Well, it seems like the ECB is telling the countries they need to change the treaty if they want the ECB to act more like the Fed (giving up the pretense of sterilization). Maybe the move is designed to push the issue and make the summit come up with an even bigger plan (regardless of how unlikely it would be to get implemented). For sure, sovereign spreads are indicating disappointment as we suspect the chance of a smiling hand-holding photo op has greatly diminished.
Just when you hoped the worst was over with Draghi's market-disappointing news this morning, things just got a lot more real in the Middle-East. State media is reporting that armed terrorists blew up an oil pipeline west of the flashpoint Syrian city of Homs. In an interesting twist, an anti-regime group said the government was behind the blast. Nonetheless Fox Houston is noting that the explosion is the third reported attack on energy infrastructure since the outbreak of the pro-reform protest movement in mid-March. Interestingly oil prices (along with all other commodities) continue to plunge on USD strength and liquidations (from European upsets) but we suspect that all it would take now is for a splinter Turkish group to take responsibility for the blast and this drop will promptly reverse.
Presenting All That Is Wrong With America: Here Is The Top Contributor To The House Agriculture Committee ChairmanSubmitted by Tyler Durden on 12/08/2011 - 10:48
As part of the MF Global hearing, we just heard a very dignified and shall we say it disgruntled introduction by House Agriculture Commttee Chairman Frank D. Lucas (Rep-OK) where he said it is "critical" to shed light on the MF Global matter, and which in no uncertain terms made it clear just how disgusted he would be with MF Global if it was found that Jon Corzine is guilty of stealing client funds. Well, we decided to take a step back and look at the Republican's top campaign donors. To our complete lack of surprise, we found that the top lifetime donor to the Honorable Mr. Lucas is... the American Bankers Association.
What Mario Draghi did today is the worst of all possible worlds: on one hand he is allowing more financial risk-taking on the ECB's dime courtesy of increased liquidity and relaxed collateral requirements as well as longer LTROs, on the other he essentially killed any provisional bailout rumors, saying that the ECB will not monetize, nor lend to the IMF. The result: sovereign risk is soaring, as seen by this CDS update.
Update 2: Draghi just killed IMF lending proposal - "lending money to IMF to buy Euro bonds is not compatible with the treaty" - EURUSD now in free fall.
Update: two additional comments, i) that the ECB is not the IMF, and that lending to the IMF would be very complex legally, and ii) that the liquidity situation is comparable to post Lehman have sent everything plunging to overnight lows. Lastly, Draghi just kicked the ball in Europe's court. This is about to get very ugly fast.
It was all going so well until Draghi dropped the coded 'less' bond purchases 'no bazooka' bomb-shell at which EURUSD, BTPs, European bank stocks, and ES all stalled instantly and started to revert to pre-Dragozel levels. BTPs are holding up the best for now, though almost entirely retraced, but a 1% up and down roundtrip in ES was enough for many to see the schizophrenic market at its best.
LTRO changes, collateral expansion, other? What will the ECB undertake to extend and pretend today? Find out at the ECB's conference today.
Will conduct two LTROs, with 36 month maturity with option of early repayment. First will be allotted on December 21, 2011, and will replace October 6, 2011 LTRO. This is more than the expected 2 years.
ECB will ease collateral criteria for loans to banks. Will reduce rating threshold on ABS collateral
National Central banks can accept credit claims such as bank loans
Will reduce the reserve ratio from 2% to 1%, which will free up collateral in money markets
- DRAGHI SAYS HE DIDN'T SIGNAL MORE BOND PURCHASES LAST WEEK
As of this morning, we know that in addition to the now inseparable Merkel and Sarkozy, later today in Brussels, just after he is finished with his press conference, they will be joined by Goldman's, pardon ECB's, Mario Draghi, who sooner or later will pull a Colonel Korzine and tell some faux hearing "he has no idea where the European money is." But all in due course. In the meantime, we present an artist's rendering (in this case the artist being the inimitable William Banzai) of what the fire and brimstone that will emanate from the Draghi-Sarkozy-Merkel hybrid, henceforth known as Drakozel, will look like. Because after all, the "Honk" Paulson doctrine of terrifying everyone into debt slavery and out of sovereignty, or else face certain annihilation is now the only strategy left for the mortally wounded global ponzi scheme.
