Archive - Nov 2011

We had a feeling that the modest upward blip in Greek August deposits by corporations and households, to the tune of €1.4 billion, was a "transitory" event. It was. According to just released data by the Bank of Greece, the September collapse in gross deposits from €188.7 billion €183.2 billion was the largest ever, and took the total to an amount last seen in June 2007. Indicatively Greek deposits peaked at €237.8 billion in September 2009. Said otherwise, in addition to being massively undercapitalized, banks cash in the form of deposit liabilities has plunged 23% from its all time highs. Look for this number to continue dropping month after month as more and more Greeks move their cash offshore. Additionally, the ECB announced that financing to Greek banks in September was €77.8 billion while Greek reliance on the "temporary" Emergency Liquidity Assistance program hit €26.6 billion according to Bloomberg. With every additional deposit outflow, expect ever more money to be needed to keep the Greek sham of a banking system afloat, and more and more Germans to follow in Jens Weidmann's footsteps and start getting very, very angry.

An Athenian view.

Everyone hoping the ECB would step in today and buy Italian bonds... has been disappointed. Has Draghi finally decided to make a political statement and kick Berlusconi out by send the 10 year to new all time lows? So it would appear: the 10 Year price just dropped below 87 for the first time, and the Bund-BTP spread rapidly approaching the LCH margin hike-inducing level, last at 490 bps.

Trust the Germans in the ECB (those who have not yet resigned that is) in this case Jesn Weidmann, to come in and spoil the party:

• Weidmann, speaking in Berlin, says hyperinflation shows why monetizing debt wrong
• Prohibition on monetary financing an important achievement.
• Euro treaty rightly forbids monetary financing
• Stable prices should be key goal of ECB
• Leveraging EFSF with currency reserves prohibited
• Says monetary analysis may gain importance at ECB

And for all our MMT friends:

• "One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press:” Weidmann
• Pohibition of monetary financing in the euro area “is one of the most important achievements in central banking” and "specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I"

Meet the new boss: same as the old boss:

• ITALIAN PARLIAMENT VOTING ON BUDGET MEASURE
• ITALY'S BERLUSCONI WINS BUDGET VOTE AFTER OPPOSITION ABSTAINS WITH 308 VOTES IN 630 SEAT PARLIAMENT
• BERLUSCONI WINS BUDGET VOTE WITHOUT ABSOLUTE MAJORITY
• BERLUSCONI WINS VOTE BUDGET VOTE

What is notable is that Berlusconi has now lost his majority. Sure enough:

• ITALY'S BERSANI CALLS ON BERLUSCONI TO RESIGN

What this means is not quite clear but the EURUSD is not too happy for now.

As was noted previously (here and here), today's Italian parliament vote on the 2010 Italian budget (yes, like the US they are almost up to date with real time running budgets) will be of notable significance for Berlusconi, Italy, its sovereign bonds and Europe. And the vote has just been open by the Assemblea speaker.. Also attached is the roll call of the key players and potential Berlusconi successors should the billionaire PM step down.

What does over $200 billion in intervention money get you these days? Not much: a half-life of 7 days as it turns out. Following a series of disastrous interventions by the Japanese Central Bank in the past two years, the latest and greatest, aka the Halloween shorts massacre, has now retraced 50% of the move to the USDJPY highs, which appears to be a notable stop loss barrier, and which the Japanese FinMin and central bank will defend at all costs. It would not surprise us if the BOJ were forced to throw far more good money after bad to pretend it has things under control, if the 77.60 barrier is taken out. And after all, all those USD and EUR purchased with the intervention proceeds were a boon to Europe: after all Japan (in the complete absence of China) bought a whopping... €300 million of the latest €3 billion EFSF issue. We expect to see market conventional wisdom to switch from China to Japan as being Europe's secret bailout Santa in a few short minutes.

Sean Egan, of Egan Jones, appeared on CNBC's Squawk Box this morning to pay penance for his truthiness and daring to open investor's eyes to the reality we are facing. The two main topics of discussion were the European crisis and, of course, Jefferies. Egan hushes the CNBCers when he describes the three solutions for Europe's problems - which really boils down to one of restructuring and/or printing when faced with reality - and points to a EUR2.5tn hole that needs to be filled at least. Of course, the discussion of Europe's sovereign shackles led to demands from the Kernan, Sorkin, and MCC for their pound of flesh over Egan's call on JEF but the rater defended his call with simple logic as another guest host questioned how Egan expects JEF's business model to be viable at lower than 13x leverage - great question.

