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Guest Post: Let's Dance Sirtaki On The Liquid Dance Floor!!!
Following up on the earlier post observing the mauling in Dubai sov CDS, here is a great piece from Hedge Your Mind, analyzing the comparable scenario in another country which has seen its CDS spike recently - Greece.
You'll find the ever widening CDS on
the fast-growing Hellenic debt. Rather frightening considering that CDS
are revisiting march levels (remember: markets were scared by the slump
in eastern Europe economies and numerous rumours on the blast of the
euro were flourishing).
the fast-growing Hellenic debt. Rather frightening considering that CDS
are revisiting march levels (remember: markets were scared by the slump
in eastern Europe economies and numerous rumours on the blast of the
euro were flourishing).
Today it seems that those fears
are materialising: Ukraine is in a deep syncope (borders have been
closed for two months due to the H1N1 pandemic) and Greece could be
deeply impacted by the unwinding of the liquidity-driven ponzi on the
Hellenic market. While this piece of news could be harmless for HFT or
robot traders, it is also completely put aside by fat portfolio
managers happy to eat up low priced turkeys for thanksgiving (-30%!!!).
The EURUSD is flirting with recent highs (like a turkey dazzled by the
headlights of the euphoria-maniac rally car).
are materialising: Ukraine is in a deep syncope (borders have been
closed for two months due to the H1N1 pandemic) and Greece could be
deeply impacted by the unwinding of the liquidity-driven ponzi on the
Hellenic market. While this piece of news could be harmless for HFT or
robot traders, it is also completely put aside by fat portfolio
managers happy to eat up low priced turkeys for thanksgiving (-30%!!!).
The EURUSD is flirting with recent highs (like a turkey dazzled by the
headlights of the euphoria-maniac rally car).
The excellent Researchahead blog was the first one to highlight the Greek fire (please read http://www.researchahead.blogspot.com/) for a very interesting comment on the latest Sirtaki dancefloor.
The underperformance of Greek
assets has continued over the past days. In the bond market, 10y
GGB-Bund spreads have widened sharply to currently around 174bp from
132bp just two weeks ago and a low of 108bp in early August. As the
chart below shows, this spread widening has been mirrored by wider CDS
spreads for Greece. Interestingly, the absolute level of the Greek CDS
seems to top and bottom ahead of the GGB-Bund spread. In early March it
peaked 9 days ahead of the top in the 10y GGB-Bund spread and in early
August it bottomed 7 days ahead of the low in the cash-bond spread.
What is more, the relative performance of equities seems to lag the
developments in the bond markets (I used the difference in the
percentage-performance since the lows in the equity indices on March
9). Greek equities have only really started to underperform since late
October, i.e. more than two months after the outperformance of Greek
GGBs came to a halt and started to revert.
assets has continued over the past days. In the bond market, 10y
GGB-Bund spreads have widened sharply to currently around 174bp from
132bp just two weeks ago and a low of 108bp in early August. As the
chart below shows, this spread widening has been mirrored by wider CDS
spreads for Greece. Interestingly, the absolute level of the Greek CDS
seems to top and bottom ahead of the GGB-Bund spread. In early March it
peaked 9 days ahead of the top in the 10y GGB-Bund spread and in early
August it bottomed 7 days ahead of the low in the cash-bond spread.
What is more, the relative performance of equities seems to lag the
developments in the bond markets (I used the difference in the
percentage-performance since the lows in the equity indices on March
9). Greek equities have only really started to underperform since late
October, i.e. more than two months after the outperformance of Greek
GGBs came to a halt and started to revert.
This highlights once again that
equity investors ignore the developments in bond markets at their own
peril. Furthermore, given that the underlying problems responsible for
the latest underperformance are also present in a host of other
countries, bond and equity investors should take note. First, Greece is
suffering from a structural weak economic position (significant
imbalances, low relative competitiveness etc.) coupled with limited
room for an ongoing environment of stimulative fiscal as well as
monetary policies. Fiscal policy is seriously constrained by the high
level of indebtedness and the exorbitantly high budget deficits. In
turn, fiscal policy needs to be tightened significantly just to
stabilise the deficit near 10%. This, however, will further harm the
economy. Moreover, monetary policy is far from exerting the same level
of accommodation as in other countries. The level of longer-term
interest rates is higher with 10y Greek government bonds yielding 170bp
more than their German counterparts (vs. a pre-crisis level of roughly
35bp) whereas the inflation differential has decreased (currently 1.2%
difference in headline inflation rates vs. an average of 1.55% over the
past 10 years). In turn, the monetary environment for Greece is
significantly less accommodative than it is for Germany. Moreover,
Greek banks seem to rely relatively more on the ECBs liquidity
providing measures. As this FT article suggests - citing a BNP Paribas
research piece - 7% of excess reserves provided by the ECB have gone
into Greece which only represents 0.9% of EMU GDP. Furthermore, Greek
banks seem to have used this liquidity to buy local government paper
helping sovereign spreads come down.
