Hubris is at the heart of this. Everyone says this cannot happen – we won’t allow it. Says who? The EU says: if it is written in an agreement, it must be totally correct, unchangeable, and followed at all costs. New realities can’t intervene and no slippage is allowed. Why the Germans are so sure that they know the future is beyond me. They are fallible too, but they won’t admit it, and the Greeks can’t make them budge. Haven’t they looked around? Santorini has a different economic and social cost structure than Wiesbaden. Humanity (and common sense) seems totally lacking in the negotiations with the Greeks and a violent backlash would be totally understandable. Why the countries that have been fattening up their current account surpluses selling products to Greeks, whom they should have known were basically broke – just as they always have been – should be paid 100% on the euro is beyond me. Major losses should apply not only to sovereign borrowings but also to accounts receivable for cars, electronics, and other consumer goods. The market has not opened its eyes to the impact this Greek unraveling will have. The Eurozone will be mortally wounded and the world will suffer a significant recession – maybe as deep as 2008. European banks will lose much of their capital base and many should be bankrupt, but just as in the Lehman aftermath, the governments will try to save the banks and the banks’ bondholders, solvent or not. As the bank appetite for Eurozone sovereign paper will be decimated, austerity will probably follow shortly, followed by deflation and uncontrollable money creation. The European recession should be one for the record books.
While these pages have been warning for about a month that a Greek default is precisely what Europe wants, a self-deluded market has been ignoring this reality. That is no longer the case as the default (pardon the pun) thought is now one of Greek default. As for the assumption that "it is all priced in"... that too is being scrapped as revisionist histories of Lehman come to mind. As a result the EURUSD is drifting ever lower, and has been trading with a 1.29 handle for the first time in weeks. Needless to say, Europe is on the verge of panic as the nearly 2-month impact of the LTRO is now truly gone, and with unmistakable stigma (sorry Jernej Omahen - read this) associated with LTRO banks, we shudder at the thought how many banks will voluntarily subject themselves to being seen as desperately needing European Discount Window access in two weeks. Moody's downgrade of key insurance companies and threat to cut most banks, has not helped. Finally, some unpleasant news out of China, where commerce ministry said that the trade outlook is "grim" while a research with the Chinese Academy of Sciences said that Chinese EFSF contribution should be capped at Spain's €92.6 billion, rounds out the rout. So while we wait patiently as reality in Europe truly seeps into risk prices, here is Bloomberg with a summary of overnight catalysts.
- Europe Demands More Greek Budget Controls in Bid to Forge Rescue (Bloomberg)
- Moody's Warns May Downgrade 17 Global Banks, Securities Firms (Reuters)
- Officials at Fed Split on More Bond Buys (Hilsenrath)
- Greek deal delays pressure periphery (Reuters)
- Talk, but No Action, to Break US Grip on World Bank Job (Reuters)
- Greek Rhetoric Turns Into Battle of Wills (FT)
- Greece Seeks Monday Bailout Deal, EU Questions Remain (Reuters)
- US Lawmakers Announce Payroll Tax-Cut Deal (Reuters)
- China Leader-In-Waiting Xi Woos and Warns US (Reuters)
- China's FDI falls 0.3% in Jan (Reuters)
Europe has moved into the “pound of flesh” stage of negotiations. Everyone just wants to make their point and the probability of a deal is dropping by the day. Europe is running out of time, and is just clueless. Yesterday has to confirm that even for the most optimistic person out there. They decided they should wait until the elections. Then they realized they had to deal with the March 20th bonds. Then they came up with a “bridge loan”. Clearly they didn’t bother to look up the definition of a bridge loan. A bridge loan is a loan that is meant to be temporary and has such punitive rates over time that the borrower is heavily encouraged to pay it back with new debt. This is just a “small” loan but one that is permanent and probably never getting paid back. I’m not sure if they asked the contributors whether they wanted to put up €16 billion which is somehow now “small”. Then noise came out that maybe Greece just shouldn’t have elections. The Troika and Greece have been negotiating all this time and no effort was spent on figuring out a plan in the event of default. They are scrambling to come up with one. I remain convinced that Greece could do well in default if it is managed properly, but the chances of them doing anything properly is low.
