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Today's Unprecedented Swiss Bank Intervention Driven By Massive Capital Flight From Germany To Switzerland; Result Was Euro Surge
Earlier today we disclosed what were not one but several massive central bank interventions in the Euro-Swiss Franc exchange rate. The intervention was large enough to push the rate up by 300 pips, a gargantuan amount in a world where applied leverage is often in the thousands. The amount of capital required to achieve this was likely unprecedented. Yet what bothered us was why would the SNB so glaringly intervene in the FX market not once but three or even more times. Thanks to the Telegraph we find out that the reason was a massive €9.5 billion capital flight from Germany into Swiss deposit accounts just this morning, according to BNP. Unfortunately for Germany this is only the beginning of capital reallocation from the country into neighboring Switzerland. And the technical bounce in the EUR today was in fact an even greater sign of weakness: in fact, as the IMF's Tim Kingdon pointed out, the money run in Club Med banks last week resulted in a massive €56 billion of interbank lending as the move from the periphery to the core accelerated. Now that the next stage of the run is from the core, Europe will very soon find itself with depleted depository capital very soon. Because if money is fleeing Germany, it is certain that France, Italy and the UK can not be far behind.
Below, is a chart we posted earlier of the record Swiss National Bank intervention.
And here are more details on today's unprecedented move from Evans-Pritchard:
The market is left asking what skeletons are lurking in the cupboard," said Marc Ostwald from Monument Securities. The short ban follows a report by RBC Capital Markets that circulated widely in the City accusing German banks of failing to come clean on 75pc of their €45bn exposure to Greek debt.
German lenders have the lowest risk-weighted capital ratios in the world after Japan. They were slow to rebuild safety cushions after the sub-prime crisis, and now face a second set of losses on Club Med holdings. Reporting rules have let Landesbanken delay write-downs, turning them into Europe's "zombie" banks.
Even so, nothing adds up in this BaFin episode. Germany acted alone, prompting a tart rebuke from French finance minister Christine Lagarde. "It seems to me that one should at least seek the advice of the other member states concerned by this measure," she said. Brussels was not notified. The deep rift between Berlin and Paris has been exposed again, leaving it painfully clear the European Montary Union still lacks the fiscal and governing machinery of a viable currency union.
Far from stabilising markets, BaFin's move set off a nasty sell-off in credit markets. Markit's iTraxx Crossover index – measuring risk in mid-level corporate bonds – jumped 57 basis points to 586. Markit said BaFin had caused liquidity to dry up in "febrile conditions". The Libor-OIS spread watched for signs of strain in interbank lending widened further.
If the purpose of BaFin's action was to drive wolfpack "speculators" off Greece's back, it failed. Yields on 10-year Greek bonds rose 37 basis points to 7.918pc. What it showed is that CDS contracts barely matter. The issue is whether "real money" investors such as the Chinese central bank are willing to buy Greek and Portuguese debt.
The short ban set off instant capital flight to Switzerland. BNP Paribas said €9.5bn flowed into Swiss franc deposits in a matter of hours on Wednesday morning.
The Swiss central bank intervened to hold down the franc. This caused the euro to shoot back up against the US dollar after an early plunge. The euro had already bounced off "make-or-break" technical support at $1.2135, the 50pc "retracement" of its entire rise since 2000, but any rally is likely to be short-lived.
The commentary by BNP currency chief Hans Redeker is priceless, if for no other reason than to indicate to what great degree the great ongoing experiment to prevent the disintegration of the EU is an improvisation at every single step. As such, it is only a matter of time, before a fatal mistake is executed and the whole thing falls apart, despite the best intentions of European bureaucrats.
"As a German citizen, I wish to apologise for the stupidity of my government," said Hans Redeker, currency chief at BNP Paribas. He said the CDS ban deprives reserve managers of a crucial hedging tool for non-securitised loans and will scare away global investors needed to soak up Club Med bonds.
"The European market is likely to become utterly dysfunctional. Just as the market showed signs of stabilisation with real money starting to buy euros, the Germans have destroyed this glimmer of hope," said Mr Redeker. "The BaFin ban is a desperate political move by a government battling for survival. Angela Merkel needs the support of the Left so she has given in to a witch-hunt against banks and speculators."
As for talk of disintegration, we know that Europe was hours away from implosion as recently as Friday.
Tim Congdon from International Monetary Research said deposit data from the ECB shows that there was a "major run" on Club Med banks in the second week of May. Some €56bn of interbank lending facilities were withdrawn, probably as citizens in the South switched funds to banks in the eurozone core. Bank reliance on the ECB lending window jumped by €103bn – or 22pc – in a week.
"It was extreme and very sudden, probably on Friday afternoon. The eurozone was undoubtedly in peril," he said.
The question raised by BaFin is whether underlying damage to the eurozone banking system runs even deeper than feared.
If one considers that Libor keeps crawling higher, and that the Libor reporting dispersion between the European and foreign banks in the BBA USD panel is almost back at record wides, we are fairly certain that the answer to the last question is a resounding yes.
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Is this the same Sharia law that killed Theo Van Gogh, or is he really still alive and living comfortably in Germany? How comfortable are the Dutch cartoonists right now? Everyone happy?
If you have fundamental Islamists on the property, you've informally got Sharia law. And if your new immigrants are integrating so well, why are burqas being ripped straight from women's heads as preludes to fist fights?
I HAVE been paying attention, and I see a growing sense of xenophobia, not "integration."
"Paging Mr. Sarkozy, Mr. Sarkozy to the white courtesy phone."
I give you kudos for your zeal and conviction, but I respectfully submit that you have to periodically check your idealism at the door.
lao,
You said it................need to import some Aussie gonads...........U.K., and France are screwed already.
Their man has it going on. Likely the only Pol I have seen that actually has seen the trees, before the Forest.
consider "europe" didn't exist until they stop warring with eachother and took over Mid East, SE Asia, Africa and Americas...and then they started fighting over the loot and borders in these colonies...Pope had to intervene and draw borders in Africa like a Mafia boss...you, you get Shrimp (cameroon)...you, you get Ivory (coast), you get Gold etc...
Europe gets it hydrocarbons from Russia. You need to ask Putin which currency he prefers.
