Archive - Apr 18, 2011 - Story

In a very unstunning development which would expose all those Greek and EU proclamations about a solvent Greece for another relentless barrage of lies, it appears that Germany is now resolved to not only restructuring Greece (and with certain Greek bonds trading around 60 the market has effectively thrown in the towel), but has provided a timeframe in which this should occur: "German government sources said on Monday Greece will likely restructure its sovereign debt before the end of summer, putting a time frame to recent speculation that sent the euro to its lowest in two weeks. "Decisive voices within the federal government expect that Greece will not make it through the summer without a restructuring," one high-ranking coalition source told Reuters. "That does not mean that the federal government is striving for (a restructuring) but such a step will probably not be avoidable," he added, echoing views from other coalition sources." Supposedly the thinking in Europe is that banks should have built up a sufficiently large capital buffer to where the permanent impairment of Greek senior debt will not lead to another bank run. The question however is how well has Europe considered any other unpredictable consequences, which by definition, are "unpredictable." Recall that the financial system nearly ended after the Lehman bankruptcy following the freeze in money markets: a side effect that nobody had expected at the time. What will happen this time around when Greece becomes the first "Lehman" in the sovereign realm, and just how many trillions will have to be invested to undo "unforeseen" consequences?

• Debt Ceiling Increase Is Expected, Geithner Says (NYT)
• Zhou Pledges More Tightening as China Raises Reserve Ratios (Bloomberg)
• Fed to Signal End of Monetary Easing (FT)
• Finnish Populist Party Surge Clouds EU Bailout (Reuters)
• Glencore worth up to $69 billion (Reuters)
• Libyan Rebels Gain Ground in Fierce Fight (WSJ)
• Capitalism is failing the middle class (Reuters)
• Inflation in China Poses Big Threat to Global Trade (NYT)

Summary of results:

• Citi Q1 revenue USD 19.7bln vs. Exp. USD 20.54bln; this is a whopping $5.7 billion drop from the $25.4 billion in Q1 2010. So much for revenue growth.
• Q1 EPS USD 0.10 vs. Exp. USD 0.09
• Q1 tier 1 capital ratio 13.3%
• Q1 tier 1 common equity ratio 11.3%
• Q1 net credit losses declined 25%
• Q1 Loan Loss Allowance drops to $36.6 billion from $48.7 billion year over year.
• Total deposits $865.9 billion compared $827.9 billion a year prior
  
• And the kicker: Q1 reserve release was $(3.37) billion on $4.2 billion profit from continuing operations. In other words, absent accounting gimmickry the company would barely have been profitable
  

Europe is not the entity facing a funding crunch this morning. Just out from Reuters:

• LIBYAN REBELS UNLIKELY TO EXPORT MORE CRUDE UNTIL PRODUCTION RESUMES - OIL OFFICIAL

Which means that Gaddafi has now managed to isolate and send the Libyan rebellion, armed with a central bank before they even had a constitution, on the road to insolvency. Which also means that should CIA efforts wish to be successful, especially in light of recent inability by NATO to continue the air superiority campaign due to lack of munitions, America will have no choice but to either directly provide funding to rebels, or puts marines directly on the ground: both moves which will likely not do much for the president's popularity rating.

As part of the broadly bipolar risk [ON|OFF] market stampede, Spain probably could have picked a better day to attempt to sell €4.7 billion in bills than just after the weekend when the market realized there is no way out for Greece than default. Alas, it did not, and the result was not pretty. Per Reuters: "Spain paid substantially more to issue 12- and 18-month Treasury bills on Monday compared with last month as uncertainty hovered over a Portuguese bailout and speculation intensified about Greek debt restructuring. The sale was at the low end of the Treasury's target range of 4.5 billion to 5.5 billion euros ($6.51 billion-$7.95 billion) and comes ahead of a closely watched long-term debt auction on Wednesday of bonds maturing in 2021 and 2024." Specifically, the Spanish Treasury was forced to pay 2.77% for its €3.5 billion 12 month Bill, 64 bps more than the 2.128% paid in a comparable auction in March, and making matters worse was a tumble in the bid to cover from 2.4 to 1.6. The weakness was mirrored in the auction of €1.2 billion in 18 month notes, which priced at 3.364%, up 93 bps from last month, with the BTC tumbling from 3.5 to 2.0. And one can wonder what the outcome would have been had the Fed or other central banks not been selling puts on the Spanish curve (because if he is doing it off the balance sheet in the US, there is nothing really preventing Bernanke from taking his curve manipulation tour global). And yes: Spain is next. "Investors are turning their attention to Spain as the next weakest link in the euro zone chain after Portugal said it would seek aid from the European Union and the International Monetary Fund, the third to fall after Ireland and Greece."

Homebuilder sentiment and a few speeches from Fed officials. In general week to be quiet as market begins holiday wind-down.

And so we see another tipping point in action: while absolutely nothing has changed in the fundamentals of Europe's insolvent peripherals, today, for the first time since early January, we are seeing an absolute bloodbath in the risk gauges of the European periphery. As the PIIGS list below shows, spreads are surging, and while it is no surprise that Greece is now trading north of 1200 bps following a weekend full of Greek default chatter, the important observation is that Spain and Italy are once again in the default mix.

• Portugal 615 (+15) - officially insolvent
• Italy 156 (+13)
• Ireland 588 (+21) - officially insolvent
• Greece 1225bp (+89) - officially insolvent
• Spain 250 (+16)

Concerns that the sovereign debt crisis may be entering a new phase and the risk of contagion has seen peripheral eurozone bonds fall sharply and the euro fall against major currencies and gold today. Sovereign debt risk, global inflation concerns, geopolitical risk, disappointing European earnings and concerns about Japan's coming reporting season have seen equities weaken and new record nominal highs for gold and silver (all time and 31 year). Greek bond yields have continued their relentless march higher and have risen above 14.07% (10 year) and Portuguese debt (10 year) has risen to a euro era record over 9.27%.Spanish and Irish debt are also under pressure this morning. Gold is increasingly being seen as the superior currency in a world of trillion dollar and euro deficits and bailouts. Indeed, the printing and electronic creation of billion and trillions of the major paper currencies is increasingly making gold and silver the currencies of last resort. One of the largest pension funds in the world, the University of Texas Investment Management Co (which manages the endowment for the Texas teachers pension fund), has realized this and has put 5% of the pension fund into gold bullion (see news). The fund has previously expressed concerns about the counter party risk in ETFs. However, the reason given for opting for taking delivery of 100 oz gold bars in a warehouse was that if the holders of just 5 percent of COMEX futures contracts opted to take delivery of the metal, there wouldn’t be enough to cover the demand leading to a COMEX default. The risk of a COMEX default increases by the day and appears to be moving from the realms of the “conspiracy theory” to that of “of course we knew it would happen, it stands to reason and was inevitable.” A COMEX default would have serious ramifications for the dollar and all fiat currencies as it would further erode trust in central banks, fiat currencies and today’s monetary system.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 18/04/11