International Monetary Fund
In what will assuredly be the punchline to many jokes over the course of the next few weeks, The Irish Times is reporting tonight that the Central Bank of Greece sought the advice of the Central Bank of Ireland in July and early August "to share experiences gained". We can only assume it was the double-bluff of figuring out what really didn't work since from what we have seen in the last few years, Ireland's decision to backstop/guarantee the entire Irish banking system during the crisis was perhaps what drove them into the mess they find themselves in today. While nothing surprises us with European (and indeed global) central bankers and politicians, this is perhaps the most astounding evidence of blind-leading-the-blind we have seen, especially given the focus on the stress tests which were wildly inaccurate at best in Ireland's expectations of capital/costs required.
This pace of Corporate Profit expansion has now kept up for 10 straight quarters as Government Bail-Outs go straight into the vaults, completely bypassing any possible benefit to US workers.
And 9:55 am update in which Mantega responds to Valor (and ZH):
- MANTEGA SAYS BRAZIL ISN'T PREPARING ANY MEASURE
So far the only strategic use of "unnamed government officials" has been to leak rumors, whose sole purpose is to test the market's short covering squeeze potential and to discover just how long the half-life of one after another ever more incredulous rumor is. And since the only thing to come out of Europe in the past month in terms of problem resolution (no really: there has not been one policy that has been enacted since the July 21 Greek bailout), this is a useful strategy. Alas, as Europe is about to find out, this works both ways, because as Brazilian financial site Valor Economic reports, none other than perpetual optimist Brazil, the same country that is supposedly according to one set of rumors preparing to bail out all of Europe, with or without the rest of the BRICs, is now preparing for a Greek default within the week. From Valor: "Something must happen. Greece is a few days [from bankruptcy]" said a high official source.
All the markets continue to bask in the glow of the new improved EFSF. From a low of 1115, the S&P futures are now trading at 1175. A pretty impressive 5% move. Stocks in Europe are doing even better and credit is following along. By now I would have hoped to see some details of this alleged new beast that EFSF has morphed into. While I search for detail all I could see, so far, are denials by Germany and Spain, some support from Austria, and additional rumors of what is to come. Every European politician outside of Germany can say this is a great idea, but if the money man doesn’t go along, is there really a deal? This isn’t a democracy, and only Germany controls German money. There was a brief headline that this new plan could cause S&P to downgrade Germany and France. As a back-up plan, there is talk about letting the EIB do the heavy lifting. Just in case the world wasn’t already controlled by enough 3 letter entities, welcome the EIB to the IMF, ECB, and FED party.
- A European official said a detailed plan is being worked on leveraging EFSF money with the plan using some EFSF money to shore up bank capital.
- The Austrian finance minister said Euro-zone officials are to discuss the EFSF leveraging plan on Monday
- German Chancellor Merkel says we are not prepared to implement further stimulus programmes.
- Confirmation of the EFSF leveraging talks sparked outrage in Germany, where opposition politicians threatened to derail the plans by voting against a key amendment to the bail-out fund this Thursday.
Negligible Demand For Spanish Treasury Bills Leads To Plunge In Auction Bid To Cover From 7.62 To 2.47 In One MonthSubmitted by Tyler Durden on 09/27/2011 05:53 -0400
While Europe continues to bask in the very transitory glow of a rumor driven respite from the now daily collapse, the funding costs rise. And the market is not happy, as confirmed by the just complete Spanish auction of E3.2 billion (E3.5 billion had been targetted) in 77 and 175 Day bills, which were, for all intents and purposes, failures. Summarizing, E1.6b of 77-day bills were sold at an average yield of 1.692% compared to 1.357% on Aug. 23. The Bid-to-cover plunged to a paltry 2.47 compared to a solidly overbooked 7.62 at the last sale. The last six auction average was 1.41% for the interest and 6.46 for bid-to-cover. Spain also sold E1.6 billion 175-day bills at an average yield of 2.665%, half a percent higher compared to the August 23 auction where the country could still raise debt at a cheap 2.187%. Bid-to-cover 3.95 vs 3.60 at last sale. And since this paper has to roll constantly (or between 2 and 6 months), any transitory interest benefits have now been lost and the vicious circle of deteriorating funding will continue to impact short-term debt raises by Spain, which in turn will force primary interest rates to raise again and so ad inf.
UBS' Euro Doom And Gloom Team Releases Sequel: "The Eurozone Sovereign Crisis Has Entered A More Dangerous Phase"Submitted by Tyler Durden on 09/26/2011 19:39 -0400
From the same fine Swiss folks who three weeks ago (and before it was uncovered that when it comes to playing, or at least scapegoating, dangerously, UBS is second to none) brought you, "Under the current structure and with the current membership, the Euro does not work. Either the current structure will have to change, or the current membership will have to change," comes the sequel: "We believe the Eurozone sovereign crisis has entered a more dangerous phase. Financial and banking stresses are plainly evident as concerns about sovereign default grow. Notwithstanding signs from Washington this past weekend that European and world leaders are willing to consider more decisive policies, concrete steps remain elusive. Yet rising uncertainty threatens an already weakened world economy." The Swiss Bank's conclusions? "First, Europe’s politicians and policy makers must do more to shore up the Eurozone and investor confidence more generally. Among others, that probably includes stronger capital buffers in the banking sector, an expanded EFSF/ESM to finance bank recapitalization and support Eurozone bond markets, and further fiscal austerity in ‘at-risk’ Eurozone countries. But these are big asks of Europe’s ‘political economy’. Hence, the second conclusion: The likelihood is that the crisis will intensify before policy can deliver what is required." Reality 1: Strange little "source" voices inside the heads of chief economists of financial comedy cable channels: 0.