Euros. Ask any Russian. Hands down.
Russia is partly Europe.
Russia's demographics are worse than Europe's. 0.8 children per woman, and third world life expectancy for men.
Demographics are overrated imo... like fraudulent climate change models or computer simulated ash clouds shutting down Europe's air space for a week.
Have you seen real estate prices in Moscow? Total bull. And who would want to live in these dreadful concrete Stalin Towers everywhere? Russia's biggest problem is corruption .. and Putin.
Frankly, I wish you well, but I don't think you can "lead" until you can secure the sea lanes in the South China Sea, for example. It's expensive. If it were me, I'd be happy to share these costs with you (and work together), but until then OPEC contracts in U.S. dollars works.
"Europe is the future."
Good one! The future what?
The future battleground? The future workers' paradise? The future Islamic Republic?
You have no future when your birthrate is 1.3 and you're buried in debt.
The EU will sort it out. Eventually. End of the EMU and Euro, so what? They WILL take the bitter medicine. Meanwhile back in the States, nothing have changed because everyone is so full of Schadenfreude over the failing European "socialism". 2008 will be remembered as the "breeze that refreshes"...
The Euro is just starting.
Remember 2010 as late Euro birth pains.
Euro will survive and will emerge as a stronger currency and as THE alternative to the USD as reserve currency.
Do we still need a reserve currency? Really? Considering we have a multinational economy with 550 million people using 1 single currency as opposed to the other single national economy with 330 million people using the other currency.
There's at least room to work with both.
Give me your stuff and I pay Euros or I buy from the next guy that will take Euros.
Iran would take Euros. What you say? You don't like Iran? So?
Time to make babies Europe! Do not worry ladies, I will be right there!
In you're sense of humanity is you're weakness. Germany will never be free with such high minded idealism. Sorry but that is the truth... worry about Germany and nothing else.
this man speaks the truth (in bad grammar)
"Europe as the next superpower" I'll take the other side of that trade.
Sorry, but you couldn't manage to discipline a minor country such as Greece and now are paying the price for your impotence. It's only going to get worse from here on out. Arrogance is no substitute for competence. The Euro will be a bitter memory within 36 months.
"We are the future of this world. Europe is the future."
What future? Have fun with the downside of oil production. Germany receives 10% of their energy from solar, and although that is fine and dandy, you will need a bigger boat. Besides, the world has seen zero growth since oil plateaued in '05, so you are inheriting a stagnated economy. Hopefully for you the world becomes addicted to chocolate and you can make some for everybody. I would enjoy that scenario.
I will add, if you battle windmills and call them climate change, you can count me out. Good luck!
***Disclaimer***
I do understand we have to become sustainable, as we are destroying our environment. But I DO NOT think CO2 is affecting the climate....warming...change....or whatever the new term is.
Physics does not give a rats ass what you think.
Thanks for playing.
nor you ...
"If this world and its civilizations are to have a chance at surviving the coming challenges of climate change and sustainable living, we need to have leadership and face the challenge.
Europe is the leader in this and you all know it."
You're probably too young to remember the "coming ice age" that was forecast in the late 70's and probably believe in the theory that man is more influential in global warming than the sun, so I'll just ignore your weak reference to Europe saving the world.
But even if you're right, the only answer to surviving and, indeed, thriving in a changing world is a healthy entrepreneurial class.
I'm an American entrepreneur who has done very well by satisfying customer needs in America. I sold my business a few years ago, have a European wife, a home in Europe and a home in the US.
Right now, there is no major country in this world that I could trust to take entrepreneurial risk in (of any size). Until things shake out, I'll be looking to invest in low-risk (and unfortunately low job-creation) ideas that can do some social and economic good. I believe in all-win capitalism.
If you think Europe is "the leader," you do not understand leadership. As someone else here suggested, set yourself up as a Republic, with strong state identities and an honest inviolable hard currency formula minus a central bank.
The only thing missing would be the character needed to maintain the inviolable hard currency formula--Greece is not alone in this lacking--and character is the single missing ingredient in countries I would look for to start my next major business.
The world needs more Ron Pauls.
"The world needs more Ron Pauls."
AMEN THAT!
Koolaid tastes great! eh? US Capitalism doesn't work, but I'm pretty sure European socialism is NOT the answer nor is the future in the form it is now. The Euro WAS and IS a figment of someone's wet dream. Hard to control things when you are a monetary union and have no taxation/treasury functions and have to approve every bailout by all member countries one by one through their parliaments. Also, 20% straight up unemployment in Spain. Southern Italy, 17% unemployment + for now what seems like 5-6 years? maybe more? People in Europe are LAAAZY for the most part. Good luck becoming the next world dominant power. Its going to be the chinese, if they don't crash. Sorry my friend.
Unemployment in Detroit is 50%.
Anything else?
I didn't even have to junk you, ;)
How many minimum wage jobs does an American have to slave at to afford rent on a crappy 2-bedroom bungalow in a shitty part of town, drive a beater Chev and have cable TeeVee?
Capitalism is great where applied fair and square.
What you have in the US is quasi (debt) slavery. Something went awfully wrong over the last 40 years.
too bad "US Capitalism" is as capitalist as "Russian Communism" was real communism...
we best not forget that reality when it's time to fix it all again.
re: the rest of your note - true. it is all a mess.
"We are the future of this world. Europe is the future."
I guess you haven't studied european demography much, nor looked its potential for economic growth, nor its ability to pay all of its accumulated entitlements to its rapidly aging population. The dominant culture in 50 years, at present trends, will not be of European origin, but rather more, um, arabic/turkish/north african, which is to say islamicate, I guess. So much for the chestbeating you were doing there...
damn, you beat me to it.
How are those demographics working for you in California, Arizona, Ohio, Michigan, Indiana..
Think sustainability when you talk demographics.
"Europe is the leader in this and you all know it. The Euro is not a figment of someone's imagination or a drug induced wet dream, it's the 21st century reality and the result of European cultural integration and evolution.
We will seek commodity contracts with OPEC in Euros rather than Dollars because we consume OPEC's oil and want to pay in our currency. Take it or leave it.
Get used to more of this."
