Those who have been correct about the crisis in recent years question whether a new Greek government will stick to the deeply unpopular program after elections due in April and believe Athens could again fall behind in implementation, prompting lenders to pull the plug once the eurozone has stronger financial firewalls in place. The much used phrase "kicking the can down the road" underestimates the risks being created by European and international policy makers. Some have rightly warned that we will likely soon run out of road. Rather than "kicking the can down the road" what politicians in Europe, in the U.S. and internationally are actually doing is "kicking a giant beer keg down the road". The giant beer keg is the continual resort to cheap money in the form of ultra loose monetary policies, QE1, QE2, QE3 etc, money printing and electronic money creation on a scale never seen before in history. The road is our modern international financial and monetary system. The risk is that attempting to kick the giant beer keg down the road will lead to many broken feet and a destroyed road. A European, US, Japanese and increasingly global debt crisis will not be solved by creating more debt and making taxpayers pay odious debts incurred through massively irresponsible lending practices of international banks. The likelihood of continuing massive liquidity injections by the ECB next week and in the coming weeks will help keep the opportunity cost of holding bullion the lowest it has ever been and likely contribute to higher bullion prices especially in euro terms in the coming months.
Yeah, we had the same response as our readers when we saw that freak move in the EURUSD. Apparently, despite the fact that absolutely nothing has been resolved, Reuters just ran a headline that "Euro zone reaches deal on second Greek bailout package." And that is all it took for the EURUSD headline scanning algos to surge by 60 100 pips. That there nothing substantial in it, or that this is merely a rephrasing of the actual Bailout 2 announcement from before, is irrelevant. Here is what the actual Reuters report said.
The first details of the Greek bond deal are leaking out via Reuters, and we now learn the reason for the Greek bond sell off in recent days:
- UNDER GREEK DEBT SWAP, PRIVATE SECTOR WILL GET 3% COUPON ON BONDS FROM 2012-20, 3.75% COUPON FROM 2021 ONWARDS [2021... LOL]
- PRIVATE SECTOR WILL ALSO GET A GDP-LINKED ADDITIONAL PAYMENT, CAPPED AT 1 PCT OF THE OUTSTANDING AMOUNT OF NEW BONDS [If it appears that nobody gives a rat's ass about this bullet point, it's because it's true]
- GREEK BANK RECAPITALISATION NEEDS MAY NOW BE AS MUCH AS 50 BLN EUROS-DEBT SUSTAINABILITY ANALYSIS
Which in turn explains the sell off in pre-petition Greek junior triple subordinated bonds (i.e., those held by private unconnected investors, which are subordinated to the Troika's bailout loans, to the ECB's SMP purchases, to the Public Sector bonds and to UK-law bonds in that order). With the EFSF Bill "sweetener" amounting to about 15 cents (and likely less), the fact that bondholders will receive a 3% cash coupon, a cash on cash return based on Greek bonds of 2015 trading at just 20.7 cents on the euro, indicates that investors are expecting to collect 1 cash coupon payment, and at absolute best 2, before redefault, as buying a 2015 bond now at 20.7 of par, yields a full cash return of 21 (15+3+3), thus the third coupon payment is assured not to come. And since there is a substantial upside risk premium kicker to bond buyers, in reality the investing market is saying that Greece will last at best about a year following the debt exchange (if it ever even happens) before the country redefaults.
Update: And finally for some reality from Dutch fin min De Jager: "We Cannot Approve Second Programme For Greece Until Greece Has Met All Its Obligation"... And now we know who Germany's "+1" will be when Greece becomes Southern Goldman Bavaria: "De Jager Says He’s in Favor of a Permanent Troika in Athens"
We would love to share some witty comments and jovial banter on this latest set of soundbites by Europe's effete bureaucrati on occasion of the latest and greatest Greek bailout, however having already done so on at least 10 times in the past, we have run out of things to say in this particular context and frankly we are bored with this topic. Which is precisely the Eurogroup's intention. Presenting "soundbites du jour, Greece edition N+1".
Today's FinMin meeting in Brussels is supposed to be "the one", as Greece's fate is finally decided, and Belgian caterers are forced to apply to the EFSF for a bailout (or maybe China will roll them up?) as prospects for further local summits, meetings, shindigs, tete-a-tetes, teleconferences and what nots are severely curtailed. Maybe - maybe not. We will reserve judgment until the end of the day, because, as shocking as it may sound, Europe is not the best when it comes to making decisions on short notice. Or any decisions for that matter. Especially ones which leave Greece in the same predicament as before, and when the country will certainly need more bailouts down the road, because "cutting" debt down to only 129% of GDP does leave some things lacking. In the meantime, assuming everything goes according to status quo plan, here is a timeline and breakdown of events in the aftermath of today's meeting.