A&G's AIG Moment Approaching: Moody's Downgrades Generali, Cuts Megainsurer Allianz Outlook To NegativeSubmitted by Tyler Durden on 02/15/2012 20:58 -0400
For a while now we have said that the very weakest link in Europe is not the banks, not the ECB, not triggered CDS, and not even the shadow banking system (well, infinitely rehypothecated Greek bonds within a daisychain of broker-dealers, which ultimately ends up at the ECB at a negligible repo discount, that could well be the weakest link - we will have more to say about this over the weekend) but two very specific insurers: Italy's mega insurer Assecurazioni Generali, which at last check had more Greek bonds as a % of TSF than anyone else, and Europe's biggest insurer and Pimco parent, Allianz, which is filled to the gills with pretty much everything (for more on Generali, or as we like to call it by its CDS ticker ASSGEN read here, here, here, and here). Well, Moody's just gave them, and the entire European space, the evil eye, and soon the layering of margin calls upon margin calls, especially if and when Greece defaults and a third of ASSGEN's balance sheet is found to be insolvent, will make anyone who still is long CDS those two names rich. Assuming of course the Fed steps in and bails out the counterparty the CDS was purchased from.
Greek President (And Nazi Resistance Fighter) Lashes Out At "German Boot" For Pushing Country To The BrinkSubmitted by Tyler Durden on 02/15/2012 17:28 -0400
The following extract from a Bloomberg article suggests that the German mission of getting Greece to file for bankruptcy on its own, thus removing the perception that Europe has given up on the first (of many) terminal patient, own has almost succeeded. "Greek President Karolos Papoulias slammed Germany’s finance minister for recent comments about his country as stalled bailout talks stoked tensions between Greece and the northern European countries funding its rescue. “I don’t accept insults to my country by Mr. Schaeuble,” Papoulias, who fought in the resistance against the Nazis during World War II, said in a speech today. “I don’t accept it as a Greek. Who is Mr. Schaeuble to ridicule Greece? Who are the Dutch? Who are the Finns? We always had the pride to defend not just our own freedom, not just our own country, but the freedom of all of Europe."
Northern Europe to Greece: it’s over, baby....
What is better than a one-front European war on insolvency? Why two-fronts of course. But not before many "soothing" words are uttered (no really). From Reuters: "Portugal's international lenders arrived in Lisbon on Wednesday to review the country's bailout, with soothing words of support likely to dominate as Europe gropes for success stories to counteract its interminable Greek headache. As the euro zone's second weakest link, Portugal's ability to ride out its debt crisis will be key to Europe's claim that Greece is a unique case. Despite a groundswell of concerns that Portugal - like Greece - may eventually have to restructure its aid programme, the third inspection of Lisbon's economic performance in the context of its ongoing 78-billion-euro rescue should make that contention clear. "The review will be all about peace and harmony," said Filipe Garcia, head of Informacao de Mercados Financeiros consultants. "The important thing for Europe is to isolate Portugal from Greece, to put it out of Greece's way in case of a default or even an exit from the euro." That makes sense - after all even Venizelos just told Greece that the country is not Italy. And if that fails, the Don of bailouts, Dr Strangeschauble will just give the country will blessing to use a few billion in cash. Oh but wait. It can't. Because as as we pointed out in late January, and as the market has so conveniently chosen to forget, Portugal, unlike Greece, has simple, clean and efficient negative pledge language in its non-local law bonds. Which means "no can do" to any additional bailouts under its current capitalization. Which may very well mean that Portugal is stuck with its existing balance sheet unless the country succeeds in doing an exchange offer which takes out all UK- and other strong-protection bonds. All of them. And as Greece has shown, that is just not going to happen.