Apparently you haven't look much at europe's demographics. Enjoy the north african onslaught.
The Eurozone is suffering from diminishing returns on complexity a la Joseph Tainter methinks. Increased control will not fix your problems. Not only that, good luck governing such a mishmash of economies. Having a quasi-unified culture is one thing, but throwing them all under the same currency is something else entirely.
The more I think about it the more I think the Euro is a mistake. The keynesians will say that it acts like a gold standard by tying certain governments hands and curbing their fiscal/monetary discretion but that's missing the forest for the trees. The problem is that the interest rate changes the ECB effects are applied across the whole monetary union and hinder individual market's ability to attract or deflect capital with a market-determined rate of interest.
The only way the Euro could work is if it acted as some sort of imitation gold standard, which makes it a pipedream. The monetary base would have to be permanently fixed and the varying market supply/demand for capital in the different economies be allowed to determine their respective interest rates. If you insist on regulating reserve ratios then the best place to put them would be above the point where the marginal return on debt is positive (and the market, under a system where time deposits determine loanable capital, achieves this anyway). Depending on the regs on inter-country capital flows arbitrage could narrow the spreads but there will forever be varying need/demand/supply of capital between separate economies that will lead to regional discrepancies on the price of capital, no matter how culturally or geographically "unified" they are.
Walkure
are you serious? I love the conviction you nutbag.
Yeah, for the most part. My heart is in it.
Europe is older than Happy Meals. Americans with a patriotic conviction love their founding fathers. There's a lesson to be learned for Europeans. Goethe was European. The European sentiment is older than the treaties of Schengen or Maastricht.
hell, the US founding fathers were more euro than not... most of the core US governmental elements were and still are euro, save for the king vs presidential element.
the main differences are that they were given a clean slate, and had a great model of how *not* to let a government become oppressive and, well, too big.
more capital punishment for constitutional violations, and it might have worked better for longer.
so much for that experiment...
Now's the time to swap out of PMs and gather currencies to pay for the beer. Save them for a beery day. It's a bubble and a crowded trade, you know. Can't drink or eat if you own gold, haven't you heard?
Damn those Chinese? Swiss? Europeans?, manipulating their currency all the time, threatening our free markets.
Wait, who are the currency manipulators again? I get confused.
Mostly they know that their economy and their country is 1 and a half of a 3 legged stool for the Euro. If they go, they will still be able to do business with their money. They are finally allowing this to happen and don't be fooled, the French president threatened to leave th Euro also to get the 750 billion Euro deal. This game is done and all they are doing is running around and acting as if they are solven when in reality most of those banks are insolvent, along with the country.
"As for talk of disintegration, we know that Europe was hours away from implosion as recently as Friday."
I find this hard to believe, gold is down, like $50, in Euros.
Is it common for PNB Paribas to report how much money left in one day for Switz?
They're obviously upset with the German government and trying to scare them. I'm just trying to sort bank propaganda from reality.
opinions?
Expect the media to be as harsh as possible to Germany.The media is owned by who?
I say go Germany!!If enough governments stop the banking cartels from running amok, it could be a very good thing.
+1
Good way to document the high level of propaganda.
Template:
Do not confuse American people during American Idol prime time with the nature of CDS. The American people are on a "need to know basis" and they neither need to know about the ramifications of CDS, nor need they know the potential character of this financial weapon of mass destruction.
Instead bash Germany for going against speculators that have the capacity to exploit and gain financially from the demise of entire nations.
That is considered piracy and imperialism by definition.
The cartels are stealing the entire world, while many Americans sleepwalk through their lives of consumption.ZH is a huge help in this regard.
As an American, one who is incredibly angry at the outrages perpetrated globally by the super villains, I applaud Germany's resolve to stand up to the scumbags.I hope you win in your battle against these evildoers.
In the spirit of freindship, and to honor your resolve I would only add that today
Ich bin ein Deustschlander!
This was posted on another thread and it is due some serious lime light.
"We are about to BURY rule by secrecy."
CIA Officer Explains New World Order's Demise:http://www.youtube.com/watch?v=8AIbBGi1gjo
holy hell
worth a click
ABSOLUTELY MUST WATCH!!
Thx for that link, LHendrix.
The modern US is a fascist state. Everytime I enter there, I get that same feeling. It's degrading and humiliating having to explain my family's history and what the purpose of my visit to the US may be.
Oh my, when you say you enter the US "on business" THE BELLS GO OFF and a SWAT team gets called in.
WTF? I'd like to say, you stupid fuck. Be happy that someone is coming to your country and wants to bring investment and create jobs.
Americans entering Europe ANYWHERE must feel like they're truly entering a free society.
as long as we allow the banks and government to screw us over we are all
Dummasses.
"That is considered piracy and imperialism by definition."
Pirates actually board ships to steal the loot and ransom hostages. Imperialism used to require at least gunboats in action if not actual warlike takeover of foreign territory.
Speculators are just betting on the outcome of a situation that is occuring anyway, without their direct involvement. Some other speculators are on the other side of each of those bets. None are boarding ships with cutlasses, or raping the countryside. A closer metaphor might be punters in a sports bar somewhere betting on a game on TV being played in another city. You can see that in Vegas any time of day, and in theory none of that betting affects the outcome. CDS value probably does affect the outcome, in about the same measure that the sports announcers on TV, or possibly the cheering of the spectators, affect the outcome of games. I.E. in theory and in practice not much.
Perhaps someone will explain why I'm wrong, for walkure's benefit. And maybe link to that Apocalypse Now scene. It scares the hell out of the gooks. My boys love it!
Anyone care to see our Elliott Wave prediction for tomorrow titled...
Two Roads Diverging in a Wood!
I’ll give myself 1 2/3′ds nails for last night’s post. We nailed the bottom, and only got 2/3d’s as high as I indicated we might go today. I’d be very happy with that every day. Another post for my Track Record.
Tomorrow I have to hedge. I have two primary scenarious for the short-term I’ll post both of them and let the market tell us which one is operational. Globex might tell us tonight, or it may just have fun rambling around and not gap at all in the morning. I am not going to marry myself to any scenario until I have more information directly from ES. Guessing is a good way to diminish our trading accounts. The first chart is a Bullish scenario for tomorrow, although both are ultimately going to eventually result in ES getting down to the 1040′ish level, IMO.
