Archive - Oct 25, 2011 - Story

The European farce descends into surrealism and gortesque tragicomedy. Just out of the FT's Brussels Blog which discussed what appears to be an early cancellation of the critical EcoFin (not to be confused with Euro Coffin) meeting: "A letter sent last night by Jacek Rostowski, the Polish finance minister, makes an [EcoFin meeting doubtful]. Since Poland currently holds the European Union’s rotating presidency, Rostowski is charged with convening a meeting of all 27 EU finance ministers tomorrow ahead of the big summit to lay the groundwork for a final agreement. But officials tell Brussels Blog the so-called “Ecofin” council meeting is now likely off, and in a letter to Jean-Claude Juncker, the Luxembourg prime minister who chairs the group of 17 eurozone finance ministers, Rostowski makes it appear the cancellation is due to a failure to agree on outstanding issues." No.... they couldn't agree??? Nobody could have possibly foreseen this. Nobody.

Finally someone dares to go ahead and say what is on everyone's mind, namely that proclaiming a 60% "haircut" as voluntary is about the dumbest thing to ever come out of ISDA. As is well known, the ECB and the entire Eurozone are terrified of what may happen should Greek CDS be activated, and "contagion waterfall" ensue. The fear is not so much on what happens with Greece, where daily CDS variation margin has long since been satisfied so the only catalyst from a cash flow market perspective would be a formality. Where it won't be a formality, however, is for the ECB which has been avoiding reality, and which will have to remark its entire array of Greek bonds from par to 40 cents on the dollar, which as Alex Gloy indicated earlier, will render the central bank immediately insolvent all else equal. What it also will impact is treatment of all other banks and pledged collateral valuations which is effectively the only bridge in the chasm between Mark to Unicorn and reality. So here is Barclays with what can be the effective dealbreaker, because if a bank: an entity that owns the credit event determinations committee at ISDA, comes out with a contrarian statement to the conventional "stick your head in the sand" wisdom, then pretty soon everyone else will have to follow sui: "In our view, there is little doubt that a large notional haircut of c. 50-60% would be considered a credit event, consequently triggering CDS contracts." And here is why Wednesday's summit is now guaranteed to be a flop: "We consider that launching a hard restructuring without the adequate backstop could be too risky from a financial stability perspective, and we think the ECB would likely take this view." Since the summit will have to announce a decision on the Greek haircuts to be taken even remotely seriously, and since the ECB simply can not make one at this point, look for major disappointment, whether the summit is Wednesday, Thursday, next month, or next year, simply because the ECB will not be ready to pull the trigger for a long, long time.

The only thing that continues to matter is headlines, as alpha continues to be dead and buried under 6 feet of noise. For those who care, however, here is the actual data in today's fact-based docket.

We are getting closer and closer to some actual details. Eventually EFSF will be only one or two things. We will see how much or how little outside money gets contributed.

Newsletter writer Dennis Gartman has done a swift about turn and is now adding to his gold position by buying the metal priced in dollars, pounds and euros, he wrote today in his daily Gartman Letter. Only last Tuesday, Gartman wrote that the gold market is suffering "very real damage." His comments were picked up very widely making headlines in the financial media internationally. Gartman warned that he feared that the rally from September's lows is "now under assault." Today, Gartman said in his newsletter that he was certain gold prices would break upwards sooner rather than later. Gartman said that the EU debt plan would hurt currencies. Therefore, gold will rally as currencies fall. "The authorities have no choice but to inflate their way out of the morass that they’ve found themselves falling into and that shall mean the diminution of currencies generally and the advancement of gold as the only currency not diminished", he said.

• Strong European corporate earnings results from the likes of BP and Deutsche Bank supported equities
• There was market talk of a potential reserve requirement ratio cut by the PBOC, however no action has materialised so far in the session
• SNB's Hildebrand said that the SNB will defend the CHF floor with full determination and will buy currencies in unlimited quantity if needed
• Italian transport minister said that a collapse of the Italian government is possible. Also, the Italian Northern League leader, Bossi, said a government crisis is possible
• According to summit draft conclusions, Eurozone leaders will call on the ECB for it to continue buying distressed countries’ bonds in the secondary market under current exceptional circumstances

• German lawmakers win full say on EFSF (Reuters)
• Spain Slipping on Deficit Increases Chances of Contagion (Bloomberg)
• China faces tight power supply this winter (China Daily)
• Greece, China sign memorandum of cooperation (Kathimerini)
• Gov. Corbett launches state takeover of Pa. capital, declares fiscal emergency (WaPo)
• In Cautious Times, Banks Flooded With Cash (NYT)
• An apocalyptic end to world’s biggest bubble (MarketWatch)

A relatively subdued overnight session which has seen the futures spike only modestly from their lows, on yet another forced squeeze in the EURUSD which hit a high of 1.3960 after hitting a low of 1.3877 around 3am Eastern, has seen a rumor of a Chinese Reserve Ratio cut as one of the main drivers of action, which has also pushed gold to over $1660 and silver to $32. If validated, and if China is indeed welcoming inflation with open arms, counterintuitively following the completely irrelevant PMI beat, look for these two to resume their antigravitational glidepath. As for other key developments watched by the market, here is a succinct overview from Bloomberg.

Whenever you come across a mystery in finance there always is an explanation. Like the question why the ECB would so ferociously resist any “haircuts” on Greek debt. Despite all the evidence that current debt, now expected to peak at levels exceeding most calculators’ capacity, is unsustainable. Why would the ECB, the largest single holder of Greek debt, not set an example by accepting the 21% haircut orchestrated by the banking lobby in July? (In order to still reach the 90% acceptance rate, the ECB was simply to be excluded from the calculation). Instead, the ECB promised Sodom and Gomorrah in case of a haircut (“Greek restructuring would be a disaster” – ECB’s Bini Smaghi, July 20th).