We have spent a considerable amount of time in the last week or two explaining just why depositor withdrawals (or bank runs) are the death knell for the Euro experiment. We first described the 'run on banks and governments' on the basis of the potential for overnight loss of 'fungibility' back in December but the escalation last week in Greece (and the contagion to Spain's Bankia) signals things are shifting to 11 on the amplifier of Euro-Fail. This evening brings new information from The Guardian that 'Police are urging Greeks to keep their money in bank accounts rather than putting it at risk of theft, amid further uncertainty about whether the austerity-struck country will remain in the eurozone.' Greece's national police spokesman, Thanassis Kokkalakis, told Reuters: "Many people have withdrawn their money from the banks fearing a financial crash, and they either carry it on them, find a hideout at home or in storage rooms. We urge people to trust the banking system, leave their money there, or at least in a safe place, not hide it at home" Is anyone picturing Cramer and his 'Bear Stearns' call? Speculation of a Euro-wide deposit guarantee scheme was quashed somewhat by yesterday's dismally predictable non-event summit - especially given the only three-week span to the next elections. That leaves Greek citizens juggling the possibility of having their home robbed against the probability that the government, via GEURO-isation, will do it for them in the bank.
This is the REAL DEAL for Europe. Anyone who has some kind of counter-argument to these points either doesn’t understand the political environment we’ve entered (even Central Banks are fed up with bowing to political pressure from politicians) or is simply hoping that by ignoring these realities they (the realities) will go away.
The word 'encumbrance' has received a lot of headlines in the last few months - and rightfully so - after we pointed out the impact that LTROs had in subordinating senior creditors of European banks. As Morgan Stanley points out, this is a considerable problem for bondholders as 'in a wind-down scenario, senior unsecured holders have recourse to fewer assets and hence face a higher loss given default (LGD)'. In understanding just how bad things are for European banks, it is important to focus on 'how much loss-absorbing capital there is beneath you in the bank’s liability stack, as this is the capital that will take losses before senior creditors in the event of a bail-in' which means looking at deposits as well as secured encumbrance. What is very apparent from the pictorial representations of banks’ liability structures is that rather than encumbrance from covered bonds/LTRO etc. the bigger issue for encumbrance of senior unsecured investors is the potential threat from depositor 'runs'. The hope of another LTRO is limited by collateral as policy-makers are well aware that, in a world where failing banks are to be resolved through resolution frameworks and senior creditors are to take losses to shield taxpayers’ funds, banks may not have enough ‘bail-in-able’ debt, given their growing reliance on secured funding sources. With deposits increasingly impaired - and/or the potential for contagious bank runs if we see Grexit, Europe's problem is 'all about the bank runs' now and we were told yesterday how far off that is - though the crisis 'event' may bring deposit guarantees (and the implicit exchange of sovereignty for monetary support) sooner.
The story of Facebook’s disappointing IPO is a gripping tale, and it holds some valuable lessons. But it concerns an event that has already happened. Forget Facebook — there are far more interesting events in play and that will affect you, if only at the margins. They haven’t happened yet, and they may not happen at all. But if they do, you’d sure as hell better have a plan.
In a brief though detailed clip, Stratfor's VP Peter Zeihan discusses the risk of contagion from Greece and the 'creative' - if not self-centered - suggestions for a solution to these problems. Earlier in the week we described Deutsche's suggestion of a dual currency - the GEURO - and that is where Zeihan focuses, noting that "The Greek economy is as deliciously non-competitive as the German economy is hyper-competitive" - this mismatch is the core of the crisis. The GEURO (trading as gEUROQQ on the pink sheets) plan doesn't address this mismatch but extends it just a little longer while bailout funds will continue to funneled through Athens to the country's lenders (read European banks) but private capital would be unlikely to flow and without outside capital, they would be unlikely to stimulate the growth they need to regain any kind of solid footing. Greek debt levels to GDP would rise (not fall) under the plan as EUR debts would remain but GEURO incomes (devalued) would be the source of GDP - making a long-term recovery even less likely. The only winners - simple: foreign banks who have exposure to Greece. The Stratfor VP goes on to note that the vast bulk of Greek debt is held by the ECB, IMF, and the Greeks (Greek banks) adding that private losses would not be catastrophic in the event of another Greek default - though we point out that it is the contagion effects (as we have so critically established in the past) that makes the Greek imbroglio so important to watch.
