Germany Demands "Managed" Greek Default And 50% Bond Haircuts In Exchange For Expanding EFSF, Peripheral "Firewall"Submitted by Tyler Durden on 09/24/2011 13:06 -0400
Back on July 21, the same day as the Greek bailout redux hit the tape, we speculated that the biggest weakness in the Second Greek Bailout is that the EFSF would have to be expanded to well over the current E440 billion (which even at its current size has not been fully ratified in Europe, and based on recent events may not be implemented until 2012 thanks to Slovenia and Finland), or about E1.5 trillion (and possibly as much as E3.5 trillion). The reason this is a "problem" is that it would have to come exclusively at the expense of Germany which would have to pledge anywhere between 50% and 133% of its GDP (as France would have long since been downgraded and hence unable to participate in the EFSF at a AAA rating). We also assumed that the debt rollover with a 21% haircut would not be an issue as it should have been a formality: on this we were fataly wrong - the debt rollover plan has imploded and means that the entire Greek bailout has collapsed as some had expected. And now that it is clear that contagion is threatening to sweep through the core, it is back to Germany to prevent the gangrene, no longer contagion, from advancing beyond the PIIGS. However, in order to prevent a full out revolution, Germany's economic elite has said it would agree to an EFSF expansion and hence installation of European firewall, but at a price: a "controlled" default by Greece and 50% haircuts for private bondholders (as German banks have long since offloaded their Greek bonds).
I was always told that people might think you are stupid but if you speak, you run the risk of them knowing that you are stupid. Europe is going to bail out the 16 weakest banks? Banks that are in trouble because the PSI for Greece is worse than any stress they ran. Plans should be getting made for these banks to die but to possibly save the creditors and limit systematic risk. The focus should be on putting together plans for the big banks that pose real systematic risk. The market knows the stress tests were a farce, so why make a plan to save those that barely survived that low hurdle. Didn't they learn anything from dealing with Greece. Giving minimal help to the worst institutions is NOT going to solve anything and just shows how far behind they are in their thinking.
There goes Citi...
I remain confused why the Private Sector Initiative isn't finished yet? Are [banks] worried their accountants or the markets would see through the ploy of a "par" bond exchange and not give them any benefit from that trick? Are the governments finally getting concerned that the EFSF should not pay banks par for 40% of their Greek holdings? The IIF proposal must have been structured by Robin Hood's evil twin - the one that steals from the poor and gives to the rich. The swap, that switches Greek exposure from banks to the EFSF ensures the banks lose less, but the people of Europe lose more directly. Nothing has been solved in Greece. Until Greece is fixed or defaults, the markets will remain manic/depressive. This proposal would shift some risk out of the banking system, which is good. But it puts it directly on the EFSF guarantors.
Europe’s fiscal and debt crises have dominated the financial news for months, and with good reason: the fate of the European Union and its common currency, the euro, hang in the balance. As the world’s largest trading bloc, Europe holds sway over the global economy: if it sinks into recession or devolves, it will drag the rest of the world with it. As investors, we are not just observers, we are participants in the global economy, and what transpires in Europe will present risks and opportunities for investors around the world. The issue boils down to this: is the European Union and the euro salvageable, or is it doomed for structural reasons? The flaws are now painfully apparent, but not necessarily well-understood. The fear gripping Status Quo analysts and leaders is so strong that even discussing the euro’s demise is taboo, as if even acknowledging the possibility might spark a global loss of faith. As a result, few analysts are willing to acknowledge the fatal weaknesses built into the European Union and its single currency, the euro. In the first part of this series, we’ll examine the structural flaws built into the euro, and in the second part, we’ll consider the investment consequences of its demise.
An interesting interview in Frankfurter Rundschau with German government advisor Lars Feld shares Germany's latest perspective on Greece, which is, as many expect, that the country at the heart of the Eurozone is merely setting the liquidity framework and backup preparations for the inevitable. To wit: "Restructuring Greece’s debt would cause “limited” reaction in financial markets because they have been expecting a Greek default for some time." Alas, that was the hubris that drove the decision to send Lehman over the cliff. But the world has never learned from history, why should it now? When asked if Greece is broke, Feld cuts to the chase "I fear that Greece has a solvency problem" translation - yes. Not that we needed to get confirmation with 1 Year yields in the mid 100s, mind you. Yet despite recognition of the inevitable, when asked whether Greece will leave the Eurozone, his response: "That would be a disaster - for Greece and for the euro-zone... Greece's economy and its financial system would sink into chaos, at least for a brief period time. And the speculative floodgate against the euro and its member states would open. Those who believe a Greek ouster is possible is at best naive." And therein lies the rub.
While we have heard rumors of a possible Greek referendum vis-a-vis IMF bailouts (i.e., Euro membership) in the past (as long ago as April 2010, or before the first Greek bailout, when life was actually acceptable and the retirement age was in the 50s) we have promptly dismissed such rumors: after all the EU/IMF/Troica/Status QuoTM what have you would never leave the fate of its existence in such a democratic construct as a majority vote, especially with what would be a near unanimous vote to secede. Well, it may be time to start taking these rumors seriously. Actually no, never mind.