- Germany FinMin: More Talks Needed On 2nd Greece Bailout Plan (MarketNews)
- You stand up to the bankers, you win - Icelandic Anger Bringing Record Debt Relief in Best Crisis Recovery Story (Bloomberg)
- Iranian ships reach Syria, China warns of civil war (Reuters)
- Men's suit bubble pops? Zegna CEO Says China Sales Slowing (WSJ)
- German presidency row shakes Merkel's coalition (Reuters)
- Greece must default if it wants democracy (FT)
- Decision day for second Greek bailout despite financing gaps (Reuters)
- So true fair value is a 30% discount to "market" price? Board of Wynn Resorts Forcibly Buys Out Founder (WSJ)
- Spain Sinks Deeper Into Periphery on Debt Rise (Bloomberg)
- Walmart raises stake in China e-commerce group (FT)
- Iron Lady Merkel Bucks German Street on Greek Aid (Bloomberg)
The week ahead is fairly light on big ticket data releases, but what is released will provide more evidence of the strength of global activity. The most important of these will be the flash PMIs for China and the Euro area and the German IFO reading . There is no consensus expectation for the China print, however the Euro area indices are both expected to rise slightly, as is the German IFO. In terms of cyclical hard data, Taiwan export orders and IP for Singapore and Taiwan, Euro area industrial orders and trade data from Japan and Thailand will be notable. Admittedly the data from Asia is likely to be complicated by Chinese New Year which fell in the third week of January, and presumably this is why the consensus expects such a sharp drop in Taiwan IP, however the data are still worth watching for indications of the strength in global activity. Generally, consensus expectations for these prints are not particularly encouraging and any 'beats' would be a positive surprise. It goes without saying that ongoing negotiations towards signing off on Greece's second package will also remain on the radar screen. As we write, Reuters has posted suggestions that the debt swap will be open by March 8 and complete by March 11.
A lesson to be learnt from the individuals who continue to buy European Debt
The geopolitical game theory escalates once again, as Iran, which four days ago halted exports to peripheral European countries took it up a notch, and has as of this morning halted sales to British and French companies. Reuters reports: "Iran has stopped selling crude to British and French companies, the oil ministry said on Sunday, in a retaliatory measure against fresh EU sanctions on the Islamic state's lifeblood, oil. "Exporting crude to British and French companies has been stopped ... we will sell our oil to new customers," spokesman Alireza Nikzad was quoted as saying by the ministry of petroleum website." Here is the actual statement from MOP.ir. As a reminder, on January 27 we said how Iran was about to "Turn Embargo Tables: To Pass Law Halting All Crude Exports To Europe." And so it has - now, the relentless media campaign about China isolating Iran in response to American demands has to be respun: recall that in early February Reuters told us that "China will halve its crude oil imports from Iran in March compared to average monthly purchases a year ago, as a dispute over payments and prices stretches into a third month, oil industry sources involved in the deals said on Monday." Apparently that may not have been the case, as there is no way Iran would have escalated as far as it has unless it had replacement buyers of one third of its crude. Incidentally, this is just as we predicted in "A Very Different Take On The "Iran Barters Gold For Food" Story." The end result of this senseless gambit by the west: Europe has less oil, the Saudi fable that it has endless excess suplies is about the be seriously tested, China has just expanded a key crude supply route, and Russia is grinning through it all as Brent prices are about to spike. Iran didn't invent chess for nothing.
For several weeks now we have been warning that while the conventional wisdom is that Europe will never let Greece slide into default, Germany has been quietly preparing for just that. This culminated on Friday when the schism between Merkel, who is of the persuasion that Greece should remain in the Eurozone, and her Finmin, Wolfgang "Dr. Strangle Schauble" Schauble, who isn't, made Goldman Sachs itself observe that there is: "Growing dissent between Chancellor Merkel and finance minister Schäuble regarding Greece." We now learn, courtesy of the Telegraph's Bruno Waterfield, that Germany is far deeper in Greece insolvency preparations than conventional wisdom thought possible (if not Zero Hedge, where we have been actively warning for over two weeks that Germany is perfectly eager and ready to roll the dice on a Greek default). Yet it is not only Germany that is getting ready for the inevitable. So is Greece.