In plain terms, by mid-June, Greece could very well be controlled by an anti-austerity, anti-bailout party that wants to completely do away with the second Greek bailout (which means a potential disorderly default). This actually is the best possible outcome for Greece as the alternative is outright anarchy. Remember, Greece has gone through two Governments since its Crisis began: one was the long-standing President, the other was an EU-appointed bureaucrat.
The Euro (and Yen) currencies are DESIGNED to be debased, as and when needed, to achieve synchronized diving with the pound and dollar.
While we were told during the PSI process that all was fixed and that Greece now had breathing room to cut spending and meet its TROIKA-mandated targets on the road to glory, it appears - just as we said it would - that things have got worse (much worse). In the 44 trading days since the PSI deal was struck, Greek government bonds are down over 44% in price - trading below 12% of par today for the first time ever. So much for Greylock's "no-brainer", "trade of the year" eh? Did equity markets signal an expectation of hope and change even as the government's largesse was priced into its debt? Not so much - the Athens Stock Exchange index is down an incredible 35% since 3/22 - back at 22 year lows! Where is the Greek Whitney Tilson when we need him most?
Gold’s London AM fix this morning was USD 1,558.50, EUR 1,239.27, and GBP 993.62 per ounce. Yesterday's AM fix this morning was USD 1,555.00, EUR 1,229.44, and GBP 989.56 per ounce.
Gold fell $5.60 or 0.36% in New York yesterday and closed at $1,561.20/oz. Gold has been trading sideways in Asia and was slightly lower in Europe prior to buying which saw gold rise to about the close in New York yesterday.
Someone apparerntly did not tell Russia to keep its mouth shut... That or, the sleeping bear is starting to awake and cause chaos and mischief:
- GREECE HAS PLAN FOR PARALLEL CURRENCY, SHVETSOV SAYS
- RUSSIA'S SHVETSOV SAYS `NECESSITY' FOR GREECE TO LEAVE EURO
- SHVETSOV SAYS GREEK EXIT WOULD BE GOOD EXAMPLE FOR OTHERS
- BANK OF RUSSIA’S SERGEY SHVETSOV SPEAKS IN INTERVIEW IN MILAN
Kak skazat Oops po Russki? Cue Greek denials they have any plans about anything. Ever.
Wondering what caused the sudden spike in the EUR? Wonder no more, for JPM's Greg Fuzesi merely put into words what everyone else had been speculating since this morning, namely more easing coming from the ECB. To wit: "We suspect the ECB's first response will be in terms of new liquidity measures. The committment to supply unlimited liquidity at the regular refis (1-week, 1-month and 3-month) expires in mid-July and an extension of this should be announced at the June meeting. Whether the ECB will also announce some LTROs (likely of maturites up to one year) at the June meeting is less clear. Its latest commentary suggested that it is not minded to move this early and that it will wait instead for the outcome of an internal review that it is conducting about the effectiveness of its policy tools so far. Waiting until July would also give the ECB a better sense of the political situation in Greece after the election. Hence, we pencil in the announcement of 1-year LTROs for the July meeting. Beyond this we expect the main refi rate to be cut 25bp at the September meeting, with the deposit facility rate remaining at 0.25%. This implies that the ECB will respond very incrementally to the current macroeconomic weakness." To summarize: help us Obi-Mario Draghi, you are our only hope.
