Update: The official and black-market Peso has collapsed further today to new record lows.
It is actually quite sad to watch the continued downfall of Argentina's economy under the inept ministrations of its government. The only good thing that can possibly come from this is that it will set yet another example for others so they may avoid making similar mistakes. Unfortunately the example is being set on the backs of the country's citizens, who are seemingly forced to live from crisis to crisis. Politicians rarely pay the price for their atrocious policies, and we are quite sure Ms. Kirchner and her cronies have feathered their nests in ways the average citizen cannot even dream of (most recently, corruption allegations have caught up with Ms. Kirchner's vice president. Rampant government corruption has long been a hot topic in Argentina under Ms. Kirchner's rule). It is not as though Argentina didn't have great potential. If only politicians would leave its economy alone and stopped inflating the currency into oblivion, the country could easily and quickly regain its former prosperity.
With the impasse over the latest Argentina default going nowhere fast, late last night president Kirchner stunned its creditors when she announced what amounts to a cramdown plan for holdouts, in which all bonds would be stripped of their existing indentures and converted to local law bonds. Or, as some would call it, a "scorched earth" transaction that burns all bridges, and goodwill, with the international creditor community and likely leaves Argentina unable to access global capital markets for the foreseeable future.
This week's US data onslaught begins today, with the ADP private payroll report first on deck (Exp. 230K, down from 281K), followed by the number of the day, Q2 GDP, which after Q1's abysmal -2.9%, is expected to increase 3%. Anything less and in the first half the US economy will have contracted, something the purists could claim is equivalent to a recession. The whisper numbers are to the downside since consumption and trade never caught up and the only variable is inventory as well as Obamacare, whose impact was $40 billion "contribution" in Q1 was entirely eliminated and instead led to a deduction, something we expect will be reversed into Q2. Following the backward looking GDP (which will be ignored by the sellside penguins if it is bad and praised if good) at 2:00 pm Yellen Capital LLC comes out with a correction on her call to short social networking stocks, as well as admit once again that the "data-driven" Fed really has no idea what it is doing and how it will tighten, but that tightening is imminent and another $10 billion taper to QE will take place ahead of a full phase out in October. Joking aside, the Fed is expected not to do much if anything, which may be just the right time for Yellen to inject an aggressively hawkish note considering her inflation "noise" refuses to go away.
There has been little in term of tier 1 data releases to drive the price action so far in the overnight session which means participants focused on the upcoming US related risk events including the Fed, Q2 GDP and July Payrolls. This, combined with WSJ article by Fed’s Fisher who opined that the FOMC should consider tapering the reinvestment of maturing securities and begin shrinking the Fed’s balance sheet (note that Fisher’s opinion piece is written based on a speech he gave on July 16th) meant that USTs came under pressure overnight in Asia and in Europe this morning. There has been little notable equity futures action (for now: the USDJPY algo team gave it a good ramp attempt just before Europe open, and will repeat just around the US open despite Standard Chartered major cut to its USDJPY forecast from 110 to 106 overnight), although we expect that to change since today is the day when Tuesday frontrunning takes place with full force. We expect equities to completely ignore the ongoing deterioration in Ukraine and the imminent release of EU's own sanctions against Russia, as well as what is now shaping up as an Argentina default on July 30.
Day after day, headlines from Argentina implore Judge Griesa to do the "fair, responsible" thing and lift his judgment that holdouts get paid before current bondholders receive their payments... and day after day Argentina's demands are met with silence or denials. Today, though, with 1 week left until Argentina must put up or shut up, Judge Griesa has come out swinging...
*U.S. JUDGE SAYS OF ARGENTINA RULINGS: 'JUDGMENTS ARE JUDGMENTS'; ARGENTINA'S 'INCENDIARY` RHETORIC `UNFORTUNATE,'
*U.S. JUDGE URGES 'SENSIBLE STEPS' TO AVOID ARGENTINA DEFAULT
While CDS spreads have surged once again, bonds trade with default probabilities around only 50% which, according to Jefferies "are expensive on underestimating the risk of default."
The Argentina default battle is in its final fortnight, with a July 30 grace period expiration looming, one which would result in a second bankruptcy in 13 years to formally be written down in the history books, and which could spoil the serene glow all global capital markets have found themselves in thanks to the central bankers' soothing words. As a result, Argentina has resorted to a last ditch strategy to ferret out the full list of holdout creditors (the hedge funds led by Elliott, Aurelius and various other known and unknown bondholders) as well as get a full list of the restructured bondholders (those who are perfectly happy to clip whatever coupon Argentina will pay them instead of seeing their payment stop altogether if and when CFK announces an official default). The logic behind the ruse: to circumvent the court and pay the restructured debtholders in the 11th hour.
Argentina's attempt to work around SCOTUS decision in favor of the 'holdouts' was rejected (under anti-evasion orders) last night leaving Argentina no alternative but to threaten to default on its debt. The government called it "impossible" to pay bond service due on June 30, because payment to holders of restructured bonds could not be made unless the 'holdouts' were paid $1.33 billion at the same time (and Argentina's economy minister argues could be up to $15 bn) which the distressed country clearly does not have. For the first time in 12 years, Argentina has agreed to negotiate with the 'holdouts' (has renegged on that negotiation) who refused to participate in two restructurings that followed Argentina's 2002 default but it seems increasingly likely that an even of default looms for Argentina. One good thing may come from the victory of the 'hold-outs': the government will find it difficult to rack up more debt.
