Funding Gap

"At all times, ultimate collateral and ultimate money remain crucial reference points in modern financial markets, but the actual instruments are important only in times of crisis when promises to pay are cashed rather than offset with other promises to pay.... Our world is organized as a network of promises to buy in the event that someone else doesn’t buy. The key reason is that in today’s world so many promised payments lie in the distant future, or in another currency. As a consequence, mere guarantee of eventual par payment at maturity doesn’t do much good. On any given day, only a very small fraction of outstanding primary debt is coming due, and in a crisis the need for current cash can easily exceed it. In such a circumstance, the only way to get cash is to sell an asset, or to use the asset as collateral for borrowing."

Bernanke today testifies on monetary policy before the House Financial Services Committee (formerly the Humphrey-Hawkins). The testimony will be released at 8:30 am NY with Q&A after his testimony. Tomorrow he testifies before the Senate Banking Committee but the prepared remarks are the same for both days. Indeed it’s likely that the Q&A will be where all the fun starts. As DB says, he will likely try to pull off the trick of continuing to prepare the groundwork for tapering but try to give bond markets something to help them fight off the pressure of higher yields. With no post-meeting press conference planned for the July 30th/31st FOMC, and Bernanke not scheduled to speak publicly until he appears at the Global Education Forum event on August 7th, this week’s testimony may well be the only remarks we hear directly from the chairman for some weeks.

Think Cyprus is the only country that will need a repeat bailout (as the FT reported earlier)? Think again. Cause heeeeere's Greece... again.... where as Kathimerini reports, a brand new, massive budget hole for €1.2 billion has just been "discovered." Only this time it is not some C-grade government service that can just be swept away: it is to fund the country's biggest healthcare provider, EOPYY. And the deadline is imminent: Greece has less than a month to plug it.

Japan goes to bed with another absolutely ridiculously volatile session in the books following a 5%, or 637 point move higher in the PenNIKKEIstock Market closing at over 13514, which if taking the futures action going heading to Sunday night into account was nearly 1000 points. With volatility like this who needs a central bank with price stability as its primary mandate. The driver, as usual, was the USDJPY, which moved several hundred pips on delayed reaction from Friday's NFP data as well as on a variety of upward historical revisions to Japanece economic data, but not the trade deficit, which came at the third highest and which continues to elude Abenomics. Fear not: one day soon consumers will just say no to Samsung TVs and buy Sony, or so the thinking goes. erhaps the most interesting news out of Asia was the spreading of FX vol tremors to a new participant India, which is the latest entrant into the currency wars, even if involuntarily, where the Rupee plunged to 58, the lowest ever against the dollar.

• Cypriot Bank Levy Is ‘Ominous’ for Bondholders, Barclays Says (BBG)
• Euro, Stocks Drops; Gold, German Bonds Rally on Cyprus (BBG)
• Total chaos:Cyprus tries to rework divisive bank tax (Reuters)
• More total chaos: Cyprus Prepares New Deposit-Tax Proposal (WSJ)
• Euro Slides Most in 14 Months on Cyprus Turmoil; Yen Strengthens (BBG)
• Osborne to admit fresh blow to debt target (FT)
• Even the Finns are giving up: Finnish Government May Relinquish Deficit Target to Boost Growth (BBG)
• Moody’s Sees Defaults as PBOC Warns on Local Risks (BBG)
• Australia Faces ‘Massive Hit’ to Government Revenue, Swan Says (BBG)
• Inside a Warier Fed, Watch the New Guy (Hilsenrath)
• Obama to Tap Perez for Labor Secretary (WSJ) - and with that the "minorities" quota is full
• Finally, this should be good: BuzzFeed to Launch Business Section (WSJ)

All commentary at this point on the infinite monetary sinkhole of Southern Bavaria, f/k/a Greece (whose lack of privatization efforts have angered Mother Merkel, who is now demanding more Greek assets be sold to "willing buyers") is now worthless:

• IMF SEES GREECE NEEDING EXTRA EU5.5-9.5 BILLION IN 2015-16
• GREEK GDP TO SHRINK 4.2% THIS YEAR, GROW 0.6% IN 2014, IMF SAYS
• IMF RECOMMENDS HAIRCUTS ON BILATERAL GREEK LOANS FROM EUROPE
• IMF RECOMMENDS RATES `CLOSE TO ZERO' ON BILATERAL GREEK LOANS

Has the IMF hired Armstrong yet?

Over the last few years, and at an increasing pace as of more recently, unions have become more and more confident of their ability to effect change and taken much more aggressive activist positions against the capitalist oppressors. The most recent examples range from California cities to Twinkies-maker Hostess Brands, and each time the stance from the unions appears to have been far more aggressive (and M.A.D. prone) than in the past. The question is why? Perhaps, as we tweeted following Hostess' liquidation:

Will the broke PBGC step in and fund Hostess' 18,000 workers suddenly vaporized pensions?