We will start with an appetizer of Liquidity Tenders and Securities Market Program Bond Purchases, move on to a plate of Emergency Liquidity Assistance, sample a pre-entre of Pro-Growth measures and ECB Covered Bond purchases, dive into an entre of Fed Swap Lines, medium rare, with a side of Emergency Liquidity Assistance, and finally unwind with a desert plate of Firewalls. To close we will dream of tomorrow' menu which some say may feature the mythical Eurobonds and even the, gasp, legendary Europan Bank Deposit Guarantee... Please charge it all to the taxpayer, of course.
Peripheral stock indices underperformed in early trade, with banks under considerable selling pressure amid renewed tensions in credit markets. Wave after wave of poor data from the European PMIs and the German IFOs placed shares under further pressure and talk of macro names selling EUR/USD weighed on the pair. As a result, in the fixed income space, the German 2/5 spread traded at levels not seen since December 2008. However as the session progressed, stocks staged a decent recovery, which coincided with unconfirmed market talk of an asset reallocation trade, together with talk of Asian real money accounts buying French OATs, which in turn prompted sharp tightening in FR/GE 10y bond yield spread. This also supported EUR/USD, which after coming close to making a test on the 1.2500 barrier is now trading little changed. In other news, the ONS reported that the UK economy shrank by 0.3% in the first three months of the year, more than previously thought. The downward revision was due to a bigger contraction in construction output than previously estimated. Despite this, FTSE in the cash has persisted, and is the strongest performing index in Europe today.
- China Pledges More ‘Fine-Tuning’ in Support for Growth (Bloomberg)... more promises, just never any actual funding
- Spain Calls for Help to Lower Borrowing Rates (AP)
- China Is a Black Box of Misinformation (Bloomberg)
- Fed data expose US$100bn JP Morgan blunder (IFRE)
- EU Chiefs Clash on Bonds Amid Call Greece Keep Cutting (Bloomberg)
- Spain to Recapitalize Bankia in Latest Bailout (WSJ)
- The running schizo tally: EU urges Greece to stay in euro, plans for possible exit (Reuters)
- The Seeds of the EU’s Crisis Were Sown 60 Years Ago (Bloomberg)
- Fed's Bullard says orderly Greek exit possible (Reuters)
- Some Big Firms Got Facebook Warning (WSJ)
- Chesapeake Raises Big Bet in Ohio (WSJ)
If there was one catalyst for the market to be "convinced" of an imminent coordinated liquidity injection, as Zero Hedge first hinted yesterday, or simply a 25-50 bps rate cut from the ECB as some other banks are suggesting and Spain's ever more desperate Rajoy is now demanding, it was the overnight battery of European Flash PMI, all of which came abysmal, throughout Europe, the consolidated Eurozone PMI posting the worst monthly downturn since mid-2009, the PMI Composite Output and Manufacturing Index printing at a 35 month low of 45.9 and 44.7 respectively. PMIs by core country were atrocious: France Mfg PMI at 44.4 on Exp of 47.0 and down from 46.9, a 36 month low; German Mfg PMI at 45.0 on Exp. of 47.0 and down from 46.2. The implication, as the charts below show, is that GDP in Europe is now negative virtually across the board. Adding insult to injury was the UK whose GDP fell 0.3%, more than the 0.2% drop initially expected. The cherry on top was German IFO business climate, which tumbled from 109.9 to 106.9 on Expectations of 109.4 print, as the European crisis is finally starting to drag the German economy down, or as Goldman classifies it, "a clear loss in momentum." What does it all add up to? Why nothing but a massive surge in risk, as the market's entire future is now once again in the hands of the #POMOList, pardon, the central banks: unless the ECB steps up, Europe will implode due to not only political but economic tensions at this point. Sadly, as in the US, by frontrunning this event, the markets make it more improbable, thus setting itself up for an even bigger drop the next time there is no validation of an intervention rumor: after all recall what sent stocks up 1.5% yesterday - a completely false rumor of a deposit insurance proposal to come out of the European Summit. It didn't, but that didn't prevent markets to not only keep their massive end of day gains, but to add to them. it is officially: we have entered the summer doldrums, when bad is good, and horrible is miraculous.