Sovereigns

If Spain 10 Year > 7.50% Then LTRO 3

At least that is the bogey according to JPMorgan's Pawan Wadhwa, who in a note announced that the ECB may resume SMP purchases if the 10 year hits 6.5% (as in a few hours), much to the chagrin of Germany, which was foosed into believing LTRO 1+2 would mean no more SMP purchases. More importantly, since the 6.50% barrier will be taken down with impunity in days if not hours, and the SMP has proven time and again to be powerless to prevent mass selling, the next big bogey is 7.50% at which the ECB will likely announce another 3-year Discount Window bazooka, pardon, LTRO. What JPM does not say is that with the halflife of each successive LTRO getting cut in half, LTRO 4 will be needed in June, LTRO 5 in July, LTRO 6 in July, LTRO 7 in July and so on. Most importantly, now that banks, who are desperate for some cash infusion from either the Fed or the ECB, know what the critical threshold bogey for action is, they will be sure to facilitate the ECB's life, and send Spanish 10 Years plunging to at least 7.50% and demand Draghi play ball, again. In other words: now that the market knows what the consensus is to get more European QE, it will promptly do it. After all the LTRO was never for the benefit of the countries: it was always and only to benefit Europe's insolvent banks. If that means "Greecing" Spain in the process, so be it.

Europe Slumps With Spain At March 2009 Lows

It appears the chaotic volatility of last Summer is rearing its ugly head once again as credit and equity markets in Europe flip-flop from best performance in months to worst performance day after day. With Spain front-and-center as pivot security (as we have been aggressively noting for weeks), sovereigns and financials are lagging dreadfully once again. The Bloomberg 500 (Europe's S&P 500 equivalent) back near mid January lows, having swung from unchanged to pre-NFP levels back to worst of the week at today's close, European banks are leading the charge lower as the simple fact that liquidity can't fix insolvency is rwit large in bank spreads and stocks. Treasuries have benefited, even as Bunds saw huge flows, outperforming Bunds by 18bps since pre-NFP but it is Portugal +33bps, Spain +22bps, and Italy +9bps from then that is most worrisome. LTRO Stigma remains at its 4 month wides but financials broadly are under pressure as many head back towards pre-LTRO record wides. Europe's VIX is back up near recent highs around 30%. With too-big-to-save Spain seeing record wide CDS and even the manipulated bond market unable to hold up under the real-money selling pressure, the ECB's dry powder in SMP looks de minimus with only unbridled QE (since banks have no more collateral to lend) and the ECB taking the entire Spanish debt stock on its books as a solution, access to capital markets is about to case for Spain (outside of central-bank-inspired reacharounds) and as we noted earlier - every time the ECB executes its SMP it increases the credit risk for existing sovereign bondholders (and implicitly all the Spanish banks). Spain's equity market is a mere 5% above its March 2009 lows (55% off its highs).

'All-Clear' As Europe Recovers Post-NFP Losses

All it took was a Frenchman losing his nerve, some chatter on QE, and a few more weak US and EU data points, and hope for better Chinese GDP, and sure enough - free-money-flow is back on the table and risk assets are responding. European equity and credit markets have all but totally recovered to their Thursday closing (pre-NFP-plunge) levels. European sovereigns are mixed with Portugal 27bps wider than pre-NFP, Spain unch, and Italy -11bps but EURUSD is higher on the day and now back above last Thursday's highs as we note Europe's VIX dropped in sync with US VIX today - still maintaining relatively elevated levels historically relative to the US.

Poor Cheshire Is Off His Tea

The Wizard predicts it will be Greece, Portugal and Ireland all back at the trough in 2012 and Spain lining up for its first feeding. Italy remains a question mark but with a real debt to GDP ratio of 200% the structural issues will not be overcome by anything that Mr. Monti has proposed to date. As we all focus on the sovereigns in the last few days I point out that the European banks are down around 2%-4.5% in Germany, Italy and Spain today while the largest bank in Portugal has seen its share price drop 15% this morning.  You may ignore the ugliness and the markets may ignore it for this or that day but the European ugliness is not going away and I would be a seller on any pop in equities or risk assets because the European landscape is a quite Bleak House.

