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Sovereign CDS, EFSF, And The IIF
We earlier discussed the desperate actions that occurred surrounding the EFSF self-aggrandizement this week and Peter Tchir, of TF Market Advisors, notes that the whole situation was bizarre and is becoming more and more Enronesque every day.
Simply bizarre. I assume by other "EU entities" the EIB bought some? This is really becoming Enronesque. Really is almost mind-boggling that they did this, and as far as I know, if it was a public new issue in the US where a company was buying it on the break (or putting in orders) it would likely be in violation of some SEC law.
The ECB is ultimately going to be the lender of ONLY resort in Europe and it is going to have be with full printing capacity as I'm not sure how much can be sterilized in this environment. This realization that the ECB is going to have to do everything is what is keeping the market up. Unity governments are one thing, and may even be helpful, but the market is looking more and more to the ECB.
But the lack of demand for EFSF debt is simply, as we have repeatedly pointed out, a factor of their own design and a symptom of the actions that a bloated lobbying IIF and the feckless politicians have taken.
Much has been written about the impact of the IIF's "voluntary" haircut program. I maintain that not only isn't it a Credit Event, but it shouldn't be one, because the banks are receiving something in return for doing it (or not having something taken away).
One of the obvious consequences of the EU and IIF decision to pursue this restructuring is the need for banks to manage their balance sheets and exposure "old school". They cannot fully rely on CDS and markets will treat net exposure numbers with skepticism. So banks will sell bonds/loans and unwind their CDS positions and manage their exposure the old fashioned way, by adding or reducing to their bond/loan position.
That impact seemed obvious to everyone other than the EU and IIF. Many expect sovereign CDS to become worthless, and although that was my initial reaction, all that will change is the "basis". CDS will trade tight relative to cash and the basis will be impacted. That has occurred in Greece for example where the basis went from 100 to 93, largely because CDS got tighter and bonds didn't move or went down a bit in price. CDS still has value for several reasons. Hedge funds or other true private holders don't have to agree to the plan, so they can retain bonds and the "basis" package will still function for them. The scale of Greek debt is so big, and the NPV reduction is small enough, that Greece may still have to default in the near term, and banks would be unwilling to take a further reduction "voluntarily". The CDS still has value as no plan is even officially proposed yet, let alone agreed to.
The first real unintended consequence is impacting the EFSF and has nothing to do with sovereign CDS, but everything to do with "voluntary" write-downs. What bank (or IIF member) would buy EFSF bonds knowing that the EU would ask for voluntary restructurings on these bonds ahead of anything else. Since the EFSF is complicated and relies on guarantees, it would be the easiest debt for the EU to restructure if needed. The facade that guarantees aren't debt but are useful is part of the problem. Guarantees aren't as good as a real obligation. If France or Germany runs into any problems and needs to change their debt profile, the EFSF would be the first target. It doesn't really count as their debt, in their minds, so it would have limited impact on market perception (again, in their minds). We have always questioned how likely the EFSF is to honor its obligations if required, but the new question is how quickly would these be restructured.
So the first real unintended consequence of the IIF/EU voluntary plan is to make banks in particular, but all IIF members, scared to own these bonds. They are already long all the sovereign debt they can handle, and not only would this be adding to their exposure (which they would have to account for somehow) it is in an extremely weak form, most at risk of being "voluntarily" forced to restructure. I guess that is the nature of unintended consequences, they have consequences that are unintended.
Hedge funds and real private money won't touch EFSF as a long term holding. It is so complex, constantly devolving, and run by someone without the skills to manage what EFSF has become. Private investors can buy a mix of sovereign bonds to create the risk/return profile they want, and the EFSF just is too confusing, has too much potential future change risk, that it isn't appealing. Sure, from time to time, if it gets cheap to France some funds will buy EFSF, short France or something, but EFSF bonds don't make sense for real private money.
So the pseudo-private money (EU banks, EU pension funds, and EU insurance companies) are reluctant to buy EFSF bonds because they already have too much sovereign exposure, and the EU is likely to force "voluntary" changes on EFSF debt before it would on actual outright sovereign debt. Real private money is confused by the structure, the ever changing purpose, and managements express desire to make non-commercial decisions at off-market prices.
Who does that leave? Only sovereign wealth funds and other supra-national entities. EFSF is the bond only a mother could love. Whatever happens this week, is likely to have consequences down the road, that haven't been thought about and may be worse in the end than letting the system clear itself.
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Euro to 1.40 bitchez. Goldman may have one right call after all.
2% move from here? who cares?
Ever'so Feckin' Stupid Feckers
In order to permit the ECB to act as fiscal agent of the governments of Italy and other PIGS (via debt monetization) wouldn't its charter have to be amended first?
Please hold your laughter until someone has answered the question. Thanks.
Well... it's bought up several hundred billion's worth already, and, as far as I'm aware, no moniepolizie have marched into the ECB and arrested anyone because of it.
But hey! Maybe that's why God invented Monday.
EFSF denies buying its own bonds
http://www.reuters.com/article/2011/11/13/us-eurozone-efsf-idUSTRE7AC0M5...