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As reported yesterday, The SCOTUS dealt a major blow to Argentina hopes it would avoid making payments on its "holdout" bonds when it enforced a lower-court ruling that said Argentina can't make payments on its restructured debt unless it also pays holdout hedge funds headed by Elliott Management, best known for briefly seizing an Argentina ship in late 2012. The immediate result was a major rout in the country's sovereign bonds, which also sent Argentina CDS soaring. Sadly for Argentina, this would hardly be the end of it, and about an hour ago, Standard & Poor added insult to injury and lowered its long-term foreign currency rating on Argentina to CCC- from CCC+ citing a "higher risk of default on the country's foreign currency debt." As a result, yesterday's drop in bonds has continued, if at a more moderate pace, and the country's USD bond due 2024 hav continued to sink in intraday trading. So what is next for the cash-strapped Latin American country for which the road ahead is suddenly quite "challenging" and default appears increasing like the only way out? For the answer we go to Citi's Jeffrey Williams who has laid out the five most likely developments.
The years-long court battle over Argentina's sovereign debt default appears to have ended... badly for Argentina (and apparently well for Elliott Management). As WSJ reports, the U.S. Supreme Court on Monday rejected Argentina's appeal (and mutually assured destruction threats that it "could trigger a renewed economic catastrophe with severe consequences for millions of ordinary Argentine citizens."; leaving in place a lower-court ruling that said Argentina can't make payments on its restructured debt unless it also pays holdout hedge funds that refused to accept the country's debt-restructuring offers. Argentine USD bonds are down 10 points on the news ahead of President Cristina Fernandez addressing the nation at 9pm local time.
For all complaints about painful, unprecedented (f)austerity, the PIIGS (even those with restructured debt such as Greece) sure have no problems raking up debt at a record pace. Over the weekend, Spanish Expansion reported that Spanish official debt (ignoring the contingent liabilities) just hit a new record. "The debt of the whole general government reached 942.8 billion euros in the second quarter, representing an increase of 17.1% compared to the same period last year. Debt to GDP of 92.2% exceeds the limit set by the government for 2013..." Moments ago, it was Italy's turn to show that with employment still plunging, the only thing rising in Europe is total debt. From Reuters, which cites a draft Treasury document it just obtained: "Italy's public debt will rise next year to a new record of 132.2 percent of output, up from a previous forecast of 129.0 percent."
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The ongoing debacle surrounding Argentina's holdout over holdouts appears to be escalating (in rhetoric at least) once again. As Reuters notes, negotiations or voluntary payment by Fernandez's government appear almost impossible. Economy Minister Hernan Lorenzino called Griesa's ruling "a kind of judicial colonialism". "The only thing left is for Griesa to order them to send in the (U.S. Navy's) Fifth Fleet," Lorenzino told reporters, outlining Argentina's plans to file an appeal against Griesa's ruling with the 2nd Circuit Court of Appeals in New York on Monday. Many specialists think it unlikely that the appeals court will reinstate the stay. "It may be an issue of process, but Argentina will struggle to justify why it refuses to pay the $1.3 billion," Eurasia Group analyst Daniel Kerner wrote last week. "Argentina has the resources to meet the payment, so in the end it will be a political decision (and) there does not seem to be any political support for paying the holdouts at all." The Argentina case surely brings into clear view the murkiness of investing in sovereign debt and the increasing difference between ability-to-pay and willingness-to-pay.
Just like Rome wasn’t built in a day, the Eurozone won’t be destroyed in a day, but it is on a path that leads to eventual dismantling. This week we will see everyone play nice. Conciliatory words will be spoken. Growth will become the topic de jour. The markets will fall all over themselves once again on news of bank bailouts. The headlines we get in the early part of this week will once again be overwhelmingly designed to encourage people and the markets. Europe will have a new spirit of co-operation and will welcome fresh insights into the process. Growth, growth pacts, plans to grow, infrastructure growth, etc., will be talked about. There will be talk, and maybe even action on the bank recapitalization efforts. Good banks and bad banks will abound. Governments will promise money to banks at rates so low no sane investor would even consider. Ultimately these plans will fail, and we will see fresh lows on the year for stocks, with the U.S. and Germany hit hardest as justifying further bailouts for the core will be nigh on impossible, growth is not easy to achieve, and the good-bank-bad-bank model is a loser from the start.
Going into the US open, European equity markets have carried across some risk appetite from last night’s Wall Street news that 15 out of 19 major US banks had passed the Fed’s stress test scenarios. This risk appetite is evident in Europe today with financials outperforming all other sectors, currently up over 2%. Data released so far today has been relatively uneventful, with Eurozone CPI coming in alongside expectations and Industrial Production just below the expected reading for January. Taking a look at the energy complex, WTI and Brent crude futures are seen on a slight downwards trajectory so far in session following some overnight comments from China, highlighting the imbalance in the Chinese property market, dampening future demand for oil. Looking ahead in the session, the DOE crude oil inventories will shed further light on the current standing of US energy inventories.