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Attention Finally Turns To The Two Ultimate Backstoppers Of The World: Germany And China

Tyler Durden's picture





 

It has been long in coming but finally the credit market is noticeably refocusing its attention to the two countries that are supposed to carry the burden of bailing out the world on their shoulders: Germany, and, that perpetual placeholder for global rescues, China. As noted yesterday, while following today's anticipated ISDA decision to effectively make price discovery in CDS null and void, and in the process also put the whole premise of sovereign debt insurance into doubt, CDS still provides a very useful metric courtesy of the DTCC, namely open interest, or said otherwise, gross and net notional outstanding in the CDS. And while we will reserve the observation that not only did ISDA kill sovereign CDS, but in the process it also ended bilateral netting effectively pushing up net CDS to the level of gross, we will highlight that as of the last week, net notional in both German and China CDS has hit a record, of $19.6 billion and $9.3 billion, respectively. This is occuring as notionals in the two most active countries to date, France and Italy, have been declining. In essence, what the CDS market is telling us is that while the easy money in French and Italian default risk has been made, it is now finally the turn of China and Germany to defend their credit risk and sovereign spreads. We expect that if China is indeed confirmed to be the backstopper of Europe through funding the EFSF in whole or in part, that while its CDS may or may not surge, net notionals will continue to increase as it means that ever more are laying insurance, as hobbled as it may be, on the country which recently was forced to bail out its own banking system, let alone Europe. Keep a close eye on China, which while the bulk of the market is taking for granted as the global rescuer of last resort with hard money, the smart money is already positioning itself for the next big disappointment.

The logical corollary, as suggested back on July 21, is that German cash spreads, now that German CDS is largely moot for risk determination purposes (just observed the basis trades blowing up across the board), will promptly resume widening following today's euphoric rally, which while truly impressive begs one question: if it was such a slam dunk to run up markets by announcing a 50% haircut, why did French banks not agree to this before?

 


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Thu, 10/27/2011 - 13:03 | Link to Comment danger close here
danger close here's picture

is the super short squeeze still happening? must be those retail shorts huh.

Thu, 10/27/2011 - 13:06 | Link to Comment alien-IQ
alien-IQ's picture

I blame the Leprechauns. They're always short.

Thu, 10/27/2011 - 13:10 | Link to Comment qussl3
qussl3's picture

No wonder they are always looking for that pot'o'gold.

Under a rainbow no less.

Thu, 10/27/2011 - 15:06 | Link to Comment GenX Investor
GenX Investor's picture

Haven't these damn Wall Street fund managers made up their losses chasing SPX for the month yet???

Thu, 10/27/2011 - 15:33 | Link to Comment eureka
eureka's picture

Wall Street is taking a clue from Haliburton (which moved to Dubai) - and will soon move to Shnaghai...

"many to defend their credit risk and sovereign spreads. We expect that if China is indeed confirmed to be the backstopper of Europe through funding the EFSF"

- because the plantation slaves are reversing the old order, taking tha mansion, by becoming the new plantation store owner - i.e. lending to both EU and US, so that their masses can keep buying from the store while getting ever deeper indebted to the store... ensuring their further enslavement, submission and obedience -

yes indeed, the western world is Land Of The Slaves And Home Of The Cowards.

How about growing some:  LET THE BANKS TAKE 100% HAIRCUTS !!!

Thu, 10/27/2011 - 13:21 | Link to Comment Ruffcut
Ruffcut's picture

A billion dollars to china is like a pimple on an elephant. NOt a big deal. you gotta balance the ponzi fairly. That is all it appears to be.

Thu, 12/01/2011 - 12:20 | Link to Comment Jonbutterfly
Jonbutterfly's picture

Such is the schizophrenic nature of the world economic system that US Bank credit ratings are falling while the Dow is on a holiday tear. The system looks good on the outside, but it's hiding a cancer: http://djia.tv/press-tv/top-us-banks-credit-ratings-fall/


Thu, 10/27/2011 - 13:12 | Link to Comment SheepDog-One
SheepDog-One's picture

He's right all theyre doing is GUARANTEEING total collapse. 