One can always rely on Art Cashin and the Friends Of The Fermentation (FoF) to provide a novel perspective on pretty much everything.

This is not news, and was already broken over the weekend, but at least now it is official.

• GREEK PRESIDENT TOLD THAT PAPADEMOS TO HEAD GOVERNMENT- BBG quotes SKAI

That said, while the EURUSD is obviously delighted that the ECB has just placed its first proxy to head a sovereign nation, perhaps PM is not quite the right title: how about Federal Reserve Viceroy for the Aegeo-Turkish region; or Annexation Tzar for the ECB. As a reminder, L-Pap's profile can be found here.

Open Europe has today published a note on the dramatically evolving situation in Italy, with new estimates on how much the rising bond yields could cost the Italian government and an assessment of the current political situation.

Key points:

• Berlusconi’s majority in the lower house of the Italian parliament remains uncertain;
• If Berlusconi falls, the best option for Italy and the eurozone would be a national unity government with a strong backing in Italian parliament;
• Italy could face an extra €28bn in interest payments over the next three years, potentially wiping out almost half of the projected €60bn budget savings by 2014;
• Italy needs widespread institutional as well as economic reforms if it is to return to economic growth.

This morning, Italian 10 year borrowing costs reached a record 6.74%, very close to the 7% threshold which financial markets see as broadly unsustainable (and which therefore often results in a self-fulfilling solvency crisis and possibly a bailout). Similar increases have been seen across the board for Italian debt of all maturities. Worryingly, short-term debt is becoming increasingly expensive (the yield curve is flattening) a sign that investors see increased risk in short-term lending (something seen in the other countries which accepted bailouts).

However, rumours of Berlusconi’s resignation triggered a rebound-effect on the stock markets yesterday. There should be no doubt that although Italy’s difficulties will not be resolved if Berlusconi goes, he is definitely a big part of the problem. So will Berlusconi resign, and what will it mean for Italy and the eurozone?

The EU is getting closer to having two actual alternatives for EFSF on the table. Partial Protection Certificate (PPC) - the goal of which is to reduce coupons on bond issues - and Co-Investment Funds (CIF) which create a levered vehicle for purchasing/supporting secondary bonds. CIF’s seem to have a better chance of working, though they will require not only cheap EFSF money at the first loss part of the capital structure, but also some “dumb” money at the senior part of the capital structure.  If they get enough of that, they can create some compelling value for “mezz” investors. This is not TALF.  TALF was a much better deal for outside investors.  The range of assets the investor could choose from was broad.  Most fund managers believed they were “cheap” but couldn’t come up with the capital to invest, or handle the downside. TALF was a great opportunity.  CIF’s may create some interesting opportunities, and are at the very least flexible enough, that investors could have a discussion, but they are nowhere near as appealing as TALF was.

Ever wondered about the true intrinsic value of Euro banknotes? Prudent Investor blog reader Kurt Lindlgruber from Austria sent me this pragmatic approach, pulling up the calorific value of such notes once they have lost their purchasing power as did all fiat currencies in history. Lindlgruber's calculations contradict French philosopher Voltaire's famous quote that 'Paper money will always return to its intrinsic value. Nothing.' It is not all that bad. Your soon-to-be worthless Euros will at least keep you warm for a few minutes.

BNP Paribas SA and Commerzbank AG (CBK) are unloading sovereign bonds at a loss, leading European lenders in a government-debt flight that threatens to exacerbate the region’s crisis.

BNP Paribas, France’s biggest bank, booked a loss of 812 million euros ($1 billion) in the past four months from reducing its holdings of European sovereign debt, while Commerzbank took losses as it cut its Greek, Irish, Italian, Portuguese and Spanish bonds by 22 percent to 13 billion euros this year.

Ryanair has demonstrated masterfully how one can take an abysmal situation (the Italian head's upcoming urgent planning for one-way departure options from Italy, following the inevitable collapse of the Italian bond market) and spin it to one's promotional advantage. Today, the Italian website of Ryanair carries those two things nearest and dearest to Silvio's heart: "escape" opportunities and "charity" catalogues.