European Union

The day dawns with a deal for Greece that is full of smoke and mirrors; lies and deceptions. It is a deal pretty much as expected and, as I have said before, now the realities are going to be confronted. Europe has spun the agreement and the Euro has rallied some and the S&P futures are up but the next few weeks, I am afraid, will hold some serious disappointments. The page turns today because now we are about to confront not what is told to us but the actuality of what has been presented to us and just what will happen as a result.

There is nothing new in this interview of Spiegel magazine with Ken Rogoff, but it is refreshing to listen to a person who has at least some standing in the arena of grand self-delusion (i.e., economics and capital markets), telling it like it is. While he rehashes all the old points, these bear reminding as the key one is what happens to Germany as the can kicking becomes a new default exercise in preserving bank "solvency" at the expense of the last stable economy: when asked if in 2015 the Eurozone will be the same, his response: "It may well be the case that all current members remain in the euro zone, and that Germany keeps on shouldering the ever-increasing debts of other countries. But the price of such a scenario is very high for all involved: southern Europe would become embroiled in permanent stagnation and the German economy would eventually be dragged down to a slower growth trajectory." So even though everyone knows that Europe is doomed in its current configuration, let's all just pretend things shall be well, and keep the even more doomed banks alive for a few more quarters? Is the loss of a banker bonus truly such a great catastrophe to society that countries have to remain in a state of perpetual misery until it all finally unwinds? Judging by today's market action the answer is yes.

Let’s be honest, quite a few Americans love a good war, especially those Americans who have never had to bear witness to one first hand.  War is the ultimate tribally vicarious experience.  Anyone, even pudgy armchair generals with deep-seated feelings of personal inadequacy, can revel in the victories and actions of armies a half a world away as if they themselves stood on the front lines risking possible annihilation at the hands of dastardly cartoon-land “evil doers”.  They may have never done a single worthwhile thing in their lives, but at least they can bask in the perceived glory of their country’s military might.   This attitude of swollen ego through proxy is not limited to the “Right” side of the political spectrum as some might expect.  In fact, if the terrifyingly demented presidency of Barack Obama has proven anything so far, it is that elements of the “Left” are just as bloodthirsty as any NeoCon, and just as ready to blindly support the political supremacy of their “side” regardless of any broken promises, abandoned principles, or openly flaunted hypocrisies.  No matter how reasonable or irrefutable the arguments against a particular conflict are, there will ALWAYS be a certain percentage of the populace which ignores all logic and barrels forward to cheerlead violent actions which ultimately only benefit a select and elite few.

The geopolitical game theory escalates once again, as Iran, which four days ago halted exports to peripheral European countries took it up a notch, and has as of this morning halted sales to British and French companies. Reuters reports: "Iran has stopped selling crude to British and French companies, the oil ministry said on Sunday, in a retaliatory measure against fresh EU sanctions on the Islamic state's lifeblood, oil. "Exporting crude to British and French companies has been stopped ... we will sell our oil to new customers," spokesman Alireza Nikzad was quoted as saying by the ministry of petroleum website." Here is the actual statement from MOP.ir. As a reminder, on January 27 we said how Iran was about to "Turn Embargo Tables: To Pass Law Halting All Crude Exports To Europe." And so it has - now, the relentless media campaign about China isolating Iran in response to American demands has to be respun: recall that in early February Reuters told us that "China will halve its crude oil imports from Iran in March compared to average monthly purchases a year ago, as a dispute over payments and prices stretches into a third month, oil industry sources involved in the deals said on Monday." Apparently that may not have been the case, as there is no way Iran would have escalated as far as it has unless it had replacement buyers of one third of its crude. Incidentally, this is just as we predicted in "A Very Different Take On The "Iran Barters Gold For Food" Story." The end result of this senseless gambit by the west: Europe has less oil, the Saudi fable that it has endless excess suplies is about the be seriously tested, China has just expanded a key crude supply route, and Russia is grinning through it all as Brent prices are about to spike. Iran didn't invent chess for nothing.

The ethics of debt, at least in the officially sanctioned media, boils down to: nobody made them borrow all those euros, and so their suffering is just desserts. What's lost in this subtext is the responsibility of the lender. Yes, nobody forced Greece to borrow 200 billion euros (or whatever the true total may be), but then nobody forced the lenders to extend the credit in the first place. Consider an individual who is a visibly poor credit risk. He would like to borrow money to blow on consumption and then stiff the lender, but since he cannot create credit, he has to live within his means. Now a lender comes along who can create credit out of thin air (via fractional reserve banking) and offers this poor credit risk $100,000 in collateral-free debt at low rates of interest. Who is responsible for the creation and extension of credit? The borrower or the lender? Answer: the lender. In other words, if the lender is foolish enough to extend huge quantities of credit to a poor credit risk, then it's the lender who should suffer the losses when the borrower defaults. This is the basis of bankruptcy laws--or used to be the basis. When an over-extended borrower defaults, the debt is cleared, the lender takes the loss/writedown, and the borrower loses whatever collateral was pledged. He is left with the basics to carry on: his auto, clothing, his job, and so on. His credit rating is impaired, and it is now his responsibility to earn back a credible credit rating....The potential for loss and actually bearing the consequences from irresponsible extensions of credit was unacceptable to the banking cartel, so they rewrote the laws. Now student loans in America cannot be discharged in bankruptcy court; they are permanent and must be carried and serviced until death. This is the acme of debt-serfdom.

