Sovereign Debt

Things That Make You Go Hmmm.... Such As An Empty Box Filled With Promises Of Money, And Europe's Soup Nazi

Some amusing weekend observations from TTMYGH's Grant Williams: "The EFSF is basically an empty box filled with promises of money - many of them from the very people who are most likely to need to borrow that same money. Should they need to borrow the money, they won’t be able to make good on their promises so there will be less money for them to borrow. Now the brain trust running Europe have decided, in their collective wisdom, to apply leverage to the non-existent money in the empty box that they have yet to actually borrow, so it can backstop even more of the hundreds of billions of Euros of sovereign debt issued by countries whose finances are in such dire straits that they either require the kind of robust growth that is hardly likely to materialize any time soon or the forgiveness by the holders of that debt of a large part of it....Of course, granting Greece the package they did this past week, the Eurocrats have rather incredibly found yet another corner into which to back themselves. You can hardly champion the ‘One Europe’ manifesto on the one hand but then, as the next country lines up at the counter, declare “No soup for you!” - but that seems to be the ‘plan’ at this stage."

"We Are All Greeks" - SocGen Presents The New World Order

"We are all Greeks" - so begins one of the best reports on the unsustainability of the status quo, and on what "the new world order" will look like, created by SocGen's Veronique Riches-Flores. Her overarching observation: "No one can claim immunity from a Greek-style spiral" because "Our economies are mature, with weak potential GDP, especially post the financial crisis" and due to that old standby which everyone chooses so conveniently to forget, yet which is the biggest threat to the world's "welfare-state" stability, in existence since 1860 and which has been responsible for not only the longest period of peace in world history, but for the longest stealth plundering of middle-class wealth (there is indeed no such thing as a free lunch): "We are aging - we have no chance to see our future income improving substantially in the long run ; our savings capacities are shrinking and our health and pensions spending is increasing." That, in a nutshell, is it, no matter how many protracted essays one reads predicting the future (or war in Europe): the truth is there is increasingly less cash flow, coupled with increasingly more demands for cash.

Portugal Is Next: Improverished PIIG Demands US Assistance, Debt "Haircut" To Come Next

It has been just over 48 hours since our call that PIIGS the world over will scramble to demand the same concessions that were just granted to Greece courtesy of its economy being in the toilet and getting worse (thanks to lies to misrepresent the Greek economy as being worse than it really was). We already got Ireland yesterday. Now it is Portugal's turn. Reuters reports that "Portugal asked Mexico on Saturday to tell fellow G20 members next week that the United States should offer "financial help" to resolve the euro zone sovereign debt crisis, describing it as a "systemic and global" problem, a Portuguese government source said." Of course, the "US" is a clear proxy for "everyone else" - that the US, whose politicians can't agree on a fiscal stimulus for the US, let alone for some country by the straits of Gibraltar they have never heard of, will not move an inch to save Portugal is a given. Which means that once Portugal is, as it anticipates perfectly well, shut down by the US it will commence demanding for help from those who at least can grant it - the EMU and the Eurozone. And when those refuse, Portugal will do the glaringly obvious: take a page right out of the Greek textbook and proceed to suicide its own economy. And why not - it worked miracles for Greece. Now: two down and two to go. The only question is when does Italy do precisely the same logical next step, and tell the world that its $2+ trillion in debt, the second most in the Eurozone after only Germany, is unsustainable, and will need a modest haircut. 20% should do it. We wonder, what will that do to French banks (and their "perfectly hedged" US proxies - such as MF Global and others)?

S&P Issues Statement On EFSF, Says "Almost Certain" European Governments Would Support CDO

The first kicker in the just released S&P statement on the revised and AAA-rated EFSF is the following: "In our opinion, there is an "almost certain" likelihood that the EFSF's 'AAA' rated member governments would provide timely and sufficient extraordinary support to the EFSF if needed." So, uh, S&P is determining the fate of trillions worth of securities on the basis of a hunch, a whim, if you will. A strong one, but a hunch nonetheless. Swell. And the second kicker:  "If we lowered the ratings on one or more of the 'AAA' rated member guarantors, we would also likely lower the ratings on funding instruments that the EFSF had issued before the date of the downgrade, if the lower ratings on the member guarantor were to lead to less than 100% 'AAA' rated coverage for the relevant EFSF funding instrument." This, in the parlance of our times, is known as a springing downgrade, which sets off the kind of cataclysm that only AIG could achieve once the investing community realized it had a rating-based collateral schedule. So once again the fate of the free world depends on FrAAAnce. Swell2.

Grade 3 Math Assignment

Here is the basic problem and why Italian and Spanish bonds are getting crushed again today (ignoring horrific unemployment data out of Spain). If Italy defaults with a 40% recovery, there is 1.613 trillion euro of debt affected (that is up about 10 billion in about a month). That means creditors would lose 970 trillion. Spain with 663 billion would cost almost 400 billion (its debt has shot up about 15 billion in a month). The problem is that EFSF doesn't take default off the table. It may delay the time to default (by helping roll debts as they mature), but all it mainly does is shift who would take the loss. The guarantors can't handle losses that big. There is no "ideal" solution because the problem is just an order of magnitude too large to provide any real help. Either the economies are going to get to balanced budgets (some combination of growth and cuts) or it will fail. Will EFSF do enough to see if the economies can get there?

