Sovereign Debt

Pivotfarm's picture

Bond dumping and Berlusconi

BNP Paribas SA and Commerzbank AG (CBK) are unloading sovereign bonds at a loss, leading European lenders in a government-debt flight that threatens to exacerbate the region’s crisis.

BNP Paribas, France’s biggest bank, booked a loss of 812 million euros ($1 billion) in the past four months from reducing its holdings of European sovereign debt, while Commerzbank took losses as it cut its Greek, Irish, Italian, Portuguese and Spanish bonds by 22 percent to 13 billion euros this year.

Euro And Futures Slide As Schaeuble Admits Germany Faces Potential Further Costs From Greece Fallout

EURUSD and US equity futures slid lower this evening as late day exuberance leaked away. This was then accelerated briefly by comments from Germany's FinMin Schaeuble in a German newspaper that Germany faces additional costs should Greece go bankrupt or bondholders face a larger write-down on GGBs. Bloomberg notes the comments suggest additional costs potentially amounting to billions stemming from losses at WestLB and Hypo RE. While this seems like a 'worse-not-worst' case scenario concern, it does suggest that even the venerable Germans do not see the EU Summit (10/26) solution as the endgame in the charade of European sovereign debt and politics.

Wolf Richter's picture

Germany at Its Rubicon

No country is economically more dependent on the euro than export powerhouse Germany. But now that the euro extravaganza slammed into a mountain of debt, Germany finds itself at war—with itself.

Presenting The Latest Eurodebt Exposure Masking Scam Courtesy Of Morgan Stanley: Level 1 To Level 2 Transfers

For the latest gimmick to mask PIIGS sovereign debt exposure (where we already know that the traditional fallback of "gross being irrelevant and only net being important" crashed and burned today after Jefferies offloaded precisely half of its gross exposure, while raising net, thereby confirming that gross exposure is indeed a risk), we turn yet again to Morgan Stanley. As a reminder, despite our note that the company's gross exposure (which is now a major risk factor, thank you Rich Handler for proving our "bilateral netting is flawed" thesis) to French banks alone is $39 billion, Morgan Stanley downplayed this by saying that only $2.1 billion is the actual net funded exposure to Peripherals Eurozone countries. We'll see if Jack Gorman will have to revisit his defense after today's Jefferies action. Well as it turns out, we now have gimmick number two, one which will surely delight the bearish investors out there looking to find a bank doing all it can to mask not only its gross but net exposure (and wondering why it has to resort to such shenanigans). Presenting the Level 1 to Level 2 switcheroo, courtesy of, who else, Morgan Stanley.

Is China Gold's First Overseas Purchase A Harbinger Of A Gold Miner Roll Up?

Gold has retraced over 60% of its September swing high to low - rallying almost 12% off late September lows. Whether by cause or effect, it seems our stimulus-driven, vendor-financing, USD-heavy, mercantilist neighbors across the Pacific have decided the time is right to BTFDs in gold and gold miners as today's South China Morning Post notes "China Gold to buy Central Asia mine". Jery Xie Quan, VP of China Gold, further noted that was also negotiating potential mine acquisitions in Canada and Mongolia, which are either in advanced development or close to starting production. Are the Chinese using their excess USD to purchase gold-producing assets? Who knows but it may help explain the relatively strong performance of the EUR against the USD as the former region deteriorate fast.

Here Is Today's 3pm Rumor...

In true save-the-market style, as 3pm ET comes around we have another rumor from Europe. This time it purports to be the creation of an investment fund, as a subsidiary of the EFSF, which will 'attract' external capital sources, via tranching of returns, to enable the purchase of sovereign debt in primary and secondary markets. Headlines, via Bloomberg, for now suggest this is yet another strawman and given the concessions on this morning's EFSF issue, just who exactly is going to be investing in this levered product and why? Equity markets remain 'exuberant' relative to credit though HY is slowly catching up to the intrday heights of the S&P 500 futures. It really doesn't sound like anything but the beginnings of the structure of the SIV for the EFSF that we have been discussing for a couple of weeks now.

While Banks Are Being Shorted With Impunity On Euro Sovereign Debt Panic, Did Someone Forget About BlackRock?

