European Union

No sooner have the supposedly close (and yet so far away) Greek debt negotiations increased haircuts but added desperate incentives such as GDP Warrants, then The Guardian is reporting that Greek PM Papademos is calling crisis meetings with Greek political party leaders as tensions are clearly growing between Greeks and their EU overlords/partners. The 'increasingly intransigent' negotiating team sent by Brussels is demanding even more severe austerity measures before sanctioning the new bailout funds. The incredulity at the complete mis-communication and increasing bifurcation is nowhere more clear than the divergence between FinMin Venizelos saying "We are one step [away]. I would say it is a formality away from finalizing (the debt relief agreement)," and the disbelief by Greek MPs that "The troika doesn't appear to be willing to accept any concessions whatsoever on reducing the minimum wage and scrapping bonuses," said the government aide. "No political party is willing to move either, saying wage cuts are a red line they are simply not going to cross. You tell me how this is going to be resolved. We have no idea and we're very worried."

• Victory for Merkel Over Fiscal Treaty (FT)
• Everyone wants a mediterranean colony: China's NDRC Delegation Visit Greece to Boost Economic Ties (Xinhua)
• As Florida votes, Romney seems in driver's seat (Reuters)
• Greece’s Papademos Seek On Debt Deal by End of Week (Reuters)
• Banks Set to Double Crisis Loans From ECB (FT) - as Zero Hedge predicted two weeks ago
• S&P: Doubling Sales Tax Won’t Help Japan Enough (Bloomberg)
• Toshiba cuts outlook after Q3 profit tumbles (Reuters)
• Blackrock’s Doll says Fed’s QE3 is Unlikely, In Contrast to Pimco’s Gross (Bloomberg)

All you need to read.

What is the bottom line?  The stark decline in the BDI today should be taken very seriously.  Most similar declines have occurred right before or in tandem with economic instability and stock market upheaval.  All the average person need do is look around themselves, and they will find a European Union in the midst of detrimental credit downgrades and on the verge of dissolving.  They will find the U.S. on the brink of yet another national debt battle and hostage to a private Federal Reserve which has announced the possibility of a third QE stimulus package which will likely be the last before foreign creditors begin dumping our treasuries and our currency in protest.  They will find BRIC and ASEAN nations moving quietly into multiple bilateral trade agreements which cut out the use of the dollar as a world reserve completely.  Is it any wonder that the Baltic Dry Index is in such steep deterioration? Along with this decline in global demand is tied another trend which many traditional deflationists and Keynesians find bewildering; inflation in commodities.  Ultimately, the BDI is valuable because it shows an extreme faltering in the demand for typical industrial materials and bulk items, which allows us to contrast the increase in the prices of necessities.  Global demand is waning, yet prices are holding at considerably high levels or are rising (a blatant sign of monetary devaluation).  Indeed, the most practical conclusion would be that the monster of stagflation has been brought to life through the dark alchemy of criminal debt creation and uncontrolled fiat stimulus.  Without the BDI, such disaster would be much more difficult to foresee, and far more shocking when its full weight finally falls upon us.  It must be watched with care and vigilance...

There is a reason why we mock the IIF's perpetual optimism that a deal will be done any. minute. now at every possible opportunity. Especially when after all of last week, we kept hearing over and over from every source imaginable just how "guaranteed" a deal is before today's Euro Council meeting began. Well, surprise, surprise, the red carpet clownshow is on, and there is no deal. And it gets worse. According to Bloomberg, European leaders won’t finalize Greece’s second aid program today because talks with banks over debt reduction aren’t completed, German Chancellor Angela Merkel said. Leaders are also awaiting an assessment of Greece’s current needs and the status of its economic reforms, Merkel told reporters before a European Union summit in Brussels today. Said otherwise, that 150 pip surge in the EURUSD, which as was said was very transitory, has faded. Even more amusing, Stolper is once again out of the money on both his latest EURUSD call, and his Sunday long USD call. Simply stunning.