The EURUSD just went apeshit surging by 50 pips as the robots merely read the favorable tone in the headlines as released by Bloomberg, while completely missing the point that absolutely nothing is done yet. Here there are, via BBG:
- JUNKER SAYS SUBSTANTIAL FURTHER PROGRESS HAS BEEN MADE - EURUSD spikes 20 pips
- JUNCKER SAYS CONFIDENT EUROGROUP TO MAKE DECISIONS ON MONDAY -EURUSD unchanged
- JUNCKER SAYS TROIKA HAS PRESENTED DEBT SUSTAINABILITY REPORT - EURUSD spikes another 20 pips
- JUNCKER SAYS GREECE, TROIKA HAVE IDENTIFIED EXTRA BUDGET MOVES -EURUSD unchanged
- JUNCKER SAYS HE'S CONFIDENT OF FEB. 20 DECISIONS ON GREECE - it was supposed to be Feb 15 remember...
- JUNCKER SAYS GREECE SETS EU325 MLN IN EXTRA BUDGET MEASURES -EURUSD unchanged
- JUNCKER SAYS STRONG ASSURANCES FROM LEADERS OF 2 GREEK PARTIES - EURUSD says: "OOOPS"
And the one the robots have so far missed:
- JUNCKER SAYS FURTHER CONSIDERATIONS NEEDED ON SPECIFICS
Translating the last one: NOTHING HAS CHANGED!
As I Said Was Guaranteed To Happen Two Years Ago: Greece = Kaboom! But Now Many Misunderstand The ConsequencesSubmitted by Reggie Middleton on 02/15/2012 13:45 -0400
The complacency of the markets is amazing given the risks at hand. I don't think I'm that smart, so is it that so many others are that stupid? It can't be, can it?
Remember that Lehman week? What happened to volatility and the market? Similarities to 2008 and Lehman Brothers? Yes.Submitted by thetrader on 02/15/2012 12:30 -0400
Equity markets are dislocating from credit and volatility risk. "Real " risk markets suggest something bigger could be happening sooner than later. We see some similarities to the famous 2008 Lehman week.
UBS' economics research group do not believe that Greece is saved but hope that it is at best ring-fenced. In an excellent Q&A follow up, Stephane Deo and his team address the role of the EFSF, the IMF package and its austerity measures, the ECB's participation, and finally the likelihood of the PSI being successful and its fallout. As Greek 2Y yields break 200% (obviously price is the critical part but these yields are stupendous) and bridge loan discussions appear for the March 20th maturity, perhaps UBS view of the IMF 'walking away' is more credible if they manage to ring-fence a recap of the banking sector. We would be surprised if contagion was contained and, as we have seen before, that risk leaks out somewhere and unintended consequences (or unknown unknowns) tend to pop up just when we least expect them. Perhaps the FT's note this morning (which incidentally confirms the everything that Zero Hedge warned about almost a month earlier) that deadlines are slipping rapidly is the bright yellow canary in the Piraeus coal-mine as 'time is running out' for a solution here very quickly (as seemingly is the desire).
Outspoken and oracular MEP Nigel Farage bombards his fellow unelected officials with 'you can't handle the truth' comments as he points out the total contradiction that is the European Parliament's (and 'Puppet Papademos') view of how things are going in their democracy relative to the reality of a TROIKA-ordered coup forced on the man in the street. Greece is being driven further and further into chaos and as he implores his peers: "If they don't get the Drachma back, you will be responsible for something truly truly horrible!".
S&P futures have moved more than 20 points since 3:30. The first big move was on the back of a story that Greece really will commit to the whatever the EU demands. The second move was after China re-pledged to invest in Europe. IG17 is about 1.5 bps tighter than the wides of the day and is unchanged this morning. In Europe, Main is unchanged while stocks are up about 1% across the board. Even the 10 year bond which saw yields drop from 1.98% to a low of 1.92% are only back to 1.94%. Why? Sentiment seems overly bullish, overly complacent, and the credit markets are sending a warning sign to stocks about irrational exuberance.
While the pathetic lunatics and kleptocrats in Europe debate just who wants Greece to default more, gold has had enough of the endless BS. And while one would think that the plunge in the EUR, and the resultant surge in the USD would push gold lower. Wrong. After all a strong dollar means weak gold, conventional wisdom says. Apparently a continent on the verge of dissolution is gold beneficial. Strange.