The Anatomy Of A USD-Funding Crisis And The Fed's Global Swap-Line Bailout

The Fed's currency swap with the ECB is nothing more than a covert bailout for European banks. Philipp Bagus of Mises.com explains how the USD-funding crisis occurred among European banks inevitably leading to the Fed assuming the role of international lender of last resort - for which US taxpayers are told to be lucky happy since this free-lunch from printing USD and sending them overseas provides an almost risk-free benefit in the form of interest on the swap. Furthermore, the M.A.D. defense was also initiated that if this was not done, it would be far worse for US markets (and we assume implicitly the economy). The Fed's assurances on ending the bailout policy should it become imprudent or cost-benefits get misaligned seems like wishful thinking and as the EUR-USD basis swap starts to deteriorate once again, we wonder just how long before the Fed's assumed role of bailing out the financial industry and governments of the world by debasing the dollar will come home to roost. As Bagus concludes: "Fed officials claim to know that the bailout-swaps are basically a free lunch for US taxpayers and a prudent thing to do. Thank God the world is in such good hands." and perhaps more worryingly "The highest cost of the Fed policy, therefore, may be liberty in Europe" as the Euro project is enabled to play out to its increasingly centralized full fiscal union endgame.

Artemis On Volatility At World's End: Deflation, Hyperinflation And The Alchemy Of Risk

Imagine the world economy as an armada of ships passing through a narrow and dangerous strait leading to the sea of prosperity. Navigating the channel is treacherous for to err too far to one side and your ship plunges off the waterfall of deflation but too close to the other and it burns in the hellfire of inflation. The global fleet is tethered by chains of trade and investment so if one ship veers perilously off course it pulls the others with it. Our only salvation is to hoist our economic sails and harness the winds of innovation and productivity. It is said that de-leveraging is a perilous journey and beneath these dark waters are many a sunken economy of lore. Print too little money and we cascade off the waterfall like the Great Depression of the 1930s... print too much and we burn like the Weimar Republic Germany in the 1920s... fail to harness the trade winds and we sink like Japan in the 1990s. On cold nights when the moon is full you can watch these ghost ships making their journey back to hell... they appear to warn us that our resolution to avoid one fate may damn us to the other.

How The Rout Will Decide The Route

Liquidity never solves issues of solvency and the time that it buys is generally of a relatively short duration. After the $1.3 trillion loan by the ECB to the European banks which helped drive up the prices for European sovereigns what do we now find as the liquidity ebbs? Yesterday’s Spanish auction was abysmal and the French auction today did not go too well with rising yields and less demand. The austerity measures are driving Europe into a worsening recession and the financial positions of Spain and Italy are deteriorating even as new measures are put into place. In fact there are only two ways out of the European mess which are growth, not happening, and Inflation which may be the ultimate strategy employed by the EU and the ECB if the construct holds to the point of changing strategies which is surely no outlier event.

Renewed European Fears Send CHF Soaring, Force Swiss National Bank To Defend EURCHF 1.20 Floor

