Didn't Anyone Notice The Seemingly Irreparable Damage To The Eurozone Last Week? Global Short Ban, Here We Come!Submitted by Reggie Middleton on 07/19/2011 07:24 -0400
SocGen On The Stress Test: "It Does Not Reflect Reality" And "A Political Error Can Trigger A Freeze In Money Markets"Submitted by Tyler Durden on 07/17/2011 23:28 -0400
And we thought we were harsh on the EBA's second farce of so-called 'stress tests'. Enter SocGen's Hank Calenti and team: "The test does not reflect current reality, in our view; even if GIIPS sovereign are further stressed within this test, a €22bn shortfall and a relatively healthy average 6.2% core Tier 1 appear. The European banking sector is captive to politics at the moment. A political error can trigger a freeze in money markets, and a liquidity crisis could quickly turn into a solvency crisis. Only improved governance would avoid such a nasty scenario." We wonder what Calenti would say about the US in this case...
A week earlier, we presented Moody's proposed take on which banks are at risk of failing Europe's Stress Test version 2 (which is nothing but another huge waste of time), the results of which are due to be announced later today. The event will likely be market moving although we expect it will be at most 3 months before a bank that passed the test fails in spectacular fashion, laying the groundwork for next year's Stress Test part 3: the most stringent of all, and so forth. Below is RanSquawk's comprehensive take on what to expect from today's announcement. "Last years stress test results indicated that despite a modest capital shortfall of EUR 3.5bln, overall, the EU banking system was well capitalised and that there was no major risk stemming from sovereign exposure. However, policy makers suffered a massive credibility blow after Ireland was forced to seek monetary assistance after Irish banks lost access to capital markets following revelations of massive financing gaps which in turn endangered the country itself. As such, this year’s stress tests, which have been carried out on 90 banks, have been designed to be more stringent in nature and should provide market participants with some degree of relief."
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If We Don't Break Up the Giant Banks NOW, They'll Be Bailed Out Again and Again ... Dragging the World Economy Down With ThemSubmitted by George Washington on 07/13/2011 13:50 -0400
Last chance ...
The latest monthly breakdown from PIMCO's Total Return Fund is out. Among the key findings for June are that the total AUM declined modestly by $400 million to $242.8 billion, well below the all time highs of $256 billion in October 2010. More notably, it appears that Gross has gotten tired of being mocked by CNBC for his Treasury short position and has raised his cash Treasury bond exposure by 3% to 8%, though even with that move he is still net neutral courtesy of a 1% Agency cash position and -9% in synthetic swap exposure, unchanged from May. Therefore Gross is no longer short on a net basis. He also reduced his IG exposure from 18% to 17%, offsetting an increase in emerging market corp bonds by 1%. Where he did however invest quite a bit of money in are Non-US Developed market: i.e. European sovereigns: arguably Italian names, as per the announcement of PIMCO's Bosomworth on Bloomberg TV last night. However, since this report is for June, and since the increase in bond exposure occurred before the massive rout in July, it probably means that Gross did not time his increase in European debt exposure quite as well as he had hoped. Lastly, and just as interesting, is the increase in the effective duration of the TRF, which rose from 3.73 to 4.37, the second highest in 2011, and a steep rise from the near record low 3.42 in April. At least Gross can now saw that he is no longer largely underweight duration. Lastly, the fund still has gobs of cash, at just over $70 billion.
Who would have thought a few years ago that Moody's would be one of the biggest supporters of the gold bulls..."Moody's Investors Service has today downgraded Ireland's foreign- and local-currency government bond ratings by one notch to Ba1 from Baa3. The outlook on the ratings remains negative. The main driver of today's downgrade is the growing likelihood that participation of existing investors may be required as a pre-condition for any future rounds of official financing, should Ireland be unable to borrow at sustainable rates in the capital markets after the end of the current EU/IMF support programme at year-end 2013. Private sector creditor participation could be in the form of a debt re-profiling -- i.e., the rolling-over or swapping of a portion of debt for longer-maturity bonds with coupons below current market rates -- in proportion to the size of the creditors' holdings of debt that are coming due."
Willem Buiter Says If ECB Does Not Intervene In Thursday's Italian Bond Auction, It Will Likely FailSubmitted by Tyler Durden on 07/12/2011 09:48 -0400
Willem Buiter, Citigroup's chief economist and former BOE policy maker, told reporters in London today that "the ECB will intervene on whatever scale is necessary to allow Italy to conduct its auction on Thursday. If the ECB doesn’t come in, the Italian bond auction is likely to fail. What we’re going to have is the ECB are going to be doing the heavy lifting." To anyone who watched the sharp move in Italian sovereigns, so reminiscent of central bank FX intervention overnight, Buiter's conclusion is all too obvious. As we reported, there were extensive rumors, and certainly validated by trading activity, that either the ECB or the PBOC or both, intervened in the Italian bond market to make sure today's Bill auction priced, which it did, but absent the reinforcement of the central banks could have very likely failed. What is amusing is that it was just last week that reporters were querying Trichet why the ECB's SMP bond purchasing operation had been all but abandoned. Well, here's your answer: JCT was simply preserving his dry powder for all the upcoming contagion casualties, such as Italy first, then everyone else.
The European financial system, like the others, is efficient but is not robust. It makes the most of what it has and runs on a razor edge between efficiency gains for individual agents and horrendous systemic losses. It depends crucially on the performance of its sovereign assets. System survival depends on one hand whether or not counterparties can absorb the necessary haircuts and on the other, whether fundamentals of debtor nations are strong enough to stand on their own. Spain and Italy will have to stand on their own, because when Greece goes, Ireland will most likely go, which will in turn set off a critical mass such that the nation who dictates monetary policy (Germany) will be taking care of its own self.
