Overnight Sentiment Sours As Reality Returns

Tyler Durden's picture

While these pages have been warning for about a month that a Greek default is precisely what Europe wants, a self-deluded market has been ignoring this reality. That is no longer the case as the default (pardon the pun) thought is now one of Greek default. As for the assumption that "it is all priced in"... that too is being scrapped as revisionist histories of Lehman come to mind. As a result the EURUSD is drifting ever lower, and has been trading with a 1.29 handle for the first time in weeks. Needless to say, Europe is on the verge of panic as the nearly 2-month impact of the LTRO is now truly gone, and with unmistakable stigma (sorry Jernej Omahen - read this) associated with LTRO banks, we shudder at the thought how many banks will voluntarily subject themselves to being seen as desperately needing European Discount Window access in two weeks. Moody's downgrade of key insurance companies and threat to cut most banks, has not helped. Finally, some unpleasant news out of China, where commerce ministry said that the trade outlook is "grim" while a research with the Chinese Academy of Sciences said that Chinese EFSF contribution should be capped at Spain's €92.6 billion, rounds out the rout. So while we wait patiently as reality in Europe truly seeps into risk prices, here is Bloomberg with a summary of overnight catalysts.

  • Bund yields moderately lower, 1.1 to 2.5bps; Treasury yields mixed, with 2-, 3-yr yields higher vs lower further out curve
  • A Greek default is inevitable and the chances of the country being pushed out of the euro are increasing, which could push U.S. 10-year yield to ~1.50%, according to Standard Bank
  • UBS, Credit Suisse and Morgan Stanley’s credit ratings may be cut by as many as three levels by Moody’s
  • Italian bonds fell, driving 10-year yields to 5.79%, a two-week high, as European officials struggled to reach agreement on a financial rescue for Greece
  • PPI probably rose 4.1% Y/y in January, economists estimated before today’s report; Bernanke speaks in Virginia
  • A record rally in European credit markets ground to a halt as the unraveling rescue plan for Greece fueled concern of a default triggering turmoil in the euro region

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crgTMT56's picture

We need to put out a 10 out of 10 Stopler article.  It just has to be done....

apberusdisvet's picture

but but but..........doesn't an actual default trigger the CDSs, and thus financial armageddon?

Non Passaran's picture

CDSs won't have any impact.
It's the next domino in line that scares them shitless.

economics1996's picture

What is there to worry about?  Not a problem.

Dugald's picture

Of course not....just wait for some very unbeliveable rumour to float and the markets will surge again, hopium to the stars......BS ad astra......

Falcon15's picture

In the most direct sense, yes. An actual "default" would. However the ISDA has made a very implicit statement that a "haircut" is not an actual default or "credit event". Therefore, a "haircut" would not trigger the CDS's, and the CDS sellers would keep their fees, paying out nothing. The bond holders lose whatever the value the bonds are slashed by (I have read anywhere from 50-70%), in addition to the "fees" or "spread" paid to the CDS issuers which tallies as a huge net loss of the bond value in addition to any monies paid out to hedge against default. Bitch of it is, the bond holders get ass hammered. It is still financial "armageddon" for bond holders. Additionally, if (and this is a big "if") the bond holders decide to keep the now severely devalued bonds, and wish to maintain their CDS's on those bonds, they have to keep paying fees.

If Greece cannot ink a bailout deal, and Greece has an actual default, then the CDS's trigger. Sticky wicket. Someone loses no matter how the deal is cut. Just a matter of who and how much.

DarkStarDog's picture

That only happens with real price discovery markets, not in extend, pretend, and reruns of MadMoney boobies and talking the book shooks world. Benny will save the TBTF buy da dipshit !

SWRichmond's picture

Great read.  But all of the talk of sacrificing Greece in order to save the others is nonsense.  The scale of the problems gets lrger, not smaller, and who is to say that once the budgets of Italy, Spain and France are examined the same (as Greece) shenanigans won't be "revealed"?  The coming Greek default will merely provide cover for another can-kick.

If one thinks of this crisis in terms of it being a carefully constructed plan to steal as much money as possible from as many trusting and unsuspecting fools as possible, it makes perfect sense.  Whipsaw the markets with news releases, get money positioned where it can be stolen, then whipsaw again.  Lather, rinse, repeat until the returns on the strategy diminish greatly, then cash out completely and let the taxpayers clean it up.  Simple, brilliant, and all made possible by us and our venal political class.

hangemhigh's picture

TO: SWRichmond

"If one thinks of this crisis in terms of it being a carefully constructed plan to steal as much money as possible from as many trusting and unsuspecting fools as possible, it makes perfect sense.  Whipsaw the markets with news releases, get money positioned where it can be stolen, then whipsaw again.  Lather, rinse, repeat until the returns on the strategy diminish greatly, then cash out completely and let the taxpayers clean it up. "

SWR: you've got it right .....this whole fiasco is a pemeditated plan, a methodology.   below is part of conclusion from article it has taken me 3 months to research and write.   