And like that, Europe is broken again. Following a spate of negative European data (what else is there), including a miss in German industrial production as well as a miss in UK manufacturing output, all eyes are again on Spain, especially those of the bond vigilantes, who have sold off the sovereign European bond market, sending the Spanish-Bund spread to over 400 bps for the first time since December 2011. The main reason today: a Goldman report saying Spain will unlikely meet its 2012 and 2013 budget targets, as well as JPM Chief Economist David Mackie saying Spanish government "missteps" have raised questions about its credibility, making investors reluctant to purchase Spanish debt. Stress has returned to periphery, if it broadened into bank funding markets more LTROs would be forthcoming; if that “failed to hold yields at an appropriate level” Spain may need assistance from the EFSF/ESM and the IMF. Euro area unlikely to return to stability in sovereigns without some burden sharing; nominal growth likely to stay below borrowing costs, making fiscal targets “all but impossible to achieve”. UBS piles in saying Spanish banking stresses still haven't been addressed. Finally, a big red flag is that market liquidity is once again starting to disappear, and as Peter Tchir points out, Main is now being quoted with 3/4 bps bid/ask spread, all the way up to 1 bps spread. In other words, as we have been warning for weeks, the period of fake LTRO-induced calm is over, and the market is demanding more central planner liquid heroin. The question becomes whether Europe has even more worthless collateral in exchange for which the ECB will continue handing out discount window money in sterilized sheep's clothing. Yet nowhere is the resumption in risk flaring more evident than in the Swiss Franc, where the EURCHF all of a sudden broke through the critical 1.20 SNB floor, which was set back in September 2011, the day gold was trading at its all time high. Said otherwise, everyone is once again scrambling for safety. And since they can't get it in the CHF, it is only a matter of time, before gold resumes its ascent as the paper currency alternative that sent it to its all time highs late last summer.

Reversals In Progress

Today’s Spanish auction results were, in a word, awful. Not just higher yields, but a terrible bid-to-cover and perhaps even worse; all of the funding could not be accomplished. The effects of the LTRO are rapidly diminishing as the money has now generally been utilized and the national banks of a nation can no longer support the funding needs of the countries in the periphery. We have reached the turn here and I predict much higher yields to come now for the troubled nations in Europe including Italy. What could be accomplished by liquidity has been accomplished but solvency problems cannot be cured by liquidity alone and that lesson is about to be re-learned again.

The Ugly Truth For Northern Europeans

As Europe's exuberance from the LTROs fades (with Italian banks now negative YTD, Sovereigns wider than LTRO2 levels, and financials desparately divided by the LTRO Stigma) Jefferies David Zervos uncovers the sad reality that faces peripheral creditors and Northern Europeans - as we noted a month ago here. The 'success' of the LTRO monetization scheme (as opposed to EFSF/ESM transfer dabacles) is what enabled the Greek restructuring, and as Zervos notes, the losses that the big boys (Spain and Italy) need to take will not be taken via a haircut but a monetization as the number 1 rule is we must always assume that losses will be taken in a way that protects the large northern banks, northern jobs and most importantly Northern politicians. If the loss realization is not managed correctly (and losses there will be), then the ugly truth will escape but the North's large-scale vendor-financing scheme with the periphery will have to continue - even in the knoweldge that the debt will never get paid back.

The income and savings of Northern workers must be ploughed (directly or indirectly) into the rest-of-Europe or the entire structure becomes insolvent and the breaking of that social contract (that they will be looked after when they are old) will inevitably lead to revolt and nasty nationalist political forces being unleashed. The hope to avoid this is the 'wealth illusion' as the workers of the north can never be allowed to realize they have only 50% of their worth in reality. Ireland will be next on the loss-realization-monetization path but as we move from relatively small and containable sovereigns to the big-boys, the idea that Spain and Italy will roll over and accept a decade of austerity in exchange for a haircut is pure folly. These countries hold too much clout in the Eurozone and their threat of exit is a material threat to the northern jobs and hence northern politicians. The only way the northern politicians will be able to save face when it comes to Spain and Italy is through massive monetary policy accommodation. Inflation will rebalance Europe; but let's hope that the process of restating northern wealth and wage rates does not lead to revolt in the northern streets. The politicians will need to carefully execute this trade.

Schrodinger's Market As European Equities Surge And Credit Shrugs

On this first day of the second quarter, and especially since the US open (and the ISM print) European equities decided all was well and rallied broadly back to their highs of last week. In the meantime, credit markets (sovereigns, financials, and non-financials) sold off quite notably from a positive start and despite a small rally into the close (which sovereigns did not participate in) closed practically unchanged. It seems Schrodinger's cat is indeed present not just in Chinese PMI, US jobs data and regional surveys, but also in the risk asset markets as credit market participants are dramatically different in their views (and flows we suppose) going into this quarter. We also note that Europe's VIX has collapsed in the last few days to a more normalized level relative to US VIX.