— zerohedge (@zerohedge) November 16, 2012

...It is the confidence of an all-powerful government at their back with the US Pension Benefit Guarantee Corporation, which is the backstop for private sector plans, providing cover. The problem is, as UBS explains, the PBGC has a huge deficit and is cashflow negative. This leads us to the uncomfortable expectation of further USD government support (bailout) or a more direct monetization by the Fed. PBGC could be impacted severely if a few large firms terminate their pensions. In this case, UBS expects PBGC to sell equities and buy long duration fixed income.

Where will the €10bn for the buyback come from? This is far from clear but it is hard to imagine it being found anywhere other than the bailout funds, meaning a new transfer of around €9bn will be needed. This again poses significant political problems as leaders in Germany, the Netherlands and Finland (to name but a few) try to convince their parliaments (and public) that this is not more money into a black hole. It has been suggested that some of the other mechanisms mentioned below could be used to fund the buyback, but this looks impossible since they are being tapped to fill the existing funding gap. These substantial obstacles to a successful debt buyback are crucial since the IMF has already stated its on-going participation in the Greek bailout hinges on this policy. The likes of Finland and the Netherlands have also previously stated that IMF involvement is requirement if they are expected to continue to aid Greece. With a plan on the buyback expected to be in place by 13 December, to allow for the release of the next tranche of bailout funds, this deal could hit a wall even sooner than many expected.

After tumbling to lows of 1.2735, and dragging the entire 100% correlated risk complex down with it, the EUR has since seen a straight line push higher despite the sad reality that for all expectations, Europe was embarrassingly simply unable to come to a resolution over Greece and has kicked the can to November 26, leaving Greece with zero cash to fund obligations to European banks, and if anything is left over, to fund domestic operations. The reason for the move up? The market, in all its wisdom, hopes  that 6 short hours after saying "9", Merkel has already softened her stance and that a deal in 5 days is inevitable. Of course, these are the same people who said a deal last night was inevitable. These are the same people who also said that Washington is this close from a reconciliation on the Fiscal cliff, despite this thing called reality (see Rough start for fiscal cliff talks from Politico). Adding to the surrealism was a French spokesman who said the country would "do everything to reach a Greek accord." Since a recently downgraded France will "do" nothing (that's Germany), but will "say" everything, it is safe to say that France is now the comic relief typically attributed to Jean-Claude Jun(c)ker. Finally, and wrapping up the bizarro surreality of central planned markets, the recent spike in Brent on Gaza re-escalations has been interpreted by those uber-complex DE Shaw algorithms as a risk on move, and pushed all risk indicators to overnight highs. With volume today set to be abysmal as trading desks will be empty around noon, expect some more absolutely insane zero volume moves in the SkyNet battleground formerly known as the "market."

The phrase "Constructive Discussions" will have us all pulling our hair out within a few weeks. Markets will be rock and rolled by anything anyone says about the Fiscal Cliff. The received European news-flow, (ie the stuff the Euro Elites want to you read and believe), says. progress on Greek Compromise and close to a solution on Tuesday with Schaeuble confident of "closing the funding gap". All of which means Greece is essentially solved - well for a while longer. As long as no one asks any difficult questions about debt sustainability and unlikely targets, haircuts for the ECB, or how the economy is doing, the Greece will be just fine and dandy. Unfortunately some folk haven't been reading the script - Lagarde has woken up to the fact she heads an "international" organisation and says a solution must be based on reality, solid and sustainable. Asmussen says a new programme will be needed, and the EU Energy Commissioner (?) says debt restructuring for the "official sector" will happen and therefore real losses are unavoidable. er.. who let him opine?

There have been no major overnight events or surprises, with Europe continuing a war of semantics whether the Spanish bailout is a bailout, and attempting to avoid it as long as possible while reaping the benefits of Spanish bonds which are trading at post-bailout levels for a 3rd months now, as well as whether Greece will receive more Troika money (the WSJ reported that Greece requires €30 billion through 2016 to close its funding gap: a number which will eventually double, then triple), and yet as of moments ago the EURUSD slipped under the psychological 1.2900 support, which also means that 1400 on the SPX cash is in play. Italy did not help after business confidence declined from 88.3 to 87.6 on expectations of a rise to 88.7 What news there has been is largely the realization that reality is here to stay, following misses and guides lower from Amazon and Apple, and no matter what some low-volume algo tries to represent by buying the stock in the after hours session, profitability and cash flow creation for both companies will be lower going forward. In terms of newsflow, the NYT released a report last night that China's Premier may have been hiding billions in "related-party" transactions - imagine that, and one which promptly got the NYT blocked from China's internet. Obviously this is a touchy topic for China days ahead of its internal party vote, and one which will hardly score the US brownie points with the domestic administration. Concurrently, Japan announced a new fiscal "stimulus" for a whopping ... $9.4 billion. That is roughly the amount of money needed to evade deflation for 2-3 hours. More apropos, Bild reports what Bloomberg noted earlier, namely that Merkel has no majority for reported Greek aid, further blowing up the hole that Greek finmin Stournaras dug himself in with his lies earlier this week. So while everyone is once again on edge, with the Shanghai composite sliding 1.7%, and key technical levels either breached or in play, today's session promises to be quite interesting.

