Archive - Feb 9, 2012

Update - It gets even better: Greek Deal Lacks Detailed Paperwork For Decision - DJ. What, 50 pages of promises is not enough.

The Greeks "pledge" that they will grow their economy in 2013? May as well pledge unicorn cab cabs for all Germans to their southern province in perpetuity. Yet somehow this is sufficient to squeeze the EURUSD higher as a "deal is done." Perhaps, but not so fast. As we speculated, the Troika not only does not want to fall for the same Greek BS any more, but frankly wants it out (and Germany votes on the bailout package tomorrow) - but has to do it diplomatically. So here it comes:

• IMF SAYS IT'S NOT FORCING AUSTERITY ON GREECE AS TALKS CONTINUE - BBG
• RICE SAYS IMF "WELL AWARE HOW DIFFICULT' IT IS FOR GREECE - BBG
• IMF'S RICE SAYS IMF MINDFUL OF `HARDSHIPS' IN GREEK PROGRAM - BBG
• RICE DECLINES TO SAY WHAT IMF SHARE OF NEXT GREEK LOAN WILL BE - BBG

But the most ominous of all:

• IMF SAYS 'PRIOR ACTIONS' LIKELY TO BE REQUIRED BEFORE FUND OK OF NEW GREEK LOAN PROGRAM - DOW JONES

By the way, dear US taxpayer, the IMF - that's you.

As reported yesterday, the cost of terminal abrogation of contractual rights in the US is, drumroll, $26 billion. Bloomberg notes:

• $26 BILLION FORECLOSURE SETTLEMENT ANNOUNCED IN WASHINGTON
• FORECLOSURE ACCORD RESOLVES 16-MONTH ROBO-SIGNING INVESTIGATION
• FORECLOSURE ACCORD IS SUBJECT TO APPROVAL BY FEDERAL JUDGE
• FORECLOSURE DEAL PRESERVES U.S., STATE RIGHTS TO OTHER CLAIMS
• FORECLOSURE ACCORD COULD CLIMB TO $40 BLN IF 14 SERVICERS JOIN

And a whole lot of corner offices for America's Attorneys General. As for what the market thinks of this "severe" settlement: BAC +1.2%, WFC +0.6%, JPM +0.4%, C -0.1%. For those who don't understand what just happened, US banks just funded Obama's re-election campaign to the tune of $26-$40 billion.

A brief, three sentence press release which talks about issues "left open for further elabortaion and discussion" but which certainly notes that the agreement's so called passage opens up the way for €130 billion in fuirther financing. It remains to be seen what the Troika's response to this PR is. We already know how the Greek people feel.

While a lot of the just completed Draghi press conference was mostly fluff, the one notable exception was the announcement that the European central bank would "approve eligibility criteria for additional credit claims" (see below). While purposefully vague on the topic, Draghi noted that the step is one of onboarding even more risk: "Sure, it's going to be more risky. Does that mean that we take more risk? Yes, it means we take more risk. Does it mean this risk is being unmanaged? No, it is being managed. And it's being - it's going to be managed very well because really there will be a strong overcollateralization for the additional credit claims. The conditions will be very stringent." While it remains to be seen just how stringent the conditions will be, but a bigger question is what is the total pool of eligible claims that can be used to flood the ECB in exchange for freshly printed cash. For that we go to Goldman whose Jernej Omahen a month ago calculated the impact of the expanded collateral pool which was formally confirmed today. To wit: "Scarcity of collateral was becoming an evident problem for a large number of banks, especially smaller and medium sized. In our view, the ECB’s collateral pool expansion was therefore a critical decision. Select corporate loans – which form over >€7 tn, or >30% of total balance sheets – will now be admissible for refinancing operations, through national central banks. Criteria on eligibility have yet to be determined – we are therefore not able to quantify the actual expansion of collateral pool at this stage. That said, the €7 tn starting points suggests it will be significant." In other words, and this is excluding anything to do with the LTRO, the ECB just greenlighted a potential expansion to its balance sheet all the way up to €7 trillion. Will banks use this capacity to convert "trash to cash" - why of course they will, and this goes to the very heart of the biggest problem with Europe: the fact that there are virtually no money good assets left as collateral, which requires the implicit rehypothecation of bank "assets" back to the ECB, to procure cash, to pay out cash on liabilities. How much will they do - we don't know yet. We will find out very soon. What we do know is that the ECB's €2.7 trillion balance sheet is about to expand dramatically, pushing the European central bank even further into bad bank status. And this is excluding the upcoming new usage of the Discount Window known as the LTRO in three weeks. Trade accordingly.

Even as the ECB's very own Mario Draghi is now peddling Greek deal rumors, which are essentially a reaffirmation that the country will "pledge" to return to GDP growth in 2013, we are already seeing real, not pledged, or promised, consequences of this deal, whether real or not (ignoring that Venizelos just said that it would actually take up to 15 days to finalize it, something which means the Greek exchange offer is DOA) namely that the crippling economic collapse discussed extensively on these pages is about to get far worse. AP reports: "Angry union leaders announced a 48-hour general strike for Friday and Saturday." “We are moving to a social uprising," said ADEDY Secretary Genera Iliopoulos." Surely this is the fastest shortcut for Greece to meet or beat expectations of halting the 10% drop in its GDP and convert that number to positive. One can only hope that makers of bulletproof vests can compensate the economic collapse as every other part of the economy shuts down.