Thu, 10/27/2011 - 13:04 | Link to Comment alien-IQ
alien-IQ's picture

The irony that the entire capitalists system is dependent on the never ending support (and bailouts) from China and Germany is beyond perfect.

Thu, 10/27/2011 - 13:12 | Link to Comment Syrin
Syrin's picture

A capitalist system doesn't have bail outs.    You should know better.

Thu, 10/27/2011 - 13:19 | Link to Comment NotApplicable
NotApplicable's picture

Some people just can't bring themselves to use the word "Socialism" in a negative context, as it upsets their programming.

Thu, 10/27/2011 - 13:35 | Link to Comment alien-IQ
alien-IQ's picture

and some people don't know the difference between Socialism and Fascism....The latter being what we have, not socialism.

Let me spell it out real simple:

Socialism = You get your teeth fixed for free.

Fascism = You get your teeth kicked in for nothing.

Thu, 10/27/2011 - 13:04 | Link to Comment LawsofPhysics
LawsofPhysics's picture

How did that phone call go this morning?  cue crickets...

Thu, 10/27/2011 - 13:23 | Link to Comment Unprepared
Unprepared's picture


Sarkozy: Mister Jiabao, If you do this, a new Marianne of my wife naked twice the size of the Liberty statue will be shipped to Shanghai before the next Chinese new year and will move Quartier Chinois to the 1st Arrondissement

Berloscuni: And consider yourself invited to the next Bunga Bunga meeting

Jiabao: Pha Cough

Thu, 10/27/2011 - 13:05 | Link to Comment SheepDog-One
SheepDog-One's picture

'Next big disappointment'? 

Nah that cant be! Unicorns jumping over glitter rainbows crapping piles of gold dubloons, etc...

Thu, 10/27/2011 - 13:11 | Link to Comment Executioner
Executioner's picture

  Yes SDO...  As someone said

Thu, 10/27/2011 - 13:05 | Link to Comment Executioner
Executioner's picture

I know that the market is not aligned with fundaments, but can someone please explain to me, how this 50% cut on greece debt may be a good thing for banks?
I mean a half default is supposed to put debt holders in bad sheets, doesn't it?

Thu, 10/27/2011 - 13:13 | Link to Comment Syrin
Syrin's picture

Exactly.   I guess the euphoria is that it's not the 60-80% (yet) some predicted.

Thu, 10/27/2011 - 13:22 | Link to Comment Executioner
Executioner's picture

Syrin, I can hardly believe that those guys made up all this just for a 3 to 4 day ramp job. I mean, since they are puppets, why is that bankers ordered such thing? Aren't US, French and German banks/bankers the major holders of greek debt? And as you have mentioned, what about all those CDS stading out in the middle of nowhere?

Thu, 10/27/2011 - 15:05 | Link to Comment Syrin
Syrin's picture

Oh, I totally agree.   There really isn't a good rational explanation.

Thu, 10/27/2011 - 13:06 | Link to Comment user2011
user2011's picture

Doesn't matter how many backstoppers there are.  US bankers are betting against the EUROZone.  They will even wage a war to do it. 

 

Look at who holds those CDS ?

Thu, 10/27/2011 - 13:06 | Link to Comment PaperBear
PaperBear's picture

Dr. Abuzaid Omar Dorda,the senior Libyan official, a former United Nations ambassador for Libya

http://libyasos.blogspot.com/2011/10/important-campaign-concerning-libya.html

currently being held and tortured by NTC members, his life being in grave danger.

Thu, 10/27/2011 - 13:06 | Link to Comment unionbroker
unionbroker's picture

tell me again why it is in China's interest to bail out the Europeans.

Thu, 10/27/2011 - 13:12 | Link to Comment homersimpson
homersimpson's picture

Think of China's interest in Europe akin to you loaning your friend $20k to keep his business afloat for another few months. Unfortunately, you already floated him 500k to start up the business. If the business goes under, you see none of your original 500k investment back. If you lend him the $20k, you might lose that too, so you grit your teeth and hope that things magically get better so you can get your original investment back one day.