equity investors ignore the developments in bond markets at their own
peril. Furthermore, given that the underlying problems responsible for
the latest underperformance are also present in a host of other
countries, bond and equity investors should take note. First, Greece is
suffering from a structural weak economic position (significant
imbalances, low relative competitiveness etc.) coupled with limited
room for an ongoing environment of stimulative fiscal as well as
monetary policies. Fiscal policy is seriously constrained by the high
level of indebtedness and the exorbitantly high budget deficits. In
turn, fiscal policy needs to be tightened significantly just to
stabilise the deficit near 10%. This, however, will further harm the
economy. Moreover, monetary policy is far from exerting the same level
of accommodation as in other countries. The level of longer-term
interest rates is higher with 10y Greek government bonds yielding 170bp
more than their German counterparts (vs. a pre-crisis level of roughly
35bp) whereas the inflation differential has decreased (currently 1.2%
difference in headline inflation rates vs. an average of 1.55% over the
past 10 years). In turn, the monetary environment for Greece is
significantly less accommodative than it is for Germany. Moreover,
Greek banks seem to rely relatively more on the ECBs liquidity
providing measures. As this FT article suggests - citing a BNP Paribas
research piece - 7% of excess reserves provided by the ECB have gone
into Greece which only represents 0.9% of EMU GDP. Furthermore, Greek
banks seem to have used this liquidity to buy local government paper
helping sovereign spreads come down.
However, similar problems
(significant structural imbalances, high deficits which will need to be
reduced via fiscal tightening, lower level of monetary policy
accommodation than for the Eurozone average, high reliance on ECB
liquidity providing measures) are apparent in a host of Eurozone
countries. I continue to see the largest problems - besides Greece -
for Ireland, Portugal and Spain. I still remain a little less worried
with respect to Italy (largely because the deficit still appears
relatively low which means that there is no need to actively tighten
fiscal policy as of yet).
(significant structural imbalances, high deficits which will need to be
reduced via fiscal tightening, lower level of monetary policy
accommodation than for the Eurozone average, high reliance on ECB
liquidity providing measures) are apparent in a host of Eurozone
countries. I continue to see the largest problems - besides Greece -
for Ireland, Portugal and Spain. I still remain a little less worried
with respect to Italy (largely because the deficit still appears
relatively low which means that there is no need to actively tighten
fiscal policy as of yet).
Given the structural economic
imbalances coupled with the need to tighten fiscal policy, monetary
policy would be more important for those countries to deliver ongoing
policy support. But again, the level of interest rates in these
countries is significantly higher (especially in Ireland) than in the
core of the Eurozone. Coupled with lower inflation rates than for the
Eurozone average (-1.5% for Portugal, -0.7% for Spain,-6.5% for Ireland
vs. -0.1% for the Eurozone) this means that real yields are much
higher. Furthermore, this high level of real interest rates is
especially apparent at the long end of the curve given the high level
of credit spreads on top of the already steep underlying yield curve
(as measured via Bunds or swap rates). This renders it much more
attractive for the banks located in these countries to use the
short-end of the yield curve to refinance than locking in rates at the
longer end. As a result, I assume that the dependency on the ECBs
liquidity provision measures tends to be higher in those countries on
average (this is not to say that for example also some weak German
Landesbanks do not rely extensively on ECB liquidity). In turn, as the
ECB starts to withdraw this liquidity, it will be especially the
banking sectors in those weak countries which will suffer
significantly, leading to further underperformance of respective bond
and equity markets.
imbalances coupled with the need to tighten fiscal policy, monetary
policy would be more important for those countries to deliver ongoing
policy support. But again, the level of interest rates in these
countries is significantly higher (especially in Ireland) than in the
core of the Eurozone. Coupled with lower inflation rates than for the
Eurozone average (-1.5% for Portugal, -0.7% for Spain,-6.5% for Ireland
vs. -0.1% for the Eurozone) this means that real yields are much
higher. Furthermore, this high level of real interest rates is
especially apparent at the long end of the curve given the high level
of credit spreads on top of the already steep underlying yield curve
(as measured via Bunds or swap rates). This renders it much more
attractive for the banks located in these countries to use the
short-end of the yield curve to refinance than locking in rates at the
longer end. As a result, I assume that the dependency on the ECBs
liquidity provision measures tends to be higher in those countries on
average (this is not to say that for example also some weak German
Landesbanks do not rely extensively on ECB liquidity). In turn, as the
ECB starts to withdraw this liquidity, it will be especially the
banking sectors in those weak countries which will suffer
significantly, leading to further underperformance of respective bond
and equity markets.
Given that the ECB should start
to embark on its exit path - even if only at a gradual pace - it
becomes even more important to shy away of investments in the
structurally weak Eurozone countries such as Greece, Ireland, Portugal
and Spain, be it in sovereign or corporate bonds as well as in equity
markets.
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It's the liabilities you don't see that you need to worry about...
MI6, news before the news.
Greece tests the limit of sovereign debt as it grinds towards slump
Greece is disturbingly close to a debt compound spiral. It is the first developed country on either side of the Atlantic to push unfunded welfare largesse to the limits of market tolerance.
