Archive - Feb 2010 - Story

"Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by exceptional occurrences beyond its control, the Council may, acting unanimously on a proposal from the Commission, grant, under certain conditions, Community financial assistance to the Member State concerned. Where the severe difficulties are caused by natural disasters, the Council shall act by qualified majority. The President of the Council shall inform the European Parliament of the decision taken." - Maastricht Treaty, Article 103(a)2

Confusion reigns day 2, only this time add a pinch of political dissent. Germany's ruling coalition of the Free Democratic Party and the Christian Democratic Union has commissioned a parliamentary report which concludes that "member states may not guarantee the debts of another member state" reports daily Handelsblatt.

For all Commodore 64 HFT setups expecting an imminent relief rally following a formal Greek bailout announcement, you may have to wait at least two more days. Dow Jones reports that a German official has said that finance ministers meeting this afternoon are "unlikely to make any decision and there is no aid for Greece on the agenda of Thursday's summit of EU leaders." Furthermore, "There doesn't exist any decision on such aid and it also isn't pending at present". Additional data points to the shape of the bailout: it appears a guarantee is the only, if any, way to go, after a source noted that a "refinancing of debt is not in Greek interest, as it would be seen as a default." With €3 billion in ten year notes set for auction by Portugal, we could be in for a very volatile day. The Portuguese 10 year Bund spread is currently 11 tighter to 137 bps.

More as we get it.

Goldman's Erik Nielsen lands the bombshell that the Greek deficit mysteriously increased from €29.4 billion to a shopping €37.9 (keep in mind, this is not Bernanke notation where only quad- prefixes impress people at this point). This increases the (running) 2009 budget deficit from 12.2% to 16%! While certainly not the last time we hear of "prior revisions", the question of just how patient Germany will be, should this number approach, oh say, 50% once the artificial support of various Goldman swaps expires (and at 50% the BSDs like Goldman will surely round up to 100%), is very much open.

• China's exports jump 21% as imports gain 86% in January, Government says.
• Fed to reveal its strategy for raising interest rates.
• Germany along with EU plans to offer Greece, other members loan guarantees.
• Japanese core machinery orders increased 20.1% in Dec, much better than expected.
• Oil drops to near $73 in Asia after report shows US crude supplies jumped last week.
• Stocks, commodities, Korean Won rise on speculation of Greek aid, China's growth.

The Chinese dumping story is really catching on. After even Alphaville reprinted it, it seems that everyone in the blogospehere is aware of the imminent, and far greater than a Greece contagion, danger of Chinese dispositions. Here is David Goldman who originally broke the story for Asia Times' Inner Workings blog, discussing not only Chinese dumping and the implication for cost of capital (ca. 11 minutes into the clip), but shares color on the topic du jour, Greece, along with Rick Santelli and Larry Kudlow.

EURUSD is testing the channel support here. Various officials commenting that no bilateral agreement has been discussed or signed are putting risk under pressure. It's almost like watching Congress fumble the vote on the stimulus package. The good news is that if you thought US politicians are terrible, you can find comfort in that they are no better in Europe. We still expect a multi-lateral resolution in the end. - Nic Lenoir

RANsquawk 10th February Morning Briefing - Stocks, Bonds, FX etc.

RANsquawk 10th February Morning Briefing - Stocks, Bonds, FX etc.

It appears that this time China's posturing is for real. Following up on our earlier post that Chinese military officials want to "punish" America by selling Treasuries, Asia Times Online is reporting that an explicit directive by the Chinese government has notified reserve managers to sell all risky US assets, including asset backed and corporates, and just hold on to explicitly guaranteed Treasuries and Agency debt. And from following TIC data we know that China's enthusiasm for MBS/Agencies over the past year has been matched solely by that of one Bill Gross.

Who's up and who's down in the hedge fund world, courtesy of HSBC. Owl Creek, Harbinger, Marathon and Third Point doing good. Bill Ackman's Pershing Square, not so much.

Not that there is too much to get excited about. The only possible positive outcome of a bailout other than immediate rescue for the shareholders of a bankrupt entity is a possible restructuration, change in management, etc.. If the bailee goes right back to his original business model (selling bad cars or making bad loans) then surely nobody gains in the long run. In the case of a sovereign entity like Greece the real question is: what will the bailout change other than temporary relief to capital markets? I am tempted to say nothing but that would not be constructive. Still though everyone knows it will be very difficult for Greece to deliver fiscal austerity, and unless the world economy picks up dramatically (China is peaking and due for a rough landing, demand still not back anywhere close to highs) Greece will have to find sources of growth internally while the government cuts its budget. This is also because as long as Greece is in the Eurozone, they are not competitive to export anything unless the EURUSD gets much weaker. A weak Euro down the road with a possible desintegration of the eurozone will be the end result no matter what further developments take place in the meantime. - Nic Lenoir

Now that some sort of Greek bailout is imminent, most likely in asset guarantee form, it is high time to evaluate the full impact of Europe's decision to jettison monetary prudence at the expense of patching a crumbling fiscal dam holding back trillions in bad investment decision cockroaches, accumulated over the years. Relying on a presentation by ML's Jeffrey Rosenberg, we observe that by providing loan guarantees to the periphery, the core (Germany/France/Benelux) may have well destabilized the core problem for the Eurozone, namely a whopping €1.6 trillion (that's in euro) in total 2010 financing needs, a number which consists of €400 billion in 2010 bond maturities, €700 billion in rolling short term debt and €530 billion in combined 2010 fiscal deficits. Germany has just taken an acute liquidity crisis in the periphery, and courtesy of action we already saw earlier in Bund rates, has sown the seeds for a funding crisis of none other than the very heart of the Eurozone.

Ongoing currency volatility spurred on by various utterances and retractions from Eurozone officials is wreaking havoc on the "Watch The Money Roll In" forex gamers. And stock investors, sniffing out a squeeze, have resumed the "Dash For Trash" trade, buying whatever stocks were beaten down the most.