Creditors

As Greek bonds go from unintended consequence strength to strength, helped by a EU planned buyback, so Cypriot bonds have been monkey-hammered in the last week or so (and dramatically so today) as the IMF withholds support, demanding a haircut is imposed. As Speigel notes, Cyprus did its part on Wednesday night by passing a 2013 budget with far-reaching austerity measures, yet the would-be creditors (providing the bailout funding) are at odds with the IMF playing 'bad cop'. The IMF is demanding a partial default (rather like being half pregnant) involving haircuts for private creditors before it joins the deal. The IMF is concerned that, despite the austerity measures the country has now adopted, it still wouldn't be able to shoulder the interest payments due on its debt - gracious, where have we heard that uncertainty before? "The situation in Cyprus is much worse than it is in Greece," one high-ranking EU official said, and its hard to argue when you note that with a GDP of EUR18bn in 2011, its banking system has 'assets' of EUR150bn, and fiully EUR10bn of the EUR17bn bailout (should it appear) is aimed at propping up the idiocy of the banking system!

Very much in keeping with the tradition of Japan's now monthly QE8 (September) and QE9 (October), last night's announcement of what is effectively QE10, left a bitter taste in the mouth of salivating habitual gamblers (f/k/a traders), after Shirakawa showed he would not bend over to Abe's political demands just yet, and left out any mention of inflation targeting, whether 2% or 3%, out of the QE10 announcement. What he did include was yet another JPY 10 billion increase in the total asset purchase fund to a total of JPY 76 trillion, increasing the size of eligible JGB and Bill purchases by JPY 5 billion each. However, since this approach has proven to be a total failure in recent months, the market immediately faded the move and the USDJPY tumbled to under 84.00 overnight. Of course, this an all other overnight news items are, of course, completely irrelevant, as the market now observes the Cliffhanger drama in what may be its last day. As we expected several days ago, if the GOP indeed proceeds to vote Plan B in the House today (and is subsequently voted down by the Senate), you can drop any hope of a compromise deal in 2012.

What causes hyperinflations? The answer is: Quasi-fiscal deficits (A quasi-fiscal deficit is the deficit of a central bank)! Why have we not seen hyperinflation yet? Because we have not had quasi-fiscal deficits! Essentially, hyperinflation is the ultimate and most expensive bailout of a broken banking system, which every holder of the currency is forced to pay for in a losing proposition, for it inevitably ends in its final destruction. Hyperinflation is the vomit of economic systems: Just like any other vomit, it’s a very good thing, because we can all finally feel better. We have puked the rotten stuff out of the system.

Reminding the world of just the kind of truthiness that got him sacked originally by that other Italian, the Ex-Goldmanite Mario Draghi, back in November 2011, and which the world has to look forward to when Silvio Berlusconi returns to power some time in 2013, even if not as PM (a position he currently has a snowball's chance in hell of regaining based on current political polls), Reuters informs us that the Italian, who certainly has not read the Goldman book on status quo perpetuation, just said the unimaginable: the truth. To wit: "If Germany doesn't accept that the ECB must be a real central bank, if interest rates don't come down, we will be forced to leave the euro and return to our own currency in order to be competitive." Berlusconi said in comments reported by Italian news agencies Ansa and Agi. The 76-year-old media tycoon has made similar remarks in the past about the possibility of Italy, or even Germany, leaving the euro, but has often at least partially rectified them later." Not this time. Now with Germany and the Buba folding like a broken chair, Silvio is coming back and knows he can demand anything and everything, and Germany has no choice but to accept, Merkel reelection in a few months be damned.

The longer you delay needed “radical measures,” the more private investors will be able to sell “their toxic paper without haircut to governmental bailout funds, and then hightail.”

• Bernanke Wields New Tools to Reduce Unemployment Rate (BBG)
• Home Seizures Rise as Banks Adjust to Foreclosure Flow (BBG)
• EU Backs Release Of Greek Aid (WSJ)
• Democrats Confident They Have 'Cliff' Leverage (WSJ)
• Americans Back Obama Tax-Rate Increase Tied to Entitlement Cuts (BBG)
• Goldman flexes tentacles: Treasury open to Carney radicalism (FT)
• Launch Fuels Asia Security Concerns (WSJ)
• BOJ’s Unlimited Loan Program Seen Open to Use by Hedge Funds (BBG) - there are Japanese hedge funds?
• Abe Set to Face Manufacturing Gloom as Japan Contracts (BBG)
• US and UN condemn N Korea rocket launch (Guardian)
• Eurozone agrees common bank supervisor (FT)
• Berlusconi Adds to Italy Turmoil by Signaling He’d Step Aside (BBG)

"what you realize is that the lessons of ’08 will actually result in a much quicker process, a process that I would describe as a “black hole” if and when there is the next financial crisis.... Nobody in America has actually seen, or most people probably can’t even contemplate, what an actual loss of confidence may look like. What I’m trying to struggle with as a money manager, who really seriously doesn’t like to lose money, is how to protect our capital and how to think about the next crisis."

The tension over the Greek buyback, which was supposed to be completed on Friday with satisfactory terms, i.e., holders of more than EUR30 billion of new bonds tendering, is rising following a report from Kathimerini that roughly EUR25-26 billion has been accounted for, short of the formal target needed to hit the deleveraging goal. Confirming that the biggest beneficiary from the buyback are foreign (mostly US-based) hedge funds, while the biggest loser are Greek banks, is the participation rate which has seen a majority of the tenders, EUR16 billion, come from hedge funds happy with a 100-200% return in a few months as explained previously. For the banks the pain of writing down debt by two thirds once more after doing the same in March is far greater and explains why only EUR10 billion (of a total of EUR15 billion held by the sector) have been tendered into the buyback, by official Greek financial institutions who are also fearing retribution from shareholders despite official promises by the Greek FinMin they would be shielded from the fury of the people. That said, insolvent Greek banks have no choice if they wish to receive the billions in Troika funds used to replenish their underwater capital base and like it or not have to agree to the debt deal.

Iceland went after the people who caused the crisis — the bankers who created and sold the junk products — and tried to shield the general population. But what Iceland did is not just emotionally satisfying. Iceland is recovering, while the rest of the Western world — which bailed out the bankers and left the general population to pay for the bankers’ excess — is not. Iceland’s approach is very much akin to what I have been advocating — write down the unsustainable debt, liquidate the junk corporations and banks that failed, disincentivise the behaviour that caused the crisis, and provide help to the ordinary individuals in the real economy (as opposed to phoney “stimulus” cash to campaign donors and big finance). And Iceland has snapped out of its depression. The rest of the West, where banks continue to behave exactly as they did prior to the crisis, not so much.

UBS and Nomura have suggested that gold could rise next week as the Federal Reserve may announce further easing at the FOMC meeting – on Tuesday (11/12/12) and Wednesday (12/12/12). Nomura said it is worth considering whether the FOMC will announce further easing to replace so called ‘Operation Twist’. The research house noted that gold remains at the same level as during the October meeting, which suggests gold has not yet priced in any move by the FOMC – creating an opportunity for gold bullion buyers. Regardless of whether the FOMC actually eases at this point – Nomura thinks there is a non-negligible probability – gold is likely to rise. Therefore, Nomura expects gold to rise and prices in this probability as the December meeting approaches, just as gold rose when the September meeting was approaching.