Citing uncertainty over the country's ability to meet 'austerity' targets and its rising susceptibility to external shocks - given its heavy reliance on external investors - Moody's just downgraded Hungary to Junk Ba1 (with a negative outlook). With its 10Y yield currently at 9%, only 190bps wider than Italy, we thought it somewhat ironic that Hungary's average 10Y yield from SEP09 to SEP11 was 7.2% - almost exactly where Italy finds itself trading currently.
The only quote worth noting from the just delivered speech by ECB executive board member José Manuel González-Páramo is the following: "We cannot completely delegate governance to financial markets. The euro area is the world’s second largest monetary area. It cannot depend solely on the opinions of ratings agencies and markets. It needs economic governance arrangements that are preventive and linear. This underscores my central point that a much more comprehensive approach to economic governance is now the priority for the euro area. And this means more economic and financial integration for the euro area, with a significant transfer of sovereignty to the EMU level over fiscal, structural and financial policies." In other words, in order to protect people from the "stupidity" of rating agencies which after years of lying have finally started telling the truth, and the market which does what it always does, and punishes those who fail, Europe must be prepared to give up "significant sovereignty" (sounds better than Anschluss) to Europe's "betters" which is another way of saying 'he who pays the piper calls the tune." And "he" in this case is, of course, Germany. In other words, courtesy of one failed monetary experiment Germany will succeed, without sheeding one drop of blood, where it failed rather historically some 70 years ago.
As Europe prepares to set off on a historic, if very divisive round of Treaty changes in an attempt to set the framework to be followed by all countries in advance of the controversial European federalist experiment and even more divisive issuance of "stability" bonds, we thought we would once again remind readers just what the very simple math behind the entire spectacle is, which Europe tries so hard to ignore with each passing day. Because at the end of the day it is a very simple tension: there is massive demand for fresh cash in the form of 1.7 EUR trillion in maturing debt (ignoring interest payments). Of this Morgan Stanley says, "Policy makers and investors have consistently underestimated the bank funding roll as a transmission mechanism of sovereign fears into the banks and real economy." This is 100% correct: courtesy of 30 years of great moderation everyone assumed that the funding markets would operate for ever and that interim rollovers would never be an issues. Incidentally this is precisely what we warned about back in April 2010 when we said that "Unless the UST can roll its debt not on a monthly but now weekly basis in greater and greater amounts, the interest rate doesn't matter." As it turns out, we were 100% right on the core problem, but 100% wrong on the location - the rollover funding crunch is not in the US, it is in Europe. And this is precisely what Europe is now fighting each and every day with, coming up with crazier and crazier plans to mask the fact that no matter what, there simply is not enough cash. Because while the first chart shows cash demand needs, the second one shows that when it comes to cash 'supply', or said otherwise issuance of unsecured debt, the market is now completely and totally dead. Indeed, November issuance is just laughable as the red-boxed region so vividly demonstrates. And that, in two charts is that - everything else is hype, rhetoric, smoke and mirrors.
Walk Thru For The Upcoming European Treaty Changes - Is A Redemption Fund The "Transitory" Hail Mary?Submitted by Tyler Durden on 11/24/2011 - 16:35
Once again today was marked by ongoing disagreements over the form of any and every solution (or non-solution) to the 'problem' that is the Euro-Zone. At every corner, the EU Treaties are dragged up as impediments to the free-and-easy save-us-with-your-printing-press arguments (among others). Credit Suisse provides an excellent summary of the relevant sections and while their perspective is that the Treaties do provide some flexibility for the ECB to extend its operations (and the incumbent introduction of much stronger fiscal watchdog measures), Euro-bonds will (no matter what and certainly noty a slam dunk for success) require a full Treaty change - a process that could take years. There are currently three options being discussed for the Stabilittee bonds - all of which have more than short-term time horizons for any potential implementation and so we suspect, as CS mentions, that the talk of the Redemption Fund from the German Council of Economic Experts will grow louder as an interim step.
If a ballistics expert were so poor at his job that his artillery routinely fired missiles into the sea or, worse still, at his own men, he would soon be removed from office. He might perhaps be purged more dramatically, pour encourager les autres. No such logic would seem to apply, however, in either politics or economics in the west, where discredited practitioners of failed theories are allowed to pontificate and spend into absurdity. We cannot say with certainty what was spooking European investors prior to last week’s make-or-break summit (the 14th such “crisis summit” in 21 months), but it seems plausible to argue that they were concerned about an unsustainable build-up of credit, credit risk and leverage. Happily, those concerns have now been put to rest, because the Euro Zone’s leaders have pledged more credit, more credit risk, and more leverage. To put it another way, President Sarkozy and Chancellor Merkel have bought more time, albeit time paid for with yet more borrowed money. A three ring circus of blind, incontinent clowns would have more class.
The focus of the recently released quarterly investor letter by Bill Ackman's Pershing Square seeks not so much to explain why the fund has a negative return YTD, but to justify why the Fund's approach to "intrinsic value" is right, and the market, well, not so much, as well as the show why even if he continues to be wrong he won't have to dump losers. Supposedly this is the kind of the thing that LPs like hearing these days. The one line that sticks out like a sort thumb in this valiant effort to explain the lack of alpha is the following: "It is largely a function of Pershing Square’s growing influence in the capital markets, our experience with previous investments, and specific circumstances with each of our holdings." That's great, and a false belief in one's market moving "economy of scale" works great, until it doesn't. Just ask Bill Milller. Also we wonder: where have all those "HF hotel" idea dinners that used to generate so much faux alpha for the Ackman-Einhorn-Loeb trio, gone? In fact, the hubris of mistaking beta participation for alpha creation is often the ast mistake many hedge funds make just before they can't make any more mistakes. That aside, in the letter Ackman explains away his thesis (again) on JCP, Fortune Brands, Family Dollar, GGP (no longer the sterling poster child of the REIT renaissance), Citi and lastly his recent(ly leaked) investment in the Canadian Pacific Railway. All we can say is that we hope Ackman is better hedged for the coming retail downturn than he was back in 2008.