Thu, 10/27/2011 - 13:22 | Link to Comment jcaz
jcaz's picture

One problem, tho-  while you were lending him $500K,  you took it from a phony pile of $1M real estate holdings you created.....  Now, your friend wants $20K. and you've only got $50K real money.....  So now you REALLY want that $500K back, but your house of cards is quickly folding under.....  You might be down to $10K yourself soon, so you're in a trap- loan out the $20K, with a hope of seeing the $500K, or keep the $20K and perpetuate the fraud a little bit longer?

Answer? 

Thermonuclear is one idea.....

Thu, 10/27/2011 - 13:28 | Link to Comment homersimpson
homersimpson's picture

My apologies for not adding more realism to my answer but you are correct..

Thu, 10/27/2011 - 13:16 | Link to Comment FeralSerf
FeralSerf's picture

Mercantilism.

Thu, 10/27/2011 - 13:33 | Link to Comment earleflorida
earleflorida's picture

1.35 billion consumers

Thu, 10/27/2011 - 16:27 | Link to Comment EvlTheCat
EvlTheCat's picture

Sorry earleflorida, China has 95 million consumers, and growing, in Brazil and all the natural resources the country can provide locked up. Europe has no chance of competing with that. China is systematically wiping out Brazil's manufacturing sector, and making them dependent on cheap imports. Brazil is exporting like crazy to China and has literally become part of China's hedge.

China is buying time in Europe to try, and turn it's shit EU investments into gold, before it permanently moves on to greener pastures. I.E. South America.

I can't comment if it is because China presumes they will be the next reserve currency or not. However, that is some individuals speculation.

Now, if China can pull off a soft landing, like they hope, Brazil will be the "New America". However, if they don't and go for the hard landing, Brazil is going to get screwed. Brazil is all in China. China is NOT all in Brazil. All the people buying into Brazil are true ballsy front runners, if you ask me.

The Brazilian people will be the key. The government will do anything China asks as long as the money flows. The people will only follow if they think they will get something out of it. I.E. Jobs, easy credit, entitlements. Fraud is rampant in Brazil. Their economic infrastructure is a joke. Most middle class Brazilians have spent their entire lives dodging taxes. They are not scared of their government and do not fear jail, like people in America. Anyone and everyone can be bought off.

My opinion, of course.

A few interesting articles:

www.washingtonpost.com/world/americas/china-tries-to-win-over-brazilian-...

http://www.forbes.com/sites/ricardogeromel/2011/08/24/is-brazil-a-deriva...

http://www.eurasiareview.com/13102011-flow-of-chinese-investments-contin...’s-ascendency-analysis/

http://www.washingtonpost.com/wp-dyn/content/article/2010/07/25/AR201007...

Thu, 10/27/2011 - 13:35 | Link to Comment earleflorida
earleflorida's picture

2x post :-((

Thu, 10/27/2011 - 13:09 | Link to Comment Protonrick
Protonrick's picture

But why would anyone now buy a Credit Default Swap if they don't pay up in a "credit event?'

Thu, 10/27/2011 - 13:18 | Link to Comment Executioner
Executioner's picture

Yes I am also trying to figure out where the catch is

Thu, 10/27/2011 - 13:21 | Link to Comment JohnG
JohnG's picture

Cue expensive lawyers.

Thu, 10/27/2011 - 13:23 | Link to Comment NotApplicable
NotApplicable's picture

Because some day in the future, they might actually allow someone to default. So, you'd better get your bets in now to avoid the rush.

/sarc

Thu, 10/27/2011 - 13:08 | Link to Comment Shvanztanz
Shvanztanz's picture

Is this anything like bank robbers telling the customers to remain calm and finish filling out their deposit slips while they fill duffle bags with cash at top speed with the get away bird on its way to the rendezvous on the roof?

Thu, 10/27/2011 - 13:09 | Link to Comment qussl3
qussl3's picture

Singapore already forecasting recession.

That little bugger leads and is pretty reliable for Asian growth at least.