By Ambrose Evans-Pritchard
22 Nov 2009
Greece has long been skating on thin ice. The current account deficit hit 14.5pc of GDP in 2008. External debt has reached 144p (IMF). Eurozone creditors – German banks? – hold €200bn of Greek debt.
During the panic last February, German finance minister Peer Steinbruck promised to rescue any eurozone state in dire trouble. He is no longer in office. The pledge was, in any case, a bounced political cheque even when he wrote it. Greece can assume nothing.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/663011...
At the risk of demonstrating my ignorance, if Greece or a Baltic state goes down, I would assume the Euro gets hit. Is this a reasonable expectation, or is there some reason this would cause the Euro to rally? Thanks in advance for any response.
If Greece goes down, yes, it will affect the Euro, since that country is a member of the eurozone.
As for Latvia, I don't think it would affect the Euro as much, since it is not a member. However, many Eurozone members (Austria, for instance) have invested heavily in Eastern bloc countries, and that could severely impact them.
Both events would probably reveal very shocking truths about the level of indebtness of the major European banks (debt ratios > 50).
To continue Andys question, would we expect to see arun up in the USD?
Waldo
Europe led us into the first depression and it will lead us into this one.
Europe has led us into depression the first time and will lead us into depression this time.
I believe Dubai has debtors prison, so if they default on the sovereign debt, will the government put themselves in prison?
Deep fried auto flattened turkey? Mmmmm, turkey! How about the stock of an overpriced glorified coffeshop to go with it?
House prices crashing in Latvia, ranked #5 in sovereign CDS,
http://www.cmavision.com/market-data
Latvian house prices fall 59.7% in Q3 (y/y)
“price falls in several countries have been much larger than house price rises anywhere and include unprecedentedly severe falls in Latvia (-59.7% year to date), the UAE (-48.1%), Bulgaria (-28.7%), Iceland (-21.2%), Russia (-19.5%) and Slovakia (-15.3%) (all figures inflation-adjusted).”
http://ftalphaville.ft.com/blog/2009/11/25/85251/latvian-house-prices-fa...
@11:30
GLD +1.24%
SPY +0.36%
TLT -0.51%
This won't last. There is a loud pop coming quick.
Dollar tanking again...Obama speaking again... Speculators gambling gain... Geithner/Bernanke lying again. What's new. To me, its either groundhog days everyday, or one big joke being played on the people with some sense of reason.
Zombie - love it!
Consider Ukraine as DEFAULTED. Dead in the water!
http://online.wsj.com/article/SB1000142405274870349940457455729223462186...
The melt up before the storm? Is the dollar the best place to be right now?
This melt up is breaking my will and my spx put options if the "storm" doesn't materialize in december.
Honest question here: If we view the EU and the US as federal entities with member states sharing their a common currency and central bank, would a default by Greece or Ireland be worse for the EU than a default by California or NY for the US? Basically, who has more "member" state debts, the US' individual states, or the EU's member states?
I would think the US would have an easier time bailing out California, than would the EU with bailing out Greece. I'm making an assumption here that say, Oklahoma would not be as PO'd about a CA bailout as, say France would be with a fellow member bailout.
Opinions?
Simple answer: take a look at the GDP of California vs the GDP of Greece.
If it was an independent nation, California would have (if I remember well) the 8th-largest GDP in the world, or 1.8 Trillion dollars in 2007. It is the richest state of the USA.
Greece's GDP is 338 billions dollars in 2009. The top four countries in the EU (Germany, UK, Italy and France) all have GDPs between 2 and 3 trillion dollars.
So, yeah, bailout of Greece would be a lot easier for the EU than the bailout of California for the USA.
References:
http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP_%28nominal%29
http://en.wikipedia.org/wiki/List_of_European_countries_by_GDP_%28nomina...
Still waiting patiently for the brekdown of the Eurozone. It just don't make sense to be bind together with completly different cultures. Greece,Italy,and even france run a very socialy tight ships,and now they can'tprint their way out so they are souck with ECB. But if they break,they can reinstute their currency back and they can do what they like. I wonder if their is any European here to give us more perspective............
Does the EU club have a future?
The economic crisis has transformed the global economic landscape. The dreams of a decade ago now seem grandiose, says MI6 Ambrose Evans-Pritchard.
http://www.telegraph.co.uk/news/worldnews/europe/6189918/Ambrose-Evans-P...
Greece already has printed currency ready to roll since, 2006
I wouldn't read too much into this. I was in Greece in the summer and while everyone was complaining, they were all out dining, drinking and partying. Tourism was down considerably, which is normal given the high euro and global recession, so they're going to go through a rough winter. The other major industry, shipping also got slammed last year. Keep an eye on National Bank of Greece's stock price (NBG).
The morbidly curious? Keep your eyes peeled for correllations between economic collapse and outbreaks of novel H1N1. Is Greece due for a little visit from ManBirdPig, the AntiSanta?
- Lockdown the plebes
- Shut down borders
- Short-circuit civil unrest
- Prevent bank runs
- Excuse statist excesses
- Provide cover for disappearances
- Steal the roast beast
ManBirdPig is so useful one might wonder if he's on TPTB's payroll.