European Central Bank

Following up on Peter's summary of the if-then conditional analyses to be conducted concurrently by various classes of Greek bondholders ahead of Thursday's PSI deadline (even as Bingham is rapidly organizing a Greek ad hoc 'holdout' committee to stop the PSI), here is some news that may obviate pretty much everything, and goes back to our warning from January, namely that despite all the sturm und drang, media fanfare, and threats from former Goldman-cum-JPM bankers, the hedge funds will 'just say no' and courtesy of basis packages (yes, the fact that Greek CDS soared to a record 76 pts upfront on Friday indicates more buyers than sellers) hold out for par recoveries in court: they would be idiots (or have a gun at their head) not to do so. To wit from Bloomberg: "Greece may fail to garner enough investors to participate in a voluntary writedown of its debt, Der Spiegel magazine reported, citing unnamed officials at the European Central Bank. A second Greek bailout is partly tied to investors’ agreeing to the writedown by a March 8 deadline." Remember that Germany has made it very, very, very explicit that if the PSI fails, the bailout is off... just as they have planned from the get go.

Re: LTRO2, banks, CRE and the oppurtunity to see just how much free really costs...

Overnight sentiment is turning south, after 4 successive days of breakout attempts have failed to conquer Dow 13K, and with crude sticky at multi month highs. The EURUSD is down over 100 pips and is testing 1.32 support. BBG summarizes the key overnight events that are shaping the mood: EU leaders, bowing to German demands, signed a deficit-control treaty at the 17th summit since the outbreak of the crisis. The treaty puts tighter  restrictions on spending. A test of Europe’s commitment to austerity will come when the region debates whether to ease the deficit-reduction target for    Spain, which is part of the overnight downbeat mood in stocks after PM Rajoy announced that the deficit target for the coming year is 5.8% of GDP and the 4.4% deficit goal is unattainable. The European Central Bank said overnight deposits soared to  a record after its second allocation of three-year loans. Elsewhere, investors are complaining that the European Investment Bank doesn’t deserve the same exemption from losses on its Greek bond holdings as the euro region’s central bank because it didn’t buy the notes to support monetary policy. Well - don't complain, and merely just say no to the PSI. Treasuries steady; Bloomberg’s Soveriegn Debt Movers shows Greek yields plunging, Portugal slightly higher. European stocks mostly higher, U.S. futures steady. Will this downbeat mood remain - all depends on which way the momentum algos move, and whether they have been recalibrated from the prior program of following crude with a positive correlation.

• Brazil declares new ‘currency war’ (FT)
• Postal Cuts Are Dead Letter in Congress (WSJ)
• China state banks to boost selected property loans (Reuters)
• ECB Says Overnight Deposits Surge to Record (Bloomberg)
• Van Rompuy confirmed for 2nd term as EU Council president (Reuters) - you mean dictator
• BOJ Shirakawa: Japan consumer prices to gradually rise (Reuters)
• IMF Says Threat of Sharp Global Slowdown Eased (Reuters)
• Eurozone delays half of Greece’s funds (FT)
• BOJ Openings Can Shape Monetary Policy (Bloomberg)

All you need to read.

Back in September, before the transition from then ECB head J.C. Trichet to current Goldman plant and uber printer Mario Draghi we asked whether "Trichet will disgrace his already discredited central banker career by pushing a rate cut before he is swept out of the corner office by Mario Draghi, or will the former Goldmanite Italian become the most hated man in Germany soon, after he proceeds to ease, even as Germany still experiences Chinese inflationary re-exports. The answer will be all too clear in just a few months." Sure enough, following a whopping €1 trillion in incremental liquidity released by the ECB in the three shorts months since Draghi's ascension on November 1, all under the guise that the ECB is not printing when it most certainly is, albeit "hidden" by the idiotic claim that it accepts collateral for said printing (what collateral - Italian and Spanish bonds, which will become worthless the second even more printing is required in a few short months? This is run time collateral that can be issued "just in time" to convert it to even more cash as UniCredit did again today), the answer is becoming clear. Slowly but surely the realization is dawning on Germany that while it was sleeping, perfectly confused by lies spoken in a soothing Italian accent that the ECB will not print, not only did Draghi reflate the ECB's balance sheet by an unprecedented amount in a very short time, in the process not only sending Brent in Euros to all time highs (wink, wink, inflation, as today's European CPI confirmed coming in at 2.7% or higher than estimated) but also putting the BUBA in jeopardy with nearly half a trillion in Eurosystem"receivables" which it will most likely never collect.

• China’s Holdings of Treasuries Dropped in ’11 (BusinessWeek)
• Bundesbank at Odds With ECB Over Loans (FT)
• Euro zone puts Greece's efforts under microscope (Reuters)
• Bank of America Considers a Revamp That Would Affect Millions of Customers (WSJ)
• In Days Leading Up to MF Global's Collapse, $165 Million Transfer OK'd in a Flash (WSJ)
• Greece Approves Welfare Cuts for 2nd Bailout (Bloomberg)
• Irish Minister Pushes to Cut Bail-Out Cost (FT)
• China to Support Tech Sectors (China Daily)
• Spanish Bond Yields Fall in Debt Auction After ECB (Reuters)
• China to Expand Cross-Border RMB Businesses (China Daily)

