Presenting Europe's Schizophrenia Post LTRO

Tyler Durden's picture

Since Draghi's second savior LTRO, European markets have been flip-flopping gradually lower. These four charts do not seem to suggest a market that is confident about tail-risk containment, sovereign firewalls, or an orderly restructuring by Greece. Sovereign spreads are broadly higher (Spain, France, and Portugal the most), CDS spreads are underperforming (as protection is sought and CDS seen having value as a hedge), non-financial and financial credit is notably weaker, LTRO Stigma remains notably wide, stocks are broadly lower, and the EURUSD is back at 'fair' with its swap spreads (removing its over-pessimism). There has been no change in the price trends for UK-law versus Greek-law GGBs (i.e. noone believes this is over) and even if it were, a renewed focus on growth is hardly a market positive given lending trends and macro prints in Europe recently.

1. Sovereign bond spreads are leaking wider with Spain, France, and Portugal notably worse this last week...


2. CDS are underperforming at the same time, suggesting that i) market participants trust that CDS remain a valuable hedge (i.e. that Greece actions will not destroy this market), and that ii) CDS are a better gauge of sovereign risk as they are not as easily manipulated by the ECB SMP or LTRO carry (note Portugal and Italy are extremely 'cheap' in CDS relative to the bond side with high basis)...

3. Credit and Equity Markets are ratcheting lower with credit markets tending to lead up and down. The flip-flopping personality is nowhere more evident than here...


But 4. The EUR is back in line (having removed its over-pessimism) relative to its EUR-USD-implied swap spread fair-value suggesting no over-excited positivity at renewed growth prospects or on the other hand break-up risk any time soon (especially compared to the seeming over-pessimism we have seen recently)...


Charts: Bloomberg

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Gomie's picture

Of course you forgot to mention this: Italy bond yield lowest since June

The majority here were completely wrong up to an hour ago on Greece. Show all the charts you would like but with US markets moving higher and confidence up, it seems the beginnings of a self-sustaining cycle are now evident. 

Dapper Dan's picture

Is confidence up because of the markets being up?

BaBaBouy's picture

This Whole GREEK DEFAULT Thing is a Charade, A Choreographed Act, Fixed, A Put-On, A Hollywood Production...


Deserves FIVE Oscars !!!


Even SpiellBerg is Applauding ....

Pass The PopKorn(and The Options), Stevie.

Wolferl's picture

Yeah, a fake just like the moon missions. ;-)

Al Huxley's picture

Yes, thank god, MMT has been proven correct, and the key to prosperity isn't actually producing things of real value, but actually just creating new debt, then creating new paper to pay off that debt, and using the debt to consume.  Think of all those wasted years of industrialization and production that could have been avoided if only this concept had been discovered sooner.

JailBank's picture

Self-sustaining? If you take away all the FED and Treasury games the markets would not sustain these levels. Float those interest rates above 0% and see this market sustain the current levels. If you mean FED intervention until the end of time as the "new normal" then yes you would be correct.

Buck Johnson's picture

Your exactly right, just look at what happened earlier this week when the market went solid red and was starting to spiral from bad data and also information coming out that no one is taking the bait in Greece.  This market is so manipulated that it's a joke.

Eclipse89's picture

Here in Italy the most appropriate definitions of today's economy is PARALIZED; BLOCKED; HAMMERED; IMPALED.

Gas at nearly 2€ per liter.

Banks which do not know what lending is.

Companies closing day in and day out.

But Monti says that confidence is returned as spread to bund had plunged and that Europe is happy with the progress made so far...

Fuck you.

JPM Hater001's picture

And thank you man on the streets.


Wolferl's picture

@ Eclipse 89


You are paralized because gas is at 2 €? Move your butt up and walk, lazy MF.

JPM Hater001's picture

You know thats like $11 a gallon right?

Eclipse89's picture


These are just raw facts I see by keeping in touch with the productive world of Northen Italy, which is considered one of the richest part of the globe as per GDP pro capite.

If things are not running well here, imagine in the rest of Italy.