While yesterday it was the sovereigns who suffered the wrath of the IMF's wholesale growth outlook downgrade (unbeknownst to Christine Lagarde), today it is the turn of the financial sector (which is increasingly being blurred with the former in a world in which central banks are used to both backstop bank liabilities and fund endless public deficits, unafraid of the consequences in a closed loop fiat world in which defection is, so far, impossible) to be greeted by a cold dose of reality emanating from the IMF's "Global Financial Stability Report" especially as pertains to Europe's insolvent banking system. The most notable finding of said report is the admission that the IMF was only kidding when it said six months ago, in April of this year, that the worst case outlook now has European banks deleveraging to the tune of $3.8 trillion through the end of 2013, or over the next 14 months: now this number is 18% higher, or a gargantuan $4.5 trillion (12% of bank assets). This is how much debt Eurobanks will need to shed in a "weak policies" case in which Europe continues to delay implementing fiscal reform, aka austerity, as per Figure 2.14. Even the baseline (and this being the IMF it means it has zero chance of happening) scenario is not much better, at a revised $2.8 (7.3%) trillion in deleveraging. The reason for the increase is due to "lower expected earnings, higher losses linked to worsened economic conditions, and greater funding pressures on banks."

After seeing its stock market tumbling to fresh 2009 lows, the PBOC decided it couldn't take it any more, and joined the Fed's QE3 and the BOJ's QE8 (RIP) in easing. Sort of. Because while the PBOC is prevented from outright easing as we have been saying for months now (even as "experts" screamed an RRR or outright rate cut is imminent every day while we warned that Chinese inflation has proven quite sticky especially in home prices and food and China's central bank will not attempt to push its stocks up as long as the situation persists, so for quite a while) it can inject liquidity on a ultra-short term basis using reverse repos (or what are called repos here in the US). And shortly after it was found that Chinese companies industrial profits fell 6.2% in August after tumbling 5.4% in July, we learned that the PBOC added a record 365 billion Yuan to the financial system in order to prevent a creeping lockup in the banking system. While this managed to push the Shanghai Composite by nearly 3% overnight, this injection will prove meaningless in even the medium-term as the liquidity is now internalized and the PBOC has no choice but to add ever more liquidity or face fresh post-2009 lows every single day. Which it won't as very soon it will seep over into the broader market. And as long as the threat of surging pork prices next year is there, and with a global bacon shortage already appearing, and food prices set to surge in a few short months on the delayed effects of the US drought, one thing is certain: China will need a rumor that someone- even Spain- is coming to its rescue.

Remember when we said two months ago that one way or another the market will need to tumble to enforce the chain of events that lead to Spain demanding the bailout which has long been priced in, and (especially after yesterday's violent protest) Rajoy handing in his resignation? Well, it's "another." After nearly 3 months of suspending reality, in hopes to not "rock the boat" until the US presidential election, reality has made a quick and dramatic appearance in Europe, where after a day in which the EURUSD tumbled, events overnight have finally caught up. What happened? First, ECB's Asmussen said that the central bank would not participate in any debt restructuring, confirming any and all hopes that the ECB would ever be pari passu with regular bondholders were a pipe dream. Second, Plosser in the US said additional QE probably won't boost growth which has reverberated across a globe in which the only recourse left is, well, additional QE. Finally, pictures of tens of thousands rioting unemployed young men and women in Madrid did not help. The result: Spain's 10 Year is over 20 bps wider, and back over 6%, Germany just had a €5 billion 10 Year auction for which it only got €3.95 billion in bids, which means it was technically a failure, and the second uncovered auction in one month, and finally CDS across the continent, not to mention the option value that is the Spanish IBEX which may fall 3% today, have finally realized they are priced far too much to perfection and have, as a result, blown out.

There was a time about a year ago, before the second Greek bailout was formalized and the haircut on its domestic-law private sector bonds (first 50%, ultimately 80%, soon to be 100%) was yet to be documented, when it was in Greece's interest to misrepresent its economy as being worse than it was in reality. Things got so bad that the former head of the Greek Statistics Bureau Elstat, also a former IMF employee, faced life in prison if convicted of doing precisely this. A year later, the tables have turned, now that Germany is virtually convinced that Europe can pull a Lehman and let Greece leave the Eurozone, and is merely looking for a pretext to sever all ties with the country, whose only benefit for Europe is to be a seller of islands at Blue Aegean water Special prices to assorted Goldman bankers (at least until it renationalizes them back in a few short years). So a year later we are back to a more normal data fudging dynamic, one in which Greece, whose July unemployment soared by one whole percentage point, will do everything in its power to underrepresent its soaring budget deficit. Case in point, on Friday the Finance Ministry proudly announced its budget deficit for the first eight months was "just" €12.5 billion, versus a target of €15.2 billion, leading some to wonder how it was possible that a country that has suffered terminal economic collapse, and in which the tax collectors have now joined everyone in striking and thus not collecting any tax revenue, could have a better than expected budget deficit. Turns out the answer was quite simple. According to Spiegel, Greece was lying about everything all along, and instead of a €12.5 billion deficit, the real revenue shortfall is nearly double this, or €20 billion, a number which will hardly incentivize anyone in Germany to give Greece the benefit of another delay, let along a third bailout as is now speculated.