As we pointed out on Friday, there is a clear stigma being priced into LTRO-encumbered European banks relative to non-LTRO-encumbered (due to many aspects but most notably the implicit subordination of senior unsecured debt via collateralized loans to the ECB). Today that stigma, proving as we said that Draghi is simply incorrect, continues to grow as there is a dramatic preference for non-LTRO names in today's modest post-Greece's gun-to-my-head decision relative to a small improvement in LTRO-accepting names. As this performance gap increases we suspect it increases the probability that LTRO II will be a disappointment in terms of size and the implicit derisking that could encourage.
Crude Spikes To Two Weeks High Following Israel Embassy Bombings, Warning Of Iranian Naval KamikazesSubmitted by Tyler Durden on 02/13/2012 - 10:22
While today's market session has been broadly calm for the time being, that has not prevented Oil from falling back to its old norm of being impacted by the merest rumor of geopolitical tensions, of which we have had quite a few of already, following car explosion attacks targeting Israel embassy officials in India and Georgia. While Iran has yet to make any announcement on these events, which oddly enough resulted in no deaths, Israel has already blamed Iran for everything. From Reuters: "Prime Minister Benjamin Netanyahu said Israel's arch-foe Iran "stands behind" bombers who targeted Israeli embassy cars in India and Georgia on Monday. Netanyahu linked the incidents to reports of foiled attacks in Thailand and Azerbaijan last month for which, he said, Iran and its Lebanese guerrilla "proxy" Hezbollah were responsible."Iran, which stands behind these attacks, is the largest exporter of terror in the world," Netanyahu said, addressing his Likud party faction in parliament." It appears that when it comes to car bomb assassination plots, Iran still has to learn from those which targeted its own nuclear scientist successfully a few weeks ago. Yet this latest escalation in attempted provocations is not unexpected: it comes on the heels of the announcement of a US Naval Official who said that "Iran is building up its forces in the Persian Gulf and has prepared speedboats loaded with explosives." Whether it actually has or has not is irrelevant: all that matters is that the US navy 'says so.'
So what is happening with PSI? The March bonds are up a couple of points today. The May bonds trade at 33 and after that, all of the Greek bonds trade between 20 and 30, largely depending on coupon with a slight bias towards better prices for nearer term maturities. So what is the PSI meant to do? Is the PSI meant to treat all bonds equally? If so, then it makes no sense for the March bonds to be trading at a significantly higher price. The ECB may own some of these bonds, and may be getting paid out at par, but that shouldn’t affect the price of non ECB held bonds. The payments and PSI aren’t pro-rata. Maybe it is simply a bet on the ineptitude of the politicians. In any case, watch these short dated bonds both on an outright basis and versus the longer dated bonds. Right now, it looks like they are signaling some more monkey business coming up. Either the PSI is maturity weighted, or a decent number of investors are willing to bet that it will be profitable to holdout.
If there was one thing the Troika needed not to hear less than 24 hours after the latest bailout demand vote passed, it is that the leader of Greek ill-named "New Democracy" party who is likely to replace Papademos as the next leader of Greece following the April elections, is that at best the new "deal" will last for two months, or until after the next local election. Needless to say, this it the only "pledge" out of Greece in the past week that is 100% certain to be kept. From The Guardian: "Samaras, the current front-runner to replace Lucas Papademos, told parliament last night: "I ask you to vote in favour of the new loan agreement today and to have the ability to negotiate and change the current policy which has been forced on us"." While hardly surprising, Guardian goes on to point out "that would rather thwart the Troika's demands that Greece's leaders all pledge to implement the current plan, as Megan Greene of Roubini Economics pointed out on Twitter: 'Samaras demands bailout be renegotiated after elections and troika insists he sign that he'll uphold 2nd bailout. We still have a problem.'" Indeed - it is called Merkel seeks guarantees that what the next Greek leader said is a joke before it agrees to send even more billions in taxpayer cash down what Schauble earlier called a "bottomless pit."
Stocks advanced today after Greek lawmakers finally approved a new austerity package aimed at averting a default. As a result, it now looks like that the country will get the next bailout tranche and avoid failing to meet debt redemptions in March. The draft legislation published by the Greek government showed that the EFSF may provide EUR 35bln to help Greece buy back bonds held by euro-area central banks as collateral, while Greek finance minister said that EUR 70bln in bonds are to be issued in the swap and Greece needs to make debt swap offer by Friday Feb 17th at the latest. Credit metrics such as Euribor and Euribor/OIS spreads continued to improve, which in turn supported financial sector. Looking elsewhere, comments from Iranian President Ahmadinejad over the weekend who said that Iran will soon reveal "very big new achievements" in its controversial nuclear programme, together with comments from China’s Wen who said the country will begin to fine tune its economic policies in the Q1 of this year supported both Brent and WTI crude prices today. Going forward, there are no major macro-economic releases this afternoon, but both the BoE and the Fed are due to conduct another round of Asset Purchases.
There is a silver lining to Athens' ever uglier transition to a third world country: the massive GDP boost that awaits it as it sets off to fix broken windows and burned down buildings. In fact, we eagerly await Krugman's OpEd praising some of the more recent developments out of Greece in the past 48 hours. Granted, the country will need to get even more bailout funding from the Troika for said GDP boost to occur, but who cares about details anymore.
