The ECB just disclosed that it will continue accepting sub-A rated debt as collateral post January 1, 2011, as was widely speculated, merely to facilitiate funding needs of countries which are getting increasingly lower-rated by the rating agencies. Furthermore, the ECB has made it clear that this whole exercise is merely for optical purposes: "The new haircuts will not imply an undue decrease in the collateral available to counterparties." What is notable, however, is that the ECB has highlighted it will no longer accept non euro-denominated collateral after 2010. This is not good for countries which plan on syndicating dollar-denominated debt, as has been recently the case for Portugal, and, currently, Greece. Although in Greece's case we tend to think the country doesn't give a rat's behind about whether new issuance will be eligible, andis much more focused on just avoiding default.
In an interview with Bloomberg's Tom Keene, Richard Clarida of PIMCO has pretty much sealed the fate of Greece: "I don’t think that [7%] would be an attractive enough yield. Greece is sort of like the Titanic. Eighteen things went wrong, and when they go wrong at once it’s problematic." Of course, with this kind of rhetoric the 10 Year will be trading at 8% tomorrow, followed up by Clarida saying not even 9% would be attractive, and so forth. When you have the world's largest bond fund say it is not touching Greece with a ten foot pole essentially no matter what the yield, you get an idea of why Greek 1 Year CDS is trading 600/700. In the meantime, stocks continue to be blissfully unaware of what the surge in the dollar will mean to Obama's export-led US manufacturing utopia. Oh well, at least we can continue to export "advanced" Wall Street services to Greece (and most other European peripheral countries) post default, courtesy of every domestic restructuring firm which is currently brushing up the sovereign reorganization "we are great" pages in its pitchbooks.
Life for Greek administrators can not be much fun these days - anywhere they look they just see more bad news. The latest comes from (appropriately named if you are Greek) S&P analyst Marko Mrsnik who told Reuters that "if the high borrowing cost persists and the consequent deviation from the consolidation path is not addressed, this would in our opinion, delay the reversal of the government debt trajectory and could lead to lower ratings." Nothing yet from Moody's - should Greece and the linked NBG be downgraded even one more notch by Moody's then all sorts of colletaral trigger horrors will be triggered and the liquidity crisis will reach a whole new level of pain.
With 3D being all the rage, just like in the 50s (when is Amazon releasing a 3D Kindle? nobody reads those things anyway, but at least wearing stereoscopic glasses when reading a book will make you look really cool), below is a fancy way of demonstrating what happens when a country goes the way of Lehman. The chart from Bloomberg shows the shift in the GGB curve from steep to inverted over the past month. As we have long claimed, an inverted curve is the death knell for any company, let along a country. The only question now, as John Taylor asks, is what the final outcome will be: civil war due to austerity or civil war due to the inability to fund anything, and a confiscation of deposits (and gold, if there was any left to be confiscated).
Yesterday we reported that the MBA announced the highest average 30 year FRM rate since August: a jump from 5.04% to 5.31%. Today this deterioration in mortgage rates was confirmed by Freddie Mac, whose 30 year Fixed Rate Mortgage jumped from 5.08% to 5.21%. Whether this is a function of the recent surge in 10 Year yields (subsequently ameliorated by Chinese purchases during yesterday's auction) or of the end of QE finally being felt is uncertain, although it is probably a combination of the two. This implies a loss in household net worth of billions of dollars in just one week. Of course, that is money that was already spent to bring you last month's fantastic retail store data, which was driven purely by everyone doing the moral hazard jingle, and refusing to pay for anything already purchased. Wholesale government justified theft is now a way of life in America, but it's cool - the banks on the hook for these billions in losses will keep getting back door bailouts in perpetuity.
FX Concepts' John Taylor: "The Economic Reality Will Eventually Destroy Greece And Europe"; Warns Of Civil WarSubmitted by Tyler Durden on 04/08/2010 - 10:01
"There is nothing but politics that says that Greece can make it through this process. Although politics includes compromise when it is working, the breakdown of politics is war. Usually the war implied in this famous aphorism would be between states, but in this case it would be between the people and the government that has failed them. The Greek government can’t follow the current course. On the issue of ‘internal devaluation,’ the European political elites are way out of touch with their people: almost no one will stand for it. The political maze we are entering might have many twists and turns with distorting mirrors, but money is money and its powerful logic will win in the end. No matter how many speeches and new regulations are made, the Greek economy will continue to deteriorate, dragging down the rest of Europe far more powerfully than its 3% implies. Please let the Greeks out and please restructure the euro, or drop the whole idea. If you don’t, the future will not be pretty." - John Taylor, FX Concepts
The Gold Anomaly – As noted earlier, gold seemed to opt out of the usual Pavlovian response to the dip in the Euro. There were several hypotheses for the gold step-out. One was a rumor, actually a series of rumors that one or more gold fund or ETF had scantly any real bullion backing. That would not show up in trading but only if delivery was called for. Some felt the buying of gold was kind of a short covering to reduce the gap. There were also rumors that gold might be used as the anchor of a new monetary basket that might become a supplemental reserve currency. That thesis may have sprung, in turn, from reports that China is looking to allow the Reminbi to trade with several currencies, most notably the Russian Ruble. There were lots of other hypotheses and rumors about the gold trading anomaly. Whatever the cause, the anomaly stood out like a sore thumb. It began to disappear overnight. - Art Cashin
Full Text Of Trichet Speech Following Today's Monthly Monetary Policy Meeting Of ECB's Governing CouncilSubmitted by Tyler Durden on 04/08/2010 - 09:05
Regarding our collateral framework, the Governing Council has decided to keep the minimum credit threshold for marketable and non-marketable assets in the Eurosystem collateral framework at investment-grade level (i.e. BBB-/Baa3) beyond the end of 2010, except in the case of asset-backed securities (ABSs). In addition, the Governing Council has decided to apply, as of 1 January 2011, a schedule of graduated valuation haircuts to the assets rated in the BBB+ to BBB- range (or equivalent). This graduated haircut schedule will replace the uniform haircut add-on of 5% that is currently applied to these assets. The detailed haircut schedule will be based on a number of parameters which are specified in the press release to be published after todays press conference.
