When the first revision of the second Greek bailout to the tidy round number of €130 billion was announced, we scoffed, mockingly. Because a country which then had a 7% budget deficit, and now has a deficit that will be well in the double digits, and not to mention a banking system that is now hollow following tens of billions in deposit withdrawals as month after month the Greek bank run gets worse, would obviously need much more liquidity (but banish the thought that it is a solvency crisis...) Sure enough, earlier today Der Spiegel broke the news that the second bailout, which has yet to be re-ratified, and absent Greece meeting demands to cede fiscal sovereignty, is likely a non-starter, would be increased to €145 billion "citing an unidentified official from the so-called troika." So whether or not this is true is irrelevant: what matters is that Spiegel released the article in the same series of posts in which it explained just why Germany has full right to demand (via European enforcement mechanisms or however) virtually anything in exchange for the ongoing endless bailout (such as: Merkel macht Wahlkampf für Sarkozy and Griechenland sträubt sich gegen EU-Aufpasser). Which means one thing only: the great propaganda spin machine is now on, and its only purpose is to provide Germany a buffer of "having done everything in its power" to prevent the now inevitable Greek default. Which, incidentally, means that a Greek default is inevitable. Because at this point once the default floodgates open, the question will be not where the bonds will trade, but just how big the impairment on the European DIP (aka Troika bailout package) will be.
Following yesterday's frankly stunning news that the Troika politely requests that Greece hand over its first fiscal, then pretty much all other, sovereignty to "Europe", here is the Greek just as polite response to the Troika's foray into outright colonialism:
- GREEK GOVERNMENT SPOKESMAN DECLARES THAT THE BUDGET IS SOLELY ITS RESPONSIBILITY - DJ
What is interesting here is that unlike the highly irrelevant IIF negotiations which will end in a Greek default one way or another, the real plotline that should be followed is this one: because unless Germany, pardon the Troika, gets the one condition it demands, namely "absolute priority to debt service" and "transfer of national budgetary sovereignty", as well as a "constitutional amendment" thereto. there is no Troika funding deal. Furthermore, since as a reminder the PSI talks are just the beginning, the next step is ensuring compliance, as was noted yesterday ("[ceding sovereignty] will reassure public and private creditors that the Hellenic Republic will honour its comittments after PSI and will positively influence market access"), any refusal to implement such demands is an automatic dealbreaker. Which means anything Dallara and the IIF say, as representatives of a steering committee that at this point probably constitutes of one bondholder, with the bulk having shifted to the ad hoc committee, is irrelevant. Germany just got its answer. And the next step is, as Zero Hedge first suggested, an epic LTRO in precisely one month, whose sole purpose will be to prefund European banks ahead of the Greek default with enough cash to withstand Europe's Bear Stearns. Although as a reminder, in the US, Bear Stearns only led to Lehman and the global "all in" gambit to preserve the financial system by shifting bank insolvency risk to the sovereigns (a chart showing bank assets as a percentage of host countries' GDP can be found here). But who will bailout the world's central banks which already collectively hold over 30% of global GDP in the form of "assets", or as this term is better known these days, debt?
- Greek Debt Wrangle May Pull Default Trigger (Bloomberg)
- Italy Sells Maximum EU11 Billion of Bills (Bloomberg)
- Romney Demands Gingrich Apology on Immigration (Bloomberg)
- China’s Residential Prices Need to Decline 30%, Lawmaker Says (Bloomberg)
- EU Red-Flags 'Volcker' (WSJ)
- EU Official Sees Bailout-Fund Boost (WSJ)
- EU Delays Bank Bond Writedown Plans Until Fiscal Crisis Abates (Bloomberg)
- Germany Poised to Woo U.K. With Transaction Tax Alternative (Bloomberg)
- Ahmadinejad: Iran Ready to Renew Nuclear Talks (Bloomberg)
- Monti Takes On Italian Bureaucracy in Latest Policy Push to Revamp Economy (Bloomberg)
That Europe has been unable to do the simplest thing, and come to a conclusion in its negotiation with Greek creditors, now running into its six month, is not very surprising. After all this is Europe, where nothing gets done before the deadline, only in the case of Greece the deadline also means the risk of runaway contagion. And as of today there are about 53 days left before the March 20 Greek D-Day. Yet the one thing European should at least be able to do is to have their story straight on what happens once Greece defaults. If nothing else, to show solidarity for optics' sake. Alas, it can't even do that. Because just overnight we have two diametrically opposing stories hitting the tape. On one hand we have Spanish economic minister Luis de Guindos telling Bloomberg TV in Davos that the euro region could withstand a Greek default. This is very much in line with the Jamie Dimon line of thinking that there will be limited fallout. Yet on the other hand, it is that perpetual bag of hot air, Europe's very own head propaganda master Jean Claude Juncker, who ironically told Le Figaro that a Greek default must be avoided at all costs as it would lead to Contagion (read tipping dominoes all over the place). Too bad that both Fitch and S&P said that a Greek default at this juncture is inevitable. And while Juncker's statement in itself is absolutely true, the fact that discord is appearing at the very core of European propaganda - the one place it can afford to stay united until the very end - is troubling indeed. Especially since Juncker also told Le Figaro that Germany can not be asked to do everything alone. Is that a quiet request for the Fed to keep bailing out Europe since the ECB apparently has no interest in doing so?