The result, for now, is that Greece’s dreaded appointment with the Ghost of Default Future has been postponed. The cycle of austerity, protests, bondholder angst, and threats of default, followed by another round of bailouts, continues.
Remember when the IMF said Europe will need $200 billion to recap itself, only for the DSK successor to promptly reneg on what she said after Europe shrieked with terror that someone in power dared to tell the truth (as opposed to marginal fringe blogs), or remember when Goldman said the real bottom line will be more like $1 trillion? We can now add FAZ and the DIW to the list of unpatriotic organizations who dare to tell the truth. From Frankfurter Allgemeine by way of Reuters: "Germany's 10 biggest banks need 127 billion euros ($175 billion) of additional capital, German newspaper Frankfurt Allgemeine Sonntagszeitung reported, citing a study by economic research institute DIW. The paper on Sunday cited Dorothea Schaefer, research director for financial markets at DIW, as saying the ratio of banks' equity capital to balance sheet total needs to rise to at least 5 percent. A source said this month that the International Monetary Fund has estimated European banks overall could face a capital shortfall of 200 billion euros." That's ok: when the pirates take charge in a few months we are certain the creditors will promptly relinquish all claims against debtor banks, or else walking the plank will become a distinct possibility.
Following A 70% Concession From JP Morgan, Here Is The Live Jefferson County Reorganization Vote WebcastSubmitted by Tyler Durden on 09/16/2011 11:22 -0400
One short month ago, when the Jefferson County, AL commissioners sat down to vote on whether or not to file for Chapter 9, they decided to delay the vote by a month. Until today. Follow along as the final vote takes place, only this time the expectation is that the commissioners will agree to the proposed reorganization as JPM and other creditors have agreed to substantial concessions of $750 million of the total $1.1 billion loan. Naturally, if this settlement is rejected, the county will declare bankruptcy. Incidentally, what Jefferson County has shown the world is that a market test on real manageable LTV on muni debt is about 70% lower than currently marked. To Meredith Whitney's Chagrin, however, most municipalities will use up all their cash first before acknowledging reality and pushing for comparable hard line negotiating tactics with creditors.
There are two mainstream market assumptions that, in my mind, prevail over all others. The continuing function of the Dow, the sustained flow of capital into and out of the banking sector, and the full force spending of the federal government are ALL entirely dependent on the lifespan of these dual illusions; one, that the U.S. Dollar is a legitimate safe haven investment and will remain so indefinitely, and two, that China, like many other developing nations, will continue to prop up the strength of the dollar indefinitely because it is “in their best interest”. In the dimly lit bowels of Wall Street such ideas are so entrenched and pervasive, to question their validity is almost sacrilegious. Only after the recent S&P downgrade of America’s AAA credit rating did the impossible become thinkable to some MSM analysts, though a considerable portion of the day-trading herd continue to roll onward, while the time bomb strapped to the ass end of their financial house is ticking away. China, being the second largest holder of U.S. debt next to the Fed, and the number one holder of dollars within their forex reserves, has always been the key to gauging the progression of the global economic collapse now in progress. If you want to know what’s going to happen tomorrow, watch what China does today.
BoomBust BNP Paribas? This Article Is A Hard Hitting Piece That EVERY MSM Outlet Needs To Pick Up On, IMMEDIATELY!Submitted by Reggie Middleton on 09/13/2011 16:40 -0400
This post, in and of itself, should demonstrate to the entire Sell Side of Wall Street, the MSM/pop media outlets and all who may follow them that BoomBustBlog forensic research and analysis is simply superior to much of what is available and significantly overpaid for in terms of investment advice and opinion.
Last week, Zero Hedge first brought to readers the infamous UBS report, which has since made the global rounds, and which essentially laid out the binomial tree for Eurozone survival as follows: either the EUR survives, or we get Civil war. In keeping with the schizophrenia of the TBTF banks whose number one goal is to cover their ass by predicting the two opposite possible outcomes, so as to avoid being sued by sovereigns once the dominos start falling, here is the firm's much respected economist George Magnus, who in his latest release of "By George", does a comprehensive framing of the agenda in the Eurozone. His conclusions: don't believe the European bureaucrat PhDs - there is much more here than meets the eye. To wit: "The dilemma over where to draw the lines between integration and sovereignty lies at the core of the fiscal union debate. The policy agenda has to recognise this, and not assume that fiscal union, one way or another, is eventually a ‘gimme’, even though logic would say it should be. Parallel to the logic are the politics and vested interests, the German Constitutional Court notwithstanding, which say fiscal union only one theoretical outcome, and maybe a long shot. Most likely, the political limits to fiscal integration have not yet been reached, but if there are further moves towards but not reaching this goal, they will most certainly be on German, and therefore, limited, terms. We may conclude that while the Euro system is not about to break up, its viability as it stands is far from assured." Maybe not "about" - give it a few weeks though...