Risk is back on in Europe (and thus spilling over to the US), confirmed by both a tightening in PIIGS spreads across the board and a jump in the EURUSD by 100 pips from overnight lows following a rehash of the same old rumor that the EFSF, or Europe's "toxic bank" off the books CDO equivalent, will provide emergency credit for insolvent countries. With the European Parliament summit starting tomorrow at 1pm (moved back by an hour), there is anticipation that Europe will finally present a strong resolution to ongoing problems. The expectations are not lost on Europe itself: as Barroso said "The minimum we must do tomorrow is to provide clarity on the following: measures to ensure the sustainability of Greek public finances; feasibility and limits of private-sector involvement; scope for more flexible action through the European Financial Stability Facility, the EFSF; repair of the banking sector still needed; and measures to ensure the provision of liquidity to our banking system." Unfortunately just like every previous time, Europe will disappoint as there is no holistic resolution that does not involve the default of the PIIGS. In the meantime, as Bloomberg reports, "European officials are considering steps previously rejected by Germany, including the use of precautionary credit lines, to prevent the spread of the region’s debt crisis, a person close to the talks said. Other options up for discussion at tomorrow’s Brussels summit include enabling the main 440 billion euro ($624 billion) rescue fund to lend to recapitalize banks, said the person, who declined to be named because the talks are in progress. Nothing will be decided until leaders convene. Together with a second Greek aid package, the goal is to prove to markets that Europe has the will and the tools to prevent the crisis from engulfing Spain and Italy." With Italy already "engulfed" it shows just how badly behind the curve Europe still is.
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To say that systemic risk is a MAJOR problem for the EU would be the understatement of the year. For instance, if Portugal defaults, Spain’s banks will get taken to the cleaners. This in turn could trigger a HUGE systemic collapse as exposure to Spanish debt is equal to 4% or more of GDP for Switzerland, France, Germany, the UK, and the Netherlands.
First Spain's Castilla La Mancha region was the first to announce it had "discovered" major debt ceiling holes, now it is Portugal's turn. The Telegraph informs that "Portugal's new leader Pedro Passos Coelho has told the nation to brace for further austerity measures after his government discovered a "colossal" €2bn (£1.7bn) hole in the public accounts left by the outgoing Socialists." And while it answers our immediate question "who's next" it certainly does not provide an answer to who's last. Because as more and more governments are changed, more and more such "discoveries" will be announced, but luckily for Europe (and then America), there are far more pressing issues that distract the populace than discoveries than in the past would have led to popular backlash. Concurrently, Portugal joins Greece in indicating that beggars can most certainly be choosers: "Mr Passos Coelho also appeared to caution the European authorities that his government will not tolerate heavy-handed interference in the country. "We want to take part in an ambitious European project and make our contribution so Europe can confront its problems in the most ambitious way, but as prime minister I will not stand by and let Europe govern Portugal," he told a party gathering." And while short-termism reigns across capital markets at least for a few more hours, the reality is that there is simply not enough money out there to plug each and every hole as it is uncovered. But that will take the market a few weeks to months to realize.
Greece is NOT the big problem for the EU. However, worldwide exposure to Greek debt is in the ballpark of $277 billion. So a default there would result in significant market dislocations. Now consider the exposure to a BIG Problem such as Spanish debt. In this situation, Great Britain is on the hook for $51 billion. The US is on the hook for $187 billion. France is on the hook for $224 billion. And Germany is on the hook for a whopping $244 billion.
Presenting The ECB's Own Reflections On A Member Country's "Withdrawal And Expulsion From The EU and EMU"Submitted by Tyler Durden on 07/19/2011 11:01 -0400
The trope du jour in Europe now appears to be that Greece will be temporarily expelled from the eurozone following the ECB agreement to allow Greece to default "temporarily" whatever the hell that means. Good luck pushing a freefall (not a prepack) through bankruptcy court (what bankruptcy court: Southern New York? Eastern Santorini? Upper Volta? Mars?) in the 1-2 weeks that the idiot bureaucrats think it would take. And while they can come up with whetever BS to paint the tape as idiot algos once again go berserk on positively emoting headlines at least until tomorrow when everything collapses again, and send the EUR higher, the truth is that the biggest refutation of this approach comes from none other than the ECB, which in a paper titled: "Withdrawal and Expulsion from the EU and EMU - some reflections" tells us that this is pretty much impossible. To wit: "This paper examines the issues of secession and expulsion from the European Union (EU) and Economic and Monetary Union (EMU). It concludes that negotiated withdrawal from the EU would not be legally impossible even prior to the ratification of the Lisbon Treaty, and that unilateral withdrawal would undoubtedly be legally controversial; that, while permissible, a recently enacted exit clause is, prima facie, not in harmony with the rationale of the European unification project and is otherwise problematic, mainly from a legal perspective; that a Member State’s exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable; and that, while perhaps feasible through indirect means, a Member State’s expulsion from the EU or EMU, would be legally next to impossible." The fact that the paper was written by a Greek back in 2009 is oddly ironic. That said, we assume this is merely yet another observation that will be ignored by the Statusquocrats who continue on irrelevant of facts of reality with their failed plan to preserve the EUR for a few more months no matter the taxpayer cost.
There is one hedge fund manager who I'll never forget, Ray Dalio of Bridgewater...
