Hungary

In an interview with Italian newspaper Milan Finanza on Saturday, JP Morgan CEO Jamie Dimon said that he could lose up to $5 billion from the firm's exposure to the PIIGS countries. As Reuters reports, "Dimon said the bank was exposed to the five countries (PIIGS) to the tune of around $15 billion. "We fear we could lose up to $5 billion ... We hope the worst won't happen, but even if it did happen, I wouldn't be pulling my hair out," he said. Dimon said Europe was the worst problem for the banking sector. "But the EU and euro are solid even if the states will have to be financially responsible and do all they can to develop common social policies," he said." While it is admirable of JPMorgan to disclose some of its dirty laundry, as this was a topic that received hardly any mention in the firm's prepared quarterly release, and is predicated surely by the fact that its Basel III Tier 1 Common of $122 billion dwarfs this possible impairment, there are some questions left open. Such as what happens if and when Greek CDS, now most likely before March 20, were triggered? And the logical follow up - what happens when Portugal, Ireland, Spain and Italy, and who knows who else (Hungary?) follow suit and decide that a coercive restructuring is actually not suicidal, even though it most certainly is once a given threshold is reached. In other words, how long can Europe tolerate the same two-tiered sovereign debt market that S&P warned about so explicitly yesterday? Finally what happens to JPM's Tier 1 Common when the European dominos impact not only the directly exposed PIIGS nations, and specifically their bonds, but all those other banks, insurance and reinsurance companies, whose current viability makes up the balance of JPM's remaining $117 billion in Tier 1? Because in its essence, stating that JPM is "fine" even if Europe were to collapse is analogous to Goldman telling Congress it would collect on its AIG CDS if and when the CDS market were to implode absent the government bailout of AIG, which itself was accountable for over $2 trillion of the entire CDS market itself.

All you need to read.

UPDATE: EURUSD at highs of day now 1.2790, sovereigns and corps/fins tightening back modestly

The ECB press conference has begun and immediately the headlines are flying and driving EUR weaker (ironically not helped by the dismal US macro data that just printed). European sovereign spreads are leaking wider, stocks are underperforming, treasuries outperforming bunds, and corporate and financial spreads are widening rapidly on his comments, via Bloomberg:

• *DRAGHI SAYS ECONOMIC OUTLOOK FACING SUBSTANTIAL DOWNSIDE RISKS
• *DRAGHI SAYS FISCAL COMPACT MUST HAVE UNAMBIGUOUS WORDING
• *DRAGHI SAYS FISCAL CONSOLIDATIONS ARE UNAVOIDABLE
• *DRAGHI SAYS ECB WILL ACT AS AGENT FOR EFSF
• *DRAGHI SAYS HARD DATA DON'T YET SHOW STABILIZATION
• *DRAGHI SAYS HILDEBRAND WAS `VERY, VERY GOOD' GOVERNOR
• *DRAGHI SAYS ECB DIDN'T DISCUSS CUTTING DEPOSIT, MARGINAL RATES
• *DRAGHI SAYS ONGOING TENSIONS KEEP DAMPING ECONOMIC ACTIVITY
• *DRAGHI SAYS ECB `VERY CONCERNED' ON HUNGARY
• *DRAGHI SAYS ANY WAY TO INCREASE THE 'FIREWALL' FIREPOWER WELCOME
• *DRAGHI: NATIONS SHOULD HAVE HAD CAPITAL READY ON STRESS TESTS
• *DRAGHI SAYS NEW COLLATERAL RULES EXPANDED POTENTIAL RISK
• *DRAGHI SAYS PSI WAS RESPONSE TO `SELFISH' BEHAVIOR
• *DRAGHI SAYS ECB EXPECTS SUBSTANTIAL DEMAND FOR SECOND LTRO
• *DRAGHI SAYS GREEK CASE IS `UNIQUE'

