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Secondary Market Purchases Are 'Not' The Answer For Europe

Tyler Durden's picture





 

Submitted by Peter Tchir of TF Market Advisors,

 

Do we finally get details out of Europe?

Spain has finally made the “formal” request for aid [ZH: and Italy is right behind them this morning]. There is another summit. Expectations for anything positive seem incredibly low. There seems to be a scramble to shoot down anything that is said out of Europe. It really doesn’t matter what is said, the negatives and potential negatives, and imagined negatives get the traction.

Details will be required for the market to

  1. Believe anything real is going to occur and Europe isn’t just trying to prop up the markets with talk
  2. Analyze the impacts of any programs to figure out what they will actually do and what they can accomplish

Today, so far we are back to disappointment and fear mode. Some of the fear seems to be overdone, again, such as what Juncker said about “restructuring” for the financial system. His quote seems to be directed at the financial system in Spain, which does need to be restructured, but has been taken to apply to the country. Without details it is speculation either way, but is another example where right now the market is in the mood to price in the worst interpretations of every statement. Details are needed.

Details are needed now. Spanish bank recap details. Greek renegotiations and other plans for the EU have to be put on the table, with the details included. The market cannot survive at these levels with weak economic data and no belief the EU is actually going to do anything useful.

At the same time, many of the ideas for what Europe should do are horribly wrong, yet have managed to gain traction.

Don’t Buy Bonds in the Secondary Market

Of all the things people want Europe to do, buying bonds on the secondary market seems the least effective [ZH: which Novotny has now explained the ECB will not undertake]. Any program that has a chance of working has to help both the sovereigns and the banks. If an action only helps the sovereign or the bank it is less likely to succeed. If it helps neither, than it is a total waste of limited capital.

Secondary Bond Market Buying Does Not Help the Sovereign

  • Changes in secondary market yields do not immediately affect the average coupon paid by the issuer, and can take years to have a meaningful change on the borrowing costs
  • Rallies sparked by secondary market activity have been short lived and markets normalized quickly with little to show for it other than an underwater portfolio at the ECB
  • The subordination and unwillingness to participate in any potential restructuring was a problem in Greece and remains one of the main reasons why Greece is only partially through their default

Secondary Bond Market Buying Does Not Help Banks

  • Banks, particularly those in Spain and Italy hold their sovereign debt in “banking” or “accrual” books where they are not impacted by market prices so long as they don’t sell. They are NOT selling. The banks are already “all-in” the sovereign trade and are not taking losses to reduce positions
  • The losses have no impact on their “earnings” and with the ECB being lenient on collateral requirements, the secondary market prices have even less impact than normal for banks using the ECB or LTRO to fund the positions

So don’t waste the money on secondary market purchases. The money barely helps the sovereign and does nothing for the banks. It may help some speculators who will buy ahead of the activity, but will be quick to get short again when the time comes.

Cheap, Long Dated, Primary Intervention is Best Hope

Providing low cost, long maturity debt to sovereigns is the best outcome. It would allow debt maturities to be handled taking near term default risk off the table. By pushing out maturities, the near term default risk is further reduced. Low coupons do have an impact on the current budget.

Access to cheap long term money will actually help secondary market spreads as well. The degree of subordination will affect how much secondary market spreads benefit, but as secondary market spreads or yields are relatively unimportant.

Getting the cost of funds down and extending average maturity is effective and is something that may be relatively easy to accomplish within all the existing programs that the EU has at their disposal.

Bank Recapitalizations – finally?

Bank recapitalizations would be even better than just cheap money for the sovereigns, but seem far more difficult to achieve. The fact the Greek banks aren’t yet recapitalized is a failure. The fact that the ECB and EU took pressure of banks throughout Europe earlier this year when the markets were calm was another grievous mistake. The Spanish bank recap plan is a chance for them to redeem themselves.

We will have a better idea of how successful the plan will be once details come out, though given low expectations, it still seems very likely to surprise to the upside.

Does Anything Else Matter?

Not really. Maybe the economic data will be so different than expectations that it will have a large impact, but that seems unlikely. The data has been weak, and consistently weaker than expected, so each miss has less of an impact. A few positive surprises might help, but those are only likely to help or hurt the market at the margin. The real key is any clear direction from Europe. I expect that Europe is actually going to surprise to the upside, but every day we go without details and with negative comments, we will see markets remain under pressure.

 


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Mon, 06/25/2012 - 11:25 | Link to Comment Hondo
Hondo's picture

The only suprise to the upside is the complete cramdown of debt to equity....and even then the regs have to be changed to make sure they can't leverage up again.....there will be plenty of pain with that but so to the break-up of the EUR........I don't believe we will see any positive surprise.

Mon, 06/25/2012 - 11:33 | Link to Comment slaughterer
slaughterer's picture

Dear Mr. Tchir,

glad to see you back after a notable hiatus from ZH.  Your text will be circulated among the top politicial offices in Europe right away.  We like your suggestions.

Sincerely,

Mario

Mon, 06/25/2012 - 11:36 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

Tchir wrote: "If it helps neither, than it is a total waste of limited capital."

