"Springtime For The Euro, Then Reality" - Citi Summarizes What Happened In Europe, And What Are The Next StepsSubmitted by Tyler Durden on 10/27/2011 06:38 -0400
Citi's Steven Englander summarizes last night's 4 am Eurosummit announcement, the kneejerk reaction in the all-important EURUSD, and what to expect both over the immediate future and the longer term: "We would expect the next 24 hours to be driven by how the Sarkozy call to China President Hu Jintao goes, how investors analyze the sustainability of Greek debt under this program, and the reception that the EFSF proposal will get. We are a bit surprised by the enthusiasm given the lack of detail and lack of surprise. We are also wondering how seriously investors will take the EFSF guarantees (which only apply in the event of a default), given that the banks were strongly encouraged to declare the current restructuring voluntary. Investors may fear that the EFSF - guaranteeing - governments will similarly contrive to avoid paying out on their first-loss guarantees."
The most important news of the night is not that the Greek haircut will be 50%, which is still insufficient as it excludes ECB Greek debt holdings, plus as the IMF noted, a 60% NPV haircut on all bonds is needed for Greece to return to viability, but that the EFSF will be just €1 trillion. Unfortunately, the EU Council and its advisor, JPM, refused to read the Zero Hedge analysis on why anything less than €2.4 trillion is insufficient (not to mention assumes no French AAA-downgrade... ever). Which is why we repost it for whatever sentient carbon-based life forms are left to realize why tonight's Euro TARP should be promptly faded until it is at least doubled to well €2 trillion, which, alas is impossible: absent Uncle Sam footing €250 billion solely to bailout French banks, this will not work!
Expectations of a grand plan may be on hold for a little while as the reality sets in for traders and asset managers alike this morning. Despite EUR strength, back above and holding a 1.40 handle, risk assets in general are less excited. European credit indices are opening tighter, as we would expect with higher beta outperforming. XOver -32bps and SENFIN -16bps may seem impressive but there is little follow-through in the underlying credits with most of the major European financials at best 5bps tighter (and notably BARC and LLOYD are wider). SovX is tighter by 14bps while underlying single-name Western European sovereigns are generally tighter with PIIGS unsurprisingly outperforming (though we have seen very few runs on Greece yet leaving it unch - which makes sense given the uncertainty). CEEMEA sovereigns are wider though (even if the index is compressing) as hedge unwinds seem the raison d'etre of trading desks today. Most importantly, the yield of EFSF bonds is rising (as we discussed yesterday), with the 2021s breaking back below Par. This makes sense as the sovereign risks are transferred to the supra-national EFSF entity and concentration risks are increased.
Barclays Explains Why A 50% Greek Haircut "Would Be Considered A Credit Event, Consequently Triggering CDS Contracts"Submitted by Tyler Durden on 10/26/2011 23:19 -0400
Barclays, a voting dealer of the ISDA determinations committee, two short days ago made the following statement: "In our view, there is little doubt that a large notional haircut of c. 50-60% would be considered a credit event, consequently triggering CDS contracts." Since the entire Greek bailout now centers around ISDA refuting what one of its members has said on the public record, and effectively making any form of sovereign hedging via CDS null and void, we can't wait to hear just what excuse the International Swaps and Derivatives Association will use to justify the transfer of billions of monetary ones and zeroes equivalents into its electronic pocket in the process making a complete mockery of its mission statement, presented as follows: "ISDA fosters safe and efficient derivatives markets to facilitate effective risk management for all users of derivative products." We expect ISDA to release a statement imminently, as CDS traders will have to know how to treat existing protection before the US CDS market opens around 5:30 am. And since we already know what the release will say, (though we are very curious as to how ISDA will deny what is glaringly obvious), we urge readers to address all their concerns, furious anger and profanities at this grotesque sacrifice of a self-professed responsibility for "effective risk management" at the altar of the almighty dollar, to the following address...
360 Madison Avenue, 16th Floor
New York, NY 10017
Phone: 212 901 6000
Fax: 212 901 6001
and even better, here is who is Deputy CEO ISDA Europe: George Handjinicolaou
What do you know: a Greek!
We have noted again and again that the seemingly single-minded effort to avoid a credit-event or involuntary restructuring is yet another one of the actions of an ignorant and ill-informed elite who simply do not understand the unintended consequences of any and everything they do to calm a desperate banking system. Today saw Willem Buiter, of Citigroup, agree with our perspective in terms of both the realistic lack of impact from a CDS event on Greece (per se) and moreover his perspective that the lack of a credit event could throw bond markets into a chaotic state as seemingly worthless CDS contracts and CTD bonds are tossed like hot potatoes from one smart banker to another smart hedge fund. Peter Tchir notes this evening that this is NOT a credit event and the only thing we know for sure is the sense of panic in the hearts of those holding the CDS-Cash basis package heading into tomorrow's illiquidity fest.
Just the math, something Europe is unable to do:
- Greece has €350 billion in total debt including about €70 billion in Troika "post-petition" loans; these are untouched.
- Of the €280 billion, roughly €75 billion is held by the ECB: this, like the Troika loans, will be untouched.
- This leaves just ~€200 billion in actual debt to undergo a haircut.
- Apply a 50% haircut to this debt (ignoring the fact that of this about €35 billion is held by Greek pension funds, and once the realization that Greek pensions have been cut in half dawns upon the population, the result will be the biggest riots ever seen in Athens yet).
- Total debt to be cut: just about €100 billion.
- Hence, of the total €350 billion, just €100 billion is eliminated, most of it used to backstop and service Greek pension and retirement obligations
- €250, or the residual, of €350, the original, means 72%, or a 28% haircut.
- Greek GDP was €230 billion on December 31, 2010 and declining fast.
