Greece

Marc To Market's picture

Italy Trumps Greece

 

News that the Greek bond buy scheme did not get sufficient takers to reach the 30 bln euro target set the commentariat ablaze.  This may prove to be a minor technicality as Greek banks initially offered 75% of the Greek bonds but were prepared to pitch them all if necessary to ensure EU aid is forthcoming, which is the source of their recapitalization funds.

 

The bigger story is the fall of the Monti technocrat government in Italy.  Berlusconi's PDL party pulled support by abstaining economic reform votes at the end of last week.   After a series of consultations with the Italian president, it appears that parliament will not be dissolved until two important pieces of legislation are approved, the 2013 budget and financial stability measures.  The former is needed for obvious domestic reasons.  The latter is needed to maintain credibility in  EMU; assuring its partners.

 

 

 

The Year 2012 In Perspective

As in any other Ponzi scheme, when the weakest link breaks, the chain breaks. The risk of such a break-up, applied to economics, is known as systemic risk or “correlation going to 1”. As the weakest link (i.e. the Euro zone) was coupled to the chain of the Fed, global systemic risk (or correlation) dropped. Apparently, those managing a correlation trade in IG9 (i.e. investment grade credit index series 9) for a well-known global bank did not understand this. But it would be misguided to conclude that the concept has now been understood, because there are too many analysts and fund managers who still interpret this coupling as a success at eliminating or decreasing tail risk. No such thing could be farther from the truth. What they call tail risk, namely the break-up of the Euro zone is not a “tail” risk. It is the logical consequence of the institutional structure of the European Monetary Union, which lacks fiscal union and a common balance sheet.... And to think that because corporations and banks in the Euro zone now have access to cheap US dollar funding, the recession will not bring defaults, will be a very costly mistake. Those potential defaults are not a tail risk either: If you tax a nation to death, destroy its capital markets, nourish its unemployment, condemn it to an expensive currency and give its corporations liquidity at stupidly low costs you can only expect one outcome: Defaults. The fact that they shall be addressed with even more US dollars coming from the Fed in no way justifies complacency.

Greek Debt Buyback Participation Still Short Of Target After Deadline

The tension over the Greek buyback, which was supposed to be completed on Friday with satisfactory terms, i.e., holders of more than EUR30 billion of new bonds tendering, is rising following a report from Kathimerini that roughly EUR25-26 billion has been accounted for, short of the formal target needed to hit the deleveraging goal. Confirming that the biggest beneficiary from the buyback are foreign (mostly US-based) hedge funds, while the biggest loser are Greek banks, is the participation rate which has seen a majority of the tenders, EUR16 billion, come from hedge funds happy with a 100-200% return in a few months as explained previously. For the banks the pain of writing down debt by two thirds once more after doing the same in March is far greater and explains why only EUR10 billion (of a total of EUR15 billion held by the sector) have been tendered into the buyback, by official Greek financial institutions who are also fearing retribution from shareholders despite official promises by the Greek FinMin they would be shielded from the fury of the people. That said, insolvent Greek banks have no choice if they wish to receive the billions in Troika funds used to replenish their underwater capital base and like it or not have to agree to the debt deal.

AVFMS's picture

Hmmm… Need to find another way to kill time until Year End. Morning highs, lunch time lows and then trailing the US. EGBs on the stronger side with augurs seeing a weakening Germany and calls for lower rates putting the EUR under pressure. Ok, Germans: now work! Somebody has to pay the bills!

"Bruttosozialprodukt " (Bunds 1,3% +1; Spain 5,45% -1; Stoxx 2597 -0,3%; EUR 1,295 -20)

Frontrunning: December 7

  • Bundesbank cuts growth outlook as crisis bites (Reuters)
  • Strong quake hits off Japan near Fukushima disaster zone (Reuters)
  • Greece to Buy Debt It Already Owns to Reach Target (BBG)
  • Draghi’s Go-to ECB Seen Risking Credibility Through Overload (BBG)
  • Judge urges Apple and Samsung ‘peace’  (FT) ... Alas only the US government has a Magic Money Tree; others need profit
  • Fed Exit Plan May Be Redrawn as Assets Near $3 Trillion (BBG)... make that $5 trillion this time in 2014
  • Level Global, SAC Fund Managers Ruled Co-Conspirators (BBG)
  • Egypt demonstrators reject Mursi call for dialogue (Reuters)
  • Japanese Dealerships in China Retrench in Wake of Dispute (BBG)
  • Apparel factory fire reveals big brands' shadowy supply chainsa (Reuters)
  • Republican Defectors Weigh Deal on Tax-Rate Increase (BBG)

Pre-NFP Party Spoiled By Reality, Bundesbank And Another Japanese Earthquake

In a day in which it was all supposed to be about today's far weaker (because there is a perfectly good alibi in the face of Hurricane Sandy) Nonfarm payroll report, expected to print at 85,000, due out in 2 hours, once again it is the the "rest of the world" that stole the scene, starting with a reality slam out of Germany whose Bundesbank came out with revised forecast for German economic growth, which collapsed projected 2013 growth from 1.6% to a tiny 0.4%, adding that there are "growth projections risks to the downside" in effect all but sealing Germany's recessionary fate in the coming year, and send the EURUSD to overnight lows. Sure enough, as if to confirm this forecast, moments ago German Industrial Production in October tumbled -2.6%, on expectations of an unchanged print. None of this should come as a surprise to our readers whom we have been warning for weeks and months that the European economic malaise is spreading closer to the core with each passing day. What this means is that as we have been saying for months, slowly but surely the narrative that the ongoing German bailout of Greece is crushing the AAA-rated economy will become louder and louder until it is the German people themselves who demand a severing of all ties with Greece.And speaking of Greece, there are simply no words to explain the stupidity of what may be happening there. Perhaps the following Bloomberg headline captures it best: Greece to Buy Debt It Already Owns to Reach Target. Er, LOLWUT?