Somehow, following three years of defaults, the world has only now figured out that the ISDA CDS trigger determination committee is made up of the same bankers, who stand to lose everything in the case of global out of control contagion, such as that which may occur if an unwelcome CDS trigger sends the house of cards collapsing, and force mark to market losses on all those institutions which hold impaired debt at par (all of them). As a result, the ISDA meeting which is currently in process is expect to find absolutely nothing, and we agree, however not for that particular 'conspiratorial' reason, but because ISDA is waiting for the PSI outcome for a realistic finding on a credit event. Because after all ISDA is not stupid: they don't want to appear like a pushover - remember how vehemently ISDA had opposed a Greek CDS trigger in the days when Europe still was not prepared for this outcome -  but on the other hand wants to preserve some CDS market credibility, which would disappear if none of the recent events in Greece were to trigger CDS. Yet more Greek creditors are getting impatient. Even as the first ISDA meeting has to find (that there has been no CDS trigger), the association's determination committee has just released that it has gotten a second question whether a "Restructuring Credit Event occurred with respect to The Hellenic Republic?" We find it rather odd (or not really) how suddenly quite a few requests are springing out of the woodwork by creditors who obviously are interest in a Greek default. As such the PSI gets quite interesting, because if the pre-PSI action is any indication, quite a few creditors are rather interested in triggering just the event they now consistently badger ISDA with.

The Blokes across the pond are starting to sound as bad as some of the sell side charlatans stateside. Either that or the weed over there is just that much better!

...European banks are three times larger than the European sovereigns, the ECB is not the Federal Reserve Bank of the United States, the leading economy in Europe, Germany, is 22% of the economy of America, that there are ever and always consequences for providing free money, that Europe is in a recession and it will be much deeper than thought by many in my view, that the demanded austerity measures are unquestionably worsening the recession and increasing unemployment, that nations become much more self-centered when their economies are contracting and that the more protracted all of this is; the more pronounced Newton’s reaction will be when the pendulum reverses course.

Yep! If you push that sausauge too far in an attempt to hide it, it's bound to start hurting someone... somewhere... 

Yesterday following the S&P announcement of the Greek 'selective default', we had one simple question to the ECB:

Today we get the answer.

From S&P: "We lowered our sovereign credit ratings on Greece to 'SD' following the Greek government's retroactive insertion of collective action clauses (CACs) in the documentation of certain series of its sovereign debt on Feb. 23, 2012....We do not generally view CACs (to the extent that they are included in an original issuance) as changing a government's incentive to pay its obligations in full and on time. However, we believe that the retroactive insertion of CACs will diminish bondholders' bargaining power in an upcoming debt exchange. Indeed, Greece launched such an exchange offer on Feb. 24, 2012." Translation: Greece better have that PSI in the bag or else the "Selective" goes away and "Greece would face an imminent outright payment default." Our question for former Goldmanite and current ECB head Mario Dragi: does the ECB allow defaulted bonds to be pledged as collateral within the Euro System?

That the German vote to pass the second Greek bailout package would be problematic is an understatement. Even as German parliamentarians are expected to pass the latest (but certainly not last as the G-20 meeting over the weekend demonstrated) hurdle to fund the Greek rescue, new revelations out of Greece have come to light exposing the true degree of capital flight out of the country, spearheaded by none other than the country's own corrupt politicians. Kathimerini reports: "As a political outcry grew on Friday over the revelation that an MP had transferred 1 million euros out of the country in May when authorities were struggling to appease Greek citizens’ fears of the repercussions of a possible default on their savings, Finance Minister Evangelos Venizelos told Parliament that a significant number of lawmakers had moved sums in excess of 100,000 euros out of the country. Earlier, addressing a cabinet meeting, Venizelos had told fellow ministers that there are several public figures among the Greeks who transferred a total of 16 billion euros abroad over the last two years. According to research conducted by the Finance Ministry’s information systems department, 9 percent of this money ended up in Swiss bank accounts." As such, it is obvious why German popular tabloid Bild has called for German lawmakers to reject the Greek bailout: at this point the farce is arguably too much for everyone, and the situation is playing out just as predicted here back in July. Merkel is due to address the Bundestag at 3 pm local time, or in just over an hour. Those curious about the blow by blow, can follow the developments out of Germany at the following live blog by Bild.

As gold strengthens on the back of the extreme experimentation of the world's (now-sheep-like) central bankers' easing and printing protocols, it does no real harm to the world, but as John Burbank (of Passport Capital) notes, the painful unintended consequence of all this liquidity is energy costs skyrocketing - and it won't stop until the economy breaks. The negative feedback loop, that we pointed to yesterday as potentially the only thing to stall a magnanimously academic response to the insolvency we see around the world (and the need for deleveraging at this end of the debt super-cycle), of oil prices into the real economy will be devastating not just for US but for EM economies, though as the bearded-Burbank reminds us - Saudi benefits greatly (and suggests ways to trade this perspective). Flat consumer incomes while costs are rising is never a good thing and while we make new highs in oil in terms of EURs and GBPs, he warns we may soon in USDs also. Summing up, his perspective is rising tensions in the Middle East combined with central bank liquidity provision are a huge concern: "We're actually quite bearish. The only reason all this liquidity is coming into the market is because things are really bad. It's not because things are good. It's hard to know where things are going to go. The point is, just because they're putting liquidity in the market doesn't mean the economy is improving."