Angela's Ashes: EU May Draft Eurobond Legislation Despite Merkel's Objections

Huge news out of Bloomberg, especially if it winds up becoming true. According to the New York-based financial publication, European Union regulators may start drafting legislation for a Eurobond to help control the debt crisis, which appears to be spiraling out of control. This is a stark contrast from what German Chancellor Angela Merkel has said in recent days. Earlier in the week, Merkel and French President Nicolas Sarkozy held a press conference on the European Union financial crisis, and it was nothing short of disastrous. Both said there would be no Eurobonds, thought Sarkozy said that something might happen in future regarding that. Both also said that the European Financial Stability Fund (EFSF) would not be increased. Both were seen as major negatives in the marketplace. The European Commission said it may start drafting legislation on euro bonds, despite the German objections. “The report will, if appropriate, be accompanied by legislative proposals,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a written response. “These euro securities would aim to strengthen fiscal discipline and increase stability in the euro area through markets,” wrote Rehn, in quotes obtained by Bloomberg. The European Union has 17 countries, with France and Germany being the two strongest nations in the union, and Portugal, Italy, Spain, Ireland, and Greece being the weakest. We have talked ad nausea about the problems of Italy, Greece, and the rest of the "PIIGS." Both France and Germany are rated AAA, while Greece is at junk, and the others could be on their way there. Merkel again came out today and said “we don't want that,” in response to Eurobonds. The country would face an additional $67.6 billion in costs if a Eurobond was enacted. It is obvious to see why she and the rest of Germany do not want to do it, but they may have no other choice. “The idea will not fly politically,” Daniel Gros, director of the Centre for European Policy Studies in Brussels, said by telephone to Bloomberg. “Why should taxpayers in northern Europe pay for the liabilities of countries in the south? There are also serious economic problems with such a system,” Gros opined. The European Union needs to do something. If expanding the EFSF is not an option, then Eurobonds has to be the answer. One of the two options is needed here. It does not matter which one, although Eurobonds may prove to be the better option over time. It is a shame that Germany and France have to bail out their weaker partners, but if they do not, then German and French banks get hit, and could ultimately go under. With so much inter-connectivity in the world, there is no other option. Not doing anything would be disastrous, and could lead to the eventual downfall of the Euro. Both Chancellor Merkel and President Sarkozy have said they will do whatever they can to keep the Euro. Here are two options that are well liked by the market place. You might have to bite the bullet Angel and let it happen. Otherwise, the ashes you see around you will not only be from the PIIGS burning, it could be all of Europe. ACTION ITEMS:

Bullish:
Traders who believe that either the Eurobond comes to fruition or the EFSF gets expanded might want to consider the following trades:

• One or both of these suggestions could save Europe. The Eurobond would probably be better received. In the event it happens, go long everything. The crisis will have been averted. Tech, including Apple AAPL, Google GOOG, and other high beta tech names will do well.

Bearish:
Traders who believe that neither of these options happen may consider alternate positions:

• If either one of these does not happen, Europe could implode from within. In this case, go long gold GLD and hide your valuables. It is going to be a bumpy ride.
  
  

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