It seems self-evident. The government can debase the currency and thereby be able to pay off its astronomical debt in cheaper dollars. But as I will explain below, things don’t work that way. In order to use the debasement of paper currencies to repay the debt more easily, governments will need to issue and use the gold bond. The paper currencies will not survive too much longer. Most governments now owe as much or more than the annual GDPs of their nations (typically far more, under GAAP accounting). But the total liabilities in the system are much larger. The US dollar game is a check-kiting scheme. The Fed issues the dollar, which is its liability. The Fed buys the US Treasury bond, which is the asset to balance the liability. The only problem is that the bonds are payable only in the central bank’s paper scrip! Meanwhile, per Bretton Woods, the rest of the world’s central banks use the dollar as if it were gold. It is their reserve asset, and they pyramid credit in their local currencies on top of it. It is not a bug, but a feature, that debt in this system must grow exponentially. There is no ultimate extinguisher of debt. In reality, stripped of the fancy nomenclature and the abstraction of a monetary system, the picture is as simple as it is bleak. Normally, people produce more than they consume. They save. A frontier farmer in the 19th century, for example, would dedicate some work to clearing a new field, or building a smokehouse, or putting a wall around a pasture so he could add to his herd. But for the past several decades, people have been tricked by distorted price signals (including bond prices, i.e. interest rates) into consuming more than they produce. In any case, it is not possible to save in an irredeemable paper currency. Depositing money in a bank will just result in more buying of government bonds. Capital accumulation has long since turned to capital decumulation... I propose a simple step. The government should sell gold bonds. By this, I do not mean gold “backed” paper bonds. I mean bonds denominated in ounces of gold, which pay their coupon in ounces of gold and pay the principal amount in ounces of gold. Below, I explain how this will solve the three problems I described above.
Riskier assets advanced today, as market participants reacted to yesterday’s FOMC statement, as well as reports that Greece is making progress in talks for a debt-swap deal. However despite a solid performance by EU stocks, German Bunds remain in positive territory on the back of reports that the ECB has ruled out taking voluntary losses on its Greek bond holdings but is now debating how it would handle any forced losses and whether to explore legal options to avoid such a hit according to sources. As such, should talks between private creditors and other governing bodies stall again, there is a risk that Greece may not be able to meet its looming financial obligations. Of note, Portuguese/German government bond yield spreads continued to widen today, especially in the shorter end of the curve.
Rumors Start Early: Greek Creditors "Ready To Accept" 3.75% Cash Coupon But With Untenable ConditionsSubmitted by Tyler Durden on 01/26/2012 07:07 -0500
As a reminder, the primary reason why the Greek PSI deal "officially" broke down last week, is because the European Fin Mins balked at the creditor group proposal of a 4%+ cash coupon. So now that creditor talks, which incidentally don't have a soft deadline so they can continue indefinitely, or until the money runs out on March 20, whichever comes first, have resumed we already are getting the first totally unsubstantiated "leaks" that negotiations are on the right path. As various US wires reported overnight, including DJ, BBG and Reuters, citing completely "unbiased" and "unconflicted" local Greek media, "Greece's private creditors are willing to improve their "final offer" of a four percent interest rate on new Greek bonds in order to clinch a deal in time to avert a messy default, Greek media said on Thursday without quoting any sources. With time running short ahead of a major bond redemption in March, private creditors are now considering an average coupon of around 3.75 percent on bonds they will receive in exchange for their existing investments, the newspapers wrote." All is good then: the hedge funds will make the proposal to Europe and Europe will accept, right? Wrong. "Another daily, Kerdos said participation of public sector creditors including the ECB in the swap deal was a pre-condition for that offer, which it said could bring the average interest rate to about 3.8 percent." And that as was reported yesterday is a non-starter. So in other words, the latest levitation in the EURUSD started at about 4am Eastern is nothing but yet another rumor-based attempt to ramp up risk. Only this time the rumor is actually quite senseless, which probably explains why even the market which has been completely irrational lately, has seen the EURUSD drop from overnight highs. That said, expect this rumor to be recirculated at least 5 more times before end of trading.
Scared by PM Volatility? Identify Severe Undervaluation Points in Gold & Silver v. Trying to Call Perfect BottomsSubmitted by smartknowledgeu on 01/26/2012 05:39 -0500
For a new investor in gold and silver, here is the most lucid piece of advice I can offer. Identifying severe undervaluation points in gold and silver, buying gold and silver assets during these times, and not worrying about interim short-term volatility, even if the immediate volatility is downward, is much more likely to impact your accumulation of wealth in a positive manner than trying to perfectly time market tops and bottoms in the highly manipulated gold and silver game.