Mario Draghi has just begun his press conference in a more upbeat tone than recent months. EURUSD is limping back from its last try at 1.33 but only modestly as he sees inflation risks 'broadly balanced' and reminds us all of the 'transitory' nature of his temporary non-standard measures, as Bloomberg notes. The main thing is that the ECB is once again easing collateral demands and will now accept credit claims. This simply proves that Europe is running out of any money good assets to pledge to the ECB as "collateral." Before the European (and thus global) ponzi is over, the central banks will accept Mars bars wrappers as collateral at 100 cents on the freshly printed dollar/euro.

Just in case the BLS seasonal adjustment needed a little confirmation prodding, here comes the BLS with its weekly initial claims number which at 358K (next week to be revised to over 360K), was a pleasant beat of expectations of 370K, down from an upward revised 373K the prior week. Offsetting this was an increase in continuing claims by 64K from 3437K to 3515K, up from an upward revised 3451K. According to Bloomberg's Joseph Brusuelas the underlying trend “supports modest improvement in labor market." Elsewhere, the net addition to EUCs and Extended benefits was a total of +19k. What this means is that the layoff wave of the temp worker hiring binge for the holiday season, is now ending. As for actual full time job additions, we will have to wait and see the "unadjusted" BLS data for that.

This is not a drill...

And so the EURUSD spikes on yet another supposed agreement out of the Greek politicians. The FT reports: "Greek politicians have reached a deal. Statement out shortly according to FT's Athens correspondent." Further from the FT's blog: "An official in the prime minister’s office says: “There’s an agreement, Mr Papademos has met with Mr Samaras and it’s done. There will be a statement shortly." Yes, we have heard this before, and we have seen the same reaction before. The deja vu'ness is now all blurring into one. In practice what this means, for those who can think beyond the most recent headline, is that Greece has formally agreed to pledge that its GDP will be positive in 2013... Sold to you.

The following anecdote should probably explain why Germany is now ready to part ways with Greece, Lehman-like consequences be damned. As Kathimerini reports, former PASOK defense minister Akis Tsochatzopoulos has had one of his properties in central Athens seized, the same he is alleged not to have declared to avoid paying taxes. Yep - one of the top Greek political figures caught in tax evasion. And one thought such travesties only occur in the US. But wait there is more: this is the same defense minister whom the Greek Parliament voted in favor of indicting in connection with taking bribes for the purchase of submarines. As a reminder, "At least 120 million euros was paid in bribes by the German firm that struck a deal with the Greek government for the sale of four navy submarines, according to German court documents seen by Kathimerini....Two former executives of Ferrostaal, the Germany firm that was part of the consortium which won the contract, gave depositions in Munich concerning the kickbacks paid to secure the deal, which was worth just over 1.2 billion euros. According to court documents seen by Kathimerini, the first illicit payment of 32 million euros was made in May 2000. The money was deposited into a Swiss bank account but the two former Ferrostaal employees said they did not know who the recipient was. The executives said their main aim had been to win over a “top level” official in the Defense Ministry." Turns out it is the same guy who was concurrently engaging in tax evasion. And that is why Greece had a budget revenue miss of about the same amount as it paid Germany for its subs. It also explains why, as Germany will no longer receive payment for its subs, it no longer needs Greece as a mercantilist partner.

As expected.

Somehow the anger of the sex pistols, the sound of boots marching in the background, seem right to me today. Greek Industrial Production dropped 11.3% in December. The unemployment rate jumped to 20.9%, up from 18.2%. The charade of negotiations and a bailout can go. Some deal is likely to be announced. I’m not even sure it will be relevant by the March 20th bond maturity deadline. The economy is getting worse, fast. People are getting angry, fast. The “force feeding of austerity” and plan after plan that is really just a focus on banks at the expense of the people is getting old. While we wait for whatever plan is about to be announced, to some fanfare and some small pop in stock futures, the markets are mixed.

• New Greek demands threaten debt deal (FT)
• Greek Finance Minister Heads to Brussels; Loan Talks Stall (WSJ)
• Talks Stalled on Greek Bailout as Venizelos Heads to Brussels (Bloomberg)
• US banks near historic deal on foreclosures (FT)
• Obama: Europe needs "absolute commitment" on debt crisis (Reuters)
• Fed's Lacker sees no need for more easing for now (Reuters)
• Europe compromise urged at summit (China Daily)
• China to Punish Illicit Bank Lending, Shanghai Securities Says (Bloomberg)
• Monti Meets Obama Amid ’Spectacular Progress’ (Bloomberg)
• Draghi’s First 100 Days Presage Greek Help (Bloomberg)

Many have been scratching their heads over just why the EURUSD hit a multi-month high of over 1.33 in the overnight session after once again, nothing was resolved in Greece, and in fact Greece has come begging to the finmin meeting in Brussels hoping the Troika would simply let it slide with open issues relating to pension cuts. That scratching promptly came to an end some minutes ago after the EU's Altafaj said there would be no deadline extension, somewhat illogically since there is no deal yet and the deadline has already passed, but some are finally starting to grasp that putting the ball back in the Troika's court is actually not a good thing since it is Germany's desire at this point merely to have the smallest excuse to part ways with Greece. The EURUSD has thus dipped by 60 pips back to levels seen last night, yet levels that are still 250 pips rich to the 1.30 seen three days ago before the relentless rumor (and hope)-driven ramp up commenced. Should there be nothing favorable to come out of the FinMin meeting today look for that difference to promptly close, now that there are just 40 days left until the heard Deadline of March 20, and a bond exchange offer needs an absolute minimum of 30 days before results are tabulated, and holdouts (yes there will be many billions in holdouts) are calculated.