The True French Debt To GDP: 146%

In my continuing attempt to debunk what the European Union presents as facts; I turn my attention to France. I have already given you the correct debt to GDP ratios for Spain, Italy, Portugal and Germany which follows the exact principles of what any corporation in America or Europe would be mandated to report or suffer the slings and arrows of being held accountable for Fraud. I include contingent liabilities, derivatives, promises to pay, various guarantees and all of the normal accounting practices to be considered on any balance sheet except the sovereign nations of Europe. In the end, of course, it is your decision but at least we can begin any consideration based upon the facts and not based upon a fictitious account. Again, I divide up the liabilities into two categories, their national obligations and their European obligations; the European Union, the European Central Bank and finally for the other European institutions for which they bear some burden. Then I add it all up, divide by their GDP and we arrive at a factual accounting. Nothing complicated here except sleuthing about to get the data which is no easy task as it is hidden in various nooks and crannies.

European Bailout Stigma Shifts From Banks To Sovereigns As Bundesbank Refuses PIG Collateral

Back in early February, the ECB's Margio Draghi told a naive world when discussing the implication of taking LTRO bailout aid, that “There is no stigma whatsoever on these facilities." We accused him of lying. Additionally, we also suggested to put one's money where Draghi's lies are, and to go long non-LTRO banks, while shorting LTRO recipients. In two short months the spread on that trade has doubled (see below), which intuitively is not surprising: after all, as a former Goldmanite (and according to some - current), Draghi is merely treating Europe's taxpayers like the muppets they are. As such, fading anything he says should come as naturally as Stolpering each and every FX trade. Yet what that little incident shows is that despite all their attempts otherwise, the central planners can not contain every single natural consequences of their artificial and destructive actions. Today, we see learn that the same Stigma we warned about, and that Draghi said does not exist, is starting to spread away from just the bailed out banks (becuase we now know that the LTRO was merely a QE-like bailout of several insolvent Italian and Spanish banks), and to sovereigns. From Bloomberg: "Germany’s Bundesbank is the first of the 17 euro-area central banks to refuse to accept as collateral bank bonds guaranteed by member states receiving aid from the European Union and the International Monetary Fund, Frankfurter Allgemeine Zeitung reported." And where Buba goes, everyone else is soon to follow. And what happens then? Since it is inevitable that Spain and Italy will be next on the bailout wagon, what happens when over $2 trillion in bonds suddenly become ineligible for cash collateral from the only solvent central bank in the world (aside for that modest, little TARGET2 issue of course). Will it force the ECB to be ever more lenient with collateral, and how long until the plebs finally realize that the ECB has been doing nothing but outright printing in the past 5 months? What happens to inflationary expectations then?

Overnight Sentiment: Positive Despite Barrage Of Misses, On More Bailout Promises

A bevy of economic data misses overnight, including German and UK retail sales, Japan industrial production, UK consumer confidence, and a European economy which is overheating more than expected (2.6% vs 2.5% exp, although with $10/gas this is hardly surprising), and futures are naturally green. The reason: the broken record that is the European FinMins who are now redirecting attention from the slowly fading LTRO impact to the good old standby EFSFESM, which according to a statement by de Jager has now been agreed on at €800 billion, lower than last week's preliminary expectation for €940 billion in joint firepower. That this is nothing but a headline grabber is as we have noted before, as there is much doublecounting, capital allocation to and by the PIIGS as well as funding already assigned. It will likely take stocks some time before the realization dawns that this is not new capital and liquidity entering the markets, unlike QE on either side of the Atlantic, while the amount is largely inadequate to fill the multi-trillion liquidity shortfall, let alone "solvency" of European sovereigns and banks. So for now enjoy the greenness all around.