Angela Merkel has some problems… The European Stability Mechanism, ESM, or simply the euro bailout fund, stands on 700 billion euros, a pretty big number. But even after this plentiful supply of cash, EU’s problems seem to have no end. One of the links that will perhaps make the mounting crisis easier to understand is that out of the 700 billion, 620 billion will be borrowed. Hedge fund, Icecap Asset Management writes in the quarterly letter, “To clarify, the bailout fund which was created to bailout countries who had too much debt, is being created by using even more debt.”

Angela Merkel

Angela Merkel Domestic Pressure

The only super power that is at a safe distance from the crisis is Germany of course. Icecap writes that European Union is at strong as Angela Merkel is. If Angela Merkel is reelected, there may be still some hope for EU, if not then the anti-euro sentiment could prevail easily and the big daddy of EU may be unavailable to provide its love and support to debt-laden euro economies. Already there are 24 percent German voters  who could root for an alternative course for EU, Angela Merkel and Germany’s future and the fact that growth stalled in Germany in March does not help matters.

Cyprus, the now-retired safe haven for Russian businessmen and their offshore assets, may have shaken the trust of ordinary depositors but those who had hoarded millions of euros abroad apparently still walked away with all their cash intact. Icecap Asset Management points out the dilemma that the country is still facing in raising its portion of bailout that was infamously approved by the torika. The Russians pulled one on Germany when they moved their assets from Cyprus after paying personal visits to the special branches of banks that were open.

Of the many deep wounds that ail Europe these days, one is an immeasureable banking crisis which keeps getting bigger with every month. Each country that had a bailout program approved from torika, seems ever in need of more cash to save itself. Icecap’s commentary plainly mocks the state of eurozone where each country has its own set of troubles, Spain suffered through an increase of 18 percent in outstanding debt in one year, Italy debated for weeks over choosing a consensus president and Ireland is likely needy once again.

In terms of bond yields that investors seem to be rushing into these days, the letter argues that it is foolish to think that the low yield in Italy and Spain has anything to do with recovery, rather its just that the domestic pension funds and banks that have no other way to go but to buy government debt. This domestic buying, that Icecap calls “forced”, is what is driving down yield rather than any expression of confidence from foreign investors. Icecap points out that a social security penison fund in Spain has 97 percent of its assets invested in Spanish debt, an exposure which is so concentrated that it reeks of an impending disaster.

H/T Zero Hedge

IceCap Asset Management Global Markets April 2013