Archive - Jun 11, 2012

It just gets more and more mind-numbing by the moment.The latest from Europe, which earlier confirmed that ESM loans would get preferred creditor status:

• SPANISH BANK RECAPITALIZATION LIKELY TO BE IN EFSF BONDS, SIMILAR TO GREEK RECAPITALIZATION - EU OFFICIAL
• EUROZONE MONEY FOR SPANISH BANK RECAP COULD COME FROM EFSF TO AVOID THE ESM'S PREFERRED CREDITOR PROBLEM - EU OFFICIAL
• SPANISH BAILOUT COULD LATER BE TAKEN OVER BY THE ESM, BUT EXTENDED LOANS WOULD NOT BECOME SENIOR TO OTHER DEBT

Nothing like figuring out your hare-brained bailout attempt was a failure from the beginning. Ok: Here are the problems with this band aid:

1. Unfunded
2. Temporary, and eventually will be replaced by the ESM. Markets can, luckily, still discount.
3. Negative pledge issue still exists as Finland made all too clear. Countries will demand extra security interest while under EFSF regime and until ESM priming comes in play.

Ball is in your court Europe.

After opening and surging to up 18 pts last night (to within a tick of its 200DMA), S&P 500 e-mini futures (ES) have faded the entire gain (just as we said last night) with ES now red. European financial credit is wider on the day. EURUSD has given most of its gains back and Italian and Spanish sovereign bond yields/spreads are considerably wider on the day. US major financials have turned red after opening significantly higher. Swiss 2Y rates are at new record lows at -34bps as the USD has strengthened from 0.8% lower to only 0.15% lower now - which is having an incremental impact on Gold, Silver, and Oil - all plunging at the US day session open. So apart from all that, what did the EUR100bn of #Spailout do for all of us?

Greece gets it. Now Ireland gets it. Spain just got it. And now Cyprus is getting it. The 'it' being the desperate need by the core to hold the 'status quo' together implies much more strategic negotiating power for the periphery than anyone would want investors to know. As Greece's Syriza leader Alexis Tsipras has been saying from before the Greek election, this is a pan-European problem and renegotiating part or all of the bailout terms is far more open. As Bloomberg reports this morning, Cyprus' FinMin Vassis Chiarly said the nation should not be 'demonized' if it takes the choice of a bailout:

*SHIARLY: CYPRUS HASN'T RULED OUT EU BAILOUT OR THIRD PARTY LOAN

Confirming the constant ability of Europe's nation to state the obvious and understate the reality, Shiearly added, "the situation isn't as bas as presented by some" and do not wory Cypriots as 'it would be able to secure positive terms if it resorted to a bailout'.

On Saturday, when we discussed the impact of the Spanish bailout for other European countries, focusing on Ireland which had promptly requested a renegotiation of its own terms to match those of Spain, we noted that "Syriza's Tsipras should send a bottle of the finest champagne to de Guindos - he just won him the election." It appears that the leader of the Greek anti-bailout party wasted no time to capitalize precisely on just this.

Spain marks the fourth bailout during this Euro Zone debt crisis saga, after Ireland, Portugal and Greece, and may need more aid, while Italy is looking good to be the fifth bailout candidate

"Any aid that might come from the European Stability Mechanism, which is expected to start work next month, would enjoy a preferred creditor status second-only to the IMF, the spokesman confirmed."

Now that the Spanish bond market has realized it has just been primed by senrio debt, the next steps are straight from our Subordination 101 walkthru. Which means sell Spanish local low bonds, go long English-law, preferably, those with a negative pledge. Of course, the presence of a negative pledge is precisely the loophole that will allow Finland, and soon others, to demand a security interest in the event of priming (such as an ESM-sourced loan) which at last check, is precisely what they are doing assuming the EFSF is used to temporarily source the loan until the ESM takes over. So here is a good example of a bond, courtesy of the Generalitat de Catalunya Euro Medium Term Note Programme, that one should hedge a general basket of local-law Spanish bond shorts.

Spain's bank bailout bought a few months of liquidity, but at what cost? Well, the cost can be seen perfectly on the chart below, which shows Spanish and Italian sovereign bond spreads literally exploding.

With that in mind, I sincerely doubt €100 billion is going to solve Spain’s problems. The whole bailout reeks of desperation. And it likely will have political and financial implications that will quickly render the benefits of this move moot. Of course, when you’re facing systemic collapse, you don’t have time to debate implications and consequences. But I highly doubt that this move will do much to address Spain’s true problems.

European equities in both the futures and the cash markets are making significant gains after a mornings’ trade, with financials, particularly in the periphery, leading the way higher following the weekend reports of the Eurogroup confirming aid for the Spanish banking sector. With data remaining light throughout the day, its likely investors will remain focused on the macro-picture, seeing some relief as the Spanish financials look to be recapitalized. At the open, risk sentiment was clear, with EUR/USD opening in the mid-1.2600’s, and peripheral government bond yield spreads against the German bund significantly tighter. In the past few hours, these positions have unwound somewhat, with EUR/USD breaking comfortably back below 1.2600 and the Spanish 10-yr yield spread moving through unchanged and on a widening trend across the last hour or so against its German counterpart, and the yield failing to break below the 6% mark.

For those of you that keep waiting for some giant change-the-world event; I invite you to re-gear your perspective. Greece has fallen, Portugal has fallen, Ireland has fallen and now Spain has followed the road into Purgatory. These are significant events that are, in fact, changing the world though none has caused Armageddon to date though they may by their aggregate but not singular importance. This is also why Greece is of such key importance; it has nothing to do with staying in or out of the Euro or of the preservation of the European Union as a political entity. That part of the equation is barely relevant. What is of critical importance though is that if they leave the Euro that they will default on some $1.3 trillion in total debt that can be afforded by no one. That is the rub and you may ignore the rest of the Eurospeak that is bandied about from Brussels to Berlin. A default by Greece will bankrupt and cause re-capitalization at the European Central Bank, it will throw the IMF into a tailspin and it will play havoc with Target2 and the German Central Bank. Do not allow yourself to be taken in and mis-directed; this is THE issue and the only issue of real importance.