Ther's no chance they bought their own bonds. Maybe they lent money to Barclays who bought the bonds then immediately sold them to the EFSF. Plausible deniability.
But... ahhh... I am sooo confused isn't that the same thing? <sarc>
not the mama
Thanks, I needed that. :)
I've come to believe that none of these fuckers expect CDS to be money good. It's just a scam. They buy CDS so they can count the underlying security as money good and lever it up. Is this something that everyone already knows and I'm just kinda slow and late to the party, or is it even in the realm of possibilities? I try to keep up with what's going on but I haven't seen much on this.
Dawg, on paper everything looks fine. In fact 'better than ever!' according to CNBS surveys. There was a huddle down in DC in 09 when things looked like death. It was agreed that what looks fine is fine.
Right, CE. Thus all the "net exposure is contained" BS.
Hey Dawg. How you doin'?
Just came from a Tourettes Syndrome get together... knda reminded me of the EU et al charades going on. Lotta talk, no topic, lost in the ozone layer, platitudes about how all's been fixed......
Madness and insanity by other names.
BTW. I might be a tidge slow on the draw sometimes, but who/what the fuck is the IIF? These buggers have created so many committes, organizations, affiliations, diversions and imitations of life that I can't remember them all anymore let alone keep 'em straight.
IIF
Be Good!
Knucks, doing well here, I hope you are too. IIF=Institute of International Finance. Yet another international bankster club that lobby's on behalf of... the international banksters.
Ah, many thanks Dawg.
Sometimes I even giggle at the number of organizations that these folks have created (even though the reality is sad). To which the question becomes, Why? For which there must be a good answer I've yet to discern.
Like Fannie, Freddie and Ginnie here at home. More organizations making campaign contributions is synergystic... more money in the same time space.
:)
Be good, my man.
Probably this:
http://en.wikipedia.org/wiki/Institute_of_International_Finance
Or Immensely Insolvent Fuckwads in common parlance.
Good call, Dawg. The same thing is happening with mortgage and title insurers. They are being kept on life support so TPTB can pretend they might pay off someone someday.
Peter does a great job describing why no one wants these bonds. I'd like to know what, if anything, is really being done to sterilize the currency effects. It gets harder all the time to watch these spinning plates. Imagine, if it were your job to keep them spinning;)
Kaiserhoff, exactly, the guys keeping the plates spinning are soiling themselves and can't stop to change their soiled Depends. I don't buy the argument that this is all part of the grand plan of TPTB. I think they've lost control of the machine and things have gone horribly wrong, and now all they can do is try use smoke and mirrors to perpetuate the illusion that the plates are spinning just fine.
Inclined to agree.
Doesn't look like a plan at all.
Wouldn't take much for the plates to come crashing down.
How that would play out is another matter.
In the meantime surely no bank or insurance company should be allowed value CDS positions as offsetting bond risk.
It is obvious now that CDS will not pay out.
I think it's been obvious all along to the banksters, and they don't really care as it allows them more leverage and there is no counter-party risk because the counter-parties will be bailed out, ala AIG, and therefore the purchasers of CDS will in effect be bailed out. But I think the main purpose is for smoke and mirrors: "See? No risk here, all the debt is insured."
SURPRISE!!!
Solution is to swap specific sovereign bond positions for ESFS debt via ECB. ECB holds X amount of sovereign bonds (the dreck, if you will), and ESFS holds bonds in exchange for banks buying ESFS debt. Voila - shit transformed into AAA paper. But need those German and French ESFS guarantees in order to complete the socialization of the private losses.
ECB is lender of last resort - there is no alternative to printing. Germany will go along with it.
ECB is lender of last resort - there is no alternative to printing. Germany will go along with it.
as this weeks TTMYGH so vividly describes, germans still shudder at the thought of ordering a cup of coffee for 5,000 marks and then paying 8,000 by the time the tab came. GERMANY WILL NOT GO ALONG WITH IT!!!!!! wiemar still lives in their collective memory. germany will either leave the euro, or force out the laggards. GERMANY WILL NOT ALLOW THEMSELVES TO GO WEIMAR AGAIN!!!!!!!!!!!!!!!!!!!!!!!!!!!
People keep forgetting how cheap and simple it is to buy politicians these days. What the people think doesn't matter much.
Ned Zep will be proved right - sadly.
Every Banker in Europe and many beyond, Every feckless politician (all of them) every lobby lizzard, every EU kleptocrat and unelected commisar is pressing Germany to let the ECB hit the print swich. So is the USA.
They could say no, and watch their grandiose utopian european dream crumble, but they have too much personal pride at stake. They also fear being painted as the bad guy again, they will not have the strength of character to resist.
Much easier to go with the flow and lie to the population. Keep an eye out for some very cunning and creative new ways of printing to be created.
If this week has shown us anything - it is this: DEMOCRACY IN EUROPE IS DEAD.
There is no way the Germans will be allowed a vote on the constitutional changes to allow printing. NO WAY, the Bankers are openly in charge now.
The reaction of Italians to their austerity measures will be interesting - I think the full details of their serfdom will be revealed tomorrow.