People who have some money saved, either do not spend it or move it outside Italy because they're kinda frightened of about everything.

Monti did an extremely good cut job, but now he MUST, and I mean MUST do something to stimulate internal demand.

About my butt, it can suffer even gas at 8€ per liter, but not everyone can.

Nussi34's picture

Great news! I will drive down and pick up a cheap Maserati or Cayenne!

credittrader's picture

Short-end ITA maybe in (SMP and LTRO) but 5 year out still at only September tights only with 10Y spread to Bunds at 300bps (and 5Y CDS at 366bps) - both triple the levels of last June. Where does ITA fund itself? short-dated or the belly and out? Short-term risk has piled up further out the curve so be careful especially as 3s5s and 3s10s levels look extreme and spread differentials in European banks starting to mount (especially in senior unsecured). Self-sustaining is hopeful especially given the still falling credit creation (bank lending) just reported. I understand an uptrend is very exciting but self-sustaining is a little rich for what we see here (and with margin calls potentially appearing), who knows what is around the corner (or even tonight at 1am or tomorrow morning with NFP?).

Rollerball's picture

"They" are printing the margin carry trickle-down (script).  

Think musical (three-legged wicker) chairs (made in China).

spastic_colon's picture

Tyler do you think S&P will announce the official Greek default after market close tomorrow or wait until the weekend? The Friday timing of the details seems par for the course.

carbonmutant's picture

The good news is, you only lose 75% of your money if you invest in the EU...

rescator's picture

it looks like nothing will  stop this market. logic is gone...100 of billions lost on greek bonds will be celebrated with champagne with more to come on other Piigs..

i'm afraid this market will rally hard....but i will stay on the side lines.

q99x2's picture

US military now controlled by UN not congress according to Panetta. US officially taken over and destroyed by bankers.

LawsofPhysics's picture

Technically, the U.S. military was taken over by the U.N. long ago.  However, the bankers have forgotten to disarm the american "tenants".   Going to be interesting to see how that works out.

Rollerball's picture

Long: guns, ammo, caskets, burial plots, crematoriums, etc.

JPM Hater001's picture

Buffet is totally against you.  None of those throws off a dividend but the gun.

Die Weiße Rose's picture
03/08/2012 Deal or Default? 

Tension Rises as Greek Debt Swap Deadline Looms.    

 Investors are nervous as the clock ticks down to the deadline for Greece's debt swap deal. The country's private-sector creditors have to decide by Thursday evening if they want to take part or not, and it is unclear whether enough will sign up. If the deal collapses, Athens will not receive vital new bailout funds -- making a default likely.

By Ferry Batzoglou and David Böcking

Stadiou Street was once the grand boulevard of Athens. But for some time now, its reputation has been suffering. Numerous demonstrations have recently proceeded along the street, paralyzing traffic. Often, clashes with police have ensued. This week, too, Stadiou Street was the scene of unrest.

This time there was trouble in the office building at number 24, where the Civil Servants' Auxiliary Pension Fund (Teady) has its headquarters. Angry unionists stormed a meeting room in the building on Tuesday -- at precisely the moment when the Teady board were supposed to decide whether the fund would participate in the debt swap deal for private-sector holders of Greek sovereign bonds. The meeting on Tuesday was interrupted, then Teady made a decision on Wednesday evening: They would not participate.

Teady is not alone with its "no." On Tuesday, five other public pension funds demonstratively voted against participating in the debt haircut. Greece's pension funds hold domestic government bonds worth a total of €20.4 billion (€26.9 billion) -- about 5 percent of Greece's entire debt mountain. About two-thirds of that amount will be affected in any case by the debt haircut. For the rest, the funds have to give their consent -- and a number of them are opposing the move.

Growing Doubts

Outside of Greece, too, there are growing doubts about whether the debt swap will be a success. On Tuesday, the German DAX stock market index suffered its biggest daily loss of this year, falling by 3.4 percent, partly due to fears that the deal might collapse. Earlier, an internal document from the global banking association Institute of International Finance (IIF), which represented leading banks and investors in talks with Athens over the private-sector involvement, had become public. The document warned that a disorderly Greek default could result in costs of over €1 trillion.