Open Europe has published a briefing note outlining the ten questions and issues that still need to be resolved in the coming weeks in order for Greece to avoid a full and disorderly default on March 20. The briefing argues that, realistically, only a few of these issues are likely to be fully resolved before the deadline meaning that Greece’s future in the euro will come down to one question: whether Germany and other Triple A countries will deem this to be enough political cover to approve the second Greek bailout package. In particular, the briefing argues that recent analyses of Greece’s woes have underplayed the importance of the problems posed by the large amount of funding which needs to be released to ensure the voluntary Greek restructuring can work – almost €94bn – as well as the massive time constraints presented by issues such as getting parliamentary approval for the bailout deal in Germany and Finland. While the eurozone also continues to ignore or side-line questions over the whether a 120% debt-to-GDP ratio in 2020 would be sustainable and if, given the recent riots, Greece has come close to the social and political level of austerity which it can credibly enforce.
It was one short week ago that both Australia surprised with hotter than expected inflation (and no rate cut), and a Chinese CPI print that was far above expectations. Yet in confirmation of Dylan Grice's point that when it comes to "inflation targeting" central planners are merely the biggest "fools", this morning we woke to find that the PBOC has cut the Required Reserve Ratio (RRR) by another largely theatrical 50 bps. As a reminder, RRR cuts have very little if any impact, compared to the brute force adjustment that is the interest rate itself. As to what may have precipitated this, the answer is obvious - a collapsing housing market (which fell for the fourth month in a row) as the below chart from Michael McDonough shows, and a Shanghai Composite that just refuses to do anything (see China M1 Hits Bottom, Digs). What will this action do? Hardly much if anything, as this is purely a demonstrative attempt to rekindle animal spirits. However as was noted previously, "The last time they stimulated their CPI was close to 2%. It's 4.5% now, and blipping up." As such, expect the latent pockets of inflation where the fast money still has not even withdrawn from to bubble up promptly. That these "pockets" happen to be food and gold is not unexpected. And speaking of the latter, it is about time China got back into the gold trade prim and proper. At least China has stopped beating around the bush and has now joined the rest of the world in creating the world's biggest shadow liquidity tsunami.
It is time for the US administration to remind everyone that while every other piece of bad news may be priced into the markets in perpetuity, there is still geopolitics. Although that may also be priced in. Either way, the WSJ has just reported that "Federal agents on Friday arrested a man who they allege planned carry out a suicide bombing at the U.S. Capitol, part of a sting operation in which undercover agents posing as al Qaeda operatives provided fake explosives. The Federal Bureau of Investigation's Washington field office said the man was arrested "in the vicinity of the U.S. Capitol." It said the suspect never posed a danger to the public." Ah yes, the good old "threats are among us" gambit. And let's just go with the most trivial cliche possible. If nothing else, it sets the stage for next steps. As for what next steps may be, here is a hint, via Reuters: "Two Iranian naval ships have sailed through Egypt's Suez Canal into the Mediterranean, in a move likely to be keenly watched by Israel. "Two Iranian ships crossed through the Suez Canal (on Thursday) following permission from the Egyptian armed forces," a source in the canal authority said Friday. Two Iranian warships sailed along the strategic waterway on February 17 last year, in a move that Israel called a "provocation." Either way, Suez developments may be Israel's issue for the time being. We now apparently have our own suicide bombers to be 'very worried about.'
In a 60-36 vote, Senate just passed the payroll tax extension, previously voted through by Congress. From Reuters: "The U.S. Senate on Friday passed legislation extending a tax cut for 160 million workers and long-term jobless benefits through December, clearing the way for President Barack Obama to sign the measure into law. The Senate approval by a simple majority vote followed the House of Representatives' approval earlier on Friday. The legislation, which also extends current payment rates to doctors through the Medicare health care program for older Americans, will add $100 billion to the U.S. deficit and is aimed at further stimulating the economy." As a reminder, all this means is that a repeat of the debt ceiling fiasco is now virtually assured before the presidential election as discussed here, which explains the GOP's willingness to pass this through as fast as possible with no offsetting spending cuts. As for the benefits of $1000/taxpaying household, the recent rise in gasoline prices has already offset those. One can only hope that crude prices are as susceptible to successful central planning intervention as all other assets, or else many more extensions will be needed before the year is over.
- German president resigns in blow to Merkel (Reuters)
- China central bank in gold-buying push (FT)
- Germany Seeks to Avoid Two-Step Vote on Greek Aid, Lawmakers Say (Bloomberg)
- Eurozone central bankers and the taboo subject of losses (FT)
- Bernanke: Low Rates Good for Banks in Long Run (WSJ)
- Cameron and Sarkozy to test rapport at talks (FT)
- Chinese Enterprises encouraged to invest in US Midwest (China Daily)
- Goldman Sachs Group Inc. and Morgan Stanley have reduced their use of "mark-to-market" accounting (WSJ)
- Regulators to raise trigger for rules on derivatives (FT)