Going into the US open, markets are digesting the news that the Greek PSI deal has been completed, with the announcement being made at 0600GMT. The Greek Finance Ministry have announced that 85.8% of bondholders have agreed to the swap, and with CACs enforced, the participation rate can rise to 95.7%. However it should be noted that the Greek government have not enacted the CACs as yet. This has prompted a muted market reaction as participants await any further news from European officials. In the next few hours, the Eurogroup are holding a conference call concerning the recent activity in Greece, and the ISDA are also meeting to determine whether a Greek credit event has occurred. International market focus will now shift towards the key US Non-Farm Payrolls data, due at 1330GMT: US Change in Non-Farm Payrolls M/M (Feb) Exp. +210K (Prev. +243K, Dec +200K). Chinese demand for US Treasuries could slow for a second year as the country as well as others find themselves holding fewer USD to use on US debt. This could see yields moving higher in 2012, according to analysis by Bank of America.
OpenEurope Verdict On Greek PSI - Pyrrhic Victory Sowing Seeds Of A Political And Economic Crisis In EuropeSubmitted by Tyler Durden on 03/09/2012 - 08:35
Minutes ago we presented Goldman's twisted and conflicted take on Greece in a post PSI world. Needless to say, virtually everything goldman says is to be faded. Which is why not surprisingly, the next analysis, a far more accurate and realistic one, does precisely that. In a just released report from Europe think tank OpenEurope, the conclusion is far less optimistic: "The deal sets the eurozone up for a political row involving Triple-A countries. At the start of this year, 36% of Greece’s debt was held by taxpayer-backed institutions (ECB, IMF, EFSF). By 2015, following the voluntary restructuring and the second bailout, the share could increase to as much as 85%, meaning that Greece’s debt will be overwhelmingly owned by eurozone taxpayers – putting them at risk of large losses under a future default. This deal may have sown the seeds of a major political and economic crisis at the heart of Europe, which in the medium and long term further threatens the stability of the eurozone."
That Goldman would have "thoughts" on the Greek PSI deal and European life in the aftermath, is no surprise: just be sure to take these with a pound of salt. After all Goldman is a key member of the ISDA's European Determination Committee (and co-chairman with JPM of our very own Treasury Borrowings Advisory Committee). Not to mention that Goldman is the firm that allowed the Greek default to happen in the first place, by allowing it to hide its unprecedented debt accumulation far beyond what was allowed by the Maastricht treaty. In either case, here is a summary of what Goldman sees happening next: "After the finalization of the PSI process, only small residual transactional uncertainty remains. The new Greece package ensures low funding costs that under certain assumptions could even be sustainable in the long term. Moreover, the exposure of the Greek private sector to the Greek government declines very substantially… …while the exposure of the European official sector rises to substantial levels. Late-April elections will be a risk; but polls suggest a pro-EUR government is the most likely outcome. The new government will be tasked with creating a better growth environment. Using our GES score, we observe key areas of structural improvement for Greece’s growth environment… …among others, the creation of a more business friendly environment, the establishment of conditions for increased openness to trade and a more effective rule of law." We will shortly present a far more realistic, and far less conflicted.
Only in Greece, can you wipe out €100 billion of debt, and have the new debt that replaces it trade at 20% of face value. So 85.8% of Greek law bonds “participated”. The government intends to use the Collective Action Clause to force the holdouts to participate. It is unclear if the government has actually used the clause already, or just intends to. Once they use the CAC, that will be a Credit Event for the CDS. English law bonds saw participation less than 70%. The deadline has been extended until March 23rd. As discussed all along, the English Law bonds gave some protection to holders and that clearly gave them the confidence to hold out. Given the Event of Default covenants, and the right to accelerate, some bondholders may push to accelerate after the Greek law bonds get CAC’d. The market now knows that the PSI will be “successful” and a massive amount of debt will be wiped out, but the new bonds are being quoted “when and if issued” at prices ranging from the high teens to mid twenties. Why are the new bonds so weak? SUBORDINATION!