That's the text.. if you want the charts.. let me know and I will post a link....
link
please
thanks in advance
Enjoy!
http://bostonwealth.blogspot.com/2010/05/two-roads-diverging-in-wood.html
don't do this spam stuff here.
and yes, that's all it is, as well-intentioned as you may be.
submit like GW or Leo, and if it's good enough for TD, et. al. you'll be in.
you and grand-supercycle diminish the site.
please stop.
In the past, wars have broken out over less than this. Hopefully, cooler heads will prevail, but sometimes these things take time to develop.
War does not benefit Europe.
Think about it.
If Europe is the future, it will be a future of walkers and burkhas.
challenges we can surely overcome.
the "walkers" are rich and unleveraged fyi.
savings rates in Europe are healthy.
debt is only an issue on a collective national basis but neither corps. nor individuals have that problem.
higher taxation is still possible so is national debt refis with higher interest rates.
Walkure you talk of nations as if they still have power - the enemy is within , the enemy is in Frankfurt.
Merkel didn't care to talk to Frankfurt first, did she? But Merkel called the shot(s) today. Confusion reigned.
I'd love to be a fly on the wall in Berlin these days.
Clearly we are seeing the time where the government (the people's representatives) are reclaiming power back from the capital (Frankfurt).
Who is behind it all? You tell me.
I have no doubt in my mind that all other Europeans will follow. The CDS market is dead after today anyway.
This is all so much horseshit.
O M G they won't let us have our precious fucking CDSs on sovereign bonds so we can fucking "HEDGE" our exposure.
Hey, listen, how about FUCK YOU? The world ran JUST FINE without all these goddamned FAKE PAPER products worth SHIT.
What is happening right now is a WAR is breaking out between the BOE/Fed axis of paper bullshit economics and the Germans. Oh, what, you won't play ponzi devaluation ball, well then we will "capital flight" your ass.
You let us carve you up or else we crash your economy by pulling all our "money," which is just more fucking paper.
Same crap...the BOE used the Sterling Bill for 200 years now we are using the dollar for the same purposes. The reserve currency gives us the privilege to crash entire nations and economies just as the BOE's cronies did all throughout the 1800s. Eventually, the world must repudiate the yoke of the dollar.
+1. They clearly gave Bernanke the finger. This is war.
trav you have come alive since switching to
Float like a butterfly,
sting like a bee................................ color.
It wasn't as cold when you took this picture.
trav... +7777. You nailed it. The CDS whiners can go dig a ditch. THAT would be useful.
Velobabe... you warm my cockels.
They will just go from single name CDS contracts to iTraxx[all families], CDX.IG and CDX.HY to hedge exposure .... you dont need single names to hedge your exposure ... you can buy tradable indexes and use rollover-rollover period duration European Option in the whole thing. Single name CDS, are really more easier to trade and the market is more liquid as oppossed to iTraxx and CDX, and the pricing is not structuralized, but thats the only difference.
Then what's the big to-do? Someone's commish?
Basically yeah; in iTraxx and CDX you trade either spread or price and there is no naked shorting [new issues] so yeah; its about commissions, and fees for fixed income desks. It really is not about hedging; you can hedge 10 billion of bunds with, iTraxx SovX Western Europe [that is if you do not own the bond outright, with ownership CDS on said issue is abetter why to go]. Then iTraxx SovX Western Europe moves opposite of the average of movements of index components. The best is to buy equally weighted indexes; saves you all the hussle and equal distribution makes component moves more profitable, whereas in a non-equally weighted index one component with a larger index weight can nullify a big movement in a component which only weighs half as much in the overall index value.
Thx Cheeky-
OK. I get iTraxx and CDX, for 125 credit offerings. (sovereign too?) Merkl must think her ban would cut speculators off from single issue speculation to some end, no? Or the ban would take the sovereign debt out of the basket, no?
Hey- is there any reason anyone should be concerned that one company or two seem to own all these CDS and subprime indexes?
Any opinion of Markit, for example. I heard some chatter a while back.
Thanks as always!
Markit doesn't own those indexes in a conventional sense. Markit just does the pricing and listings. The index has a custodian and a legal structure very similar to any old ETF. The problem arises when one digs deeper into how Markit conducts pricing. The normal route is you take all bids and offers on a bond, a tranche or index, cut 10% of the highest ones and 10% of the lowest ones and calculate the average. Thats the ending price. The problem i have with Markit monopoly is not the dominance in the index part of the credit derivative market, but in the pricing part. I am not sure what their percentages are when it comes to how much of the highest bids/offers is rejected and how much of the lowest bid/offers is rejected. It can be very manipulative and hide the true price of a swap. CMA, for example, lists different spreads on same tranches,bonds and CDOs on the same day. I think their pricing method differs greatly, but CMA does list iTraxx and CDX with the price calculated by Markit. iTraxx and CDX are proprietary indexes traded trough ICE so ICE has some interest in keeping the prices up as well.
Look; about Merkl; she did the right thing here, just she didn't do enough. Those with interest in betting on EMU countries need not to buy single names, just trade indexes; much easier, and this new regulation says nothing about tradable indexes [AFAIK]. Single name short CDS make most of the CDS market and it was probably the most identifiable instrument in this whole mess, so it is only natural that she attacked naked CDS. Indexes are not naked CDS per se; more like bond-cash swaps which list spreads as its value.
My mistake...I meant to say the banks who own Markit, as advertised. (this isn't fully transparent as to who owns how much. But I think you can purchase a closer look at the UK Company House, perhaps something for you or TD). Yes, I have heard complaints about the pricing, just as you described. Some curious minds pushed a little further by suggesting possible impropriety in 2007-08. I can hardly see how that could have a major impact, it's not like the subprime market was healthy but for that. But, I learn something new everyday.
I see their board of directors really changed quite a bit after 2008.
Have you ever dug into Markit incorporation papers out of curiosity?
Thanks for the explanation on the index v. the single names. I get ya.
Sorry, but this isn't correct.