On Tuesday evening, the CEO of the German state-owned development bank KfW, Ulrich Schröder, also warned that the debt swap could fail. The bank's experts, he said, had found increasing evidence that fewer creditors than expected would participate in the debt swap. That, he said, was the cause of the turbulence on the markets. "I would be happy if we were wrong," said Schröder.

According to the official plan, private-sector creditors such as banks and insurance companies should write off a total of €107 billion in Greek debt. To achieve this, they need to waive about half of the nominal value of their bonds, and swap the rest for new securities with longer maturities and lower interest rates.

The Greek government is aiming for a voluntary debt swap. Greece needs at least 90 percent of its private-sector creditors to agree to the swap by the deadline of 9 p.m. CET on Thursday for the deal to succeed.

EU Monetary Affairs Commissioner Olli Rehn expressed his optimism that the deal would go through. "According to our information, the debt swap should take place without a hitch since the operation is interesting financially for the private sector," Rehn said in an interview with France's Le Figaro newspaper.

'We Are Taking Part'

Indeed, many financial institutions have announced in recent days that they would participate in the debt swap. Following announcements by several major German banks, giant insurance companies Munich Re and Allianz also promised they would participate. "We are taking part," said a spokeswoman for Munich Re. The president of the German Savings Banks Association (DSGV), Heinrich Haasis, signaled broad support for the deal on the part of the association's members. "We are assuming that virtually all of them will participate," he said.

Six Greek insurance funds have already agreed to take part, including IKA, the insurance fund for private-sector employees. In addition, during a meeting with Finance Minister Evangelos Venizelos on Tuesday evening, six major Greek banks agreed to take part in the deal with all their Greek government bonds.

The problem is the following. Politicians were able to put pressure on major banks and insurers to participate in the debt haircut. In any case, many financial institutions had already largely written off the Greek bonds on their balance sheets, meaning they are not particularly affected by the debt swap.

But with other creditors, the participation is much more problematic. The Greek pension funds are a case in point. They now face a crucial test. They suddenly find themselves exposed to drastic losses totaling around €11 billion. Although there are vague plans for the funds to receive state-owned real estate assets in return, nobody currently knows what this will mean in concrete terms, or whether these properties are actually usable.

The pension funds are already suffering from dramatic drops in income as a result of wage cuts of up to 50 percent within the space of two years, skyrocketing unemployment and lower capital injections from the state budget. As a consequence, pensions have been reduced significantly. "We want to prevent a new crime at the expense of the insured," said union leader Costas Tsikrikas on Tuesday, justifying demonstrators' tough approach. University professor Theodore Paraskevopoulos spoke of a scandal. "The debt haircut is relieving the state of its obligation to pay pensions," he said.

As corporations under public law, the pension funds were forced to make a risky investment. They were obliged to carry out the informal instructions of the incumbent governments, namely that reserves could only be invested in Greek bonds. Now the funds fear the wrath of their members. And they are not alone in that fear. According to KfW CEO Schröder, many fund managers and asset managers outside Greece have also decided not to participate in the debt swap, out of concerns they could be sued by their clients.

Ruined by the State

There is also massive resistance among average wage earners in Greece who invested their savings in government bonds, which were seen as safe. The majority of them are expected to decline the debt swap offer. Private individuals hold about €3.2 billion in Greek government bonds. "This affects more than 11,000 people and their families," says Yiannis Tsolias of the association of private investors in Greek bonds. "Some people invested all their savings, which they earned above board. The government is ruining them."

The IIF said on Wednesday that just 40 percent of private-sector investors have signed up for the deal so far. If not enough investors sign up by the deadline on Thursday evening, then Greece will have to resort to Plan B. The voluntary debt swap would then be abandoned. Instead, creditors would be forced to participate through the retroactive introduction of so-called collective action clauses (CACs).