Not even 6 hours after the PSI exchange offer details, and already the true Greek problem rears its head. Because it is not the crushing debt coupon that is the primary threat to Greece: cutting the cash coupon from infinity to 2.6% is welcome, but utterly meaningless if the debt load is still intolerable (as a reminder, just the Troika DIP is about 130% of Greek GDP, meaning all junior debt is worthless as confirmed by the trading price of the New Greek debt in the 15 cents on the euro region). No - the true threat to the Greek economy is that nobody wants to work anymore. Sure enough, the previously reported -7.0% contraction in Q4 GDP has just been revised to -7.5%. From Reuters: "Greece's gross domestic product (GDP) contracted by 7.5 percent year-on-year in the fourth quarter of 2011, the country's statistics office said on Friday based on seasonally unadjusted provisional estimates. The contraction, which followed a 5.0 percent GDP decline in the previous quarter, was deeper than a previous Feb. flash estimate of -7.0 percent." And one can be absolutely certain that this number will be revised far further lower when all is said and done. Also, with recently released Greek PSI data coming at an all time low, we wish Greece the best of luck in achieving that -1.0% GDP growth in 2013 as per the IMF's downside case. Finally, this explains why the NEW Greek debt is trading with an implied redefault probability of 98%.
If a Greek default is not enough for the compulsive speculators out there, as a reminder today we have that all important February NFP number release, which on one hand we have ADP as indicating in line with expectations of a +210,000 print, on the other we saw both Gallup, Initial claims and the ISM as well as various diffusion indices as pointing to a weaker print. Here is Goldman, which has come in slightly below expectations, with a forecast of 200,000 offset by a further reduction in the unemployment rate to 8.2%. Of course, as we noted last month, once the US participation rate hits 58%, the unemployment rate will actually mathematically go negative. And strangers years have happened in an election year... From Goldman: "We expect tomorrow's employment report to show solid nonfarm payroll growth of 200,000 in February after 243,000 in January. Although unseasonably warm weather should again boost payroll growth in February, we expect a moderation in the rate of job creation due to (1) a likely payback in manufacturing employment; and (2) mixed labor-market news since the last report. Uncertainty around the extent and timing of the weather effect and manufacturing payback suggest risks are probably tilted to the downside of our forecast. We expect the gain in employment to push down the unemployment rate by 0.1 point to 8.2% in February."
Broadly speaking markets are derisking post the PSI deal announcements. Treasuries are 1-2bps lower in yields, EURUSD is down 35pips or so under 1.3230 (and JPY is rallying as carry is unwound), ES has dropped -5pts, Gold and Silver are sliding modestly, and WTI is off its peak but remains over $107.
Greece Issues Statement On PSI, Says €172 Billion Of Bonds Tendered In Swap, Will Enact CACs, ISDA To Meet At 1pm To Find If CDS TriggerSubmitted by Tyler Durden on 03/09/2012 - 02:04
The biggest sovereign debt restructuring in history is now, well, history. The headlines are finally come in:
- GREECE ISSUES STATEMENT ON DEBT SWAP
- GREECE COMPLETES DEBT SWAP
- GREECE SAYS EU172 BLN OF BONDS TENDERED IN SWAP
- GREECE GETS TENDERS, CONSENTS FROM HOLDERS OF 85.8%
- GREECE SAYS 69% OF NON-GREEK LAW BONDHOLDERS PARTICIPATED
We learn that €152 of the €177 billion in Greek law bonds have tendered, which is 85.8%. This means that €25 billion in Greek law bonds have not - these are the hedge funds that could not be Steven Rattnered into participating, and will now sue Greece for par recoveries.This is also the number that ISDA will look at today to determine if, in conjunction with the CAC, means a credit event has occurred. And yes, the CACs are coming, as is the Credit Event finding:
- GREECE SAYS WILL AMEND TERMS OF GREEK LAW BONDS FOR ALL HOLDERS
Japan's Trade and Current Account imbalances appear to be hitting some kind of terminal velocity and while neither JGBs nor CDS seem to reflect the ensuing chaotic recognition that perhaps the can that has been so faithfully kicked down the "Nishi-no-michi" or the West Road may have plunged over the lip of Mount Fuji (conjuring images of Mordor), FX markets recent and abrupt weakness brought on by yet more printing (a topic we discussed in great detail recently as the chosen heretical method du decade) may well be coming face to face with reality. We assume Azumi is faithfully watching these market moves but we wonder at what point the quasi-intentional weakening of local currencies flares into a full-blown currency war - and instead of merely encouraging simpleton FX-carry strategies chasing momentum and leverage - quickly becomes the hyperinflationary super nova that many have been waiting for over the last decade. Dismal demographics aside, we wonder how long before Koo prescribes yet more of the same medicine for this constant state of deflation and at what point does inverted-Apple-looking charts for Trade and Current Account balances become simply too hot to handle...