We have extensively discussed the extremes to which European Sovereign spread risk has moved over the past few months. Furthermore, if we normalize by looking at a GDP-weighted credit spread across all of the members of the euro-zone, we are at all-time record wides on this measure. One question that has come up again and again is 'given the market's credit perceptions, why isn't the EUR lower?'. It appears that this is mainly due to regime shifts in the relationship as the correlation between EURUSD and European sovereign risk is extremely high when government intervention (specifically QE uncertainties and fed swap lines) is not rife. The point is that for the last four months, EURUSD and European sovereign risk have been almost perfectly correlated suggesting that as long as there is no ring-fence on risk, the EUR will continue to weaken significantly and at a minimum the EURUSD is an effective hedge against sovereign credit deterioration. Watching this relationship may provide insight into repatriation effects or government intervention as well as offer insight into how EURUSD will move given specific bond moves - a 100bps rise in Italian bond spreads alone infers a 140pip drop in EURUSD for example.
With Europe set to close shortly, it just may be the case that the relentless headline barrage of rumors, lies and other European sourced imports will cease at least for a few hours. So while we are awaiting to see what Syria and Iran's (not to mention Russia and China's) response will be to the latest Arab League 24 hour ultimatum, here is today's open thread to kill the boredom until we get a chance to express our thanks for all the selling opportunities about to unfold, and until we get to find out if one can buy that completely unnecessary 9th plasma (for 50% off because in America spending money is saving) while dumping BTPs from a WalMart store at 3am in the morning.
If anyone is wondering why the collapse of MF Global after the discovery of its commingling and theft of client funds was the single worst thing that could happen to market confidence, then look no further than the small Baltic country of Latvia where precisely what Jon Corzine's firm did to its clients, has happened at the bank level. Businessweek reports: "Lithuanian prosecutors issued an arrest warrant for Vladimir Antonov and Raimondas Baranauskas who are former shareholders of Bankas Snoras AB. Both men are suspected of embezzlement and document forgery, the Prosecutor General said in a statement on its website today. Baranauskas is also suspected of accounting fraud and abuse of authority, it said." Kinda like Jon Corzine, if not by the actual authorities, then by everybody else. And just like in the US where the lack of confidence in the system following the MF filing, so in Latvia the people have decided to hit the ATMs first and ask questions later. "“This money was the bank’s clients’ money,” said Irena Krumane, head of Latvia’s bank regulator, on Latvian Television last night. Krajbanka will most likely be liquidated because the bank doesn’t have the resources to meet depositor and creditor demands unless the Lithuanian government decides to recapitalize the lender, said Janis Brazovskis, the lender’s administrator, in an interview with Latvian Independent Television program 900 Seconds today...Depositors can withdraw 50 lati a day beginning today for the rest of the week, said Krumane at a press conference." At today's rate this is about $95. Which is why what happened next, as shown in the pictures below, was to be completely expected, and is a perfect indicator of the collapse in liquidity and credibility of our own system where commingling, unlike in Latvia, goes unpunished.
UPDATE1: ES -4pts from close yesterday now (-17pts from overnight highs)
UPDATE2: EURUSD below yesterday's lows
From the moment the words left Merkel's lips this morning that 'conditions weren't right' for euro-bonds and would send 'completely wrong signal', risk assets started to crack lower. Both ES and European markets are now well below yesterday's lows as EURUSD also turns red and sovereign spreads start to break wider (and bear flatten) again.
Belgium just can't get a break. While its simultaneously arguing with France and Luxembourg over Dexia's bailout burden and suffering under a total lack of government, Merkel's unequivocal comments on Euro-bonds did nothing to save the ailing nation. Then business confidence prints worse than expected continuing its worse slide since 1993. Not only are Belgian government yields at record highs but so is the spread to German Bunds (at 350bps) and French OATs as Dexia's credit also cracks to record wides.
Geopolitical risk remains elevated and Middle East tensions are escalating globally with Russia appearing to be prepared to risk conflict over Syria with NATO and the US. Yesterday, Russian President Dmitry Medvedev threatened to target and, if necessary, destroy the U.S. missile defence shield in Europe once it is built. A marked deterioration in US–Russian relations and concerns of a new ‘Cold War’ may support gold prices. While all the focus has been on Europe, and to a lesser degree the US in recent months, two of the other largest debtor nations in the world, Japan and the UK (including corporate and bank debt), have been under the market's radar. This will change soon and will likely lead to the next phase of the global financial crisis. The fact that we have a global debt crisis which will almost inevitably lead to an international monetary crisis is as of yet not acknowledged or realized by the markets and the media. Today, the IMF warned in a new report that market concerns over fiscal sustainability could trigger a "sudden spike" in Japanese government bond yields that could "quickly" render the nation's debt unsustainable as well as shake the global economy.
The entire hopium driven rally from yesterday afternoon on a Reuters report that Germany may be warming up to the idea of Eurobonds destroyed by one word out of place, in this case Merkel's who just said that "she stands firmly against joint Euro-bonds." Translation: market will have to punish EURUSD far more for her to change her mind.
It is in French but it is really a body language kinda gig. They promise to do everything they have to save the euro. In other words they are as clueless as always. The important thing is that Sarkozy just said they have agreed to abstain from making demand on the ECB. So...no more pressure to monetize?