• Euro-Region Debt Sales Top $29B This Week (Bloomberg)
• Greek Fury at Plan for EU Budget Control (FT)
• Greek "football players too poor to play", leagues running out of money, may file for bankruptcy (Spiegel)
• After insider trading scandal, Einhorn wins the battle: St. Joe Pares Back Its Florida Vision (WSJ)
• China Signals Limited Loosening as PBOC Bucks Forecast (Bloomberg)
• China's Wen: Govt Debt Risk "Controllable", Sets Reforms (Reuters)
• IMF Reviews China Currency's Value (WSJ)
• Watching, watching, watching: Japan PM Noda: To Respond To FX Moves "Appropriately" (WSJ)
• Cameron to Nod Through EU Treaty (FT)
• Gingrich Backer Sheldon Adelson Faces Questions About Chinese Business Affairs (Observer)

Both the ECB and the Fed are accepting poorer and poorer sludge and collateral to back various liquidity schemes.

You've just crossed over...

Unconstitutional ... in any language.

While over the past 2 days there may have been some confusion as to who, what, how or where is demanding that Greece abdicate fiscal sovereignty (with some of our German readers supposedly insulted by the suggestion that this idea originated in Berlin, and specifically with politicians elected by a majority of the German population), today's quotefest from German Economy Minister Philipp Roesler appearing in Germany's Bild should put any such questions to bed. And from this point on, Greece would be advised to not play dumb anymore vis-a-vis German annexation demands. So from Reuters, "Greece must surrender control of its budget policy to outside institutions if it cannot implement reforms attached to euro zone rescue measures, the German economy minister was quoted as saying on Sunday. Philipp Roesler became the first German cabinet member to openly endorse a proposal for Greece to surrender budget control after Reuters quoted a European source on Friday as saying Berlin wants Athens to give up budget control." And some bad news for our Portuguese (and then Spanish) readers: you are next.

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?

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?

Which is why we were delighted that after months of modest confusion on the topic, the Congressional Committee on Financial Services (including subcommittee chairman Ron Paul), have demanded that not only Geithner make his stance on a US-funded IMF bailout of Europe crystal clear, but that they are openly opposed to "American taxpayer dollars being used to bail out Europe...through additional contributions to the IMF." We are curious to see just how Geithner will weasel his way out of responding to this: perhaps the only logical stall tactic is to reply that he will be busy helping Mitt Romney in his tax "revisions" over the next several months.

All you need to read.

Even as the Euro-Dollar 3 Month basis swap has contracted to a nearly 6 month low at -75 bps, on residual hopes that the LTRO will do anything to fix Europe (it won't - just compare it to the €442 billion 1 year LTRO from June 2009 which worked until it didn't for the simple reason that Europe does does not have a liquidity problem), Europe has once again reemerged as a source of risk off (not least of all because the fulcrum security benefiting from the LTRO - the Italian 2 year BTP is for the first time in weeks wider by 17 bps). Why? The same reason as always: Greece, with a touch of Portugal. As BBG observes the positive sentiment in Asia earlier was retraced in the European session, with commodities, FX, equities lower, especially after ECB demurred from accepting losses on its Greek bond holdings. What that means is that as we patiently explained over the weekend, the imminent Greek default (just listen to Soros over in Davos spewing fire and brimstone on Europe for allowing the situation to get to a place where a Greek default is inevitable) will create so many subordinated junior tranches of Greek debt it will make one's head spin. But while the fate of Greece is all but sealed, and a CDS triggered virtually factored in (note: a Greek CDS trigger, in isolation, won't have much of an impact as repeated here before - in fact it will return some normalcy to the market as CDS will be a hedging vehicle once again over ISDA's corrupt trampled corpse), it is what happens to Portugal and its bonds that has the market gasping for air. Because as Zero Hedge pointed out first, a Greek default will be impossible to be enacted in Portugal in its currently envisioned format, as stupid as it may be. In fact, due to the pervasive and broad negative pledges in most medium-term Portuguese bonds, any priming Troika bailout is impossible without providing matching collateral for everyone else under UK indenture bonds!