Sovereign Debt

Watch Merkozy Cracking Up Following Question If Italy Can Implement Reforms

Even our non-polyglot readers will have zero problems understanding the response (in French) by Merkozy, when asked during the press conference, whether Italy, which has the second largest debt load in Europe at $2.2 trillion and inches behind German, will succeed in implementing promised 'reforms.' The wholesale laughter 19 seconds in the the clip, by not only the entire audience, but by Merkel and Sarkozy pretty much explains what the "next steps" in Europe are as the continent has now given up any pretense it is even trying to keep a serious facade on the upcoming serial defaults... and why 10 Year BTPs will need much more than just the SMP, EFSF and the hand of god to stay above 90 in the coming week.

Exclusive Interview With Diapason's Sean Corrigan

Zero Hedge has the pleasure to bring its readers this extensive Q&A with one of the most prominent voices of "Austrian" economic sensibility, and foremost experts on capital markets and commodities: Diapason's Sean Corrigan, who has repeatedly graced our pages in the past and who always provides a much needed 'on the ground' perspective on his native Europe. Among the numerous topics discussed are the Eurozone, its collapse, its insolvent banks, and the EFSF as the Swiss Army Knife ex Machina; the 3rd year anniversary of Lehman's failure and what lessons have been learned (if any); how to fix the US economy; on Goldman's relentless attempts to intervene in, and define, US monetary policy; what the Fed's role should be (if any) in the economy and capital markets; his views on the Occupy Wall Street movement; his advice to an inexperienced 25 year old looking to make their way in the world; And lastly, the $64K question: what is the endgame. A fascinating must read.

Greek Writedowns - Let's Do ONE Thing Correctly

It is painfully clear now, that in spite of months of talk, headlines, and propaganda, very few people in the EU worked on any details.  I thought, at the very least, they were working with traders, lawyers, and structurers and somehow were just getting the wrong answers.  But now, it looks like asides from the IMF, no one else was figuring out anything, they were just saying what they thought the market wanted them to say. The IMF and other countries finally realize real losses need to be taken and recognized on Greek debt.  For once, they can step back, break away from their existing thinking – the IIF’s PSI proposal – and do something that will actually work.

French Regulator Urges Banks To Write Down Greek Debt To Realistic Levels

Slowly even those staunchest critics of reality, namely undercapitalized and insolvent French banks, are coming to grips with the truth that they are going to see massive losses on their tens of billions of French debt exposure. The FT reports that the French stock market regulator has told French banks to apply realistic assumptions to their Greek debt haircuts. Because through today, French banks only used the 21% agreed upon haircut at the July 21 (and even that number is likely greatly overstated). So where are Greek bonds trading now? Oh about 30 cents on the dollar (70% haircut) , which means at the end of the day French banks will see about three time more losses on Greek holdings than provisioned. And the market, which is not all that stupid, knows this and has been punishing French banks. This is precisely what regulators are trying to avoid. The problem, as is well known courtesy of daily fruitless discussions between Sarkozy and Merkel, is that "French banks have more cross-border exposure to Greece than any other country, mainly through subsidiaries owned by Crédit Agricole and Société Générale. BNP Paribas holds the most Greek sovereign bonds among private sector investors, with €4bn of exposure...French banks argued that limiting themselves to 21 per cent was justified because trading in Greek government debt was so subdued, making market prices unreliable." Uh, what? Those billions in Greek bond volumes, where the 1 year yields 184% in dozens of daily trades, are "subdued" and "unreliable?" Why not just buy the bonds then and take advantage of the illiquid arb then? What's that? Crickets? Oh ok. In the meantime, what is certain is that after the ECB, France is the country most exposed to a Greek admission of reality (even truncated, assuming a 60% haircut which is still generous). Which of course confirms, once again, our thesis that the only source of EURUSD stability in the past two weeks have been French banks liquidating assets, and using the feedback loop of rising asset prices from FX EUR repatriation to sell even more to a willing market.

US Equity Markets Remain Odd Bull Out

The ongoing squeeze in US equities, evident in the significant outperformance of the most-shorted-name indices from Goldman relative to market indices, continues to keep domestic wealth effects ticking along nicely while US credit and European equity and credit markets do not seem to have got the same memo. While this rally, seemingly predicated on the fact that Europe 'get's it' finally (and admittedly some talking head chatter about the number of earnings beats - which we argue is useless given previous discussions of the wholesale downgrading of expectations heading into earnings), the US equity market is the only market to have made new highs this week, is outperforming its credit peers in the US (which is simply ignorant given HY's relative cheapness if this was a risk-on buying spree), and most wonderfully - is hugely outperforming the European financials, European sovereigns, European IG and HY credit, and European equities. Did US equities become the new safe-haven play of the world? Perhaps this week, but we suspect that won't end well - at least from the experience of the last decade or so.

5 Head Scratching Charts – EFSF Is Failing To Help European Sovereign Debt Markets

Stocks hit their low on October the 3rd. They bounced on announcements and beliefs that Europe finally “gets it” and will “solve” the sovereign debt crisis. The S&P hit a low of 1075 and a high of 1233 and is back to about 1220, which is still a healthy 13.5%. Yes, there is more going on than the European crisis, but clearly the belief that the problems in Europe are solved has played a big role, especially in the financials where the return is over 17%. It seems like the market has gotten ahead of itself, and these 5 charts show why.

Phoenix Capital Research's picture

 

It’s time to settle the debate regarding Europe’s banking system. I know that the mainstream media keeps talking about another round of bailouts or an expansion to the Emergency Financial Stability Facility (EFSF) as though these things matter. But the reality is… they don’t. Europe’s problems go WAY beyond Greece’s debt. And the entire European banking system is primed for a systemic collapse.