- Moody's suggests U.S. eliminate debt ceiling (Reuters)
- ECB weighing eurozone default options (FT)
- Debt Deal Search Intensifies (WSJ)
- Obama struggles to get Wall Street funding (FT)
- Euro Zone Sees 3 Options For Private Role in Greece (Reuters)
- Germany Says It's Confident EU to Reach Agreement on Second Greek Bailout (Bloomberg)
- ECB's Mersch-Inflation risks to upside, eyeing developments (Reuters)
- Lockhart: Fed could keep rates low "much longer" (Reuters)
- Greece Seeks Advisers for Privatization (WSJ) - there's always Goldman
We finally agree Greece will default. Why can't we all agree on the turmoil likely as a result? European CRE will get C-R-U-S-H-E-D in a volatile rate storm.
Schizophrenic Sentiment Turns Positive Following Another Potential European Bond Market Intervention, "Strong" Greek, Spanish AuctionsSubmitted by Tyler Durden on 07/19/2011 07:12 -0400
Following last week's blatant secondary bond market intervention ahead of Italy's two auctions which even Willem Buiter predicted would need central bank intervention (ECB, but any would work), we were waiting to see if the ECB would announce an increase in its bond purchasing activity via the SMP for the week the passed. It did not. Which leaves just one culprit to explain the dramatic moves ahead of bond auctions (which naturally set the mood and allowed the primary issuance to proceed smoothly and not bring down the euro). China. And we venture to assume that it was China again who started buying bonds in the secondary market ahead of today's 4:30 am and 5:00 am issuance of €4.5 billion in 12 and 18 month bills and €1.25 billion in Greek 3 month bills, which resulted in the 10 year tightening -7bps to 1550; after it hit 1564bps earlier today, highest since at least 1998, while Italy's 10-yr yield over bunds tightened -22bps to 310bps vs yesterday’s 332bps, the highest since 1996. Yes this was before the auctions on no good news, and happened just as gold hit an all time high of just under $1610. Sure enough, following this sudden spike in buying interest, the auctions priced tremendously, and have resulted in a major shift in market sentiment in the past 3 hours, leading to a surge in Italian financial stocks, a jump in the EUR and thus a spike in futures.
Many associate exploding CDS as a feature of backward third world countries, or, as they are better known these days, PIIGS. It may thus come as a surprise to most that the default risk of not only the US, which we reported had recently hid a multi year high, but especially Germany and the UK have surged by well over 50% in the past month. In fact, Germany, by most objective evaluations, an economy that is far more resilient and productive than America's, has in the past 3 days seen its CDS surge to a level 10 basis points wide of the US. And if not the actual economy, what then? Why such monstrosities as Deutsche Bank and Commerzbank, which as reported previously have caused many to doubt are as viable as the stress tests represents, and whose combined asset bases are well over the total GDP of Germany. As the for the UK, after trading at around 55 bps for months, the spread has jumped to nearly 80 bps. So as Sigma X indicated earlier that it may now be time to shift attention to the UK, have the vigilantes already succeeded in penetrating all the way to the very core of the Eurozone? Or, courtesy of ISDA's criminal abdication of its responsibilities by pre-determining that no development in the future of Greece would be an event of default, perhaps the only natural response now is to buy protection on those names which have not blown out to ridiculous (read 600 bps or wider) spreads. Which, however, is very bad news for the Eurozone core, as going forward investors will simply hedge peripheral cash risk with core synthetic: a process which will result in the eventual wipe out of both instruments. But that's precisely what happens when the CDS administrator and "regulator" decides to play ball with the central planners instead of the siding with market participants: unintended escalating consequences galore.
In mainstream financial circles, the concept of a global currency is often spoken of only with an air of caution. It is approached always in hypothetical terms. It is whispered of as some far off dream; a socio-economic moon landing in the far reaches of fiscal space. Perhaps in 2015, or 2020, or maybe 2050, but certainly never just over the horizon, or right around the corner posing as an innocuous trade asset created over 40 years ago and used only on rare occasions. Unfortunately, the development of a centralized global security representing the creation of a supranational economic body is much closer than many would care to admit…
On all fronts, this debt story feels like the swirling motion is starting.
The Head Of The World's Biggest Hedge Fund Sees "Economic Collapse" Due To Money Printing By Early 2013Submitted by Tyler Durden on 07/18/2011 15:56 -0400
As part of its most recent issue the New Yorker has released a must read interview with Ray Dalio - head of the world's biggest hedge fund, Bridgewater. Dalio's fund, which according to some may now be as large as $80 billion, continues to outperform even in this problematic environment, indicating that unlike various other managers who shall remain nameless, and whose wealth is built up almost exclusively on one trade (and that belonging to someone else in the first place), Dalio, despite rumors that he is preparing to leave his current position and is actively seeking a replacement, is still keenly able to adapt to changing macro conditions. Which is why his warning about future rounds of QE, which he sees as a certainty, should be heeded. Especially since it conforms 100% with the warnings of Zero Hedge - Dalio believes that future inevitable money printing will "lead to a collapse in currencies and bond markets." Dalio is even kind enough to give a time frame. "I think late 2012 or
early 2013 is going to be another very difficult period." He is, to say the least, quite diplomatic.