Creditors

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Germany Refuses Greek Demands For Public Sector Debt Cuts As It Is "Shouldering Everything Anyway"





Yesterday, Greek finmin Venizelos did his best to exude confidence when he, of all people, decided to give the ECB, and thus Germany, a virtual ultimatum demanding that public sector creditors are also impaired (supposedly only some, while excluding Greek pension companies). Kathimerini has more on this in "Never mind PSI, OSI is all the rage." And the only reason why Veni needs this critical step is because the hedge fund holdouts among the PSI creditors demand it. Alas, Germany does not deal well with ultimatums, especially from fiscal vassals. As OpenEurope notes, Die Welt reports that Greek Finance Minister Evangelos Venizelos has called for Greece’s official creditors, such as the ECB and national central banks, to take part in the restructuring of Greek debt, something German Economy Minister Philip Rösler insisted was “not currently on the agenda”. It gets better. According to Goldman, German Finance Minister Wolfgang Schäuble said that "no additional contributions from the public sector are necessary.”  German finance minister against public sector participation in Greek debt restructuring. Speaking to news channel n-tv finance minister Schäuble said that "Greece needs a reduction in private sector claims of 50% … It does not need an additional contribution from the public sector because we're shouldering everything anyway". When asked whether he thinks that the composition of the Euro area would be the same at the end of the year as today, Schäuble replied: "I hope so". So there you have it: Greece needs further concessions, which Germany will give, if and only if Greece concedes to previous German demands of abdicating fiscal independence. The only question is how badly Greece needs German help. Everything else is smoke and mirrors.

 
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John Taylor's Open Letter To Greece: "Get Out Greece! Get Out Right Now!"





Get out Greece! Get out right now! You should have moved two years ago; you missed that chance, but now it is much better than later. Summer vacations are being planned while we speak, you must move fast to get the biggest advantage out of bolting from the euro. Don’t let the next global recession bare its teeth. Investors still have money and they are interested in buying your assets when the prices are knocked down – each day you wait their value is deteriorating and you are looking more desperate. Most important: don’t listen to the naysayers in Brussels who are warning you of disaster outside of the ‘protective euro blanket.’ It’s much better outside, even the Turks know this.

 
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Daily US Opening News And Market Re-Cap: February 2





European Indices are sliding following comments from EU’s Juncker that Greek PSI talks remain “ultra-difficult”, despite earlier gains following comments from the Chinese Premier considering further contributions to the EFSF and the ESM. The Basic Materials sector is outperforming others amid news of a possible merger between Glencore and Xstrata, causing shares in both companies to trade in strong positive territory ahead of the North American open Oil & Gas are one of the worst performing sectors in Europe today, with Royal Dutch Shell shares showing the biggest losses following disappointing corporate earnings. Elsewhere, S&P released a report suggesting Eurozone recession could end in late 2012, forecasting 1% GDP growth for the Eurozone in 2013, however these comments were not followed by significant European index movements. In terms of fixed income securities, Spain held a well received bond auction earlier in the session, with all three lines showing falling yields and strong bid/cover ratios.

 
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Frontrunning: February 2





  • Merkel Seeks to Reassure China (FT)
  • German-IMF Rift Stalls Greece Deal (WSJ)
  • Survey of Banks Shows a Sharp Cut in Lending in Europe (NYT)
  • Bernanke to testify on economy and deficit (AP)
  • House votes to freeze congressional, federal pay (WaPo)
 
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Overnight Mood Better Following Stronger PMI Data, More Promises Of "Imminent" Greek Deal





Anyone who went to bed with the EURUSD about to breach 1.30 to the downside may have been surprised this morning to see it trading nearly 150 pips higher. Checking the headlines for news of a Greek deal however would be futile, as one did not occur. Instead what did, were more promises of a deal being "imminent" even as Greece is doing all it can to appease intransigent creditors, offering GDP upside warrants (something that did not work too well for Argentina), with the IMF stating it demands guarantees that this time Greece will follow through with promises. Oddly enough the German demand for fiscal overrule has gotten lost in the noise but is certainly not forgotten and last we checked Merkel has not withdrawn this polite request. Still futures are up, primarily on a smattering of better than expected PMIs, in China and Europe. Alas, the Chinese PMI beat as discussed last night, was more of a cold water shower as the market had been hoping for much more defined promises of PBoC intervention and instead got a lukewarm Goldilocks economy which could last quite a bit longer without RRR-cuts. As for European PMI numbers being better than expected, we only wonder if these now correlate with the prevailing unemployment rate throughout the Eurozone.

