Something interesting happened on the way to the detail-free bailout of Spain's insolvent banking system (which may or may not see senior bond impairments depending on just how big of a capitalization hole the ECB, not some fringe blog, sees). We got details. To wit, from Dow Jones:
The European Union loan to Spain will have a 30-year maturity, an interest rate of 2.5% and a 10-year grace period, reports ABC in its Monday Internet edition, without citing any sources.
Now here's the thing: anyone who has ever looked at a balance sheet, and actually happens to be familiar with terms such as priority, seniority, guarantee, and subordination, will notice something rather peculiar. Namely that only idiots of the nth degree will claim that a 30 year 2.5% bond is pari passu, or equal in right of subordination - precisely what those unelected technocrats in Europe have been repeating day after day since various European summits - with a 10 year at 7%, which is where the Spanish debt actually clears the market. In other words, sorry - there is something here which gives the bailout debt implied seniority. And here is the punchline: if the Spanish bailout debt does not trade like a pari passu piece of debt, it means that it is... i) not pari passu, and that it is ii) priming, no matter what any so-called pundit with a newsletter to peddle, may claim otherwise. Period. End of Story.
In a few moments we will post a critical analysis by David Korowicz, titled Trade-Off: Financial System Supply-Chain Cross- Contagion: a study in global systemic collapse, arguably one of the best big picture overviews of the New Normal in systemic complexity, which considers the "relationship between a global systemic banking, monetary and solvency crisis and its implications for the real-time flow of goods and services in the globalised economy" and specifically looks at how various "what if" scenarios can propagate through a Just In Time world in which virtually everything is connected, and in which even a modest breakdown in one daisy-chain can lead to uncontrolled systemic collapse via the trade pathways more than ever reliant on solvency, sound money and bank intermediation.To wit: "For example, when the Federal Reserve Bank of New York commissioned a study of the structure of the inter-bank payment flows within the US Fedwire system they found remarkable levels of concentration. Looking at 7,000 transfers between 5,000 banks on an average day, they found 75% of payment flows involved less than 0.1% of the banks and 0.3% of linkages."
As Euro area policymakers continue to ‘muddle through’ the crisis, everyone's favorite FX Strategist - Goldman's Thomas Stolper, summarizes the decline in the EUR so far as due to slower growth and easier monetary policy, together with growing EUR short positions. Of course, the root cause of both developments is the political crisis in the Euro area. The uncertainty about the stability of the institutional framework of the Euro area forces front-loaded fiscal tightening, which in turn damages growth. In response, the ECB eased policy more than expected, while the Fed, did not ease as much or as early as many projected. Despite today's ecstacy in EURUSD, Stolper believes the EUR is unlikely to strengthen materially as long as this situation persists especially as the potential for the ‘fiscal risk premium’ to rise on the back of daily headlines that are dominated by disagreement and dispute remains. In an effort to clarify his thinking, Stolper identifies eight key issues that will determine the outlook for the Euro. Most of them relate to the Euro area crisis. The most interesting ones are possibly the timing of a recovery in the periphery, the ability of France and Germany to develop a common vision for further integration, and the evolution of fiscal policies in major economies outside the Euro area. He concludes that the risks in the near term remain substantial.
It seems every week there are new acronyms or catchy-phrases for Europe's Rescue and Fiscal Progress decisions. Goldman Sachs provides a quick primer on everything from ELA to EFSM and from Two-Pack (not Tupac) to the Four Presidents' Report.
It seems increasingly the European leaders themselves (absent the self-referential peripheral political paeons) are getting the joke in Europe. Following Buba's Weidmann's rational comments this morning (via Bloomberg):
- *WEIDMANN SAYS CAN'T SOLVE EURO CRISIS WITH EVER BIGGER FUNDS
- *WEIDMANN BANK FINANCING (Bailout - kicking the can) COULD WORSEN WITH EURO CRISIS
Now, Poland's deputy finance minister is pulling back dramatically from their desire to enter the European union:
- *POLAND PLANS `OPPOSITE OF ACCELERATION' IN EURO DRIVE: DOMINIK
- *POLAND SAYS EURO-AREA STABILITY IS NEW CRITERION FOR EURO ENTRY
It seems there is some rational thinking occurring in Europe - no matter how algos react to recycled headlines.
