Back To European Sov Exposure: Moody's Will Downgrade Austria's Erste Over Attempt To Hide Billions In Sovereign CDSSubmitted by Tyler Durden on 11/04/2011 - 10:09
Before MF Global went bankrupt due to European sovereign exposure, the smart money was that Austria's Erste would be "it." After all, recall from our October 10 post "that Erste disclosed some major losses on its €5.2 billion CDS portfolio, consisting of "EUR 2.4 billion related to financial institution exposures, and EUR 2.8 billion related sovereign exposures". Why is this a surprise? UK-based financial advisory Autonomous explains: "The fact that Erste had a sovereign CDS portfolio which was not marked-to-market has left many investors scratching their heads. As a reminder the EBA stress test data showed Erste to have zero sovereign CDS exposure within its sovereign mix compared to the €2.8bn it now appears to have ‘fessed up’ to (taking a cumulative €460m hit). They also have €2.4bn exposure to banks via writing of CDS. The bulk is non-PIIGS but banks spreads have moved in the same manner as sovereigns (albeit wider and more volatile)." And there you have it: the bogeyman that everyone has been warning about, yet nobody has seen, CDS written (as in sold) in bulk against other sovereigns and other banks which up until now were only mythical, as they, to quote the EBA (which had Dexia as its safest bank) simply did not exist. Oh, they exist all right, and what they do is create a toxic spiral of accentuating losses whenever the risk situation deteriorates, creating positive feedback loops of ever increasing losses until the next Dexia appears... and then the next... and the next. Expect the market to latch on to this dramatic revelation like a rabid pitbull once the hopium high from today's EURUSD short covering squeeze wears off." Of course, the market ignored this loud warning bell, and next hting you know MF was under. This time it won't be so easy, especially since Moody's just announced it is about to downgrade Erste precisely for this reason. This move also explains why the market is suddenly rife with rumors of a broad Austria downgrade.
Because while the prospect of democracy returning to Greece may have been killed (for now), the world is discovering that not only will nothing else be accomplished at the "No We Cannes't" meeting, but the world will now be fully focused on Italy which unlike Greece, is not quite so easily fixable. Europe's propose solution: make italy an IMF protectorate. We give this plan exactly 24 hours before massive failure, and before attention returns to the top news of the week: the EFSF is a complete dud, and Europe will never be able to fund the €1 trillion bailout fund.
- BERLUSCONI SAYS ITALY AGREES TO EU MONITORING
- BERLUSCONI SAYS IMF TO CARRY OUT `CERTIFICATION' EVERY 3 MONTHS
- BERLUSCONI SAYS ITALIAN DEBT HELD MOSTLY HELD BY ITALIANS - like Mario Draghi
- BERLUSCONI SAYS ITALY HAS NEVER HAD TROUBLE SERVICING DEBT
And in other headlines, confirming just how impossible any form of organized decision-making is in Europe, how ironic it is to think that Obama will ever say no to his banker masters, or just how happy China will be to bail Europe out after it is about to be snubbed all over again, here they are...
As BTPs broke 450bps over Bunds and approached the dreaded 88 handle, suddenly someone decided 6.3% yields were more than acceptable (and well worth holding over a weekend including the Greece vote!!). It seems the SMP is back in action with Draghi at the helm...it certainly seems he has no problem for now purchasing bonds!!
US Needs To Generate 262,500 Jobs Monthly To Return To Pre-Depression Employment By End Of Obama Second TermSubmitted by Tyler Durden on 11/04/2011 - 09:29
We will simply copy and paste, with the appropriate adjustments, the form text we put up after each and every NFP report calculating the number of people that have to be added by the end of a hypothetical second Obama term. Using the October boilerplate: "Every few months we rerun an analysis of how many jobs the US economy has to generate to return to the unemployment rate as of December 2007 when the Great Financial Crisis started, by the end of Obama's potential second term in November 2016. This calculation takes into account the historical change in Payroll and includes the 90,000/month natural growth to the labor force, and extrapolates into the future. And every time we rerun this calculation, the number of jobs that has to be created to get back to baseline increases: First it was 245,500 in April, then 250,000 in June, then 254,000 in July [then 261,200 in October]. As of today, following the just announced "beat" of meager NFP expectations, this number has has just risen to an all time high 261,200 262,500. This means that unless that number of jobs is created each month for the next 5 years, America will have a higher unemployment rate in October 2016 than it did in December 2007. How realistic is it that the US economy can create 16.2 million jobs in the next 6261 months? We leave that answer up to the US electorate."
While we have commented on the technical minutia of the LCH's margining rules and their blended AA benchmark, 450bps over Bunds remains a clear line in the sand in the market's mind. With Italy ever so graciously accepting (and if we believe the headlines - requesting!!) IMF's observation/supervision, it seems real money continues to leave the country's bonds in droves. With 10Y BTP yields breaking 6.3% today, the spread over Bunds just passed 450bps once again - will Draghi step up to the plate?
And back to the old gimmicks: the Birth Death adjustment has now "added" 530 jobs in 2011, or 42% of the total 1,256K jobs added in 2011, and the October number of 102K is 31K greater than a year earlier. Truly business formation in the current recession is soaring...
