Greece's bailout program is not working. After receiving hundreds of billions of Euros in new loans to stave off a sovereign default, Greeks are on the verge of electing a new government that may throw Eurozone politics into turmoil. How things will play out in Greece and abroad is anybody’s guess. But it is important to consider the factors which have contributed to the current state of affairs.
The old joke is "In America, you correct newspaper, but in Soviet Union, newspaper corrects you.” Switzerland is now experiencing the bond market equivalent.
The precarious "game theory" equilibrium that worked for decades while OPEC was still a functioning cartel is unwinding before everyone's eyes. Just as Saudi Arabia accurately anticipated, the lower the price of crude goes, the more both OPEC members and their non-OPEC peers (especially shale companies funded by hundreds of billion in junk bonds) will have to produce in order to keep their budgeted revenues roughly in line (and keep creditors happy for the time being) in the process setting off an unprecedented wave of bankruptcies and production capacity declines, which take about 6-12 months after the price plunge to materialize. Case in point: the country formerly known as Iraq (and now better known as that region around the Tigris and the Euphrates that does not belong to ISIS) is pumping crude at a record pace and will continue to boost exports this year, its Oil Minister Adel Abdul Mahdi said.
When it comes to America's foreign creditors, only two names matter (except for Belgium whose Euroclear service continues to be used by an anonymous entity(s) to buy up US Treasurys): Japan and China. And it is in the Treasury buying and selling dynamics of these two entities that we can see how Japan's monetary policy has impacted its holdings of US paper, which just hit a new all time high of $1,242 billion, while on the other hand Beijing's official holdings of Treasurys have remained unchanged since the summer of 2011, and which in July declined yet another month to just $1,250 billion, the lowest since January 2013.
Market Wrap: "It's Turmoil" - Overnight Gains Wiped Out, Futures Trade Below 2000 On SNB "Shock And Awe"Submitted by Tyler Durden on 01/15/2015 07:56 -0400
To paraphrase a trader who walked into the biggest FX clusterfuck in years, "it's total, unprecedented market turmoil." So while the world gets a grip on what today's historic move by the SNB means, which judging by the record 13% collapse in the Swiss Stock Market shows clearly that the SNB market put is dead and the SNB may be the first central-banking hedge fund which just folded (we can't wait to see what the SNB P&L losses on its EURCHF holdings will be), here is what has happened so far for anyone unlucky enough to be walking into the carnage some 2 hours late.
In what has been the most anticipated bankruptcy case in the past several years, hours ago Caesars Entertainment put its main operating unit under Chapter 11 bankruptcy protection in Northern Illinois bankruptcy court (case 15-01153) even as a splinter group of dissident creditors including Appaloosa and Oaktree, holders of about $41 million of Caesars debt and which allege the company has siphoned off billions in value from creditors, put the company into involuntary bankruptcy in Delaware bankruptcy court on January 12. As a reminder, Caesars was one of the sterling LBOs of the last credit bubble, when in 2008 Apollo and TPG decided to take the company private. The problem, as is always the case: too much debt, especially when combined with a broken business model, as Caesars has lost money every year since 2009.
Moments ago, the Advocate General Pedro Cruz Villalon of the EU Court of Justice in Luxembourg delivered the non-binding opinion on issue of Mario Draghi's "unconditional" OMT. Here are the details from Reuters and Bloomberg:
- EU COURT ADVISER SAYS OMT PROGRAMME IN LINE WITH EU LAW SO LONG AS CERTAIN CONDITIONS MET
- EU COURT ADVISER SAYS OMT LEGITIMATE SO LONG AS THERE IS NO DIRECT INVOLVEMENT IN FINANCIAL ASSISTANCE PROGRAMME THAT APPLIES TO STATE IN QUESTION
- EU COURT ADVISER SAYS ECB MUST OUTLINE REASONS FOR ADOPTING UNCONVENTIONAL MEASURES SUCH AS OMT PROGRAMME
In other words, Draghi's "unconditional" bazooka just became conditional, but it is still a bazooka, albeit one that will never actually be used since well over two years after it was revealed following Draghi's famous "whatever it takes" speech, it still has no legal termsheet or basis, and no definition on its pari passu or burden-sharing status. And it never will: after all it was merely meant as a precautionary device designed to scare away the bond vigilantes, and never to be actually implemented.