The global economy is an entangled affair, make no mistake in your calculation here, and the numbers from around the globe are telling and will affect both the U.S. bond and equity markets. Much of the financing for the Emerging Markets was provided by the European banks and as they pull back and reorganize based not just on Basel III but based upon problems of the sovereign where they are domiciled the situation exacerbates. Two of the world’s financial axises are slowing and troubled and to not think that this will not affect America will lead you to conclusions causing you to play the Great Game badly. What did the meeting of the European Finance Ministers accomplish; not much. They nodded to the Spanish banks and agreed to inject $30 billion by the way of the sovereign, increasing the debt of Spain, with veiled promises of a new ESM fund which would lend money directly to the banks at some point in the future and this point is highly subjective depending upon to whom you listen. The Spanish claim within days or weeks while the Germans indicate it may be sometime next year. There is now a “maybe-maybe” timeline in Europe for almost anything as the weaker nations prod the stronger nations for more money.
Despite the ongoing barrage of pronouncements out of Europe on a weekly if not daily basis, discussing the imminent launch and even more imminent success of the ESM, the reality is that many questions remain: such as will Germany just say nein again today, in the constitutional court's verdict, especially after the President asked Merkel over the weekend why it is that Germany has to keep bailing out Europe, a proposition which no longer impresses about 54% of the German public. More importantly, even though the debate over the explicit subordination of the ESM may be resolved (it never will be as the bailout funding will always be implicitly senior to general bondholders no matter how many pieces of paper are signed), a bigger debate now emerging is just who will guarantee the bank losses. Below, we answer that question, and virtually every other outstanding one, courtesy of this DB analysis, which removes most of the lack of clarity surrounding the European bailout mechanism. Yet the main axis of inquiry in our opinion is different: what is the timetable of funding rollout. Because as DB explains, "It follows that from July to October, the ESM can only lend about EUR 100bn. If that is committed to Spain, there is nothing left in the ESM until October. Any other intervention before October would have to be under the EFSF." In other words, assuming a smooth acceptance of the ESM today by the German court, and no further glitches, the best case scenario is one which provides for funding to Spain... and there is no other cash until virtually the end of the year under the ESM, whose implementation is staggered as the chart below shows.
Last week it was the Fairness Distributor In Chief threatening China with WTO action over its unfair duties on US car imports. Before that it was Europe trying to protect its crumbling trade at all costs with its primary trade partner. Now, it is China's turn to retort to the world's beggars, and all those who just happen to ravenously import its iWares with the reckless abandon of a gadget junkie. FT reports: "Beijing has threatened swift retaliation against a range of European Union industries if Brussels presses ahead with an investigation into government subsidies granted to two Chinese telecoms equipment companies. The Chinese threat was delivered at a meeting with EU trade officials in Beijing late last month that was arranged at the behest of Chen Deming, China’s commerce minister, to try to defuse a brewing trade dispute that is straining commercial relations between the two sides. Instead, it collapsed into acrimony, with the Chinese warning their EU visitors that they would respond to any investigation of Huawei and ZTE Corp by probing subsidies granted to European agriculture, automotive, renewable energy and telecoms companies. “Put it this way: it’s not like they went for a beer after and watched football,” one person briefed on the meeting said." None of this is new: recall China Lays Out Conditions Under Which It Will Bail Out Europe; Does Not Want To Be Seen As "Source Of Dumb Money" in which Li Daokui "added that Beijing might also ask European leaders to refrain from criticising China’s currency policy, a frequent source of tension with trade partners." Looks like we can scrap those "China bails out Europe" (ignore the fact that the Chinese economy itself is imploding for a second) rumor in perpetuity.
European equities have been grinding lower throughout the European morning, with basic materials seen underperforming following the release of a multi-month low Chinese CPI figure, coming in at 2.2%, below the expected 2.3% reading. The focus in Europe remains on the Mediterranean periphery, as weekend reports from Spanish press suggest that the heavily weighted Valencia region may be pressed into default unless it receives assistance from the central government. The sentiment is reflected in the Spanish debt market today, with the long-end of the curve showing record high yields, and the 10-yr bond yield remaining elevated above the 7% mark. News from an EU council draft, showing that Spain is to be given extra time to meet its deficit targets did bring the borrowing costs off their session highs, but they do remain stubbornly high at the North American crossover. The gap between the core European nations and their flagging partners continues to widen, as Germany sell 6-month bills at a record low of -0.0344%. As such, the 10-yr government bond yield spread between the Mediterranean and Germany is seen markedly wider on the day.
It is truly difficult to believe that social tensions may be contained indefinitely under a deteriorating economic scenario – although there is the 'frog in the pot analogy' again. There are also escape valves which surely help keep social tension from mounting such as the ongoing criminal investigation in which former Bankia chairman Rodrigo Rato and 32 members of the failed bank’s board were formally cited this week as suspects of fraud, misappropriation of funds, and the falsification of financial documents; a necessary but inconceivable turn of events compared to only two months ago. Ultimately, however, unless the long-yearned European breakthrough (which nobody has managed to properly define) occurs soon and some form of economic upturn begins to be seen as within reach, there is no reason to believe that Spain’s situation will improve over the next several months. If the summer turns out to be as “hot” as expected, Rajoy may at least have to revise his communication strategy and start facing the public. The cooling variables which currently work in favor of keeping society simmering in a state of fear rather than boiling with outrage may not hold the fire.