 
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Labor Unions Demand Escalation Of Trade War With China, Ask Obama To Restrict Chinese Auto Part Imports





Because the last time the administration got involved in the car space the results were so positive (for the unions if not so much for creditors), it appears we may be approaching another episode where central planning will make the decisions in the US auto space. Only this time instead of creditors, the impaired party will be China. Reuters reports: "Midwestern U.S. lawmakers and union groups on Tuesday urged President Barack Obama to restrict imports of auto parts from China that they said benefited from massive illegal subsidies and threatened hundreds of thousands of American jobs. "We need to stand up to the bully on the block," U.S. Senator Debbie Stabenow, a Michigan Democrat, said, referring to Beijing. "The bully on the block continues to take our lunch money and we need to stop that," she said." Odd - China was not complaining when the Obama administration was providing massive subsidies (whether or not illegal remains to be seen  - surely Holder is all over it) to the solar and other "green" industries. In other words, just like Solyndra and Ener1, who are merely the first of many artificially subsidized entities, provided such great if highly transitory results for US employment, let's recreate the experiment at the wholesale level, by implicit subsidies and while also angering America's biggest creditor. Something tells us this proposal has a definite probability of passing. In the meantime, central planning for everyone.

 
EB's picture

MF Global Customer Funds Were Not "Vaporized" - Stanley Haar Takes WSJ to Task





Your article gives the appearance of having been ghost written by Andrew Levander and/or the JP Morgan legal department.

 
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Greece Releases New Proposal With Even Greater Losses To Creditors





The most recent addition to the "I am Jack's complete lack of surprise" pile comes from Reuters, which reports that the latest out of Greece is a proposal for even greater cuts for creditors than previously expected. From Reuters: "Greece's private sector creditors could take a loss of more than 70 percent in a planned debt swap, Finance Minister Evangelos Venizelos said on Tuesday. "There is a very serious discussion based on new facts. We are talking about a PSI much greater than the original," he told lawmakers, referring to private sector involvement in the deal. "We are talking about a haircut on the net present value exceeding 70 percent," he said." What this means, simply, is that when calculating the NPV of the post-reorg bond, the Yield to Maturity is now less than 30%, and thus is likely going to have a cash coupon of about 3.6%. This is relevant because as is known, one component of the creditor recovery is receipt of EFSF bill in lieu of cash to the tune of 15 cents of notional, and the balance, at least until this point, would have been a 35% yielding piece of post-reorg paper. That was the case when the cash coupon was 4%. Going forward, and assuming a 3.6% cash coupon, the return on this fresh start debt drops substantially. Needless to say, creditors will almost certainly balk at this, because when it comes to calculating real yield, most are expecting a roughly 90% recovery at best on the EFSF strip (as every fund will scramble to dump their paper), so 14 cents on the total, and then funds are also hoping for at least 1 year of current yield, i.e., cash coupon. It becomes iffy around the 2 year mark, as it is a roughly 90% probability that Greece will file for bankruptcy yet again just after the first coupon is paid, at least according to hedge fund return calculations. It also means that nobody gives a rats ass about the IRR, but most are only concerned with what the cash coupon will be that they can collect for one, max two years. Which explains why at 14 cents + 3.6 + 3.6 or 21.2, which is where Greek paper trades currently, there is absolutely no upside for creditors, and the only real upside option is to hold out for sovereign debt litigation, where the recovery could be as high as par. Expect no deal to come out of this, despite what the IFF, which now likely represents just Deutsche Bank and SocGen, says. So much for that upper hand.

 
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Why An Outsized LTRO Will Actually Be Bad For European Banks





The post-hoc (correlation implies causation) reasons for why the initial LTRO spurred bond buying are many-fold but as Nomura points out in a recent note (confirming our thoughts from last week) investors (especially bank stock and bondholders) should be very nervous at the size of the next LTRO. Whether it was anticipation of carry trades becoming self-reinforcing, bank liquidity shock buffering, or pre-funding private debt market needs, financials and sovereigns have rallied handsomely, squeezing new liquidity realities into a still-insolvent (and no-growth / austerity-driven) region. Concerns about the durability of the rally are already appearing as Greek PSI shocks, Portugal contagion, mark-to-market risks impacting repo and margin call event risk, increased dispersion among European (core and peripheral) curves, and the dramatic rise in ECB Deposits (or negative carry and entirely unproductive liquidity use) show all is not Utopian. However, the largest concern, specifically for bondholders of the now sacrosanct European financials, is if LTRO 2.0 sees heavy demand (EUR200-300bn expected, EUR500bn would be an approximate trigger for 'outsize' concerns) since, as we pointed out previously, this ECB-provided liquidity is effectively senior to all other unsecured claims on the banks' balance sheets and so implicitly subordinates all existing unsecured senior and subordinated debt holders dramatically (and could potentially reduce any future willingness of private investors to take up demand from capital markets issuance - another unintended consequence). We have long suggested that with the stigma gone and markets remaining mostly closed, banks will see this as their all-in moment and grab any and every ounce of LTRO they can muster (which again will implicitly reduce all the collateral that was supporting the rest of their balance sheets even more). Perhaps the hope of ECB implicit QE in the trillions is not the medicine that so many money-printing-addicts will crave and a well-placed hedge (Senior-Sub decompression or 3s5s10s butterfly on financials) or simple underweight to the equity most exposed to the capital structure (and collateral constrained) impact of LTRO will prove fruitful.

 
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