Spain is holding out for a better bailout deal. Spanish banks need an estimated €40 billion but will likely need much more than that. (see definition of ‘recipriversexcluson’) The ECB wants to lend the money to Spain so that it can then bailout it’s own banks but Spain wants the ECB to lend the money directly to the Spanish banks, in this way the ‘loan’ is not a Spanish sovereign liability but a liability of the banks themselves. The ECB, correctly, perceive that those Spanish banks don’t have an assured future even with a bailout, whereas, the country of Spain is unlikely to disappear from the map of Europe anytime soon, and they have a better chance of getting their money bank from Spain than if they bailed out the banks directly. This issue is at the heart of the negotiations which have taken place over the last week and look set to be concuded by teleconference this afternoon. I’ve written above that it’s the ECB negotiating with Spain but in reality it’s Germany and some other Northern Eurozone countries who are driving the ECB position.
All this wrangling appears rather interesting if you happen to be a Greek trying to decide who to vote for in the upcoming Greek election.
Société Générale head of foreign exchange research Kit Juckes on the US dollar dynamic, QE 3, 4, and 5, "even lower rates for even longer than you thought," and the Bank of Japan slowly learning to match policies with the Fed.
First we got Spain miraculously announcing late at night local time, but certainly after close of market US time, that the bailout so many algorithms had taken for granted in ramping stocks into the close may not be coming, because, picture this, Germany may have conditions when bailing the broke country's banks out, and Spain is just not cool with that, and now, after the close of FX and futures trading, we get Moody's giving us the warning the after Egan-Jones, S&P, and Fitch, it is now its turn to cut the Spanish A3 rating."As Spain moves closer to the need for direct external support from its European partners, the increased risk to the country's creditors may prompt further rating actions. The official estimates of recapitalising Spain's banking system have risen significantly and the country's indirect reliance on European Central Bank (ECB) funding via its banks has been growing. Moody's is assessing the implications of these increased pressures and will take any rating actions necessary to reflect the risk to Spanish government creditors. Moody's rating on Spain is currently A3 with a negative outlook." Moody's also warns, what everyone has known for about 2 years now, that Italy could be next: "However, Spain's banking problem is largely specific to the country and is not likely to be a major source of contagion to other euro area countries, except for Italy, which likewise has a growing funding reliance on the ECB through its banks." Of course none of this is unexpected. What will be, however, to the market, is when all 3 rating agencies have Spain at BBB+ or below, which as ZH first pointed out at the end of April will result in a 5% increase in repo haircuts on Spanish Government Bonds, resulting in yet another epic collateral squeeze for the country which already is forced to pledge Spiderman towels to the central bank.
"The next stage in the crisis will be blatant blackmail....
With their refusal to accept money from the bailout fund to recapitalize their banks, the Spanish are not far from causing the entire system to explode. They clearly figure that the Germans will lose their nerve and agree to rehabilitate their banks for them without demanding any guarantee in return that things will take a lasting turn for the better."
The biggest news this morning is the talk that Spain's Rajoy will discuss 'how to shore up' his banking system with the EU officials this weekend. As SocGen noted earlier, EURUSD managed a 30 pip bounce and then promptly sold off - 'That says it all really'. A 'bailout' of Spanish banks poses a lot more questions than it answers. Specifically that this crisis began with Greece and now has spread to Spain. Will the focus move on again? The market believes that European officials have yet to put in place contingencies that will stem contagion and stress on other European countries. Hence the anemic response from currencies. What is clear is that Greece, and now Spain, have set the dismal example for their peers: 'Crush the banks, then get bailed out' which leaves only one course of action it seems, banks will be shorting themselves to force action from their overlords in Berlin and Brussels. If we get a risk-on bounce in Italian banks, on any weekend 'interim' resolution for Spanish banks, then shorting into that strength seems more than appropriate (or long credit, short equity as burdens are shared).
Perhaps some novel solution is found but this is not the muddling along kind of thing at all. This is the changing of charters kind of thing, the changing of national banking regulations kind of thing; the ceding of power to Europe kind of thing and anyone who thinks that this can all be accomplished in a matter of days is out having tea with Cinderella’ fairy godmother. Yet equities have rallied and bond spreads stopped widening on just this kind of hope but I predict that this will all be short-lived because, on its face, it is irrational. There is nothing wrong with having hopes and prayers but to base investment decisions on irrational interventions of some Divine power where there is not even a door for the Divinity to enter is just poor judgment by this name or any other you may concoct. It is no longer a case of “Risk on/Risk off” but of “Reality on/Reality off” and I advise you to keep pressing the “Reality on” button!