We are at that moment in time where Greece has capitulated and it is going to be hanging or life imprisonment and Greece, eyes downward cast, is waiting for the verdict. This situation may have been long in coming but it is going to be a disaster for the IMF and for the European Union however it goes. Greece (3) will be a “moment” of that you may be assured and the announcement will be coming shortly. The forthcoming decision will be a matter of credibility in the end as the next line in the sand will hit the ECB, the EU and the IMF in a place that hurts as the last free barrier, the private investors, has been breached and is it going to be the taxpayers of Europe that bear the brunt or is it to be the nation of Greece and her people. There can be no more excuses and the fantastic charades of the past have evaporated and been found wanting. The shepherd ascended Mount Olympus and finding no temples, no gods now is descending back down the mountain and trying hard to figure out just what to say to the people. We are about to face a “Moses Moment” when the worshipping of the “Golden Bull” will no longer cut it. Stand by!
Summit full life: One week. Literally. Last Friday morning speculation that Germany had "caved" to Mario Monti, somehow allowing beggars to be choosers, and would allow an unconditional and IMF-free rescue of Spain and Italy while the seniority of the ESM was eliminated, sending the Spanish 10 Year yield to under 6.2%. The same security is now back over 7%, where it was just before the summit, as Finland and Holland (or half of Europe's AAA-rated countries), and even Germany, made it quite clear, as we said all along, that stripping seniority of a piece of debt is far more complex than saying one wants to do it in a Memorandum of Understanding. The other thing pushing Spanish spreads wider was German FinMin spokesman Kotthaus saying that no decision on Spain can be taken on Monday as there is no Troika report on Spain bank aid yet, and that the European bailout activation, which was supposed to begin on July 9th, may be delayed until July 20. At that point it will likely be delayed again, only this time GSPGs may be trading wider than their lifetime highs of 7.285%. Finally, adding insult to Mario Monti "victory" is that Merkel's popularity rating just hit a multi-year high. So: who was last week's summit "winner" again?
Seven out of the seventeen economies that belong to the European Union that need to be bailed out. This is 41% of the Euro-17 that is in trouble. The second indication of decline is the recessions in Europe. In fact virtually all of Europe is in a recession and while Germany has held its head above the water I think by the third or fourth quarter that she is also mired in an economic decline. Europe is 25% of the global economy and this is beginning to affect the United States as exemplified by the declining revenues and profits of many American corporations that have so far reported out this quarter. The axes of the financial markets are America, Europe and China and with Europe in serious decline and China also contracting the strings are vibrating so that all of the markets are likely to go down. Even without some cataclysmic shock, realization is coming. The debts of Europe are being paid off with ever more debt and the can kicking will find its walls and as the European recession deepens it will be felt in America and then adjustments will have to be made - as fact overbears fantasy.
I understand the dream of the common socialist. I was, after all, once a Democrat. I understand the disparity created in our society by corporatism (not capitalism, though some foolish socialists see them as exactly the same). I understand the drive and the desire to help other human beings, especially those in dire need, and the tendency to see government as the ultimate solution to all our problems. That said, let’s be honest; government is in the end just a tool used by one group or another to implement a particular methodology or set of principles. Unfortunately, what most socialists today don’t seem to understand is that no matter what strategies they devise, they will NEVER have control. And, those they wish to help will be led to suffer, because the establishment does not care about them, or you. The establishment does not think of what it can give, it thinks about what it can take. Socialism, in the minds of the elites, is a con-game which allows them to quarry the favor of the serfs, and nothing more. There are other powers at work in this world; powers that have the ability to play both sides of the political spectrum. The money elite have been wielding the false left/right paradigm for centuries, and to great effect. Whether socialism or corporatism prevails, they are the final victors, and the game continues onward… Knowing this fact, I find that my reactions to the entire Obamacare debate rather muddled. Really, I see the whole event as a kind of circus, a mirage, a distraction. Perhaps it is because I am first and foremost an economic analyst, and when looking at Obamacare and socialization in general, I see no tangibility. I see no threat beyond what we as Americans already face. Let me explain…
Germany will leave the Euro the moment that the EU Crisis spreads to France. At that point any discussion of EU bailouts is pointless, as the very countries needing aid (France, Italy, Spain, and Greece) account for 53% of the ESM’s funding.