Thu, 10/27/2011 - 13:11 | Link to Comment socratesplus
socratesplus's picture

by the end of november two things will have happened:  this eu summit will look as outdated as the july summit is now; and the us supercommittee will be deadlocked.  shorts who live to see another day will have that day in the sun.

Thu, 10/27/2011 - 13:14 | Link to Comment SheepDog-One
SheepDog-One's picture

Riding along on clouds of Hopium smoke isnt lasting long anymore. 

Thu, 10/27/2011 - 13:25 | Link to Comment jcaz
jcaz's picture

LOL- and where were you a month ago?

Ooh- you might make it back to the 200 day moving average today!

Wake up.

Thu, 10/27/2011 - 13:15 | Link to Comment vast-dom
vast-dom's picture

Question: if it was such a slam dunk to run up markets by announcing a 50% haircut, why did French banks not agree to this before?

 

ANSWER: because any haircut at this point, and the actual %age is moot, is a desperate hail mary play more at market repositioning gambit in order buy time for the Great Unwind. PIIGS will not play nice during next round and that is when longs reaping today will go short tomorrow and/or sideline themselves. Downgrades abound. 

 

Question: why is copper surging?

 

ANSWER: because hopium trumps fundamentals (ie reality), until it doesn't. 

 

Question: why is silver not $52-55?

 

ANSWER: because COMEX and the big players are scared shitless of reality.

Thu, 10/27/2011 - 13:21 | Link to Comment DormRoom
DormRoom's picture

Of course Germany & China are the world's backstop.

 

Germany benefitted from the European North-South imbalances.  And China benefitted from the US-China trade imbalances.

 

If markets were efficient these imbalances wouldn't have grown to a level where they could collapse the entire system.  But they have, and we are here; playing kamikazi financial genga.

 

The problem is that there are now entrenched social & financial institutions that have grown out from these structural imbalances, so if imbalances are rebalanced, it will likely cause huge social upheavals in these countries.

 

scar tissues cannot be replaced.

 

#occupywallstreet.

Thu, 10/27/2011 - 13:13 | Link to Comment Sutton
Sutton's picture

Fed should have decreed in '08 that the CDS' shorted  by AIG were not a credit event, thanks for coming.

Thu, 10/27/2011 - 13:18 | Link to Comment Liquid Courage
Liquid Courage's picture

Heads up Tyler(s):

Been busy but don't think I've seen any ref to the following Forbes article here

Rich Danker, Contributor

 

 10/26/2011 @ 6:51PM |2,380 views

Recreating A Real Gold Standard

http://www.forbes.com/sites/richdanker/2011/10/26/recreating-a-real-gold...

(Linked also at 321Gold, where I first saw it)

A few Highlights:

Nations would settle international payment deficits and surpluses in gold rather than paper-based currencies. This would have the effect, principally on the U.S. as the issuer of two-thirds of world reserves, of removing the debt overhang which has made trade deficits, government overborrowing, and hot money bubbles the way of life.

[Louis E.] Lehrman’s historical model is the international gold standard of 1873-1914, an era of industrial breakthrough, global economic growth, and astounding price stability. As charted by his colleague John Muller, it was the most stable period of U.S. monetary regimes based on the Consumer Price Index.

And, (with a nod to Professor Antal Fekete):

Commercial bills, not government securities, would be discounted and the Fed, like other central banks, would be prohibited from owning sovereign debt (other than short-term revenue anticipation bonds). The asset side of the ledger would consist of gold and liquid, secure non-governmental financial claims. Lehrman calls this Fed policy “scaled to the modest wit of man . . .” and it is a thorough relief from the excess allowed to the central bank today.

Worth a look, no?

Thu, 10/27/2011 - 14:02 | Link to Comment PaperBear
PaperBear's picture

“the plan is based on replacing national currencies (the dollar, euro, yen) with the non-national, neutral asset of gold as the world’s reserve money supply.”

Yep, while I hold some shares of Sprott Physical Silver Trust I am also wanting somewhere that I trust to hold my other physical gold/silver that I can have my salary of british pounds turned into more physical gold/silver then use a debit card to spend my physical gold/silver.