Over the past hour the EURUSD has tumbled by nearly 100 pips on what some believe is a liquidation program, but is largely driven off continued European data weakness (and with the recession here, we will be getting much more of this in the days to come), as well as continued scramble for safety. Germany auctioned off a 5 year note which received €9billion bids for €4billion target; the bund yield 2.3bps was indicative of a safe haven bid, and explains why bank deposits with the ECB rose to a new record €486billion. The strength is somewhat peculiar as it was earlier reported that the German economy contracted by 0.25 bps in Q4, which is never a good thing, but the assessment is that German weakness will hit others more than Germany itself. Elsewhere, Spanish industrial production declined -7.0% Y/y vs an estimated -5.4%, the worst decline since Oct. 2009. Spain 2-year yield down -34bps, causing spread to bunds to fall 33bps. We doubt that this contraction will last, or the BTP yield flirting with the 7% barrier especially after Rabobank finally noted what we have been saying for a while, namely that LCH will soon have to hike Italian margins again. In Greece, CPI rose 2.2% Y/y vs est. 2.7%; a decline which is seen as a symptom of economic downturn. Confirming the slowdown, we learn that Euroarea Q3 economic growth was reduced to 0.1%, meaning that the recession likely started in Q4. Hungary is again a center of attention, after the forint drops following an EU statement it may suspend Hungary funding (unless the country hands over its legislative apparatus to the EU entirely). Finally, we find out that French Fitch is now channeling France, after saying that the ECB must do more to prevent a cataclysmic Euro collapse. All this leads to a drop in the EUR to under 1.27, a slide in crude to under $102, and a decline in gold to $1634 after nearly hitting $1650 in overnight trading as the world realizes that a return in Chinese inflation (that SHCOMP surge isnt coming on its own) courtesy of a loose PBOC, will mean a prompt retrace of the metal's all time highs.

If there is any one more vivid confirmation of Mayer Rothschild words "Let me issue and control a nation's money and I care not who writes the laws" then we have yet to find it. Today Hungary, which had "valiantly" defied Europe and the IMF in ignoring pressure to make its central bank more "malleable" finally folded, following a recent explosion in its bond yields, a surge in CDS to records, and a collapse in its currency. And to think how easy it is to subjugate a state to slave status in our "globalized" days without shedding one drop of blood. Reuters reports: "Hungary's government is ready to consider modifying disputed legislation if the European Commission deems it necessary, Foreign Minister Janos Martonyi told the bloc's executive and European Union partners. "We fully respect the authority of the European Commission, the guardian of the EU treaties," Martonyi wrote in a letter dated January 6 and published by his ministry on Tuesday. "We stand ready to consider changing legislation, if necessary."" As Rothschild foresaw so effectively over 200 years ago, selling out your sovereignty only takes a few pieces of (paper) silver.

• SEC calls for detail on debt exposure (FT)
• Calls for US taxpayers to bear housing (FT)
• Beijing Sets Meek Tone on Reform to Banking Sector Amid Uncertainty (WSJ)
• Merkel, Sarkozy to seek growth, jobs for euro zone (Reuters)
• UK leaves door open for cash to IMF (FT)
• Hungary Runs Out of Options in Row With IMF (Bloomberg)
• Monti Says No More Budget Cutting Needed to Balance Italian Budget by 2013 (Bloomberg)
• China to maintain 'prudent' monetary policy (China Daily)
• Regional free trade talks in the pipeline (China Daily)

Can Austerity Work?

The meeting between Merkel and Sarkozy on Monday is likely to be the main focus of next week, as well as continued debate of the Greek PSI. Overall, this process is likely to push the EUR lower in the next couple of weeks, while the missing details for better fiscal policy coordination are getting negotiated. On the macro side, IP in Germany will have slowed by 0.2% mom in November and consensus expects the aggregate Euro-zone IP to have contracted by the same amount. But we also get November IP in many other places, including the UK and India. Already released over the weekend, Chinese money supply data has been stronger than expected and the amount of new loans issues in December is clear evidence of policy easing.

I go schizoid.

Brief and concise summary of the week's key bullish and bearish events.