- And that is how a 50% haircut is "cut" almost in half
We just may have a deal:
- EU OFFICIAL SAYS DEAL REACHED ON GREEK DEBT-CUTTING PLAN: AP
- 'PRIVATE CREDITORS TO TAKE 50% CUT ON GREEK BONDS, AP SAYS
- EU official, who wished to remain anonymous, tells Bloomberg that euro-area leaders are set to approve accord for 50% writedown on Greek bonds
If true, this means that Portugal, Ireland, Spain and Italy will promptly commence sabotaging their economies (just like Greece) simply to get the same debt Blue Light special as Greece. It also means that, at least according to Barclays, we have a CDS credit event, although we are certain that Europe would never announce this deal unless ISDA (complete determinations committee list here) was onboard, and corrupt as always. In addition, Greece was unable to generate a 90% acceptance for a 21% haircut tender offer. And we are somehow supposed to believe they can do it with 50%? Lastly, as a reminder, on September 14, Moody's put SocGen, BNP and Credit Agricole on downgrade review. This will be the trigger
In a few short minutes, at 4 am local time, Herman Van Rompuy will hold a press conference to formally announce the 50% haircut agreement and to release the captive reporters. Watch it live.
When watching politicians on TV, consistently peddling the agenda of their biggest bidder and never, unfortunately, that of the electorate, one often wonders: why do these people not wear the logos and decals indicating who their sponsor is, and how much money changes hands. After all it works for sports personalities of all shapes and sizes: why should politicians be exempt. Granted, the quid pro quo is to influence behind the scenes, and as such an overt act of advertising would be largely counterproductive, but campaign financing is without doubt one of the greatest weaknesses of modern society, and among (or at least should be) the main grievances of the Occupy Something crowd. And while a radical proposal like that would certainly never catch on due to concerns of constant exposure of the sell out nature of America's public representatives (who really merely represent corporations), here is an informative clip from Reuters, with observations on "if presidential hopefuls wore their sponsors on their sleeves, what logos would your contender wear?" The result is quite entertaining.
Stunned. That probably best describes the mood of China's vast pool of property owners. For the last few years, anyone with as much as a taxi driver's salary has been speculating in the real estate market, scooping up off-plan properties at terms that would make a Countrywide mortgage broker blush. And why not? Chinese culture has almost universally adopted the attitude that property prices never go down. Minor fluctuations and corrections over the last several months have been written off as statistical error. Well, reality has now uncomfortably set in. Recent reports from the National Bureau of Statistics show that home prices have fallen up to 50% in many parts of the country in the period from July to September. But who gives a damn about government reports? The real evidence is on the ground. Here in Shanghai, nearly 300 angry customers stormed a sales office of Longfor Properties Co Ltd after finding out that the developer had slashed prices on one of its projects by nearly 25%... practically overnight.
Americans may be fleeing from stocks in droves, but they sure aren't shy about rotating the resulting meager liquidation proceeds into weaponry. According to Gallup, "Forty-seven percent of American adults currently report that they have a gun in their home or elsewhere on their property. This is up from 41% a year ago and is the highest Gallup has recorded since 1993, albeit marginally above the 44% and 45% highs seen during that period." Considering the social situation "out there", and the fact that the world is one badly phrased or translated headline away from a complete HFT-facilitated market collapse, this is hardly all that suprising.
Here are the EBA's latest stress test results, or, more specifically, the worthless exercise of how much capital European banks need to get to both 9% Tier 1 as well as to build a "temporary capital buffer against sovereign debt exposures to reflect current market prices." Let's not forget that in the last two stress tests, the EBA found something like a grand total of €5 billion in capital deficiency. This time, the joke is again on the EURUSD traders, as the number for Tier 1 at 9% satisfaction is €106 billion, below the €200 billion projected by the IMF, the €400 billion projected by Credit Suisse, and €1 trillion calculated by Goldman Sachs. Granted the number excludes a further €40.6 billion in sovereign capital buffer, so altogether the number is about €147 billion. Furthermore, if you live in Ireland, you are in luck: none of your nationalized, insolvent banks need additional capital. Neither do banks in Hungary, which is about to be downgraded by the rating agencies, Finland or the Netherlands. Stunningly, Dexia which 5 months ago, sailed through the EBA's farce of a test with flying colors now needs a whopping... €4.1 billion. This is a bank which a few weeks ago had around €47 billion in collateral calls. As for banks that need the most capital to reach their targeted capital buffer of 9% Tier 1, Greece needs €30 billion, Spain needs €26 billion, and Italy needs €14.8 billion. Oh yes, France, which contrary to previous media reports of needing to liquidate hundreds of billions, apparently somehow only needs €8.8 billion. Here is our napkin math: take whatever the EBA estimates, and multiply it by 10. You will then be only 25% less than what the final capital shortfall is. Unfortunately for the EBA, the number of idiots who will fall for this "third time is the charm" farce can be counted on one finger (at best).
While S&P futures managed to make higher highs in the last hour, the EUR did not as only TSYs managed to follow stocks to those extreme levels. It was an odd day, as we have noted many times today, as the total lack of news combined with rallies on the back of old news seemed enough to juice stocks higher. It does make one think a little and we suspect that ES was dragged there thanks to correlation-dependencies with TSYs being sold and EUR being repatriated back home. Oil certainly never participated in the excitement (following its higher than expected inventory build) - which ironically was what spurred buying in ES early on (and inventory build in durable goods) as metals trod water relative to USD/FX's volatile moves today. Very high average trade size in ES, the fact that IG credit notably outperformed HY and equities, and no primary issuance suggests risk appetite is really not there - despite equity exuberance - but clinging to earnings hopes when firms are beating lowered guidance and cutting outlooks seems like more of the same hope that caused pain for many before.