Why? Primarily because of this innocent statement by former R3 scion and former Lehmanite Rick Rieder, currently employed by the firm that ostensibly has more clout than even Goldman Sachs: BlackRock. From October 21 "BlackRock Inc. Chief Investment Officer Rick Rieder said the world’s biggest money manager remains a buyer of Italian government debt as European policy makers gather to address the region’s sovereign debt crisis. "Italy is attractive,” Rieder said during an interview on “InBusiness With Margaret Brennan” on Bloomberg Television. “As long as we are moving toward solutions, we think Italy is very reasonable at these levels. BlackRock, which manages about $3.66 trillion in assets, has also been buying debt issued by financial firms and high- yield bonds, Rieder said. As with the Italian bonds BlackRock has bought, the financial debt will benefit “as soon as you see stability,” Rieder said." Uh, Rick, you are marking to market right? Because Your P&L would be a 100% correlation to the following chart, which shows BTP prices since October 21.

Guest Post: Financial Cancer: Our Financial System Is Intrinsically Fraudulent and Unstable

First there are the more legitimate skim sources - interest payments, management fees, IPO fees, M&A fees, trade commissions. Then there are the less legitimate bank sources: penalty credit card interest rates, late fees, usage fees, over-the-limit fees, late payment fees, bounced check fees, low balance fees. And the capital markets sources - front-running, insider trading, account churning, manipulation of the news cycle, the captive analyst "ratings game", trading against your own client's order book, forex trades which are marked at the day high or low irrespective of when the trade took place, market manipulations at options expiration, stuffing your managed client accounts full of dubious IPOs and new issues that your organization is earning fees from originating. Bucket shops and ponzi schemes take it even a step further - no actual financial activity takes place. Its simply robbery. And now we add the new stuff: credit default swaps without margin, fraudulent loan origination, sliced & diced mortgages, mark to myth accounting, foreclosure halts to avoid realizing losses, extend & pretend, quote stuffing, HFT trading activity that boils down to denial of service attacks on exchange computers causing delays in pricing information, highly complex derivatives sold to unsuspecting but optimistic public servants, too big to fail status providing cheap backup in the event of trouble, and increased organizational size that facilitate cartel-like control over government and regulators. But if that's not enough, there is the structure itself: they aren't doing this with saved capital, but rather with freshly printed and/or borrowed capital. Its all done with 12:1 leverage at a minimum... And if the bet goes bad, the Fed will ride to the rescue with low-cost money. But usually the bet goes well, because ordinarily the number of sources of fraud today is so HUGE, its practically impossible not to succeed.

From MF Global To Jefferies To... Barclays?

Earlier today, Jefferies made it all too clear that anyone found holding any PIIGS sovereign debt exposure, net AND gross, will be promptly punished by the market all the way down to the circuit breaker halt, until such party promptly offloads its GROSS exposure to some other greater fool, in the process gutting its entire flow trading desk. Courtesy of Bloomberg we may now know who the market will focus its attention on next: "Barclays has $12.5 billion sovereign risk, $20.1 billion of risk to corporations and another $10.2 billion to financial institutions. It also has $66.6 billion of exposure in its retail business, 86% of which is to Spain and Italy. Group and corporate-level risk mitigation (sovereign CDS, total return swaps) may reduce these exposures." Or, as the Jefferies case study demonstrated so vividly, it may not, and the only option will now be for Barclays to post daily releases with CUSIP breakdowns which will achieve nothing until Barclays follows in Jefferies footsteps and liquidates (at what is likely a substantial loss) all or at least half of its gross exposure. Thank you Egan Jones for starting a hot-potato avalanche that will keep banks honest. And woe to the last PIIGS sovereign debt bagholder.

So It Was An Issue After All: Jefferies Cuts Its Gross PIIGS Sovereign Debt Exposure In Half

And so the sovereign exposure that was perfectly innocent according to three previous press releases from Jefferies, has just been offloaded to some other bank, which has a bigger market cap and "won't be cause for major alarm." Thank you Jefferies for offloading shareholder risk onto someone dumber. And now, all this action has done is made any PIIGS exposure on any bank balance sheet, gross or net (and yes, Gross exposure apparently is a risk factor in an of itself, and the market is starting to ignore all lies about bilateral netting), an immediate excuse to sell off stocks right into the circuit breaker. Look for the vigilantes to comb through any and every 10-Q with a fine tooth comb and punish any bank that still has any exposure gross or net. Our only question remaining re: Jefferies is what was the P&L hit on this liquidation?

European Summary

Here is what is happening in the world's melting pot of rumors and confusion as of this moment.