This solution would be far more problematic. The rating agencies have warned that if the CACs are triggered, then they will declare Athens to be in default. That would reduce Greek bonds to irrevocable junk status, making it even more unlikely that the country will be able to return to raising money on the markets any time in the foreseeable future. Last week, two of the big three ratings agencies, Moody's and Standard & Poor's, already declared Greece to be in selective default.

And it is by no means certain that even a compulsory debt swap would succeed. Although the Greek parliament has created a legal basis for the retroactive introduction of CACs, there are hurdles to those clauses being triggered. At least 50 percent of investors have to participate in a vote over a compulsory swap and two-thirds have to agree to it. It is completely unclear whether this condition could be fulfilled.

Legal Disputes.

Even the two-thirds rule could be contested. Around €29 billion out of the around €206 billion worth of debt held by private-sector investors is not governed by Greek law, but by, for example, English or Japanese law. A 75 percent approval threshold applies on these bonds, making it easier for owners of these securities to put together blocking minorities. A number of hedge funds have supposedly been trying to do this for months, which would allow them to reject a debt swap. The result might be legal disputes that could go on for years.

If Athens' Plan B should also fail, then the country could be faced with a disorderly bankruptcy -- exactly the thing that the European Union and International Monetary Fund have been trying to prevent for the last two years. The EU and IMF have made a successful private-sector debt swap a condition of releasing the second bailout for Greece, which was agreed upon at a Euro Group meeting in February and is worth €130 billion. If the haircut does not happen, then Greece would default on March 20, when €14.5 billion in loans mature.

It's safe to say that the tension will not abate as the clock ticks down to the Thursday evening deadline. The Greek government will announce the results at 7 a.m. CET on Friday.


posted by wr;)

kevinearick's picture

Dark Ages, Niggers in the Woodpile, & PM

Most belong in the dark ages. Do you really want to go there? Time on the sideline is necessary, but don’t make an occupation out of it. Set a timer and then get back in.

Niggardly:  grudgingly mean about spending or granting;

Nigger in the Woodpile: some fact of considerable importance that is not disclosed – something suspicious or wrong.

Paul Volcker is not a stupid man. Keep your rules simple, so the intent of agency becomes clear as early in the process as possible. The more complex the rules, the more cockroaches in the walls, and they are all coming out of the woodwork now aren’t they? Expect your best, or become the rest, competing to become the least common denominator.

Not only do you own the auto industry, its accounting paper, and all those vehicles stuffed into the channel, but you also own all those brand new government fleets that do nothing but drive around watching your activity, with Apples for the purpose. Whose fault is that?

You can see the CA wave in Europe closing into a centrifuge, fed by electronic monetary expansion. They intend to break your necks, driving the herd into PMs, but you know that don’t you? The central banks are not collecting PM as a hedge, and the Fed does not necessarily have to raise rates to make it happen, especially if everyone is expecting QE.

Fortunately, the system is too stupid to raise rates until it is too late. One of these times a head fake is going to break its own neck and pull the Treasuries in with it. Not to worry; they still have this last desperate attempt to prove to themselves that they are still in charge of the Titanic, and you might be pleasantly surprised by the bond between the intelligent Jews, Persians, & Turks, like many in the queue, who have superficial retread leadership.

When you do evacuate, do so in as many different directions, simultaneously, as possible. Wash and repeat.

Alpha & Omega

Honor Thy Parents

To Thy Owns Self Be True

The Meek Shall Inherit

Do Unto Others

“I am not commanding you, but I want to test the sincerity of your love by comparing it to the earnestness of others.”

Genesis 28:15; Romans 8:31; Hebrews 13:8; Psalm 63:7-8; James 1:2-3

She takes the $1/2M short and continues to collect food stamps on no recurring income. How long do you suppose that money is going to last? Never replace a human with a computer unless that human has something more productive to do. Emotional decisions are a black hole. Be the neutral to swim upstream. Watch for the addiction control mechanisms. It’s a spider web of spider webs.

Look around. Is Love > fear? Build accordingly.

jaanp444's picture

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