Eye onthe Market | July 11, 2011 J.P Morgan Topics: Portfolios, US corporate profits and the Twilight of the Gods (in the US, Europe, China and the IEA) Twilight of the Gods, part 4: Is Europe just trying to save its banking system, or is a more comprehensive move towards Federalism underway? I expected French proposals on a Greek debt exchange to begin to spell out the sacrifices private sector investors will have to make as Greece spirals towards insolvency. As shown below, I was wrong about that. French proposals don’t entail any specific commitments by banks, and are merely non-binding indications of interest by banks to roll over debt at some point in the future as it matures. If bank rollovers of Greek debt or Greek government asset sales fall short of the mark, the EU and IMF appear committed to providing Greece with funds to pay off maturing debt anyway. The EU taxpayer continues to foot the bill. Binding commitments from EU banks to roll over Italy gross debt to GDP Greek debt as per French posposal, Euros in billions Percent 120% This chart intentionally left blank since there are 110% no binding committments at all 100% Littl debt ittle progress on de ‘ reduction despite 20 years of 90% primary budget surpluses 80% 10% Maastricht limit 60% 50% 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: International Monetary Fund. So to be clear, the Twilight of the Gods has not arrived in Europe, since the EU appears determined to spend more money to prevent a sovereign default. I see why they are worried about contagion. The latest signs: Portugal downgraded to junk; long-term debt of 3 French banks put on downgrade watch; and stress in European unsecured interbank markets®, now affecting Italian banks which rely heavily on them. Italian bank and insurance company holdings of their own government bonds is 2x- 3x higher than the rest of the region, creating the potential for a vicious circle if something goes wrong. Italian banks are better- capitalized an