Open Europe has published a briefing note outlining the ten questions and issues that still need to be resolved in the coming weeks in order for Greece to avoid a full and disorderly default on March 20. The briefing argues that, realistically, only a few of these issues are likely to be fully resolved before the deadline meaning that Greece’s future in the euro will come down to one question: whether Germany and other Triple A countries will deem this to be enough political cover to approve the second Greek bailout package. In particular, the briefing argues that recent analyses of Greece’s woes have underplayed the importance of the problems posed by the large amount of funding which needs to be released to ensure the voluntary Greek restructuring can work – almost €94bn – as well as the massive time constraints presented by issues such as getting parliamentary approval for the bailout deal in Germany and Finland. While the eurozone also continues to ignore or side-line questions over the whether a 120% debt-to-GDP ratio in 2020 would be sustainable and if, given the recent riots, Greece has come close to the social and political level of austerity which it can credibly enforce.

To stir them up and start a war with Iran ...

The equities market is acting like we know Greece's default will be orderly and no threat to financial stability. It is also acting like we know the U.S. economy can grow smartly while Europe contracts in recession. Lastly, the high level of confidence exuded by market participants suggests we know central bank liquidity is endlessly supportive of equities. What do we really know about the coming default of Greece? Whether we openly call it default or play semantic games with "voluntary haircuts," we know bondholders will absorb tremendous losses that are equivalent to default. We also suspect some bondholders will refuse to play nice and accept their voluntary haircuts. Beyond that, how much do we know about how this unprecedented situation will play out?

A well-known bond expert just blasted the following summary of today's "market positive" and supposedly just completed ECB bond swap: "THE EQUITY MARKETS MAY RALLY ON THIS NEWS BECAUSE THEY ARE FOCUSED ON A DEAL GETTING DONE BUT ANYONE IN FIXED INCOME SHOULD NOW CONSIDER RETCHING UNDER THEIR DESKS AS WE ALL JUST TOOK ONE OF THE BIGGEST SCREWINGS OF OUR LIVES THAT MAY WELL NOT BE A SINGULAR EVENT."

Must ... Not ... Think ...

Northern Europe to Greece: it’s over, baby....

What is better than a one-front European war on insolvency? Why two-fronts of course. But not before many "soothing" words are uttered (no really). From Reuters: "Portugal's international lenders arrived in Lisbon on Wednesday to review the country's bailout, with soothing words of support likely to dominate as Europe gropes for success stories to counteract its interminable Greek headache. As the euro zone's second weakest link, Portugal's ability to ride out its debt crisis will be key to Europe's claim that Greece is a unique case. Despite a groundswell of concerns that Portugal - like Greece - may eventually have to restructure its aid programme, the third inspection of Lisbon's economic performance in the context of its ongoing 78-billion-euro rescue should make that contention clear. "The review will be all about peace and harmony," said Filipe Garcia, head of Informacao de Mercados Financeiros consultants. "The important thing for Europe is to isolate Portugal from Greece, to put it out of Greece's way in case of a default or even an exit from the euro." That makes sense - after all even Venizelos just told Greece that the country is not Italy. And if that fails, the Don of bailouts, Dr Strangeschauble will just give the country will blessing to use a few billion in cash. Oh but wait. It can't. Because as as we pointed out in late January, and as the market has so conveniently chosen to forget, Portugal, unlike Greece, has simple, clean and efficient negative pledge language in its non-local law bonds. Which means "no can do" to any additional bailouts under its current capitalization. Which may very well mean that Portugal is stuck with its existing balance sheet unless the country succeeds in doing an exchange offer which takes out all UK- and other strong-protection bonds. All of them. And as Greece has shown, that is just not going to happen.

The complacency of the markets is amazing given the risks at hand. I don't think I'm that smart, so is it that so many others are that stupid? It can't be, can it?

In case one is wondering what lit a fire under the EURUSD and the ES' ass in the past 30 minutes, why it is the trusty old fall back - China, to which all algos respond every single time like stung donkeys as if on command. Because just as the EURUSD was about to retrace the lows as the realization that the EOD rumor was nothing but an infrared herring, something else had to step in an continue to rumor-based levitation. Sure enough, that something was the Chinese central bank.

• CHINA PBOC'S ZHOU SAYS HE'S CONFIDENT EU WILL SOLVE CRISIS: MNI
• CHINA PBOC'S ZHOU SAYS HE SUPPORTS EU, ECB MEASURES: MNI
• PBOC'S ZHOU: CHINA WILL PARTICIPATE IN RESOLVING EU DEBT CRISIS
• CHINA PBOC GOVERNOR ZHOU SAYS HE HAS CONFIDENCE IN EURO: MNI

And that's all it took to life the ES by over 10 points in minutes.

• BOJ Adds to Monetary Easing After Contraction (Bloomberg)
• EU to punish Spain for deficits, inaction (Reuters)
• Obama, China's Xi to tread cautiously in White House talks (Reuters)
• Global suicide 2020: We can’t feed 10 billion (MarketWatch)
• Greece rushes to meet lender demands (Reuters)
• Obama Budget Sets Up Election-Year Tax Fight (Reuters)
• Foreign Outcry Over ‘Volcker Rule’ Plans (FT)
• Moody’s Shifts Outlook for UK and France (FT)
• France to Push On With Trading Tax (FT)