The big corporate indexes are the most liquid CDS in the world. About the top 100 or so corporate names and the dozen or so single-name sovereigns are quite liquid. Outside of this--marginal corporate and sovereign names, new or overspecialized indexes--you are wholly at the nonexistent mercy of the dealers.
Single-name sovereign CDS is useful as a macroeconomic hedge against low-frequency, high-severity events for real-money holders of a variety of assets. If I have significant Eurozone exposure, German CDS could be thought of as offering protection against a truly apocalyptic economic event in Europe. (This thinking is not quite right, in my opinion, since there are counterparty credit risks that must be considered, but I do know funds that use German CDS this way.)
SovX is not an appropriate substitute for a variety of reasons: The SovX indexes are new, so there is less market depth; they are equally weighted, so their value is influenced by dispersion (widening of one lower-quality name against the others), meaning that the index itself is more expensive and does not offer as precise an exposure as a single-name sovereign would.
If CDS were to disappear overnight, this action would move to the equity options market, where similar protection is already bought in huge quantities as index puts. This is a very crowded trade, however, and protection there is more expensive than in the CDS market and does not offer the same tailored exposure to the debt market.
Believe it or not, ZH, these instruments do serve a useful purpose. In the equity market it is easy to take a view or lay off risk through a short; in the cash fixed income market, it is far more difficult and expensive. This structural feature of the FI market is why CDS was invented in the first place.
No, no. I agree. I think you just read [or i have articulated] my thoughts poorly. I do agree that indexes can not be painted with such a broad brush; but here is my point why i keep pimping these indexes [for both, lets say anti-naked short reasons and because of my conviction that indexes are better trading vehicles than single name CDS ]; basically FI market only serves as a pricing mechanism not as a security upon which the derivative you are trading was built. Also, marginal indexes such as iTraxx SovX CEEMEA or SovX Asia-Pacific are backed fully by ICE OTC; since ICE is your counterparty in the trade [ICE is covered by any loss [AFAIK] by the custodian]. I regard exposure if and only if you are also the owner of a non-synthetic bond. It is not exposure if you only wage a bet either trading CPD if the spread widens or just waiting for credit event.
I understand how CDS are beneficial to FI market and i do understand how CDS [if used properly] offset many of the risk that is traditional linked with debt issues, but selling multiple CDS on the same tranche or bond, just to synthesize the cash flows into another tradable FI instrument is ridiculous. I know it makes for a better profit and revenues , but come on man; whats next CFDP [Collateralized Future Dividend Payments]. If i could have the power I would probably create an institution similar to LBMA to issue LCDS only on synthetic bonds. It should be no problem; and the institution could be backed by credit ratings and necessary capital requirements; say 10% of the average of all the spreads on the bonds for which it has written a LCDS. That should not be much; what; 10-20 billion, and open up LIBOR and OIS for said institution to maintain minimal capital requirements and settle payouts in the case of a credit event. Shit it is better to have a cartel than a ticking time bomb.
Again, i fully understand how CDS helped to lower debt costs and reduce risk; but that only goes so far, and does not apply to naked CDS.
I'm tending to agree with this while keeping mind open. The benefit to the FI market is not near enough when considering the risks to the system. That's my position today. It doesn't seem to be even close.
Our markets operated well up until the 2000's. I'm not seeing the argument that we needed these CDS all those years prior to 00's, if only they could be regulated well.
GF- Thanks. Debate is good.
You said "German CDS could be thought of as offering protection against a truly apocalyptic economic event in Europe. (This thinking is not quite right, in my opinion, since there are counterparty credit risks that must be considered."
Isn't this the underlying problem with these insurance products not being treated/regulated as insurance products? Seems like the whole trade rests on an implied contingency.
my dad use to call my tits, bee stings†
damn, this tread just exploded over night.
i don't really have anything to add except
WOW, guys‡
If this is war then Merkel's move is the Charge of the Light Brigade
I'm seeing it this way too. Then why I am getting reverse propaganda everywhere today? Nevermind, I didn't ask that.
Boston Wealth, post your link, then get me a scorpion bowl, then get me chicken sticks... you know from where.
lol.. I have another one for weekly long term.. you wanna see that one as well!!!..
and french fries. Oh yes please peel my grape.
dbl pst
Bank run! Europe trades in its cash...for different cash...until they go dizzy and buy gold. How long will they play the game is the question. Only a matter of time before everybody turns to gold. 3 months? 6 months? And will America notice that Europe is panicked? America, you should panick too. An increase in blood pressure is good for the heart. Coming to the US this summer.....bank run!
The biggest flaw in ECONOMICS is FRACTIONAL RESERVE LENDING. That was the stupidest thing to ever get involved in. If there is one thing we should all agree on, usury is not only greedy, it is a poor business practice, especially to the extend it is manipulated.
The Central Banks are done soon. Do NOT fall for it again people. The IMF is not here to help. Be your own banker.
"If there is one thing we should all agree on, usury is not only greedy, it is a poor business practice, especially to the extend it is manipulated. "
Islam forbids it, and nearly every islamic country is mostly dirt poor and miserable. Care to run all that by us again? Any thoughts about how to price allocation of capital so that it gets allocated well, without usury?
been there done that...will be there again and will do that again, but eventually the music will stop and there won't be sufficient mats when it stops
shouldn't we deduct for poor speling?
Chill out. All the IMF has to do is lease the same gold to ANOTHER person again and wait for the interest payments to come in. They got this. It worked in 200 bc and it still works.
Everytime they do gold goes up so get to it IMF!
"Europe is the future." The future ain't what it used to be. The EMU is toast.
Is Chancellor Merkl a politician who is independent of her puppet strings? (Rhetorical)
Leo is not going to like this..
"And don't kid yourself into thinking that volatility and and major price swings in stocks, currencies and commodities has subsided or even left the building. It hasn't even set foot on the porch..."
http://theautomaticearth.blogspot.com/2010/05/may-19-2010-teutonic-hyper...
That's a terrific article. Thank you.
Agree totally with Mitch. Great article, thx for sharing.
Err.
If there was a €9.5 billion capital flight from Germany into Swiss deposit accounts.
Shouldn't the EURCHF have gone down as the capital was essentially selling euros to buy CHF?