CFTC article from 1993 warned of dangers of SIPA liquidation for a futures broker. So why Ch 11 for the parent company, which destroys customer rights?
Just a week over the last time S&P said Greece would likely default any second, it reminds us once again why we should care.
- GREECE IN ALL LIKELIHOOD WOULD QUALIFY AS A DEFAULT: CHAMBERS
- S&P'S CHAMBERS SAYS IT'S NOT GIVEN THAT GREECE DEFAULT WOULD HAVE DOMINO EFFECT IN THE EURO ZONE
Perhaps just as irrelevant if notable is that S&P basically said just that back on May 9, 2011. As for Greece, it is a given that if the country proceeds with CACs it will default. Period. And yet that is just what will happen. However a far bigger question, as we touched on yesterday, is what happens next, when Portugal decides to follow the same framework of "deleveraging" only to find that courtesy of having strong creditor protection bonds it can't? Or when the Troika figures out that due to strong negative pledges, the country's balance sheet can not be primed and thus subordinated, and thus is ineligible for secured financing. And what happens when Europe realizes that Portugal is ineligible for saving in the conventional sense? Or Spain? and so forth.
Investors are waiting on the outcome of a 2 day Federal Reserve meeting which ends on Wednesday. Here they are following any signs that interest rates will remain low, as that could put pressure on the U.S. dollar. The Tokyo Commodity Exchange, December, gold contracts climbed as high as 4,167 yen/gram, its biggest gain since mid-December. The gains initially propelled cash gold even though trading was slow during the Lunar New Year break. Japan has been notably absent in the gold market in recent years. This may be changing as concerns about the Japanese economy and continuing debasement of the yen may be leading to Japanese diversification into gold. The scale of domestic savings in Japan remains enormous. This would be a new and potentially extremely important source of demand in the gold market which could help contribute to much higher gold prices.
- Fears Mount That Portugal Will Need a Second Bailout (WSJ)
- EU to Have No Deadline for End of Greek Talks (Bloomberg)
- Japan economy predicted to shrink in 2011 (AFP)
- Japan’s Fiscal Pressure Intensifies as Tax-Boost Plan Insufficent: Economy (Bloomberg)
- Berlin ready to see stronger ‘firewall’ (FT)
- Obama Speech to Embrace U.S. Manufacturing Rebirth, Energy for Job Growth (Bloomberg)
- EU Hits Iran With Oil Ban, Bank Asset Freeze in Bid to Halt Nuclear Plan (Bloomberg)
- China's Oil Imports from Iran Jump (WSJ)
- Croatians vote Yes to join EU (FT)
- Japan’s $130 Billion Fund Unused in Biggest M&A Year in More Than Decade (Bloomberg)
- Buffett Blames Congress for Romney’s 15% Rate (Bloomberg)
There was a time, about 4 weeks ago, when the overnight session was assumed by default to mean lower futures just because it was "the time of Europe." Then markets took one glimpse at the ECB's balance sheets and realized it had grown by more in 6 months than the Fed's during all of QE2, and decided that the central bank will not let the continent fail, and despite how ugly the European interbank market continues to be, Europe was ironically a source of optimism, no matters how ugly the actual news. In other words, a carbon copy of January 2011. Alas, January 2011 ended, and so is the currency phase of Risk On on everything European. Which explains the shift in overnight sentiment. As Bloomberg explains, the First Word Cross Asset Dashboard shows sentiment retracing from early European session rise, with commodities, FX, equities lower after Greek debt negotiations hit snag, according to Bloomberg analyst TJ Marta. EU finance chiefs balked at private investors’ offer of 4% coupon for new Greek bonds; EU wants lower; IIF’s Charles Dallara to hold press conference at 8:30am EST; EU equity indexes lower, led by OMX -1.6%; U.S. futures moderately lower, led by S&P -0.5%; US$ outperforming on risk aversion; Commodities generally modestly to moderately lower. Finally both Portugal, and thus Spain, are once again back on the radar screen. Only this time the Greek "deleveraging" model will not apply, as Zero hedge first noted, and as MUFJ picked up on in its overnight note: "It would likely be more difficult for “Portugal to restructure its private-sector debt than for Greece,” Bank of Tokyo-Mitsubishi UFJ’s Lee Hardman says, without necessarily noting where he got the idea. A higher share of Portugal’s outstanding debt is governed by English law which offers greater protection to creditors vs 90% of Greek government bonds covered by local law. Finally, Hardman says that Eurozone lacks a credible firewall to ensure contagion from eventual default in Greece. That may be the case until the ECB does some gargantuan LTRO on February 29, as those in the know already expect.