The leaders pretty much have to cobble together some form of agreement. If they don’t reach an “agreement” the market will likely sell off 5% or more pretty quickly. We were at 1150 2 weeks ago when Europe was back to no plan, so that would be a pretty obvious target if they can’t reach an agreement this week. If they reach an agreement, the market is likely to move up a bit (1-2%), the bulls will be dancing in the street shouting out that Europe is fixed and gets it. The bears will point out that the agreement is a long way from being implemented and is unlikely to ever actually be followed. In either case, it doesn’t make a difference. The moment a treaty agreement is announced (assuming it is) the market will turn its attention to the ECB, IMF, and Fed. The market will be desperately hoping that the ECB immediately follows up the “successful” treaty summit with a new and fresh commitment to become lender of last resort for sovereigns. Expect disappointment. Draghi may be a dove, but he seems focused on banks (which is his primary mandate) and is unlikely to implement a new, and in Europe, revolutionary policy. The markets will test their resolve. Italian and Spanish bonds aren’t trading so well because anything has been fixed or because the market cares about treaties. The bonds rallied hard because the ECB was in the market and no one wanted to take a chance that a treaty agreement would be the excuse the ECB needed to ramp up its purchases. Without aggressive ECB action, Italian and Spanish bonds will decline in price, and renewed fears will hit all risk assets.
Citi's Steven Englander shares his outlook on what the key things to look out for, in the 8:30 am press conference, are. One variable in his forecast has already been presented: the cut was 25 bps not 50 bps. As he says: "By contrast, if they did 50bps and indicated that more aggressive measures might be forthcoming, the pendulum could swing to positive." In other words, the kneejerk jump in EURUSD following the ECB has been largely misguided for now, especially with forward EONIA rates jumping across the curve confirming that European liquidity is about to get far tigher all over again.
Corzine "Simply Does Not Know Where The Money Is" - Presenting Jon Corzine's Complete Testimony To CongressSubmitted by Tyler Durden on 12/08/2011 - 08:55
Probably far more anticipated than the monetary announcements out of BOE (which just announced it is keeping rates at a record low of 0.5%, but no more QE), or even the ECB, and certainly far more than the latest and not greatest European summit which begins today, is the 9am testimony out of the House Agriculture Committee by one "Honorable" Jon S. Corzine, as well as the Q&A that will follow. Naturally the Q&A will be the focus, but as for the prepared remarks, they have just been released and are presented below. The choice selection: "Obviously on the forefront of everyone’s mind – including mine – are the varying reports that customer accounts have not been reconciled. I was stunned when I was told on Sunday, October 30, 2011, that MF Global could not account for many hundreds of millions of dollars of client money. I remain deeply concerned about the impact that the unreconciled and frozen funds have had on MF Global’s customers and others. As the chief executive officer of MF Global, I ultimately had overall responsibility for the firm. I did not, however, generally involve myself in the mechanics of the clearing and settlement of trades, or in the movement of cash and collateral. Nor was I an expert on the complicated rules and regulations governing the various different operating businesses that comprised MF Global. I had little expertise or experience in those operational aspects of the business. Again, I want to emphasize that, since my resignation from MF Global on November 3, 2011, I have not had access to the information that I would need to understand what happened. It is extremely difficult for me to reconstruct the events that occurred during the chaotic days and the last hours leading up to the bankruptcy filing....I simply do not know where the money is, or why the accounts have not been reconciled to date. I do not know which accounts are unreconciled or whether the unreconciled accounts were or were not subject to the segregation rules. Moreover, there were an extraordinary number of transactions during MF Global’s last few days, and I do not know, for example, whether there were operational errors at MF Global or elsewhere, or whether banks and counterparties have held onto funds that should rightfully have been returned to MF Global." Translation - he pleads da FIF.
- Reports suggested that the G20 is considering USD 600bln lending programme for the IMF to help the Eurozone, however the news was later denied by the IMF and Japanese officials
- According to sources, the EU is discussing EUR 200bln loan to the IMF with EUR 150bln from the Eurozone, and the Eurozone is negotiating lifting EUR 500bln cap on the EFSF and ESM lending
- Le Monde wrote, French banks need EUR 7bln of additional capital, however recapitalisation can be done without any state aid. Later, French ACP financial regulator declined to comment on the report
- The Bank of England kept its key benchmark interest rate and asset purchase target unchanged at 0.50% and GBP 275bln respectively
- Germany insists on new treaty for Europe (FT)
- Banks Prep for Life After Euro (WSJ)
- Bank Values in Europe Fail to Lure Buyers (Bloomberg)
- Banks' Ratings Reliance Nears End (WSJ)
- BOE’s King Waits to See Europe Crisis Response (Bloomberg)
- Accelerating U.S. Economy Eases Pressure for Further Fed Asset Purchases (Bloomberg)
- Government acts on payday loan worries (FT)
- Hong Kong May Loosen Property Curbs: Tsang (Bloomberg)