If there was one analogy for the failing artificial Eurozone system we had not heard so far, was one comparing it to Hogwarts (thank you Harry Potter). Now, courtesy of Tullet Prebon that is no longer the case: "Albus Mario Dumbledore and Harry Constancio Potter are due to assemble next Thursday for the next episode of the sovereign Voldemort saga. It is foretold that during the press conference the headmaster will unveil his wand and deliver an almighty spell, ‘Expelliarmus Debtus’, whereupon the dreaded Troika Dementors will be vaporised disappearing into the austerity vortex, leaving the Muggles to live happily ever after."

Fitch joins the Hungary "junking" parade, which centers around the country's former unwillingness to yield to the banking cartel regarding its central bank, which as of today is no longer the case: "The downgrade of Hungary's ratings reflects further deterioration in the country's fiscal and external financing environment and growth outlook, caused in part by further unorthodox economic policies which are undermining investor confidence and complicating the agreement of a new IMF/EU deal."

• So very encouraging - IMF's Lagarde: euro likely to survive 2012 (Reuters)
• Drop Greek bond plan, urges ECB council member (FT)
• Soros says EU break-up would be catastrophic (Reuters)
• Japanese Banks Get 'Stress Tests' (WSJ)
• Hungary Pledges Compromise on IMF Loan (Bloomberg)
• Confidence in London property falls (FT)
• Fed nears an adoption of an inflation target as Bernanke pushes transparency (Bloomberg)
• Seoul and Tokyo seek to ease Iran oil ties (FT)

According to Bloomberg's First Word Cross Asset Dashboard, sentiment rose modestly in European session and into U.S. open, with EU and U.S. equity indexes as well as Bunds and Treasury yields modestly higher, Bloomberg analyst TJ Marta writes in following note:

• Payrolls est. 155k; market possibly expecting upside surprise after yesterday’s ADP 325k vs est. 178k
• After most Asia equity indexes fell moderately, EU equity indexes, U.S. futures modestly higher; S&P futures +0.7%
• Treasury yields modestly higher ~1bps; Bund yields modestly to significantly higher, led by 2-yr +3.6bps
• FX, commodities, EU sovereign yield to Bund spreads mixed in mostly modest ranges
• In Europe, Hungarian bonds jumped by the most in 6 weeks following hope that talks between the Premier, Central Bank Chief and Ministers would resolve the IMF rescue impasse. The meeting was concluded with Orban saying that Hungary wants IMF aid and is ready to support central bank - in other words Hungary just caved to the banking status quo. CDS declined modestly from all time records.
• Germany November factory orders collapsed by 4.8%, on expectations of a 1.8% drop - biggest drop since September 2008 - the recession has now firmly moved into the core.
• ECB deposit facility usage rose to a new record of €455.3 billion.
• Liquidity conditions are measured by Swap Spreads improved modestly, and are now at early November levels: the 3M EURUSD basis swap rose 6.8 bps to -102.25, highest since November 7; the 3M Euribor/OIS dropped to 0.93, lowest since November 25

Less than a week after a fully failed 3 Year Hungarian bond auction (in which all bids were rejected by the government) sent Hungarian yields surging on December 29, things have gone from bad to worse culminating with today's 1 Year Bill auction which sold just HUF 35 billion ($140 million) in 1 year bills at a staggering 9.96%, a surge of over 2% compared to the yield for the same maturity debt sold just on December 22. To say that this is unsustainable is an understatement. Alas, with the IMF and EU out of the bailout picture following Hungary's refusal to yield to demands to make its central bank a puppet of the state, ironically categorized by Europe as concerns of central bank "independence" it is likely that Hungary will see far more pain in the coming days as the ECB is certainly not going to be buying Hungarian debt - after all it has its hands full already with those other collapsing Eurozone countries. And punctuating the new year comfort are Hungarian CDS levels which just soared to new records over 750 bps. It is only a matter of time before ISDA decrees that any and every Hungarian default event will be fully voluntary thereby collapsing this latest default protection house of cards.