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Europe Scrambling To Avoid Subordination Threat

It just gets more and more mind-numbing by the moment.The latest from Europe, which earlier confirmed that ESM loans would get preferred creditor status:


Nothing like figuring out your hare-brained bailout attempt was a failure from the beginning. Ok: Here are the problems with this band aid:

  1. Unfunded
  2. Temporary, and eventually will be replaced by the ESM. Markets can, luckily, still discount.
  3. Negative pledge issue still exists as Finland made all too clear. Countries will demand extra security interest while under EFSF regime and until ESM priming comes in play.

Ball is in your court Europe.

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Futures Red As Reality Returns: Bailout Half-Life Now Laughable

After opening and surging to up 18 pts last night (to within a tick of its 200DMA), S&P 500 e-mini futures (ES) have faded the entire gain (just as we said last night) with ES now red. European financial credit is wider on the day. EURUSD has given most of its gains back and Italian and Spanish sovereign bond yields/spreads are considerably wider on the day. US major financials have turned red after opening significantly higher. Swiss 2Y rates are at new record lows at -34bps as the USD has strengthened from 0.8% lower to only 0.15% lower now - which is having an incremental impact on Gold, Silver, and Oil - all plunging at the US day session open. So apart from all that, what did the EUR100bn of #Spailout do for all of us?

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Visualizing China's Voracious Appetite For Gold

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And Another Spanish Bond Long

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Is Cyprus Next On The Bailout Train?

Greece gets it. Now Ireland gets it. Spain just got it. And now Cyprus is getting it. The 'it' being the desperate need by the core to hold the 'status quo' together implies much more strategic negotiating power for the periphery than anyone would want investors to know. As Greece's Syriza leader Alexis Tsipras has been saying from before the Greek election, this is a pan-European problem and renegotiating part or all of the bailout terms is far more open. As Bloomberg reports this morning, Cyprus' FinMin Vassis Chiarly said the nation should not be 'demonized' if it takes the choice of a bailout:


Confirming the constant ability of Europe's nation to state the obvious and understate the reality, Shiearly added, "the situation isn't as bas as presented by some" and do not wory Cypriots as 'it would be able to secure positive terms if it resorted to a bailout'.

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Syriza Takes Advantage Of Spanish Bailout To Boost Its Winning Odds

On Saturday, when we discussed the impact of the Spanish bailout for other European countries, focusing on Ireland which had promptly requested a renegotiation of its own terms to match those of Spain, we noted that "Syriza's Tsipras should send a bottle of the finest champagne to de Guindos - he just won him the election." It appears that the leader of the Greek anti-bailout party wasted no time to capitalize precisely on just this.

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EU Commission Confirms ESM Loan Will Have Senior Preferred Creditor Status

"Any aid that might come from the European Stability Mechanism, which is expected to start work next month, would enjoy a preferred creditor status second-only to the IMF, the spokesman confirmed."

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Spain's Real Debt To GDP Right Now: 146.6%

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"English Law; Negative Pledge" - How To Hedge A Spanish Bond Short

Now that the Spanish bond market has realized it has just been primed by senrio debt, the next steps are straight from our Subordination 101 walkthru. Which means sell Spanish local low bonds, go long English-law, preferably, those with a negative pledge. Of course, the presence of a negative pledge is precisely the loophole that will allow Finland, and soon others, to demand a security interest in the event of priming (such as an ESM-sourced loan) which at last check, is precisely what they are doing assuming the EFSF is used to temporarily source the loan until the ESM takes over. So here is a good example of a bond, courtesy of the Generalitat de Catalunya Euro Medium Term Note Programme, that one should hedge a general basket of local-law Spanish bond shorts.

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So Much For The "Bailout"

Spain's bank bailout bought a few months of liquidity, but at what cost? Well, the cost can be seen perfectly on the chart below, which shows Spanish and Italian sovereign bond spreads literally exploding.

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Daily US Opening News And Market Re-Cap: June 11

European equities in both the futures and the cash markets are making significant gains after a mornings’ trade, with financials, particularly in the periphery, leading the way higher following the weekend reports of the Eurogroup confirming aid for the Spanish banking sector. With data remaining light throughout the day, its likely investors will remain focused on the macro-picture, seeing some relief as the Spanish financials look to be recapitalized. At the open, risk sentiment was clear, with EUR/USD opening in the mid-1.2600’s, and peripheral government bond yield spreads against the German bund significantly tighter. In the past few hours, these positions have unwound somewhat, with EUR/USD breaking comfortably back below 1.2600 and the Spanish 10-yr yield spread moving through unchanged and on a widening trend across the last hour or so against its German counterpart, and the yield failing to break below the 6% mark.

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The World Is Flat And Other Tales From Spain

For those of you that keep waiting for some giant change-the-world event; I invite you to re-gear your perspective. Greece has fallen, Portugal has fallen, Ireland has fallen and now Spain has followed the road into Purgatory. These are significant events that are, in fact, changing the world though none has caused Armageddon to date though they may by their aggregate but not singular importance. This is also why Greece is of such key importance; it has nothing to do with staying in or out of the Euro or of the preservation of the European Union as a political entity. That part of the equation is barely relevant. What is of critical importance though is that if they leave the Euro that they will default on some $1.3 trillion in total debt that can be afforded by no one. That is the rub and you may ignore the rest of the Eurospeak that is bandied about from Brussels to Berlin. A default by Greece will bankrupt and cause re-capitalization at the European Central Bank, it will throw the IMF into a tailspin and it will play havoc with Target2 and the German Central Bank. Do not allow yourself to be taken in and mis-directed; this is THE issue and the only issue of real importance.

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Newedge: Spanish People May Regret This Bailout

And another bank does a book report on our Saturday post explaining the Spanish bank bail out. At this point, it should be all too clear how Spain's only solution to being in a very deep hole is to keep on digging.

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Overnight Summary: Euphoria Fading, Reality Setting In

After hitting overnight highs of 1.2670, the EURUSD has wiped out nearly all of its gains following the Spanish "bailout", and was last trading just +40 pips higher compared to the Friday close. Same thing with Spanish bonds: these reacted favorably initially, but slowly the bondholder realization that they just got primed has settled in, and with sovereign CDS still a questionable hedge courtesy of ISDA, the only real hedge is selling, and have now drifted wider on the day, as have Italian bonds following a Bloomberg piece which notes the patently obvious: Italy Moves Into Debt-Crisis Crosshairs After Spain. Expect US stocks, always last to get the memo, to realize that Europe has not only faded the entire move, but is now appreciating it for what it is: a confirmation of failure.

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