EURUSD buying support is still evident.
Daily chart is now extremely oversold, will post a chart soon.
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
It's liquidation type selling at the moment
Agreed. It is a one way trip out of USD and the EUR. There will be no buying to bring it back up. There is no symmetry in the EUR/USD trade. They are both being abandoned.
I'm willing to risk sounding less than knowledgeable. But would someone be willing to explain how banning naked shorts etc. is Germany's way of showing it has a spine? I'm not saying that's not a correct conclusion to make. I just have seen a lot of opinions without a lot of dots being connected as to why those opinions are correct. Incidentally I do agree with the idea that Merkel should have called Sarkozy's bluff (and by proxy that of Obama). Thanks in advance for the explanations.
I'll give it a try... but I'll start by saying that only Merkel and a few close advisors really knows the "why" of these bans. That's probably why you are seeing capital flight to CHF... everyone is confused.
In short, Germany is calling major BS on the bailout plan. Sure, they were tempted not to blank check the deal, but Sarkozy pulled a mini Hank Paulson and threatened financial armagddon and certain Euro death if Germany went rogue.
Germany went home and saw the markets didn't buy this crapshoot of a plan. They also saw a very pissed off German elecorate, whose tolerance for bailing out European banks and irresponsbile debtor nations was getting dangerously short.
While all the dots are not connected, it appears that the Germans are moving toward debt reduction (via defualt/liquidation) as the primary solution to crisis events, versus making Euro banksters whole and pretending that the Greeks (among others) can actually pay their debts back.
While banning naked CDS and selected short selling is nowhere close to panacea (we know it can be done elsewhere), it's huge shot across the bow to speculators that the German goverment isn't going to play Bailout Monkey to entities that are relying on a counterparty backstop to payoff on the demise of others. In other words, screw you Goldman... AIG ain't happening here because these naked CDS thingys are illegal.
Given that the Fed and most of the European continent is clearly embedded in the "extend and pretend" camp, Merkel's apparent departure toward debt deflation is ballsy. It has it's own acute risks, but Germany is in a better financial position to handle that than others. They know that German banks will be exposed to bad debt writeoffs, and restricting shorting there selectively is designed to soften the blow somewhat (it won't work).
What do you guess the top number is for German banks on this risk? Do you think she's done the math and figured it's less than Europe wants her to pay overall anyway?
+1 BINGO. Despite having the most exposure relative to others, they would be paying their proportion based on EMU rules, not share of exposure. And once the chain starts, it never ends (see US History, 2008-present).
And... that's the bird in hand while the bird in bush is, perhaps.... the collective goal of "Euro currency leverage" which (while theoretically good for Germany) looks, either way, to be delayed another ten plus years, the leverage aspect of the deeper currency. is that how you see it? That trade off? Where does sticking with the Euro and riding the Euro weakness into more export profits fit into this complexity?
Looks like German leaders have to first agree to what the LIST of "what we want" looks like. The German banks have one list, Merkl has Germany's list sounds to me.
What you suggest makes sense and I was thinking the same.
Germany can afford to give up Greece which makes up 4% of Europe's economy.
The bailout is a neverending story, no chance of repayment and what incentive is there for Grecians to work harder and be more innovative when their debt gets paid for by others.
If Merkel has accepted a short period of deflation rather than possible hyper inflation, the best bet of the century would be the Euro - cash or cash equivalent. No?
Short term I would agree, debt deflation would give the euro a boost. But IMHO, medium term the euro would still have to deal with recession and long term the euro would still have to deal with competitiveness in Club Med.
That's probably why you are seeing capital flight to CHF... everyone is confused.
Sorry, I don't think the average German is confused at all about what's happening. Germany has experienced inflation/hyperinflation recently enough for it to be burned into the popular psyche there. Just as the U.S.'s most recent money catastrophe was a depression, Germany's has been currency collapse / hyperinflation, and it seems the people there are sensitive to it and its preconditions. The Germans know what bailouts mean: printing money. Capital flight to CHF and gold makes perfect sense. No one is confused.
A new currency system is in the works. What will the new trusted currency be this time?
Google "trusted currency" to catch the sense of where things are going...
Welcome to carbon credits.
I guess that means if you want to, you could turn your body in for carbon credits. Carbon credits might be slightly darker in shade than soylent green.
Time to get back to the fundamentals:
Coinage Act
Time for a 20-for-1 split (worse if we consider gold).
Well ,the Pandora box for a rogue political moves has been opened. I can't believe, I ve got the first raw ticket. Thank you ZH.
p.s. As of trying to find a meaning in the German's move, there isn't any. It's just a first step in a long chain of populist moves entering the world political stage. The script is simple, if you point into the opposite direction of your own misdeeds and do it passionately enough, you might get away with your own shortcomings.
Merkel may be playing with fire, and not just in that she has help lay bare the fact that the so-called Union is united. Contrary to some of the posts in the thread on Greece, it became clear yesterday that the EU still has no policy on Greece, and the default option remains very much on the table. Comments from LaGarde and out of Brussels indicate a lack of unity that may well turn the rest of the world off the euro for good, as well as quash all talk of an Asian regional currency union.
Another fire with which Merkel may be playing regards her own banks. Just one, Deutsche Bank, has assets equal to 62% of German GDP and has more than 40:1 leverage on balance sheet. A very small move in asset prices could make DB a very large ward of the state, at least equivalent if not greater than the combined effect of the US TBTF banks. Plus, DB undoubtedly has a load of CDS' now in a kind of no man's land. (Swiss banks, incidentally, are also potential timebombs given their EM exposure and the fact that the two big ones each have assets at 4x Swiss GDP.)
I'm going to sit this one out.
what do you think is the worst case scenario if Germany let DB or their banks go bankrupt and reopened them with some German capital?
Me thinks someone is in deep doo doo
Default is back on the table. Off, on, on, off. The only thing consistent is total volatility between two points. It occurred to me today. Perhaps the last few months are a house of mirrors and the politicians are inside-ing the speculators.
possible?
then again, I always walk into the one sure thing at the end of the day.....the debt.
Let us be clear.
Default is on the table.
Hyperinflation, Default/Depression.