"We're Going To Need A Bigger Flowchart": Presenting The Schematic Of Part 1 Of The European EndgameSubmitted by Tyler Durden on 09/26/2011 15:36 -0400
Still confused by the doomed endgame in the 21st century Greek tragedy? Have no fear: here is the BBC (which today is two out of two for useful information)with a flowchart of Greek endgame. With apologies to the optimists, who think there may be a happy ending here, here are the only 5 possible outcomes: 1) Pyrrhic Victory; 2) Depression; 3) Moral Hazard; 4) Political Turmoil and 5) Global Meltdown. In this context, it becomes all too obvious why stocks are surging...
- ECB said to debate new 12-month loans at the October 6th policy meeting where they may discuss a rate cut
- EU may speed up ESM enactment to stem the crisis with Euro aides discussing setting up the fund in 2012 a year early.
- German IFO data higher than expected on all three readings
- CME raises margin requirements for longest dated T-Bond futures by 20%
Goldman Recaps Germany's Eurozone Stance On The Eve Of Thursday's Critical, And Much Despised, EFSF Expansion VoteSubmitted by Tyler Durden on 09/26/2011 04:45 -0400
While we shared our brief summary of last night's lengthy ARD 1 interview with Angela Merkel, the Chancellor's views bear repeating since we are now just 4 days away from the critical EFSF expansion ratification vote to be held this Thursday in Germany. While expectations are for a prompt passage the downside, as improbable as it appears, bears some attention. Here is Goldman's Dirk Schumacher with a summary of what to expect this week out of Germany.
Key FX Market Events In The Coming Week: Grand Plan In Europe, Asian Intervention And Broader USD StrengthSubmitted by Tyler Durden on 09/26/2011 02:41 -0400
In the upcoming week, debate and speculation about any “grand” Eurozone plan will certainly dominate FX markets and risk sentiment. Goldman is cautious. On one hand, it continues to believe that USD downside pressures remain the dominating medium trend in FX, and hence the current rise in risk premia creates attractive opportunities to position for renewed US weakness. On the other, it still sees plenty of Eurozone headline risk. For example, the tug-of-war over the next Greek tranche will likely continue for at least another 10 days. And important parliamentary votes are still outstanding in a number of EMU nations, in particular those with unclear majorities to implement the enhanced EFSF.
Against a background of 30%-plus falls in bank share prices around the world and growing fears of a severe blow to the European bank sector in the event of a sovereign debt default, Deutsche Bank has produced a lengthy tome that answers 'everything you wanted to know about the global banking sector but were afraid to ask'. A compendium of charts and tables, summarized effectively by 'Danger Maps' designed to highlight countries which face greater (or lesser) stresses for their banking systems is further extended into a country-by-country breakdown for developed and emerging markets. While their findings may not line up perfectly with our more global contagion perspective, they do create a systematic framework for judging relative investment opportunities that sees Japan, Australia, Hong Kong, and the Nordics as the least risky; US and UK about average on macro scores; while unsurprisingly (with the exception of Germany) the Eurozone countries have the highest danger scores. Transmission channels are discussed and they make a critical point on bank valuations that earnings estimates are extremely sensitive now to bad debt charges and credit quality assumptions. We then point out their more trading-focused (and negative stance) on European banks citing long-term funding, short-term liquidity, and capitalization as enormous systemic hurdles to anything other than short-term compressions.
Berlusconi Main Squeeze Merkel Sends Mixed Messages: Says Eurozone Insolvency Is Possible But Greek Default Would Be Comparable To LehmanSubmitted by Tyler Durden on 09/25/2011 16:42 -0400
In a surprisingly candid yet traditionally schizophrenic interview on ARD 1 show GuntherJauch, Angela Merkel once again sent the same mixed messages that have forced Berlusconi to smile to her face while saying less than flattering things, ahem, behind (no punt intended) her. While on one hand she said that default is an option under the post-2013 Euro rescue fund and emphasized that a euro-area sovereign insolvency can not be ruled out, she also made it clear that Europe continues to have no Plan B. According to Reuters, "allowing Greece to default on its debt now would destroy investor confidence in the euro zone and might spark contagion like that experienced after the bankruptcy of Lehman Brothers in 2008, German Chancellor Angela Merkel said on Sunday." Obviously this is not new, and our humble interpretation is to continue to telegraph to the market how unstable the Eurozone is so there are very little expectations and more EUR short squeezes can be accomplished, as well as not pricing in anticipation that emergency liquidity conduits, currently being implemented, actually succeed in case they actually do. Of course, should Europe really succeed in ejecting Greece without Europe imploding which is the interim end game here that would certainly send the EURUSD to well over 1.50. Alas, we put chances of that happening at about 1%.