Market focus tends to be almost solely on Chinese and Indian demand but demand is broad based throughout increasingly important Asian gold markets. Demand for gold remains robust in most Asian countries where consumers are buying gold as a store of wealth due to concerns about their local paper currency. This phenomenon is happening throughout Asia including in Malaysia, Indonesia, Thailand and Vietnam and other large Asian countries (see news below regarding demand for gold by investors in Thailand). AFP have a very interesting article on Vietnamese ‘gold fever’ which recounts how “stashing gold at home rather than having cash in the bank is a generations-old habit in communist Vietnam”. And old habits are dying hard even if an ounce of gold bullion can now cost up to US $100 more in Hanoi than anywhere else in the world due to government meddling in the gold market. AFP quote 60-year-old retiree Truong Van Hue “I still like to keep my savings in gold. It's safe for retired people like me. I can sell the gold any time, anywhere, when I need cash,” he told AFP. Although the treasure has long been perceived as a safe haven, the recent gold rush has alarmed Vietnam's government, which is faced with an 18 percent inflation rate and an unstable national currency, the dong.
Markets are rallying on the back of Greece’s approval of the austerity measures, and all I can think of is the ill-timed 1938 speech by Neville Chamberlain. But analyzing that leads to dark places, far too dark for a Monday morning when the markets are up. So I’ll try and lighten the mood, and only think about a book with talking animals – Animal Farm:
Do not imagine, comrades, that leadership is a pleasure. On the contrary, it is a deep and heavy responsibility. No one believes more firmly than Comrade Napoleon that all animals are equal. He would be only too happy to let you make your decisions for yourselves. But sometimes you might make the wrong decisions, comrades, and then where should we be?
Why do I find it so easy to imagine those words coming out of some technocrat’s mouth? Why are the Greek people faced with bailout or chaos? There has never been an alternative to the bailout since no politician has worked on one. There is plenty of historical evidence showing that countries can default, and not just survive, but thrive.
When discussing the Greek vote to pass a request for cash which is based on nothing substantial but merely more pledges to fix its economy in exchange for fresh billions in secured debt (aka bailouts) which will prime at least 136% of the country's GDP with a direct lien, we said all that matters is Germany's response. In which case ths following statement from German FinMin Schauble is likely indicative that this time around Greece will need to literally move mountains to convince Europe it will comply. From Reuters: "Greek promises on austerity measures are no longer good enough because so many vows have been broken and the country that has been a "bottomless pit" has to dramatically change its ways, German Finance Minister Wolfgang Schaeuble said. In a hard-hitting interview with the Welt am Sonntag newspaper, Schaeuble also said it is up to Greece whether the country can stay in the euro zone as part of its efforts to restore its competitiveness. "The promises from Greece aren't enough for us anymore," Schaeuble said. "With a new austerity programme they are going to first have to implement parts of the old programme and save." Yet one wonders just how will Greece first implement the measures from the first one if Europe has to vote tomorrow (or Wednesday, it is all a blur now), on ratifying the second bailout. Or was this weekend's entire Greek exercise merely one of complete irrelevance. In other news, we are fairly confident that February budget revenues are going to come in well below projections, and make the already disappointing January numbers seem like gangbusters.
- Greek Parliament Backs Austerity as Rioters Burn Buildings (Bloomberg)
- China CIC Wary of EU Government Bond Investments (Reuters)
- Spain Unions Decry New Labor Rules (WSJ)
- China Tells Banks to Roll Over Loans (FT)
- We're Not Greece: Italian Prime Minister Monti (CNBC)
- Bernanke’s Labor Pessimism at Odds With U.S. Growth (Bloomberg)
- Obama Budget Seeks Funding for Trade Unit (Bloomberg)
- Obama's Election-Year Budget to Target Rich (Reuters)
- China May Need to Fine-Tune Policy This Quarter, Wen Says (Bloomberg)
- China’s Xi Seeks Second Front for U.S. Ties in Return to Iowa (Bloomberg)
- Why Greece and Portugal Ought to go Bankrupt (FT)
Here we present a history of the Fed in charts. As you’ll surely glean from the below — the Fed has degenerated from a by and large passive institution (dealing only in high-quality self-liquidating commercial paper and gold) to an active pursuant of junk, an enabler of wars, a ‘benevolent’ combatant of the depressions of its own creation, a central planner of employment & prices and of course a forgiving friend to inconvenient market follies.
The Greek parliament just passed the latest proposed austerity plan with a majority voting Yes. Judging by the reaction of the EURUSD, which experienced a modest 40 pip short covering squeeze in the last few minutes, one would imagine that today's Greek vote outcome is surprising. It isn't: after all, all Greece has done is promise to do something it won't do in hope it can get another bailout package, this time amounting to €210 billion (of which its people will pocket a de minimis 19%). As we said earlier: "The only real questions are i) what the Greek population may do in response to this latest selling out of a population "led" by an unelected banker, which if history is any precedent, the answer is not much, and ii) how Germany will subvert this latest event, and put the bail [sic] back in Greece's court once again." Sure enough, to paraphrase what we said before, the question now is what the popular Greek response will be having learned its politicians sold it out yet again, which will likely be nothing much, as it is 1 am local time, and as everyone knows revolutions in heavily socialist countries only start between 9 am and 5 pm, with a 2 hour break for siesta. More importantly, keep a close eye on headlines out of Germany. That is all that matters now.
Stocks are not the only thing enjoying the ECB's $800 billion balance sheet expansion (and just announced additional Bank of England Quantiative Easing) over the past 6 months. Lately a new and unwelcome visitor has also figured out the Euroean Central Bank's sneaky motives. No, not Germany, they still are hopelessly confused and still believe the ECB is not "printing" money. Nor gold. It did long ago, just as Roubini was calling for an imminent crash following the 200 DMA breach - it is headed over $2000 in short order. No, this time it is that last entrant to any reliqufication party, who just happens to be the guaranteed party-pooper: gasoline.