These are the options, for the whole damn world, and they aren't mutually exclusive necessarily.
Don't worry, the status quo is fine. Everything is fine.
When your only choices are $10 gasoline and no way to support your family, or no SS/Medicare/Medicaid/StudentLoans/FoodStamps because the unfunded liabilities have become actually unfunded upon default.... What is one expected to do? Hmmm? The world is about to go apeshit bananas.
Society is going to melt down, and reform, and when it does this under economic/sociopolitical circumstances like the current ones, then the forecast for the reformation is pretty bleak. The historical realities are such that we should be on the lookout for famine, full economic collapse, warfare of every stripe and scale both foreign and domestic, and massive social unrest leading to revolutions and/or tyrannies. I'm not even going to go into the actual worst case scenarios. The above is the predictable historical baseline; not even black swan material.
"Hyperinflation, Default/Depression. These are the options, for the whole damn world, and they aren't mutually exclusive necessarily."
Assuming that's true, that argues for default/depression then....why risk both when you can choose one.
Crab Cake, you optimist!
Actually, I cannot argue with you. The world will look for someone to blame, and the world will find the guilty. It always does. Of course being blamed is not proof of guilt, but that has never mattered, and it won't matter now. Blood lust will be sated.
Frankly, while there are folks guilty of petty and not so petty crimes, the system itself is at fault because it is not sustainable. I'm not just talking about mako's interest equation, but rather the idea that there is a place and a need for all the people humans have proven capable of producing.
China wants to pull everyone out of poverty, but already they have hit the wall in terms of finding sufficient demand to consume what a labor force still hoping to absorb another few hundred million peasants can produce. At the other end of the spectrum, US firms have discovered during the recession that they can return to profitability with a much smaller workforce. Woe to the unskilled who happened to have been born in the developed world!
We sustained the dream for as long as we have, because we could still get away with issuing gobs of credit. Now the private sector has proven itself incapable of paying back what it borrowed, so it passed the torch to sovereigns. People caught on to that too quickly, though, and the first cracks are appearing. Sovereigns can't pay it back either.
When neither debt nor money remain acceptable, the music stops. We begin to cull the population, just as we have since time began. I guess this time we'll be doing it within as well as between societies. It will not be pretty, but it seems inevitable. The goal has gone from trying to stand above the crowd to trying to hide from it.
There you go again. I think you, Crab Cake and Mako are conspiring to put us all on the "lost will to live" diet. It's working. I think I'm just going to have a sugar packet or two for dinner tonight.
Humor aside, I was convinced of our impending doom after spending enough time in Singapore to visit all the malls. That kind of consumption is both offensive and unsustainable, though they've barely slowed down so far.
And to answer your earlier query, yes, I try to spend time in the flight levels for a living, though that's become unsustainable of late as well...
MP
Come on! If you think you know what's coming, you know how to play it.
May you live in interesting times!
I have been doing my best to play my own game within existing boundaries for several years now, it's why we're in this region of the world!
Definitely interesting times, my friend, definitely interesting times! We'll never be able to say this period was boring.
MP
It will be a different world when all the credit taps are completely switched off of which we are only starting to witness. The irony is that most the worlds cash reserves are held within criminal organisations hiding money which will only add to the cash depletion issues that awaits us.
Anyone want to join in my discussion of what is going to cause the markets to skyrocket before November...
it involves Richard Murphy!
http://bostonwealth.blogspot.com/2010/05/what-is-going-to-cause-markets-to.html
Any decent trader would be positioned so that 300 pips doesn't have an adverse effect on his portfolio. 150 pips in a day is more than possible and occurs regularly.
For ten years, I never bought into the anti-naked short campaigns, mostly heard regarding the stocks of lying, fraudulent companies excusing their way out of it. My answer was, it was really worth 100% more, all it would take is one capitalist with 20-50M to ruin every short's year and make a cool 100%, share buybacks, LBO, etc..
There was always another side to the market equation.
For sovereign and company debt, when it's actually an INSURANCE product, unlike shorting a share of stock, I don't see it the same way. First, I see conditions and motives for fraud at enormous levels. (Imagine if AIG's CDS unit had gone rogue and colluded with those banks and hedge funds. What? 80B enough reasons to set up pirate at your company?). Second, from what I understand (and I haven't formed a conclusion yet) there's a proportionality factor at stake in sovereign debt that's different than shorting exchange equity. True? That this type of naked short selling can create problems with sheer force, volume and momentum of trading in collusion with other capital pools that makes $$$ change hands where no fundamental problem may exist.
Can these trades change a market in a way that shorting on the NYSE cannot. Is it akin to currency trading 50-1 where you can roll a rock uphill with enough help? Now if you do this in a stock (so long as the company doesn't need to raise capital), it doesn't matter if you're long.
I sence a difference with CDO trading and currency trading, just the science of it seems different. It seems to create outcomes disproportionately compared to the shorting I know...stock.
and Greece will do what it does best yet again this weekend...
a national strike! There goes the weekend...
Meanwhile look at India, in the green...... today! In a sea of red, serf nation is positive.
Is there sense in the market? Short covering? Long uncovering??
All bull. Or bear. The degree of manipulation is breathtaking.
Sucker-pucking, a bankster's favourite sport.
In spite of Europe's attempt to "unify" via a common currency, the countries are too culturally and linguistically diverse to do so. The creation of the Euro was a last ditch effort to save an economically dying, inefficient, socialist system. It staved off its inevitable demise for maybe a few decades. We are already seeing the cracks in the effort now. The irony is that the continent will be unified, in less than 30 years, under the flag of Islam. Population and immigtation trends dictate it will be so. The countries of Europe will lose their identity - in all respects - when this happens.
The hope of the world lies west of Europe. America finds itself already following the socialist blueprint that Europeans both created and initiated for themselves. The further west you go (Asia) the more the real power of the future leadership of the world is revealed.
To me, the fate of Europe is sad indeed.
If the product of a US citizen then laughable. If the product of a person aware of the US history, then laughable.
The road map to unite people of different cultural background has been given by the US. Anyone thinking about the failure of the European approach has to give reasons in oppostion to the US's example.