Thu, 10/27/2011 - 14:42 | Link to Comment Liquid Courage
Liquid Courage's picture

All of which makes great good sense, of course, but I have to admit my initial enthusiasm on reading this article has pretty much faded to nil after I did a bit more google-snooping.

Not that there's anything wrong with the ideas presented by the estimable Mr. Lehrman et al (which includes some contributions from James Grant) at the Lehrman Institute, but it seems they've been at this for quite a while now and the net result is, ummm ... errrr ... do we have that number ... yes, here it is, it's ZERO ... NADA ... BUPKISS.

The great mass of Homo Ignoramus Economicus has been thoroughly conditioned through their Normalcy Bias to ignore any ramblings about money as too boring and PMs as the ravings of lunatics. And that, unfortunately, goes for the OWS crowd as well. So to all the proud purveyors of the Great Global Graft machine: Thanks a lot Boyz and Gurlz for guaranteeing that when your Global Ponzi does finally fail -- and make no mistake they all fail in the end -- the result will be an epic crash with no-one left standing.

That or a fierce, scary angel comes out of the clouds shooting lightning bolts from his eyes and thunder out his arse and says to the OWS-ers: "You fools ... follow the MONEY ... not that paper crap ... follow the GOLD!" Maybe that'd do it.

Thu, 10/27/2011 - 13:19 | Link to Comment hambone
hambone's picture

Ummm...anybody notice the US Treasury market is suddenly droping like a stone and yields shooting through the roof???

Thu, 10/27/2011 - 13:26 | Link to Comment jcaz
jcaz's picture

China called, they want their money back.... And no, tools, they're not putting it into stocks....

Thu, 10/27/2011 - 13:29 | Link to Comment alien-IQ
alien-IQ's picture

Is China willing to take a 50% haircut on getting their money back? It is, after all, the new normal.

Thu, 10/27/2011 - 13:46 | Link to Comment earleflorida
earleflorida's picture

If, and when the meltdown stops, they'll not only get their money back, but a few pounds of flesh right off the "Piigs'- Hock's"

Thu, 10/27/2011 - 13:29 | Link to Comment 1835jackson
1835jackson's picture

Yup...short covering I bet plus the mainstream falling for the EU crisis being solved BWAHAHAHAHAHAHAHA!

Thu, 10/27/2011 - 13:20 | Link to Comment Hondo
Hondo's picture

The problem is that no matter what happens it won't be a credit event so all buying CDS does is give a revenue stream to the corrupt banking system....exactly what they want.

Thu, 10/27/2011 - 13:31 | Link to Comment unionbroker
unionbroker's picture

remember #1 rule there are no rules

Thu, 10/27/2011 - 13:41 | Link to Comment carbonmutant
carbonmutant's picture

Is China paying retail?

Is China getting a Greek discount on EU paper?

Thu, 10/27/2011 - 13:47 | Link to Comment earleflorida
earleflorida's picture

wait for it ~ 3pm

Thu, 10/27/2011 - 13:51 | Link to Comment kito
kito's picture

why are we still talking about cds, or should i say chs, credit haircut swaps? 

Thu, 10/27/2011 - 13:53 | Link to Comment PaperBear
PaperBear's picture

How’s that contagion looking now, pal ?

Thu, 10/27/2011 - 13:54 | Link to Comment PaperBear
PaperBear's picture

Gold/silver off to the races again.

Thu, 10/27/2011 - 14:00 | Link to Comment lolmao500
lolmao500's picture

Read a book last week written in 1924. It was about a British officer living with Japanese soldiers for a year or so. He learned everything about them... and of course they talked about a Japan-US war... which most people laughed at... because Japan could never go to war against the US since the US was it's biggest client and their economy would be destroyed if they did so. Rings a bell?

Thu, 10/27/2011 - 14:01 | Link to Comment MiningJunkie
MiningJunkie's picture

Germany has exposure of $156b to the PIIGS against 3402 tonnes of Au (we are told) worth $190b - small hiccup is the German public debt at $4.7 trillion.

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