France

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?

Riskier assets advanced today, as market participants reacted to yesterday’s FOMC statement, as well as reports that Greece is making progress in talks for a debt-swap deal. However despite a solid performance by EU stocks, German Bunds remain in positive territory on the back of reports that the ECB has ruled out taking voluntary losses on its Greek bond holdings but is now debating how it would handle any forced losses and whether to explore legal options to avoid such a hit according to sources. As such, should talks between private creditors and other governing bodies stall again, there is a risk that Greece may not be able to meet its looming financial obligations. Of note, Portuguese/German government bond yield spreads continued to widen today, especially in the shorter end of the curve.

• BOJ Should Be Allowed $643 Billion Fund to Buy Foreign Bonds, Iwata Says (Bloomberg)
• Banks Hoarding ECB Cash May Double Company Defaults (Bloomberg)
• China Police Open Fire on Tibetans as Protests Spread (Bloomberg)
• Sarkozy Presidential Rival Hollande Would Lower Retirement Age, Lift Taxes (Bloomberg)
• IMF takes tougher stance over Greek debt (FT)
• Iran threatens to act first on EU embargo (FT)
• PM says ‘no complacency’ on economy (FT)
• George Soros: How to pull Italy and Spain back from the edge (FT)
• Japan's NEC to slash 10,000 jobs (Reuters)
• Obama Planning Corporate Tax Overhaul (Bloomberg)

As a reminder, the primary reason why the Greek PSI deal "officially" broke down last week, is because the European Fin Mins balked at the creditor group proposal of a 4%+ cash coupon. So now that creditor talks, which incidentally don't have a soft deadline so they can continue indefinitely, or until the money runs out on March 20, whichever comes first, have resumed we already are getting the first totally unsubstantiated "leaks" that negotiations are on the right path. As various US wires reported overnight, including DJ, BBG and Reuters, citing completely "unbiased" and "unconflicted" local Greek media, "Greece's private creditors are willing to improve their "final offer" of a four percent interest rate on new Greek bonds in order to clinch a deal in time to avert a messy default, Greek media said on Thursday without quoting any sources. With time running short ahead of a major bond redemption in March, private creditors are now considering an average coupon of around 3.75 percent on bonds they will receive in exchange for their existing investments, the newspapers wrote." All is good then: the hedge funds will make the proposal to Europe and Europe will accept, right? Wrong. "Another daily, Kerdos said participation of public sector creditors including the ECB in the swap deal was a pre-condition for that offer, which it said could bring the average interest rate to about 3.8 percent." And that as was reported yesterday is a non-starter. So in other words, the latest levitation in the EURUSD started at about 4am Eastern is nothing but yet another rumor-based attempt to ramp up risk. Only this time the rumor is actually quite senseless, which probably explains why even the market which has been completely irrational lately, has seen the EURUSD drop from overnight highs. That said, expect this rumor to be recirculated at least 5 more times before end of trading.

The biggest market-moving event so far this year is undeniably the positive (so far) aftershock from Germany's capitulation on monetary expansion and as Michael Cembalest of JPMorgan goes on to note that the ECB, directly and indirectly, is giving its governments and its banks the money that the rest of the world has been taking away. Between the ECB's LTRO largesse and its 'crisis management' initiatives (for example: collateral standards, watered down Basel III, lower bank reserve requirements), it seems clear that the resignation of the German contingency (Stark and Weber) from the ECB last year was a signal of the laying-down-of-arms by the Germans relative to the Periphery (perhaps for fear of the 'powerful backlash' that Monti among other has warned about). While the JPMorgan CIO understands the market's positive reaction (as Armageddon risk is reduced/delayed) he remains a skeptic broadly given the structural reforms and any expectations of growth among most euro-zone economies this year. He reminds investors that it should not be lost on anyone that first prize in the Central Bank balance sheet expansion race is not necessarily one you want to win and we wonder just how aware the German press and public are that this is happening under their watchful (if not frustrated) gaze.

• Fears Mount That Portugal Will Need a Second Bailout (WSJ)
• EU to Have No Deadline for End of Greek Talks (Bloomberg)
• Japan economy predicted to shrink in 2011 (AFP)
• Japan’s Fiscal Pressure Intensifies as Tax-Boost Plan Insufficent: Economy (Bloomberg)
• Berlin ready to see stronger ‘firewall’ (FT)
• Obama Speech to Embrace U.S. Manufacturing Rebirth, Energy for Job Growth (Bloomberg)
• EU Hits Iran With Oil Ban, Bank Asset Freeze in Bid to Halt Nuclear Plan (Bloomberg)
• China's Oil Imports from Iran Jump (WSJ)
• Croatians vote Yes to join EU (FT)
• Japan’s $130 Billion Fund Unused in Biggest M&A Year in More Than Decade (Bloomberg)
• Buffett Blames Congress for Romney’s 15% Rate (Bloomberg)

Hank Paulson started the extortion racket. Greek prime ministers practice it weekly. Now Christine Lagarde jumped in too. Taxpayers please step up to the plate. Or else—

There are consequences to this policy.