UK Royal Mint Silver Production Surges 100% - Sovereign Edward Supply Tight But Bullion Premiums LowSubmitted by Tyler Durden on 07/07/2011 07:42 -0400
The U.K.’s Royal Mint said that first-half silver production in 2011 doubled, while gold production climbed 8.9% over 2010 levels. The Royal Mint, established in the 13th century, used 36,219 ounces of gold compared with 33,266 ounces the previous year, according to data obtained by Bloomberg News under a Freedom of Information Act request. Silver use more than doubled to 324,421 ounces in the period. The Royal Mint makes Britannia silver bullion coins and other collector silver coins. 324,421 ounces of silver at today’s prices ($36/oz) would be worth less than $12 million dollars. Mere chump change to many wealth investors and savers concerned about their investments and savings.
Greek "Rollover" Bailout Proposal On Verge Of Collapse, After Germany Puts Bond Swap Idea "Back On The Table"Submitted by Tyler Durden on 07/06/2011 09:31 -0400
The much ridiculed "MLEC-type" bailout proposal of Greece, which contemplates the rolling of existing debt into a guaranteed SPV, and which was the European rescue deux ex machina for exactly two weeks, appears to have been pulled off the table, following the announcement by German Deputy Finance Minister Joerg Asmussen to Reuters Insider TV that "Germany has put a Greek bond swap back on the table as a model for private sector involvement in fresh aid for Athens." More: "The model put forward by some French banks is still a good base for discussions and we are currently working on this. But since rating agencies have signalled that they will consider modalities (such as) the French proposal as a selective default -- that means a rating event -- we can also put other options like a bond exchange on the table." he said, adding discussions would take place over the summer break. Translation: back to square minus one. And actually it is much worse, because if Asmussen is aware of rating agency policy, a debt exchange would most certainly qualify for an event of default. Which confirms our initial expectation from a month ago that there is nothing absent a complete loss of ECB credibility that can possibly transpire next, as the ECB realizes there is no way around accepting defaulted Greek bonds as collateral. The only question is what happens then: will the market, head currently deep in the sand, scramble upon the confirmation that the ECB emperor is naked, or will it continue acting as if nothing has changed yet again.
Back To The Drawing Board: S&P Says Greek Rollover Debt Plan "Would Likely Amount To A Default Under Our Citeria"Submitted by Tyler Durden on 07/04/2011 07:27 -0400
Last Wednesday we cited from a Reuters report, according to which the last ditch Greek MLEC/CDO rescue operation, would be welcome to S&P and Moody's as "The whole charm of the French model is that it was worked out in a such way that it will be fine with the rating agencies." Because absent a decree of no EOD, the whole thing is pointless. Well, as often turns out, this was yet more wishful thinking on behalf of some bureaucrat, masked as fact. S&P has just come out with the following: "In recent weeks, a number of proposals relating to this topic have surfaced, and the particulars in some cases are evidently still in flux. This credit comment looks at the most prominent of the recent proposals, put forward by the Fédération Bancaire Française (FBF) on June 24, 2011, in the context of our criteria for evaluating distressed debt exchanges and similar debt restructurings (see Related Research below). In brief, it is our view that each of the two financing options described in the FBF proposal would likely amount to a default under our criteria" and specifically: "we believe that both options represent (i) a "similar restructuring"
(ii) are "distressed" and (iii) offer "less value than the promise of
the original securities" under our criteria. Consequently, if either
option were implemented in its current form, absent other mitigating
information, we would likely view it as constituting a default under our
criteria." Goodbye MLEC 2 - as expected you were just as useless as your first iteration back in 2007.
Just a few dots to connect on a holiday weekend.
A few days ago, we demonstrated that the latest Greek bailout package is nothing more than recycled MLEC special purpose vehicle designed to cover up toxic assets off balance sheet, like that one that was supposed to wrap up the subprime toxic mess. Luckily that did not happen as all it would do is make the credit crash even more acute when it finally did hit. In the meantime, the other Frankenstein contraption proposed by Wall Street to contain the fallout of the PIIGS bankruptcy, is the EFSF, which also got a facelift a few weeks back, and which is effectively a CDO: the same instrument which caused European banks to now be insolvent after buying up all tranches offered them by Goldman et al in the 2005-2007 period, once US banks realized just how toxic the less than AAA tranches were. It is poetically ironic that the instrument that led to Europe's insolvency is now what is supposed to prevent (temporarily) its plunge into outright default. For all who are wondering what the details of the new and improved CDO at the heart of the Eurozone are, here is Nomura's Nikan Firoozye.
Goldman Vs Pimco Round 2: Goldman Buying Belly Again As It Doubles Down On Client Call To Short The 5 YearSubmitted by Tyler Durden on 06/30/2011 09:23 -0400
Three months ago, Goldman's Francesco Garzarelli released a note to clients advising them to short the 5 Year as follows: "We recommend going short 5-yr US Treasuries at 1.936% for a potential target of 2.30% and a close below 1.80%." Naturally, our cynical outlook on life prompted us to say the following: "As usual, since that would mean Goldman is now accumulating 5 Year inventory, it appears we will soon have a rather dramatic duel between the two biggest Wall Street titans: PIMCO and Goldman, at least as pertains to their outlook on rates." Well, Goldman won so far (its clients not so much). Today, Goldman is telegraphing that it is starting to accumulate the next batch of 5 years, which makes sense considering the point on the curve experienced its 3rd worst 3-day decline ever as reported yesterday. To wit: "Ahead of key data for June, starting with the June ISM report this Friday, we recommend initiating short positions in 5-yr UST at the current level of 1.70%, for an initial target of 2.00%, and stops on a close below 1.40%." Round two of Goldman vs PIMCO is now on.