Archive - May 2010 - Story

In the past two weeks, borrowings under the ECB's "discount window" equivalent, the Marginal Lending Facility, have jumped substantially. Where on April 25th just E2 million was outstanding, it has subsequently jumped all the way to 2.6 billion on May 3 (yes, for Americans these sums are paltry, but for European, and especially Greek banks, half a billion could mean the difference between life and death). And with the O/N-3M repo spread blowing out, the ECB could be once again becoming the lender of first and last resort. One of the rumors for the jump in borrowings has been that Greek Piraeus bank was on the verge in the last days of April after a full blown bank run, and only a last-minute MLF borrowing helped it stave off bankruptcy. The MLF dropped to E1.3 billion yesterday, although this could be merely a liquidity shift from one source to another. Keep a close eye on the ECB's daily MLF report to determine if there is a backdoor bailout occurring of one of the more troubled European banks. We will also provide details later on today, when the data becomes available, on whether the Fed has disclosed any FX swaps having taken place in the prior week.

Listening to ECB President Jean-Claude Trichet who said default is not an option for Greece while the single currency attacked the $1.27 figure at the moment when he called it a safe store of value I cut my observations of the ECB council meeting here. Mr. Market seems to have a differing opinion. BTW, interest rates are on hold despite the latest uptick in inflation to 1.4%.

I stumbled upon this ECB legal document that runs to the contrary and strangely has found no media attention.

While promoting the Euro as a safe store of value the ECB opts for tight limits on cash transactions in Greece, limiting the role of cash Euros as a medium of exchange, one of the fundamental functions of a currency.

Stating the objective to limit tax evasion the ECB recommends that all business transactions above €3,000 and all consumer expenses above €1,500 Euros shall be paid for in all other forms than cash. - Toni Straka, The Prudent Investor

“I’ve been talking to lawyers and rival CEOs just trying to ballpark it at this point…there is no number, but people are ball parking, and these are CEOs and lawyers, between $1 and $5 Billion. And that’s what they are saying. And these aren’t people that are necessarily trying to keep negative stuff on Goldman Sachs. These are both analysts that are positive on the stock, but those are the numbers that they are talking about.”

“And it depends on a lot of things. For all I know, the SEC can come in and say give us $100,000,000 if Lloyd Blankfien gets fired. That’s a possibility.”

Europe is dead. The European nations are the victors, and the way ahead will be one hell of a mess. Without taxing and borrowing power, there is no way to square the inter-euro trade balances between the countries except ‘internal devaluation,’ which means years of deflation and poverty for the voters – and protestors – of the deficit countries. Our pencil pushers and Excel experts have made lots of projections on the Greek situation and can find almost no possibility of success. The EU/IMF team projects Greek debt at 149% of GDP when this rescue ends, but their nominal GDP estimates are incredibly optimistic when salaries and jobs are cut dramatically. We see a 20% decline over the three years as a good outcome, the debt would stay the same, and the ratio goes to 186% of GDP. Almost like Japan, but foreigners own the Greek debt – no way! This rescue reminds us of Bob Rubin’s rescue of Russia in July 1998, which lasted about one month before the whole house of cards collapsed. We knew that one couldn’t work, and this one can’t either. It might take longer, but the euro is finished. Goodbye euro, hello drachma, peseta, lira, and the others. The world had hoped for more, none more than the Europeans themselves, but now we are all left to pick up the pieces. - John Taylor, ultra EURUSD bearish, and thus very rich, CIO of F/X Concepts, world's largest FX hedge fund.

BNP, Commerzbank, HSBC, SocGen, Natixis, BNP, CA, AXA, ING and Rabobank all identified as banks with massive Greek repo exposure. The next question: will writedowns on these now illiquid and, as the Greek bond market is effectively shut down for a second day running, untradeable positions be taken, or will Europe follow the US in pretending tens of billions in valuation gaps will be filled by Hopium? Also, as bankingnews.gr reports, and as we first highlighted, a variety of French re/insurers are about to get whacked.

The greatest fear of central banks, that the "isolated" sovereign contagion could spill right back into the private sector, is starting to be realized: now in Europe and soon in the US. Market News reports that high beta European CDS names and indices are all blowing out as fears of a funding/liquidity crisis are becoming prevalent. From MNI: "The CDS market has seen another session of sharp widening in many sectors, taking its cue from falling Eurozone peripheral government bond prices rather than stocks which are more stable today. Greece and other widening government bond spreads continue to drive sentiment, with the CDS market seeing underperformance in places, with high beta cyclicals, TMT and basic materials dragging the market wider." Corporate have so far been relatively spared from the deterioration in sovereign spreads, however if the risk perception in the public arena spills right back to the private sphere, then the entire private-to-public risk transfer episode will have been for nothing. And if corporate funding costs shoot higher, with no sovereigns to back them out (themselves in need of a bailout), well then our thesis that only Mars could possibly bail out the world's bankers will be all too real.

