“Emperor has no clothes”, “Water Pistol not Bazooka” and “Pandora’s Box” – Morgan Stanley

Από τον Πόρτα – ΠόρταMorgan Stanley’s Joachim Felshas just sent a note to clients in which he not only commingles three of the catchiest and most abused apocalyptic phrases of our time (“Emperor has no clothes“, “Water Pistol not Bazooka”  and “Pandora’s Box“) he also warns, in no uncertain terms, that “by raising the possibility that a country might (be forced to) leave the euro, core European governments may have set in motion a sequence of events which could potentially lead to runs on sovereigns and banks in peripheral countries that make everything we have seen so far in this crisis look benign.“

The Emperor has no clothes. This coming week markets are likely to continue to grapple with the 

notion that the ‘comprehensive solution’ presented after the EU Summit on October 26 is neither 

comprehensive nor a solution. 

First, bank recapitalisation was always about curing the symptoms rather than the disease – sovereign 

risk. And by giving banks until mid-2012 to meet the capital ratio target, governments have 

likely set in motion a wave of deleveraging that could have severe economic and market 

consequences. 

Second, the leveraged EFSF may still turn into a bazooka, but so far it looks more like a water pistol. 

We continue to doubt that investors will find the insurance and SPIV constructs appealing, and as the 

G-20 meeting this Thursday and Friday made clear, 

non-European governments also stand to be convinced that co-investing with the EFSF make sense. 

But perhaps euro area finance ministers 

will unveil some more reassuring details on the construct after their meeting this Monday/Tuesday – 

don’t hold your breath though. 

Third, the Greek political saga continues and even though the prime minister won the confidence vote 

in the early hours of Saturday, the second bail-out and debt restructuring package still needs to be 

approved and likely new elections 

late this or early next year could spring additional uncertainties. And fourth, but not least, while the 

ECB cut rates on Thursday, ECB President Draghi made it clear in the press conference that the bond 

purchase  programme remains temporary and limited (see the 

quote of the week below), suggesting that hopes for large-scale monetary financing remain just that, 

at least for now.

 

Another Pandora’s Box opened? However, my main takeaway from last week and my main worry 

for the weeks and months ahead is that Chancellor Merkel and President Sarkozy, in response 

to the idea of a Greek referendum on the bail-out package, raised the possibility of a