Yes, perhaps I should have put a fine point on my statement: the captive politicians of Germany will go along with this. Those who put up a fight will be replaced.
As noted by William Black in his great book on the S&L crisis The Best Way to Rob a Bank Is to Own One, the most fraudulent S&Ls were the ones that looked most profitable on paper. That was in fact an inherent part of the scam.
According to Benford's law, accounting statements are getting less and less representative of what's really going on inside of companies. The major reform that was passed after Enron and other major accounting standards barely made a dent.
Since 2008 and the repeal of MTM accounting and loosening of standards implemented in 2002 under Sarbanes-Oxley, the climate has been ripe for corporate profits to return to Enron quality. Enforcement is unlikely to tighten in this climate where central banks and governments themselves are more prone to accounting gimmicks.
thanks
this as clear as we will ever see this instrument until it is too late om
Even in todays deplorable situation, there are ways DJIA will reach 100 000 ,, in 2026-2027, after a prolonged bear market 2011-2020.
See the chart and explanations here:
http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&start=900#p35093
Please, Ronnie, Maggie and the Holy United States of America Who are already in Heaven. Hallowed be Your Names. Your Kingdom come, Your Will be done, on earth, as it is in Heaven. Give us this day our daily bread, and forgive us our debts, as we have also forgiven our debtors. And lead us not into temptation, but deliver us from evil.
Ronnie and Maggie have heard your prayer. And here is their answer: -Shop till you drop. If you've already dropped, then go discount shopping. -Greed is better than ever, so don't get mad...get even: Don't diss bankers for making a fast buck off your tax dollar. Instead find a way to create a scam that you too can be proud of. -Draft the unemployed into the military and cut spending on all public programs.
Change the last word evil to Goldman....
I've fallen and I can't get my ECM in motion…. Ahhhhhhhhhhh- Help me big important government figureheads. Without you, we cannot pass the new laws to piss away our irresponsibility to the younger generation. We bought into your programs for decades. Our nest egg will not be sacrificed by your new laws, we have played by your rules. We expect our money and your class warfare propaganda is not working! We can see thru your weak efforts.
Front 242 - Headhunter
Grab your popcorn. Things are steaming up. LMAO!
There have to be some things behinde the scene on the greek dael we don't see. why would anyone buy some euro bond of any of there countries if the government makes sure you can't get paid in the cds. it makes no economic sense, and tell everyone to dump the bonds. I suspect some big player with connections wrote a lot of cds and they are getting bailed otu (or perhaps a few of them)
Biflation has caused TPTB and the central bank cartel to pull in their horns on printing.
this dude is one demented bastard:
http://www.reuters.com/article/2011/11/13/us-ecb-greece-orphanides-idUSTRE7AC09120111113
So much fun we've had in Europe the last few weeks ... Might be time for a focus shift back to the US ... at least so the oligarchs can catch the shorts on the wrong side again.
OT
"The new Hmmm Books are here. The new Hmmm Books are here!"
They must be reading ZH Dept....
Generation AU:
Gold’s spectacular, decade-long run, coupled with the sovereign-debt crisis in Europe, an uncertain outlook for the U.S. dollar, and worries of worldwide recession, has tapped a new vein of investors in their 20s and 30s.
Accordingly, many of these gold buyers have little faith in equities and, unlike older investors, are more inclined to consider alternative investments. Others seek tangible, hard assets as a counterweight to stocks, bonds and cash in the aftermath of the 2008 U.S. financial crisis.
http://www.marketwatch.com/story/new-gold-bugs-are-young-and-restless-20...
i must say i laughed when i read about the banks "going 0ldSkool"
without the system clearing itself...
...i think we're gonna need those chip implants, BiCheZ!
hey! maybe they'll come w/ free banking...voluntary...to help us keep better track of those who choose not to participate...locally, of couse...
OR: (gasp!) oh, noooo! not mark-to-market!
EFSF is the bond only a mother could love.
Just like the mother of a rapist.
Looking at my crystal ball, I see the return of the ECB bad bank concept returning to the rumor mill in 5......4.....3......:)
Nice post. I enjoyed reading it.
In my opinion, all the recent negativity in the press regarding the European debt crisis has created a tremendous buying opportunity for US stocks.
The Invetrics system just gave a long term "Buy" signal as of the close of 11/11/11 with a new DJIA target of 13,500! You heard it here first.
admin,
http://invetrics.com
Sorry, that was a typo. I meant to say 15,500 which is about 27.6% higher!
admin
http://invetrics.com
Looks like we are moving higher today! The Invetrics long term Buy signal of 11/11/11 will likely get confirmed!
admin
http://invetrics.com
These bonds are robbing our children in the future, and they should never be allowed, nor should many of the other crimes that are occurring.
It is time for rebellion. If we don't fight back now, it's all over. We will live as slaves to the corporate banking pyramid scheme.
Read:
http://www.amazon.com/Simple-Wealth-Mr-Andrew-Costello/dp/1463523017/ref
I've said it earlier, who will buy this junk especially after the "voluntary" cut in debt. No on especially in the private sector want too buy bonds when the people issuing it can arbitrarily change the rules on them after they are bought.