• Crude oil little changed after falling to six-week low on stronger dollar
• Nigerian President Umaru Yar'Adua Dies, Aged 58
• Oil spill threatens price for jumbo crab cakes at top-ranked U.S. eateries
• U.S. retailers may report smallest monthly sales increase since November after shutting it because of a leakage on May 2.
• Alcatel-Lucent shares plunge after quarter's loss is double estimates
• BNP Paribas 1Q net rises 47% on fortis assets and lower provision
• BP plans to lower containment dome on to seabed of gulf of Mexico

Another year is in the books here at the University of Michigan, but European leaders are getting no such rest, as the sovereign debt crisis contagion is spreading from Greece and the periphery into the core (sov debt crises are proving to be more contagious than chicken pox). As we speculated, the Greek “bailout” is merely buying time for the inevitable– default, whether structured/planned or not. Meanwhile, Euro nations with similar debt and deficit proportions to output are coming under pressure as well, namely the rest of the PIIGS nations.

We are in the third gold war since the Second World War – the US (and other western countries/institutions, notably the IMF) lost the first one in the late-1960s to the French and the second one in the late-1970s to the Arab nations. In the report, I’ve used declassified documents from the US State Department to show how on those occasions the US authorities believed they could
defy economic gravity right up until the moment when they were overtaken by events, how they falsified economic data to support the dollar and how they negotiated secret deals to stop other governments buying gold. Food for thought I think.

Finally what we have been saying for weeks is starting to filter through to the broader population and even the politicians... Too bad Americans are too apathetic to even pretend to care that their money is being sued to fund the continued and massively mismarked existence of a few French, German and UK banks. Then again, with American Idol hitting its lowest ratings since 2002, a revolution may just be what the doctor ordered.

Barely did we have time to read the previous bearish note on the EURUSD, that we just got this latest piece from the masters of the universe: "Inverse-EURUSD overlaid with 10-year Eurozone-Periphery/-Core Spreadbasket– Continues to imply much lower levels for EURUSD" The euro will be lucky to hold 1.2700 today. 1.2400 target within a week. Some other vol pair related observations: "1-year EURUSD/USDJPY implied vol. spread– EURUSD vol. looks set to rise significantly further versus USDJPY - In the current environment it would seem reasonable to assume higher EURUSD vol. would be associated with lower-EURUSD"

Yesterday we pointed out that France was a global top three derisker in sovereign CDS as traders have shifted their worries from the periphery to the core. We have long discussed that the reason for this is that France, not Germany, has the greatest exposure to Greece and the PIIGS. Below is an RT clip in which Hugh Hendry confirms just this: according to the Ecclectica head man, a mark to realistic market of Greek debt would wipe out E35 billion in French bank capital, "and it is questionable whether the French banking system would take such a hit." Hendry's solution, as has been the case from the solution, is for Greece to leave the euro, and points out that due to FX inflexibility, there will be no tourists in Greece this year as everything becomes painfully expensive, not in Drachmas but in Euros. We would add that the burning parliament is probably not that much of a tourist draw either. In typical fashion, Hugh dismembers Angela Merkel's hypocrisy: "When the truth becomes unpalatable, what is the truth. Angela Merkel, when we say she is being generous, there is nothing generous about spending taxpayers' money in another country, that is not generosity, that is merely trying to salvage a bankrupt set of political ideology. So to blame the messenger when it's the truth that hurts, I find that inexcusable." Just as Hugh's huge bet against the euro has proven to be a terrific success, we are confident that he will be correct about the end of the EMU quite soon as well. And as the moderator adds "Shame on you, Europe, for needing the IMF to bail you out. Europe is like an African nation." Amen.

Moody's notes that the banking systems of Portugal, Spain, Italy as well as Ireland and the UK face different challenges of different magnitudes; warns that contagion risk could dilute these differences and impose very real, common threats on all of them. Rating agency is particularly worried about contagion spread to Italy.

The Eur collapse continues and what has until now be an orderly and persistent move is threatening to become erratic and disorderly ; panic is starting to set in. Today we have the ecb press conference and the market will be focused on every word of Trichet's address. We have seen mainly buying interest this morning as people do the prudent thing and take some profit in case Trichet is able to pull a rabbit out of his hat. But I am at a loss to think what he can really deliver that will assuage the markets growing concerns. I think there is a real likelihood that the market will again be disappointed and the euro will accelerate lower once he stops talking. We may be entering a new more violent phase of the sell off with bigger whips in both directions but with more risk still to the downside. We are sticking with a core short position and will look to add quickly should Trichet offer nothing new or on a bounce back to 1.2860-70 (unless a genuine rabbit is forthcoming) and roll down our stop to 1.30. Technicians have important support at 1.2740 and a close below this level should open a test of last years 1.2457 low.

RANsquawk European Morning Briefing - Stocks, Bonds, FX 06/05/10