So far today has been a replica of yesterday, with the crude rout continuing and pushing WTI under $45, but largely ignored by the FX carry pairs, and thus equity futures, which have seen some positive momentum from overnight trade data out of China where exports jumped 9.7% beating the 6% expectation, while imports fell 2.4% compared to a projected 6.2% decline as the trade surplus narrowed from November’s record $54.4 billion. For the full year, however, Chinese trade grew at just 3.4%, missing the government’s target of 7.5% growth for the third year in a row as the government quick to blame the slowing global economy. In any event, the USDJPY is well off the overnight lows which means the EuroStoxx is up some 0.8% which, just like yesterday, the E-mini is up some 9 points and rising. It remains to be seen if, just like yesterday, US equities will crash at a precipitous pace after the open, once algos realize that nothing at all has changed.
In what appears to be a desperate attempt to boost confidence in a failing financial system taken right out of the 2011/2012 playbook, over the weekend the National Bank of Greece had its latest "subprime is contained" moment and loudly announced that "the situation with deposit outflows from the country was under control" as it tried to reassure markets ahead of a Jan. 25 snap election, reports Kathimerini. And while Greek deposits may or may not be "running" one thing is certain: with an increasing probability they may not have a "continuity-promoting" government in less than two weeks, Greeks tax remittances to the government, which were almost non-existent to begin with, have ground to a halt!
Currently there are a number of weak spots in the global financial edifice, in addition to the perennial problem children Argentina and Venezuela... The happy bubble in risk assets could presumably be derailed a bit if any of the possible worst case scenarios were to become manifest.
The stealth LBO of the S&P 500 will not only continue in 2015 but accelerate, with another 2% of the entire market cap converted into debt, thanks to a whopping $450 billion in net corporate inflows, $35 billion more than the $415 billion in corporate inflows in 2014.
Welcome to the new old normal 'Murica... buy those homes... lever up... spend the HELOC... die a debt serf...
Just 2 short months ago we warned of the rising voice among the cognoscenti tilting their windmills towards the concept of "helicopter money," as Deutsche bank noted, "perhaps there's an increasing weariness that more QE globally whilst inevitable, is a blunt growth tool and that stopping it will be extremely difficult (let alone reversing it) without a positive growth shock." Committing what Commerzbank calls "the ultimate sin" is now reaching the mainstream as Germany's Der Spiegel notes it is becoming increasingly clear that Draghi and his fellow central bank leaders have exhausted all traditional means for combatting deflation; and many economists are demanding that the European Central Bank hand out money to consumers to stimulate the economy.
It appears Germany is indeed very concerned about a Greek bank run and its concomitant contagion possibilities across the European Union's banking system...
*GERMANY OPEN TO GREEK DEBT TALKS AFTER ELECTION, LAWMAKERS SAY
Although careful to point out that they are "not open to debt write-offs," German lawmakers (who preferred to remain anonymous) suggested "possible easing of repayment terms."
Who owns Greece's public debt? That's the 322 billion-euro question, according to the Finance Ministry's figures from the third quarter of last year. Most of the debt has changed hands since a bailout in 2010, a second in 2012 and a restructuring involving private creditors that same year. Private owners now hold only 17 percent. The secondary market has become very thin — bear that in mind when looking at 10-year bond yields. A default would have to be absorbed instead by official creditors, holding the remaining 83 percent of outstanding loans and bonds. These include euro-area governments (62 percent), the International Monetary Fund (10 percent) through its participation in the two bailouts, and the European Central Bank (8 percent), which purchased bonds in 2010 through its Securities Market Program. The remaining 3 percent are repurchase agreements and assets held by the Central Bank of Greece. It is unclear where losses on that portion would fall.