 ....buried within the  ‘shadow banking system’, is a hidden mechanism by which predacious banksters are able to use derivative based debt bombs to destroy weak counterparties.  The intrigues required to achieve these Dr. Evil-like, outcomes are deceptively simple.  The strong lend to the weak, then plunder their assets when a crisis, either real or invented, renders them vulnerable to assault.  Whether the end game is to take out an individual company, or an entire country, the shock and awe imperatives remain the same.  Do as much derivative trading, collateralized lending, hypothecation and rehypothecation with as many imprudent counterparties as you can. 

the hidden 'gotcha' is changes in bankruptcy laws (2005) that put derivative traders at head of recovery line. in case of default they can legally confiscate/keep all posted collaterals.  it is literally a liccense to steal............      

this zerohedge article in contributors section discusses the the impact of the bankruptcy law changes..........MF Global: Where's the Cash -- Part II                             Posted by : rcwhalen    Post date: 02/15/2012 - 23:53

Non Passaran's picture

Not bad, I might finally make some serious money on my short positions!

SWRichmond's picture

Patience, grasshoppers.

westboundnup's picture

An economic Jonestown.  The Kool Aid is kicking in.

Mugatu's picture

Mean reversion is a bitch baby!  Now the tide will roll the other way for 2 months.

Benedict Farse's picture

But But But... China?

Wakanda's picture

They kicked the can down the road to get the Northern hemisphere through winter.  A lot more people will survive if the crisis breaks in March/April and sheeple prepare early for next winter.


George Soros's picture

Biggest german yellow press newspaper is speculating about a military coup in greence


Full story!


They quote a high ranking greek general "If they tell me to send tanks to protect the banks, i will send them but i will sit in and fire the first shot by myself


battle axe's picture

Well it is about time the Greek Army got involved, come on boys, time to use the shiny new toys you guys bought as your country piled on more and more debt.....

fonzannoon's picture

LTRO 2 will be a trillion bucks. All banks will be forced to participate. No one will know which ones are bad and which ones are worse. I'm getting the hang of this!

falak pema's picture

Well its official the ECB has admitted that the current bail out deal AT BEST will reduce the Greek debt to 129% of GDP projected to horizon of 2020, based on current number crunching; which number crunching as we all know is highly dicey as the Greek government is incapable of providing an overall spread sheet of its projected outlays and revenues on a detailed basis to Troika controllers. Its all very Greek, numbers of civil servants, retirees etc. Black art! 

So now the ECB has the painful decision to make of whether the distant 9% over-target debt should be written off from its own books, something that has Schauble doing the Heil Merkel type elbow jerk in his wheel chair. 

Deadlock and Loch Ness monster of Greek default lurks in everybody's books. Lets see the new new new spin concocted in Brussels, city of perpetual sprouts!

lolmao500's picture

The economy won't make it to the US election.

Sandmann's picture

Just how often have CDS on Sovereigns paid out ? I am really sceptical that CDS have any material value when written against sovereign states and that they are little more than worthless gambling debts.


Even Mississippi: the oldest unpaid debt on record “Mississippi, between 1831 in 1838, borrowed $7 million, for which she obtained full value, and the proceeds of which she invested in a Planters’ and Union Banks. As long as the banks were financially successful the State paid her debt to the holders of the bonds. But when bad times came and the banks failed, largely, it is believed, owing to unfortunate speculation, Mississippi suspended payments, and has since consistently refuse to recognize defaulted obligations.



gojam's picture

Is there a chance that the continual market rises are just factoring in inflation due to QE ??

Anyone ?



Schmuck Raker's picture

Does anyone recall how much EFSF China has already bought?

Around euro 10b, wasn't it?

Falcon15's picture

Japan holds at least 10 Billion Euros in EFSF. I seem to recall China discussing buying 100 Billion Euros in EFSF bonds, at the last G-20. Anyone have solid numbers on China?

Schmuck Raker's picture

Thanks for the feedback F15.

We may have trouble nailing down numbers for China.

They seem to have a tendency to deal through intermediaries making it difficult to track their moves.

Shizzmoney's picture

Again, two economies.  One the plutocrats live in, and the one the rest of us, do.

But, according to MSM, "the economy is improving!".  Of COURSE it is, we are leading up to a Presidental election.....those who run the system needs to have the image of it running smoothly to get any legitimacy.

Neo-feudalism, FTW!

The Peasants' Revolt, Wat Tyler's Rebellion, or the Great Rising of 1381

The revolt was precipitated by King Richard II's heavy-handed attempts to enforce the third medieval poll tax, first levied in 1377 supposedly to finance military campaigns overseas.[1] The third poll tax was not levied at a flat rate (as in 1377) nor according to schedule[2] (as in 1379); instead, it allowed some of the poor to pay a reduced rate, while others who were equally poor had to pay the full tax, prompting calls of injustice.


GMadScientist's picture

It's always the poor who fight and always the poor who pay. That doesn't usually end well...


Thomas Anderson's picture

Greece has been on the brink for weeks and still the market has been swallowing the blue pill.  Made a quick buck during the Santa ramp, sold in late January, just picked up a little bit of put options Tues on financials and netflix, but mostly going to wait on the sidelines as this bailout farce continues.  Will gladly jump back into the market if the ECB fires up the printing press on Feb 29th or Bernanke & the FED start dropping monopoly money from a helicopter.  Stay frosty

Thomas Anderson's picture

-pulls out the six shooters- Time to reload on shorts???

GMadScientist's picture

If you want a clean pair handy after you crap yours, yeah.

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