ETF fund flows have been a uniformly positive source of capital into U.S. risk markets in 2012. Looking a little deeper at the decidedly 'risk-on' flows, Nic Colas (of Convergex Group) notes perhaps their most provocative feature has been their high degree of net concentration. When you look at the entire “ETF Ecosystem” of listed funds, just 6 funds represent all the net gains in assets over the past month ($5.4 billion in net inflows) – LQD, HYG and JNK in fixed income, VWO in emerging markets, VXX in risk, and GLD in commodities. With 1,433 different ETFs listed on U.S. markets now, Colas likens the comprehension of the $1.2 trillion in AUM across these ETFs to how well you know your spouse as we know ETF flows are important (just like a wedding anniversary date or what day the trash is picked up at home) but with their still-evolving proliferation it seems a daunting task to keep tabs on them. All in all, this brief analysis points to more of a pause in investor sentiment rather than the opening for a more full-blown correction in the coming weeks.
I think it is clear that extremists in an environment of despotism are in most cases people who refuse to abandon that which makes humanity whole. We are, indeed, dangerous, but only to those who would do liberty harm. A life of conformity is a life wasted, and a life of slavery is no life at all. Whatever we may be called today, what we leave behind is ultimately what defines us. Labels are irrelevant. If I am an “extremist” because I refuse to participate in the delusion that is America in the new millennium, then so be it. I am more than happy to join the long list of insurrectionaries who inhabit this nation today and who have been the legitimate makers of the world for generations. Everything in history revolves not around governments, but rule-breakers. They alone decide whether humanity will live tight in the fist of the authoritarian machine, or live free in the wilds of unbridled independence.
For a global economy that is "improving" we sure are getting a whole lot of records in the won't direction in the last two days. Yesterday it was Japan which printed a record current account deficit (yes, the most indebted country in the world was once upon a time supposed to export its way out of debt). Today, we learn that in February the US will report its largest budget deficit in history, as the Keynesian floodgates open full bore, and as Zero Hedge has noted repeatedly, tax revenues just refuse to come in at anything close to the pace of accelerated spending, forcing the US to borrow 54 cents for every dollar it spends (not the often cited 42 cent number which does not take into account tax refunds - see here). We would comment more on this, but frankly the chart speaks for itself. And now that the US has to fund an additional $100 billion due to the taxcut extension this means that things are only going to get worse, fast.
While the general market mood is one of pre-default euphoria reminiscent of that in the pre-Lehman weekend, clouds may be brewing. As Reuters reports, "Some hedge funds have found a legal loophole they believe will force Greece to repay some of its debt in full, three sources close to the matter said on Thursday, in a move that would intensify the standoff between the country and its debtors." The loophole? A tiny €412.5 million bond issued by Hellenic Railways with a clause that "allows bondholders to argue that Greece is in default if it is trying to restructure or change the terms of its debt, the sources said. The creditors could already argue that Athens has defaulted, and if they buy up a quarter of that bond -- or enough of it not to be forced into the debt swap -- they can also then demand immediate repayment, a process known as acceleration." More: "The funds are now trying to buy up enough of the bond -- issued by state-owned Hellenic Railways and guaranteed by the government -- to force Greece to repay them in full, to the tune of some 400 million euros. If Greece refuses to do so, this may trigger similar provisions on other Greek railway bonds, potentially landing Athens with a bill of about 3 billion euros, with investors demanding immediate repayment, the sources said." Things could move very fast since the PSI results are due in 7 hours: "Sources close to Greece's negotiation fear the funds could already start the acceleration process by Friday, or next week, if they find they have a big enough majority."
Earlier today we reported that based on various sources, the chief topic of conversation between Obama and Netanyahu at this week's talk between the two leaders was the calendar for Operation Desert Glass and Operation Enduring Brent Freedom, just so the ensuing price surge in crude does not impair Obama's reelection chances. From that point on it was merely a countdown to the official denial from the US government, as the last thing the president needs is the perception that the fate of the US' top post is somehow in the hands of Israel, which in turn needs to be bribed with concrete penetrating presents of the GBU-XXX family to withhold from doing what it feels like doing. Sure enough...