Archive - Nov 2011 - Story

At this moment, the headlines coming out of Greece are confusing and contradictory.  It isn't clear whether or not there will be a referendum or a vote of no confidence.  There may be a new leader, there may not be.  All we can do is wait for the next headline.  In the end I think there will be a referendum. You can't put the genie back in the bottle.  If a referendum is cancelled now, how will the people of Greece react? Maybe the No Eurozone plan won't be so compelling, but if people start taking a serious look at how it would work, it might not be so bad, and don't forget, the Eurozone plan isn't that great.  At some point, the citizens of the country need to make the decisions.  Electing politicians that can then be corrupted by Merkozy is not a long term solution. 

The former Goldman banker cutting rates two days after his appointment? Stunning. Next up, we get to listen to an Italian accent instead of a French one for the first time in a decade, at the press conference to be held shortly. The EUR reaction is appropriate: completely schizophrenic.

20 minutes until the expected G-Pap resignation. Spend them with this silliness.

Or just in time for the ECB announcement, due in... 30 minutes. So, if Schrodinger's Pap doesn't resign, can we finally put this silliness behind us for at least one more day.

Presented without comment:

• There were conflicting reports that Greek PM Papandreou has resigned. It was also reported that the EU referendum is off the table
• Also, according to party sources, Greek socialist MPs are forging proposal for coalition government headed by former ECB vice-president Papademos
• EU Commission said that the only option is for Greece to stay in the Euro as treaties don’t foresee an exit from the Eurozone. It also said that the Greek tranche payment is conditional on austerity implementation
• Market talk that Qatar is willing to invest into the EFSF, however earlier the Chinese President said that the Eurozone problem should mainly be solved by Europe
• According to a senior G20 official, the G20 is assessing the cost of a Greek default

One can kneejerk every headline coming out of Europe, or one can buy gold, which has finally had enough with this endless BS and has realized that no matter what the ECB will have to print, followed by everyone else.

Update: it is now officially cancelled

WTF is going on in Europe?

• VAN ROMPUY, BARROSO PRESS CONFERENCE DELAYED
  
• VAN ROMPUY, BARROSO PRESS CONFERENCE `NOT YET CANCELED' EU SAYS
  
• VAN ROMPUY, BARROSO MEETING WITH FRANCE, GERMANY, ITALY, SPAIN

And the statement that explains it all:

• EU SAYS `NOT SURE' IF VAN ROMPUY, BARROSO BRIEFING TO HAPPEN

We use the term "explain" loosely...

Today marks the beginning of a new era for the ECB, with Mario Draghi taking over the helm from Jean-Claude Trichet as the President of the central bank. Unfortunately for Draghi, the changeover is to take place at a very critical juncture and at a time when market participants are demanding that the central bank takes more pro-active measures to stimulate the stagnating economy which stands on the brink of a double dip recession. However, such action may prove difficult for Draghi to push through the governing council since doing so only few months after Trichet announced that the central bank is to resume covered bond buying and 12-month LTROs risks undermining the central banks’ credibility. Another reason why a rate cut may prove futile is that the meeting coincides with the G-20 summit where leaders of the Eurozone are expected to endorse use of the leveraged EFSF fund as an investment opportunity for countries with a large budget surplus such as China and other BRICS. In turn this indicates that comments stemming from the summit may have a more profound impact on investors’ appetite for the EU related financial instruments and therefore determine whether the EUR/USD pair consolidates above the 1.4000 level.

And refuting another rumor re-refuted previously just minutes ago, we hear from Dow Jones now that G-Pap will submit his resignation today and will ask for unity government, according to Star.gr. Oh thank god things are clear because this headline hits the tape just as we get this: Greek premier doesn't plan to resign according to Proto Thema. Needless to say, kneejerk reaction trading robots are breaking everywhere as the EURUSd trades. No point in even attaching the EURUSD chart- by the time it is up it will be off by 100 pips.

Total chaos in the markets in the past few minutes following a headline from Bloomberg that the Greek Prime Minister George Papandreou may withdraw his proposal for a referendum, an official with the ruling Pasok party said in Athens today. The official declined to be named. Obviously this is not the first time an unnamed source has spread precisely this rumor, only to be refuted minutes later and we give it the appropriate credibility. Needless to say if true this is indeed political suicide by G-Pap. The EUR needless to say soars in kneejerk reaction to the news, although the far more important Italian-Bund spread has done precisely...nothing.

While we grow weary of endless talking-heads pointing to contemporaneous VIX charts as somehow indicative of why equities are up/down/sideways and the lack of comprehension of the non-directional bias of what is simply a measure of dispersion, we do recognize the critical way that volatility-spikes (and other vol-related indicator divergences) reflect short- and medium-term market uncertainty. Having modeled business cycles through the eyes of realized and implied volatility, we were heartened to read Goldman Sachs excellent discussion of the macro-economic impact of uncertainty shocks and why the post-2009 vol spikes leave global growth at much greater risk of significant downside. Critically, they note that while previous episodes of vol-spikes have been relatively well-contained, current risks seem much less tightly defined with unusually frequent bouts of extreme volatility, leading to much longer-lasting impacts on growth than normal. Furthermore, the current spike in vol is both large and prolonged enough to suggest similar empirical expectations with peak negative implications likely in early 2012.

Because like with insolvent sovereigns and the law of communicating vessels, there rarely is just one cockroach.

Europe's core, call it Germany, is now caught in a war of reverse attrition on three fronts: with Greece, with Italy, and as of today, with France. And unfortunately for the European monetary union, Europe, call it Germany, is losing. While the focus continues to be on G-Pap for the second day in a row following his shocking referendum announcement, the real diversion remains Italy, where the government is in as much of a state of chaos as that in Athens, and whose bonds, while not yet trading at Greek levels  (remember when the Greek 1 year hit 100% two months ago? Today it is at 225%... and tomorrow the two year will be at 100%), are far, far greater in amount, and the only thing preventing their collapse so far has been the ECB, whose monetizing assistance has been contingent on Italy passing and enforcing austerity measures to deal with its runaway debt to GDP of over 120%. Unfortunately, when BTPs open for trading in 7 hours, the ECB bid may not be there, or any bid for that matter, because as the WSJ reports, "Italian Prime Minister Silvio Berlusconi on Wednesday failed to issue growth-boosting measures demanded by European Union authorities ahead of the Group of 20 summit, raising further doubts about the government's willingness to pass economic reforms aimed at restoring investor confidence in the country." Now that the ejection of Greece is virtually certain, perhaps it would be a prudent idea for what little remains of the healthy European core to kick out all the stragglers before everything becomes infected, and before French bonds trade at yields indicative of a sub-IG credit, thus ending the myth of any European union for good?