Italy - Weak, But How Would A First Loss Insured Auction Work

With the EFSF, Italian and Spanish debt all creeping higher in yield today and a disappointing Italian auction, we take a deeper dive into the mechianics of the EFSF and the paradoxically weak impact it may have as sovereign risk deteriorates. The [EFSF] idea works well when people aren’t thinking there is a real chance of default, but as that increases, the EU may wish they had stuck to their original plan of having raised 440 billion of cash that they could lend directly.  Basically, if the markets deteriorate, the first loss protection, is worth more, but provides less leverage.

Citi Explains Why The Time To Fade The EUR Rally Has Come

Yesterday the short squeeze in the EURUSD brought the pair to within pips of Citigroup's revised stop loss of 1.4260 even as it got even more bearish on the European currency, setting a new target of 1.3150. Today the bank's FX strategists continue their onslaught, stating in a note that wonders how long the Euro-love will last that "The post-summit EUR rally is driven by a continuing squeeze in short risk positions and unwinding of worst fears of financial contagion, rather than improvement in cyclical fundamentals." Here are their full thoughts on why the time to short the pair, and thus the entire EURUSD-driven market, lower.

MF Global Taps Credit Facility, Burns Through $2 Billion In Quarter

Update: and the hits just keep on coming, first Fitch and now... MF GLOBAL CUT TO JUNK BY MOODY'S... "At the end of the second quarter, MF Global's $6.3 billion sovereign risk exposure represented 5 times the company's tangible common equity. Moody's said the downgrade reflects our view that MF Global's weak core profitability contributed to it taking on substantial risk in the form of its exposure to European sovereign debt in peripheral countries." But other major US banks have no exposure whatsover right? Oh wait...They're hedged... Through "CDS".

Bloomberg has just broken that MF Global has likely just entered a terminal deathwatch after not only tapping its credit facility, but aslo exhausting it. From Bloomberg: "MF Global Holdings Ltd., the futures broker run by Jon Corzine, drew down its revolving credit lines this week as the firm reported its biggest quarterly loss and had its credit ratings cut, said three people with knowledge of the matter. The New York-based company exhausted its revolving lines, the people said, speaking on condition of anonymity because the move wasn’t disclosed. MF said in an Oct. 25 investor presentation that it had $1.3 billion in unused revolving credit facilities, without giving a date for the tally." This development means that instead of an M&A assignment as many were attributing the retention of Evercore bankers to (despite the dreary presence of David Ying in their midst), Jon Corzine's firm was far more likely focused on salvaging anything of value. However, now that traditional M&A is out of the picture (nobody in their right mind will pay anything close to market value for a company without cash), it is quite likely that the firm's bondholders, who most likely also have collateral exposure with MF global, whose plight started following the disclosure of extensive European exposure and which was downgraded to junk today by Fitch, will pull all liquidity and instead opt for a debt for equity conversion either in court or as a prepack. What is probably the biggest  take home here is just how much of a capital drain European exposure (and we are confident MF was "hedged".... just like Morgan Stanley) can become, and how quickly a firm can become completely insolvent. As a reminder, the firm reported $710 million in cash as of June 30. Obviously all of that cash must have been burned through if the firm also not only tapped but exhausted its $1.3 billion in revolvers in the past quarter (which have rating associated rate step ups, which don't take too kindly to a junk rating). Net result: $2 billion in cash (or about 9 times its makret cap) burned in 4 months primarily due to "hedged" European exposure.

GMO Does The Euro Bailout Math, Finds That Arithmetic Of "Sovereign Debt Crisis Is Daunting, But Not Insuperable"

In a much needed white paper just released by GMO's Rich Mattione, title "Et tu, Berlusconi? The daunting (but not always insuperable) arithmetic of sovereign debt" the author does just that: an overdue deep dive into the maths of the European, and global, sovereign bail out. "Much needed", because everything we have heard over the past month leading to a 20% surge in the market in the past 23 days, has been full of broad strokes and completely absent of any details. Cutting to the chase, Mattione's conclusion is that "the arithmetic of Europe’s sovereign debt crisis is daunting, but not insuperable." Which means it can be done, at least in theory, but at great costs, and will need something that Europe has never demonstrated until this point: proactive planning and tackling problems before they develop into full blown systemic crises. How does he get there? Here are his key observations...

Goldman's 10 Unanswered Questions On The European Bail Out And The Revised EFSF

Buying stocks with the confidence that all has been resolved and all open questions have been answered? Or just doing it because everyone else is doing it, and there is "career risk" for those who actually sit to think what the events over the past 24 hours mean? It's ok if it is the latter: everyone else is in the same boat. After all the whole purpose of today's rally is to get everyone exposed the same way, so when it all crashes again, nobody can be singled out for having been contrarian. Why are we so sure? Because when even Goldman Sachs has at least 10 outstanding questions on not only the structure of the European bailout, but the layout of the revised EFSF, it is safe to assume that few have the answers (which, incidentally, don't exist). So in between chasing VWAP ever higher, it may be worthwhile to read these 10 questions which nobody has the definitive answer to. At least not yet. And whose answer is assumed will be a satisfactory one...

Reggie Middleton's picture

So, the European joke has come full circle. Indebted nations borrow more money to bail out other indebted nations who ask insolvent banks to cut a 50% off deal on the loans that were given to them, but the insolvent banks will then have to raise capital which the will of course borrow from the over-indebted nations whom they just gave money to. Get it? Problem solved - BTMFD!!!