To me, that is the key concept that Europe now needs to examine with great care.  Waste of capital is a terrible thing, especially when it is scarce.

Mon, 06/25/2012 - 15:37 | Link to Comment oogs66
oogs66's picture

they have already wasted too much without results, they really need to have a plan that can be sustainable - not listening to bankers who front ran the policy decisions that beg for would be a good start

Mon, 06/25/2012 - 17:36 | Link to Comment BigJim
BigJim's picture

 Tchir wrote: "If it helps neither, than it is a total waste of limited capital."

To me, that is the key concept that Europe now needs to examine with great care.  Waste of capital is a terrible thing, especially when it is scarce.

That's the problem. These people don't know the difference between capital and monetary expansion. They believe capital can be created at the flick of a switch.

Having the ECB extend the sovereigns cheap credit will just be adding fuel to the fire.

Mon, 06/25/2012 - 12:39 | Link to Comment Carl Spackler
Carl Spackler's picture

A debt cramdown looks good as an a financial accounting bandaid.

BUT, the driving forces/behaviors of the Euro system remain the same (i.e., Socialism, its false promises and utopian hubris), so any re-capitalization through restructure is a temporary high and a fool's bet...like Facebook at $38/share.

The Euro has to be broken to bring any hope for future recovery and financial discipline across Europe. 

Mon, 06/25/2012 - 11:27 | Link to Comment slewie the pi-rat
slewie the pi-rat's picture

the negatives are the positives?

Mon, 06/25/2012 - 11:29 | Link to Comment papaswamp
papaswamp's picture

Cyprus about to make a bailout request...now they will come in fast to get what money is left...if any.

 

Mon, 06/25/2012 - 11:30 | Link to Comment Al Huxley
Al Huxley's picture

Just keep talking gentlemen (and lady) because I'm sure words are all it will take to restore the economy and the markets.  Not like you'll every have to DO something, like either default on the fucking debt, or print to cover it, oh no, I'm sure you can talk this problem away if you keep at it.  If this summit doesn't do it, then maybe next weeks or the week after.  Fuckheads.

Mon, 06/25/2012 - 11:32 | Link to Comment TahoeBilly2012
TahoeBilly2012's picture

"surpise to the upside"?? WTF?? You mean in babies left on church doorsteps or length of breadlines? What ya smokin' bro?

Mon, 06/25/2012 - 11:41 | Link to Comment Caviar Emptor
Caviar Emptor's picture

The solution to old bad debt : new worse debt. 

Mon, 06/25/2012 - 17:38 | Link to Comment BigJim
BigJim's picture

When you find yourself in a hole, you don't just lie there - you get digging!

Mon, 06/25/2012 - 12:20 | Link to Comment lascu.roman
lascu.roman's picture

I'm bluffed by the way you reason folks. So, if the ECB buys bonds in the secondary market and that brings down the yields, that doesn't help, because "Changes in secondary market yields do not immediately affect the average coupon paid by the issuer, and can take years to have a meaningful change on the borrowing costs" and "Banks, particularly those in Spain and Italy hold their sovereign debt in “banking” or “accrual” books where they are not impacted by market prices so long as they don’t sell". But when the spanish, italian, irish or whatever sovereign yields spike above 7% everyone becomes fucking crazy about it and announces another collapse of the Eurozone and its banking system. Please explain what's wrong here?

Mon, 06/25/2012 - 12:21 | Link to Comment Snakeeyes
Snakeeyes's picture

Merkel is against it ... and rightfully so. Spain and Cyprus are now asking for handouts to bailout their crazy spending and lending.

http://confoundedinterest.wordpress.com/2012/06/25/the-new-siegfried-line-merkel-dismisses-eurobonds-and-eurofdic-while-spain-and-cyprus-seek-aid/

Mon, 06/25/2012 - 12:58 | Link to Comment Cupid Stunt
Cupid Stunt's picture

Yeah, but ain't CTRL+P+P+P+P+P+P all they got left same as the US/UK ?

Mon, 06/25/2012 - 13:18 | Link to Comment CPL
CPL's picture

It may help some speculators who will buy ahead of the activity, but will be quick to get short again when the time comes.

 

That's about right.  That how the money factory works as a day trader.  That is all that is left.  The few that have the wits left over and the capital to start it again.  Just not on a central banks terms.  Not in a million years, borrowed dicks or a trillion dollars.

 

central banks have shown how poorly they deal with these situations.  They should have let it collapse four year ago and the conversations we would all be having right now is how things are improving instead of going into permabear mode.  Since it's been left too long, it is now completely and mathmatically impossible to ever fix this situation.

 

everyone is going to have to go brke and start from nothing.  everyone.  Planetary Debt Jubilee, but it won't change the hyperinflation that is waiting for people after a reset.  However it'll probably be so fast of a switch people wouldn't even notice anymore

Tue, 06/26/2012 - 00:50 | Link to Comment huckman
huckman's picture

The clown car in the goat rodeo just blew a piston.

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