Fitch Follows S&P, Slashes Spain By 3 Notches To BBB, Only Moody Is Left - Step 3 Collateral Downgrade ImminentSubmitted by Tyler Durden on 06/07/2012 11:48 -0500
First it Egan-Jones (of course). Then S&P. Now Fitch (which sees the Spanish bank recap burden between €60 and a massive €100 billion!) joins the downgrade party of rating agencies that have Spain at a sub-A rating. Only Moody's is left. What happens when Moody's also cuts Spain from its current cuspy A3 rating to sub-A? Bad things: as we explained on April 30, when everyone has Spain at BBB or less...
China Cut Their Rates for First Time Since '08 & we all know what happened in 2008, right? As the momentum drivenvtrades ramped markets I placed Armageddon put (way OTM, material time value) puts on throughout the morning - for literally pennies
The pending three-day rally that has seen European and US markets soar smacks of a short-covering squeeze, notes UBS' Art Cashin, as some of the biggest percentage gains came in the most heavily shorted stocks. While this is hardly surprising in this increasingly schizophrenic economy market, it is the long-term consistency and prophetic consternation of Margaret Thatcher's view of the Euro as "perhaps the greatest folly of the modern era" that sits uncomfortably with the Merkel comment-driven rally of this morning (for now).
Central bank gold demand remains robust as central banks continue to diversify out of the euro and the dollar. Further central bank demand is confirmed in the news this morning that Kazakhstan plans to raise the share of gold in its international reserves from 12% to 15%. So announced central bank Deputy Chairman Bisengaly Tadzhiyakov to reporters today in the capital, Astana. “We’ve already signed contracts for 22 tons,” Tadzhiyakov said. Bloomberg report that immediate-delivery gold was little changed at $1.620.41 an ounce at 10:50 a.m. in Moscow, valuing 22 metric tons of gold at about $1.2 billion. “The bank is ready to buy when suppliers are ready to sell,” Tadzhiyakov said. Kazakhstan said yesterday it will cut its holdings in the euro by a sixth. It was reported in the Reuters Global Gold Forum that the central bank buys all the gold produced in Kazakhstan and owned 98.19T at the end of April, according to the IMF's most recent international finance statistics report. Meanwhile, supply issues remain and South African gold production continues to plummet. South African gold production fell 12.8% in April from a year earlier, Juan -Pierre Terblanche, a spokesman for Statistics South Africa, told Bloomberg.
- China Cuts Interest Rates for First Time Since 2008 (Bloomberg)
- New Risk to Europe's Growth: Banks Cut Lending to Cities (WSJ)
- Labor Faces New Challenge - Losses in Wisconsin, California Come as Ranks of Government Unions Decline (WSJ)
- Yellen argues for more Fed easing amid Europe risk (Reuters)
- Americans Cling to Jobs as U.S. Workforce Dynamism Fades (Bloomberg)
- Japan’s LDP Agrees to Talks With Noda’s DPJ on Sales Tax (Bloomberg)
- Korean Buying Spree Boosts Brent Price (FT)
- China Delays Bank Capital Rule Tightening as Economy Slows (Bloomberg)
- China CIC Chief Sees Rising Risk of Euro Breakup (WSJ)
The video below is a great a preview of things to come in Greece. Per Bloomberg, Greek police on Thursday issued an arrest warrant for the spokesman of far-right party Golden Dawn for assaulting two left-wing politicians on live television. Ilias Kasidiaris was shown on a live morning show jumping out of his seat and slapping Communist Party member Liana Kanelli three times after throwing a glass of water at leftist SYRIZA party member Rena Dourou. Golden Dawn, which was elected for the first time to parliament in a May 6 election, is accused of carrying out violent attacks against immigrants. Surely, being captured on live national TV beating up women will do wonders for restoring the party's image as that encouraging pacifism and peaceful resolution of problems.
As noted earlier, Europe has been so obviously crippled by years of brutal austerity (which, as we pointed out before never actually happened), that it has had to experience the supreme indignity - a miserable two years of plunging flat GDP growth. Because under the old normal, it appears that unless one is issuing massive debt, pardon "growing", society grinds to a halt. Well, it appears that France has finally had enough, and as of today, "the French government approved a measure Wednesday that will lower the retirement age to 60 from 62 for a narrow group of workers, partly reversing unpopular pension reforms made by former President Nicolas Sarkozy as he sought to improve France's public finances." Obviously, this means that more welfare funding will have to be sourced as all else equal, this means less money will be produced by the country's workforce, and more money will be consumed by its retirees. Who will do it? Why German of course. Because after Merkel caved first on Greece, and then on Spain, it is now game over for German "prudence" and everyone will line up at the trough. Congrats Berlin: we can only hope you have discovered those magical money-growing trees. You will need them.
An uplifting story of austerity and growth at the edge of Eurozone mayhem.