian future.
As always, this underscores the point I’ve been making for two-plus years now that Powell’s “higher for longer” rate policy is squeezing not just the European banking system but also it’s political objectives.
None of this is remotely sustainable at 5.5%. And for anyone who thinks the US is more vulnerable to this than the EU is, I invite you to explain that to me in grave detail with the dollar having drank nearly all of the euro’s milkshake in global trade over the past two years.
I’ll wait.
From SURE To War
The fate of these SURE bonds and all future EC bond issuances hangs in the balance here. In fact, the future of the EU itself hangs in the balance. And that’s why I was contacted by Sputnik News yesterday to give my thoughts on this subject.
“Eurobonds are the Holy Grail for European integration,” Tom Luongo, financial and geopolitical analyst, told Sputnik. “PM Kallas is telling you what the plan is. The EU’s Achilles’ heel is the euro itself and its lack of central taxing authority.”
“Eurobonds, issued through the European Commission, of this type are another way of handing that authority to Brussels, bypassing member state central banks and legislatures,” he added.
“If one was cynical, which I am, one would suspect that the EU’s support for the war in Ukraine was mostly driven by this desire to centralize power in Brussels,” Luongo argued. “You start a war in Ukraine by purposefully crossing Russia’s red lines, drive inflation up locally, and empty the military coffers of all the post-WWII weapons and ammunition that is now outdated. (…) If you are losing, as you are now, you play up the threat of Russia not stopping at Ukraine to justify shifting your domestic spending to a military build-up, issuing Eurobonds to pay for it.”
This plan for war bonds was shepherded by . . .
[SNIP]