Two things of note in today's Rosie piece. On one hand he breaks out the 10 good and bad things that investors are factoring, and while focusing on the positive, and completely ignoring the negative, are pushing the market to its best start since 1997. As Rosie says: "The equity market has gotten off to its best start in a good 15 years and being led by the deep cyclicals (materials, homebuilders, semiconductors) and financials — last year's woeful laggards (the 50 worst performing stocks in 2011 are up over 10% so far this year; the 50 best are up a mere 2%). Bonds are off to their worst start since 2003 with the 10-year note yield back up to 2%. The S&P 500 is now up 20% from the early October low and just 3.5% away from the April 2011 recovery high (in fact, in euro terms, it has rallied 30% and at its best level since 2007)." Is there anything more to this than precisely the same short-covering spree we saw both in 2010 and 2011? Not really: "This still smacks of a classic short-covering rally as opposed to a broad asset- allocation shift, but there is no doubt that there is plenty of cash on the sidelines and if it gets put to use, this rally could be extended. This by no means suggests a shift in my fundamental views, and keep in mind that we went into 2011 with a similar level of euphoria and hope in place and the uptrend lasted through April before the trap door opened. Remember too that the acute problems in the housing and mortgage market began in early 2007 and yet the equity market did not really appreciate or understand the severity of the situation until we were into October of that year and even then the consensus was one of a 'soft landing'." Finally, Rosie steps back from the noise and focuses on the forest, asking the rhetorical question: "Isn't this still a "modern day depression?" - his answer, and ours - "sure it is."

Reuters report that the EU has agreed to freeze the assets of the Iranian central bank and ban all trade in gold and other precious metals with the Iranian Central Bank and other public bodies in Iran. According to IMF data, at the last official count (in 1996), Iran had reserves of just over 168 tonnes of gold. The FT reported in March 2011 that Iran has bought large amounts of bullion on the international market to diversify away from the dollar, citing a senior Bank of England official. Currency wars continue and are deepening. Many Asian markets are closed for the Lunar New Year holiday which has led to lower volumes. Of note was there was an unusual burst of gold futures buying on the TOCOM in Japan, which has helped the cash market to breach resistance at $1,666 an ounce.  Investors are also waiting for euro zone finance ministers to decide the terms of a Greek debt restructuring later today.  This would be the second bailout package for Greece.

• IMF begging ECB for cash, ECB begging Germany for cash... all is well: Lagarde Says Europe Must Boost Firewall (WSJ)
• More rumors of inflation targeting: Bernanke near inflation target prize, but jobs a concern (Reuters)
• A Sears Wager Stings at Goldman (WSJ)
• Draghi Makes Euro Favorite for Most-Profitable Carry Trades With Rate Cuts (Bloomberg)
• Euro zone finance ministers to rule on Greek debt talks (Reuters)
• "Reserve Currency" - Iran Said to Seek Yen Oil Payments From India Amid Sanctions (Bloomberg)
• Hackers-for-Hire Are Easy to Find (WSJ)
• Florida’s Republican Primary Pits Romney Money Against Gingrich Momentum (Bloomberg)
• YouTube hits 4 billion daily video views (Reuters)
• Carnival CEO Lies Low After Wreck (WSJ)
• Fed Forecasts Could Awaken Treasurys (WSJ)

All you need to read.

With less than three months left until the Greek D-Day, and just over one month until the next 3-year LTRO, which will be the ECB's final chance to firewall off its banks with sufficient liquidity and brace for the worst if Greece fails to reach a consensual debt reducing exchange offer (which our colleagues in the German press don't think will be nearly enough), we finally get a glimpse of how the super broke Mario brothers really feel. According to a report in the German Spiegel, the ink is not even yet dry on the latest completely toothless EU Fiscal Draft (which will allow the €500 billion European Stability Mechanism to be enacted) and already we get the world's most insolvent hedge fund, pardon central bank, and Europe's biggest debtor demanding for more. "Italian Prime Minister Mario Monti and European Central Bank President Mario Draghi both support enlarging the capacity of Europe’s permanent financial rescue mechanism, Der Spiegel reported, without saying where it got the information. The news magazine said Monti is pushing for the European Stability Mechanism’s capacity to be doubled to 1 trillion euros ($1.29 trillion), and had made the suggestion to the German government. Der Spiegel added that Draghi supports the view that unused funds from Europe’s temporary rescue fund should be added to the ESM’s firepower when it comes into force." Well good thing the ECB is not printing money or else one would get the impression that the system is getting flooded with trillions of excess cash. It also also great that the next LTRO will not be up to €10 trillion, as first reported here, and as was finally noted by the German press.

In this very informative interview between The Browser and Peter Boettke, the professor of economics discusses the contributions made by the Austrian School, and explains the various nuances of the economic school by way of recent books by "Austrians." He also explains what we can learn from Mises and Hayek, and argues that economics is the sexiest subject.

The spread differential between Japan sovereign CDS and UK sovereign CDS (both denominated in USD) is near its widest on record (Japan 55bps wider than UK). Furthermore, Japan's CDS trades notably wider (101bps in 5Y) than its bond's yields (which are the domestically held and subdued by local savings unlike the USD-denominated CDS market) while UK CDS trades 24bps inside its Gilts 5Y yield - quite a difference. Flows have surged into both the Japanese and British markets as AAA safe havens 'were' in demand (until the all-clear appears to have been signaled recently?). The critical point here is that these two nations have devastatingly unsustainable debt/GDP ratios (which show no sign of deleveraging - unlike the US - ignoring unfunded liabilities) with both at just about 500% in total debt/GDP,  and yet in general UK trades far better than Japan. McKinsey's 'Debt and Deleveraging' note today points to significant increases in leverage for Japan, Spain, and France (and UK in the middle ground of rises in leverage for now). Of course none of this matters as clearly this debt will never be paid back and/or interest coverage will approach 100% of GDP (and perhaps that is the 100bps premium in CDS for JPY devaluation probability?).