- Jonathan Weil: How $1 trillion time bomb posts a phony profit (Bloomberg)
- Jobless recovery becomes more jobless and less recovery: initial claims spike by 18k to 460,000, miss expectations by 25k (Bloomberg)
- Ken Rogoff Op-Ed: Bubbles lurk in government debt (FT)
- Investors playing defense heighten Greek debt woes (WSJ)
- Early Easter boosts March retail sales (Reuters) as consumer buy trinkets with money saved from not paying mortgage or credit cards
- With oil surging, the old merger rumor is back: US Airways, United in talks again and again (WSJ, Reuters); in the meantime US Airways prepares to allow standing-only passengers on its flights
Its not been a good week for Greece. Most seriously, the news yesterday that the four biggest banks are seeking help from the government following a drop in deposits of some EUR10bn pushes them into the danger zone which could turn into the end-game unless properly addressed. While the EU Summit spelled out how the crisis will be addressed (an IMF-led program co-financed by the Europeans), important uncertainties remain, including (1) whether the Greek government will agree to IMF conditionality; (2) how and when the European money will be disbursed and at what interest rate; and (3) whether the IMF/EU package will be big enough. - Erik Nielsen, GS
- Asia stocks, oil fall on Japan orders, US credit; Euro weakens on Greece.
- Australia jobless rate holds at 5.3%; half US level.
- Bank of Japan may raise forecasts for growth, prices on export-led revival.
- Bernanke, Dudley say recovery is yet to produce major job gains.
- Bernanke: Huge US budget deficits threaten the nation's long-term economic health.
- China will eventually allow yuan to gain.
- Consumer borrowing falls $11.5 billion in February, reflecting weakness in credit cards and auto loans.
- China's central government launched a nationwide crackdown on safety violations in mines.
- Greece to seek support from Asia
Panic in Greece as total freefall envelops both the bond and the stock market. The 10 Year is now at an absolute record 447 bps spread to bunds, or in the mid 7's in absolute terms. The stock market has tumbled by about 5% and Greek CDS have surged to a record.
Spreads were broadly wider in the US as all the indices deteriorated. IG trades 7.3bps tight (rich) to its 50d moving average, which is a Z-Score of -0.9s.d.. At 87.25bps, IG has closed tighter on only 16 days in the last 327 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. Indices typically underperformed single-names with skews widening in general as IG underperformed but narrowed the skew, HVOL underperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, HY's skew widened as it underperformed.
This week has been playing out as expected with prices grinding their way higher and lots of sharp intraday sell offs and rallies which is indicative of a market getting toppy.
Seems like the masses feel as though they are getting left behind which is why we are starting to see the panic buying in the market (new money buying at these lofty overbought prices).
Each time there is a new intraday or daily high on the major indexes there is a renewed bullishness created as breakout traders and novice traders buy into the market hoping for the next surge in price. It is these volume surges of new money entering the market which the big guys (smart money) are selling into. You can see it clear as day light on the intraday charts as new money gets sucked into the market new high and then 2 minutes later larger waves of selling hit the bids.
Dylan Ratigan, joined by the inimitable Alan Grayson and Bill Fleckenstein, does one of the best comprehensive summations of the where we are, how we got here, and why those responsible for the upcoming US default are still doing exactly what they were doing, through the enabling of the Federal Reserve. The logical question arises: when will someone finally do something about the situation the US is in right now? At this point pretty much everyone understands how the con works (and if you don't, watch this clip). Why do we allow a handful of corrupt politicians and a select few of Fed members unaccountable to anyone, coupled with a small group of Wall Street CEO, to determine the fate of this nation, and how long will democracy be trampled by those very people who claim to represent nothing but the people's interests? Watch this clip.