Nonfarm Payroll Increase Less Than Expected At +80K, Unemployment Rate Drops To 9.0% Vs 9.1% ConsensusSubmitted by Tyler Durden on 11/04/2011 - 08:33
Once again, Goldman was correct. From the report, "Nonfarm payroll employment continued to trend up in October (+80,000), and the unemployment rate was little changed at 9.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment in the private sector rose, with modest job growth continuing in professional and businesses services, leisure and hospitality, health care, and mining. Government employment continued to trend down." While October missed consensus by 15K, September was revised from 103K to 158K. The change in private payrolls was +104K on expectations of 125K (down from an upward revised 191K), while manufacturing payrolls, or whatever is left of them, was +5K on expectations of +2K. The labor force participation ratio was flat at 64.2%, just off the 30 year low. What is truly hilarious, and what confirms the L should be permanently scrapped from the BLS is that the initial August NFP number of 0 has now been revised twice to 104,000 or whatever suites the US policy at the time.
The G-20 is almost over and it looks likely to end with some indications that the IMF will put more money into Europe in some form and that all the leaders will pledge to continue to work together to resolve the debt crisis. Since resolve doesn't involve letting Greece default and remain in the Euro (the best solution for that country) we will have to continue to guess at what resolve means. The economic data out of Europe was weak. Europe is already in a recession. Using every ounce of political energy and available funds to prop up the price of bank shares, seems a horrible waste and is unlikely to do much for real companies and the economy. In the end it still seems like default or print are the most likely options and all these games that are being played to nudge the can a bit further are draining scarce and valuable resources from projects that might be a lot better for everyone in the medium to long term.
No IMF, EFSF Participation In European Bailout: Merkel Says G20 Fails To Reach Agreement On IMF Resources, Nobody Wants Any Piece Of EFSFSubmitted by Tyler Durden on 11/04/2011 - 08:06
Yesterday we reported that the latest deus ex machina in the endless European bailout was to proceed with IMF monetization and failing that, just a narrower US-funded bailout of Europe. That ain't happening.
- German Chancellor Merkel says the G20 failed to agree on IMF resources
- German Chancellor Merkel says will make sure that the IMF has sufficient resources, but also new instruments
And it gets worse:
- German Chancellor Merkel says hardly any countries in G20 have said they will participate in the EFSF
Which means we are back to the old and now expired fallback deus exes: China and the magical, wonderful and totally unfunded EFSF. No wonder the EURUSD is dropping on the news, as for the BTP-Bunds spread, well, following the Merkel announcement that Italy has to come under IMF monitoring, see below...
- MF Global clients face day of reckoning as margins call (Reuters)
- Key Defections Hit Berlusconi (WSJ)
- G-20 Urges EU to Quell Crisis as Greece Teeters (Bloomberg)
- Greek PM scraps referendum plan (FT)
- Debt-reduction supercommittee talks appear to be at an impasse (WaPo)
- US Influence at G20 Not Diminished, White House Says (Reuters)
- ECB’s Draghi Offers Hope He Can Do What Europe Needs (Bloomberg)
- Many States Already Worried About Running Short (Reuters)
- Bill Gates urges G20 to live up to aid promises (Reuters)
Jon Corzine is gone, and as we expected, will not collect a single penny from his $12+ million severance. Statement from the MF board: "The Board of Directors of MF Global Holdings Ltd. announced the resignation of Jon S. Corzine from all posts at MF Global. Mr. Corzine has confirmed that he will not seek severance payments in connection with his resignation. Edward L. Goldberg, the lead director of the Board of Directors, and Bradley I. Abelow, the Company¹s President and Chief Operating Officer, will continue in their current positions." And here is Jon's personal announcement: "I have voluntarily offered my resignation to the Board of Directors of MF Global. This was a difficult decision, but one that I believe is best for the firm and its stakeholders. I feel great sadness for what has transpired at MF Global and the impact it has had on the firm's clients, employees and many others. I intend to continue to assist the Company and its Board in their efforts to respond to regulatory inquiries and issues related to the disposition of the firm's assets." Now, as to how he will avoid questioning by the federal authorities, that is a different matter entirely...
Slowly, but surely, the global economic growth dynamo is growing ever dimmer and dimmer. Two days ago we reported that that relentless driver of global growth - exports - finally succumbed to reality, as slowly but surely the paradigm of everyone exporting to someone else with magically nobody importing, logically collapsed. This is now followed by German manufacturing, that traditional and only source of strength in Europe, which half an hour ago was reported to drop 4.3%, compared to an expectation of a 0.1% gain. In other words, as the chart below shows German factory orders have just suffered their worst three, post-Reunification months outside of the late crash itself, falling at a 28% annualized rate, to take the total back to where it first stood over five years ago. Reaction is swift: Italian and Spanish bonds immediately drop, with the yield returning to 6.23% and 5.52%, forcing the ECB's monetization actions to have to fight not only "speculators" but also reality.
Many market participants and non gold and silver experts tend to focus on the daily fluctuations and “noise” of the market and not see the “big picture” major change in the fundamental supply and demand situation in the bullion markets – particularly due to investment and central bank demand from China, India and the rest of an increasingly wealthy Asia. The central banks of India and China are rightly believed to be again quietly accumulating gold and the IMF figures do not include this potentially very important and significant source of demand. China’s gold reserves are very small when compared to those of the U.S. and indebted European nations. They are miniscule when compared with China’s massive foreign exchange reserves of over $3 trillion. The People’s Bank of China is almost certainly continuing to quietly accumulate gold bullion reserves. As was the case previously, they will not announce their gold bullion purchases to the market in order to ensure they accumulate sizeable reserves at more competitive prices. They also do not wish to create a run on the dollar – thereby devaluing their sizeable reserves. The deepening Eurozone debt crisis and real possibility means that central bank demand will remain robust and may even increase in the coming months.