Bumble Bees 'Technically' Can't Fly; Just Don't Tell Them!

The news Deutsche Bank apparently sat on potential super-senior losses of $12 bln through the banking crisis is bound to anger the many bankers who saw their careers crumble or subsumed into bureaucracy. Other banks up the ying-yang with unhedgable risk went bust or were forced into the ignominy of public bailouts. From a proper accounting or risk-management perspective DB should have been bust - but to the unknowing world it wasn't. And that sums up the complexity of the bank world - if management can hide or not recognise risks (and even sack whistleblowers who disagree with them), what's the answer? It's the No-See-Ums that kill institutions. On the basis if you can't see it, then it can't see you... should DB have survived? If Lehman had kept schtumm about its leverage and unquantifiable risk, would it still be with us? Not getting caught is an objective all management have quietly inscribed into their heads. And as far as the UK's fiscal projections... on the basis QE has historically proved to be little less effective than pushing uphill on a length of wet wool, then we might just be staring down the Japanese abyss - no growth as CAPEX will stay subdued on the weak outlook. Lastly, we've been told (forceably) our concerns the Greek buyback could be difficult are completely overstated. We are idiots for even thinking it... apparently.

Europe's Scariest Chart - Update

Despite Draghi's insistence that 'significant' progress has been made, that the ECB's efforts have not been "killer medicine", that stocks are higher and spreads are lower (implying the ECB "has already done much that is needed"), and how optimistically-biased cherry-picked economic surveys are positive despite weak economic projections; the fact of the matter is that youth unemployment is only getting worse - much worse. Euro-zone youth unemployment is at a record 23.9% but Spain and Italy saw the biggest jumps (to 55.9% and 36.5% respectively). Greece remains the worst at over 56% based on last data, while Germany rests at 8.1%.

AVFMS's picture

Strong start in Risk to take out new 2012 highs in Equities and trying to retrace near 2012 Credit lows, too. Core EGBs cool. Bunga Square’s rug pulling scuttled all that easy living by noon, weighting on the Periphery and boosting Core EGBs. ECB gloomy. Equity – bond divergence not a flyer yet, though… US sideways and Risk Watchers back to scanning European politics. EUR falling of the carpet.

"Magic Carpet Ride" (Bunds 1,29% -6; Spain 5,46% +8; Stoxx 2605 +0,6%; EUR 1,297 -100)

Il Giornale: "The Monti Government Is Increasingly Hanging By A Thread"

As predicted in our overnight summary piece titled, "Sentiment Shaken By Concerns Of Political Circus Returning To Italy" Europe appears set to be gripped by yet another political crisis, this time by the country that most forgot in 2012, with the attention focusing primarily on Spain and Greece. The reason is what some may call Berlusconi's revenge, who after being eliminated by the ECB in November 2011 when Draghi sent Italian bond spreads soaring, and made Berlusconi's departure a condition to returning normalcy in exchange for planting yet another Goldman tentacle in Italy, Mario Monti, has now shaken the credibility of his successor by having his party PDL abstain from a vote of confidence in favor of Monti's growth measures. The result, as Il Giornale reported moments ago, is that the "the government is increasingly hanging by a thread". It continues: 'Now Prime Minister Mario Monti is likely to no longer have the numbers in parliament. The majority creaks." Is this the end of the technocratic quiet in the austerity regimes? And if the people have said Basta to Goldman and its appointees, does this open the door wide for the likes of Berlusconi to retake the power and force Goldman to scramble to regain status quo "normalcy" for another several months just as every sellside firm has bet the ranch on a global renaissance in 2013?

Greece 'Selective Default' And Geithner's 'Selective Memory'

Late last night S&P placed Greece into “Selective Default” again, raising the issues, once again, of the $90 billion in Greek derivatives, the Greek bank bonds guaranteed by the country and now at the ECB, some central banks and some commercial banks where some clause may get triggered, various clauses in repos, inter-bank lending contracts and guarantees by Athens of various corporate entities all potentially seeing triggers. In the meantime, because Americans hate to be left out of anything, we continue to behave like fools. The raising of the tax rate on the wealthy will operate the country for about eight days and it seems like the savants in Washington have forgotten that there are three hundred and forty-eight days left in the year. Secretary Geithner’s ,“We are prepared to go over the fiscal cliff,” has all of the dramatics of some bluff on World Wide Poker. The focus on redistribution of wealth is a secondary consideration when you cannot pay your bills. We propose that unhappy Americans unite, buy the Abaco islands from the Bahamas, they need the money, and begin our own island nation and let the 46.5 million on food stamps fend for themselves. We honestly feel that way some days as the idiocy in Washington D.C. seems to recognize no boundaries.