And just a little bit more on yesterday's story of the day, which a few recent journalist grads took as positive having absolutely no clue about the very basics of a simple restructuring process, and in turn fed it to the 18 year old math Ph.Ds who program FX trading algos that ran away with it in the form of a 150 pip gain, when in reality it was all negative. As the WSJ reports, the only sane person in Europe, did get it: Bundesbank's Jens Weidmann "voted against the proposal, according to a person familiar with the matter." As we expected. Why? Go back to our story on subordination [10]and what it means as the ECB creates an ever more junior class of bond holders. For those who hate long sentences, the WSJ gets it right this time: "The move could rankle investors and turn them away from the peripheral euro zone bond market, blunting the impact of a possible approval of a Greek aid deal and plentiful cash from the ECB." Of course, those who don't react to idiot headlines, and every upticks courtesy of algobots, knew that long ago. But in this stupid market, it takes hours, if not days, for the progressively dumber investor base to comprehend what is going on.
More from the WSJ [11]:
"The trick is surely a short-term win for the ECB, but we fear a long-term loss for Europe," said analysts at Societe Generale in a note to clients Friday. However some market analysts worry that the creation of two different bond classes for Greece will have damaging effects on other euro-zone bond markets. The risks are particularly high for Portugal, seen as the next domino to fall should Greece default, as investors are unlikely to buy debt that could become subordinated whenever a debt restructuring occurs.
Some policymakers are also afraid the plan could alienate investors. The head of Germany's Bundesbank, Jens Weidmann, voted against the proposal, according to a person familiar with the matter.
"It has always been slightly implicit that the ECB wouldn't be treated like other bondholders. Now it's explicit that they will be super-senior to everyone else," noted Lyn Graham-Taylor, a fixed income strategist at Rabobank International.
Richard Kelly, head of European rates and foreign exchange research at TD Securities, also points out that if the ECB is seen buying government bonds at times of stress, yields on these bonds may actually rise.
It gets better:
"If the ECB is in the market buying bonds, with the subordination of investors to the central bank, the actual losses will be distributed over a smaller pool of bonds, giving investors even larger losses."
The ECB began buying peripheral bonds in May 2010, at the time of Greece's first rescue package, in an effort to calm Greek, Irish, and Portuguese markets as they came under sustained selling pressure from investors. The program was widened last August to include Italy and Spain.
"We've always said that this crisis will end when investors feel confident that they can start buying non-core debt on a fundamental, rather than tactical, basis. This is just being made less likely now, we fear," Societe Generale said.
And so on.
Those who actually care to know about the fundamental dynamics of what is going on, are again invited to read our walkthru: Subordination 101: A Walk Thru For Sovereign Bond Markets In A Post-Greek Default World [10]