Muslims are a tiny minority in Europe. They cant take over. On the contrary, the very fact they nurish that kind of delirium is an evidence the European integration of people project is walking a similar path as the US project.
Where Europeans are being hit is their loss of domination in their historical backyard, that is Middle East where they come second to the US and Africa when they start to come second to China.
As their supply lines are severed, well, they are down the road.
Nothing new. Nothing fresh.
Governments can not curb speculation.
Word they can is words by pro-government and anti-government people. Just propaganda.
As mass production capability, the only temporary stopgap measure known so far, is declining, speculators are going to dance on front stage once again.
The only difference is that they also benefited from the mass production era to grow bigger and bigger. It's gonna hurt.
by TOM BUHROW
Published: April 27, 2010Every comedian has a routine in which he asks members of the audience where they’re from. When a comedian in Paris got the answer, “I’m from Europe,” he knew immediately what that meant: “You’re from Germany!”
That was then. Ten years ago, to be precise. I was a correspondent in France for German television at the time and my country was still in the “we are not Germans, we are Europeans” mode.
These days, with Germany hesitant to help bail out an insolvent Greece, fellow Europeans and Americans alike are voicing concern that we are abandoning our European enthusiasm for crude nationalism.
I think it is the other way around: It is the others who have never agreed to a full Europe, and now they are astonished that our resources are running out.
Let me explain. Germany is probably still the most ardent believer in Europe. We are not becoming more nationalistic, just more realistic. For decades we have shouldered the challenges of the European project. We paid the lion’s share into all the budgets and grand schemes the European Union ever conceived. We gave our national interests second row.
Shell-shocked and ashamed after World War II, we yearned for a new identity. We wanted to be Europeans more than we wanted to be Germans. That was our state of mind throughout the Cold War. It was true even for a long time after the Wall came down.
After Paris, I went to Washington in 2002 to head our bureau there, and I shared this view with a French diplomat. “We are not just flirting with France,” I told him. “We are serious: We want to marry. We always wanted to. But that window is closing.”
Not abruptly, I told him. We were slowly coming to terms with ourselves. We were becoming a normal nation — as much as possible, anyway.
He was baffled. He had never looked at it that way. For a long time, France was the beautiful woman who is used to being courted but has no intentions of ever exchanging vows. And in a way this goes for all Europe. Not that there’s anything wrong with that. The suitor can still adore and socialize. But sooner or later he will remember the old Beatles song: Money can’t buy you love.
Just before the European Union expanded, it became clear that deciding by consensus would not work any longer, and a real federation was discussed. But Jacques Chirac, then president of France, said his country would never be the Arkansas of a United Europe. When told that France could be California, he said this too would never happen. It was clear to us that our fellow Europeans did not want to go further with a united Europe. They still don’t.
Yet that is what we were promised when we gave up the German mark for the euro. We were solemnly told that this monetary union was only one leg; the other would be full political union.
The mark was Germany’s flag, our identity. Germans trusted their central bank, the Bundesbank, more than any political body. The Bundesbank kept the currency stable, and we loved stability. Yet we gave all that up for a dream: a “United States of Europe.” But nobody was dreaming with us.
Most European governments wanted the cake and eat it, too — remain nation-states politically while expecting solidarity economically. That’s like having your own checking account and expecting your neighbor to provide overdraft protection.
Today Germans are being accused of egotism and nationalism because they are hesitating to bail other countries out. Old accusations start to fly. Is that what the European project is — either Germany foots the bill or our past is invoked against us?
Message to Europe: We would still love to pay, but the money is no longer there. Germany still has some strong industries, but as a country its growth is too little to cope with its shrinking and aging population.
Margaret Thatcher once shouted during E.U. budget negotiations: “I want my money back!” Imagine if Germany ever said that! At least Thatcher was talking about her own money — British contributions to the E.U. Now we hear: “I want money!” Full Stop. Well, if Europe is only about money, then I fear Germans might soon be tempted to say: “We want our mark back.”
Besides, this is not just about money. If it was we would probably grind our teeth and pay in the end, as we always do. This is about our common currency. We all vowed to keep it stable. If we break that vow, we discredit our Union.
So maybe it is time for some straight talk. The kind of talk that our governments don’t give us. My fellow Europeans, it is not us Germans who are turning away from Europe. It is you who never fully turned toward it.
We wanted to dissolve ourselves in a larger Union, you did not. That’s sad, but O.K. It does not mean we’ll start hating each other. We will continue to admire Greece’s contribution to European heritage, to love French beauty and culture, Italian friendliness, Spain’s beautiful coastlines and all the other wonders of our diverse Continent.
We will visit each other, do commerce and agree on projects that Germany will continue to fund. We’ll remain great friends. We’ll just not share the pin-code of our ATM card with you. That is reserved for a spouse, and we’ve waited a long time at the altar.
Tom Buhrow is the evening news anchor for the German television network ARD.
+1989
Great post, great find. Thanks for adding additional perspective to this debate.
MP
Enlightening - explains a lot. I had no idea how much WWII damaged the German identity.
Europe has played the guilt card with Germany in a manner reminiscent of PC in the U.S. The mostly hard working and honest white middle class in the U.S. is not allowed to express its political opinions as we all know they are all racists, but they are more than welcome to pay pay pay, perhaps only being allowed to pay as a means of assuaging their collective racist guilt. So, too, the Germans are welcome to pay pay pay, but any hint of political reticence and they will have historic guilt flung at them from all corners. I'm surprised they stand for it.
We all wonder at the German people's recently demonstrated willingness to follow a madman off a cliff, but I look around at conditions in the U.S. and shudder when I ask myself what would (will?) happen here if (when?) the economy really collapses like I think it's going to. We fell so easily for Bush's illegal attack on Iraq, and many here still support the idea. What happens here when food stamps don't buy anything?
My sentiments exactly.
Many great thinkers, philosphers and visionaires that thought themselves to be European have origin in Germany.
Don't scuff. Political innovation meets Vorsprung durch Technik.
Banging the heads against the walls when things just don't make sense is not enough.
anyone?
capital flight to CHF
Shouldn't that have made EURCHF go down, not spike up? People buying CHfs and selling EURs
EURUSD buying support is still evident.
Updates:
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
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