Sovereign Risk

Sovereign Risk

"In Bankers We Trust" Is A Foolish Course Of Action...

It’s been said that goldfish have the shortest memory of any animal – only about three seconds. But a few years ago, scientists from Israel’s Technion Institute of Technology conducted an experiment which put to rest this erroneous myth. Based on their research, it turns out that goldfish have a memory closer to FIVE months... which seems to be quite a bit longer than most fund managers, bankers, and politicians. Their meme regarding crises, appears to be "but why should any of this matter? Those who control the system would never let things get bad." Pick up a book some time. History is full of examples of entire societies who thought the exact same thing. And yet, it happened. To throw caution to the wind and say, “In bankers we trust” is a foolish course of action… and presumes quite a bit upon the character of an entire industry that has consistently proven itself to be morally dysfunctional.



Chinese Sovereign Risk Spikes Most Since Lehman

With the nation's short-term funding markets in crisis mode - no matter how much they are jawboned about temporary seasonal factors - it seems yet another indicator of stress is flashing the red warning signal. China's sovereign CDS has spiked by the most since Lehman in the last 3 days - up 55% to 140bps. This is the highest spread (risk) in 18 months and looks eerily similar to the period around the US liquidity market freeze. Hedging individual Chinese bank counterparty risk is hard (given illiquidty) and so it would seem traders are proxying general risk of failure via the nation's sovereign risk (and stocks which also languish at post-Lehman lows). On a related note, Aussie banks have seen there credit risk rise 50% in the last month as they suffer domestically and from the China contagion.

"Tapering" From Currency-Wars To Interest-Rate-Wars

"The opposite of currency wars is not necessarily currency peace; it can easily be interest rate wars," is the warning Citi's Steve Englander sends in a note toda, as EM and DM bond yields have relatively exploded in recent weeks. The backing up of yields represents an increase in risk premium, so this will likely have negative effects on asset markets and the wealth effect abroad as well. It is difficult to explain the magnitude of the yield backup in terms of normal substitution effects, and broadly speaking, if you were to compare the backing up of bond yields with the beta of the underlying economy and asset markets there would be a good correspondence. So, Englander adds, it is fear, not optimism that is driving bond markets.

Guest Post: A Short History Of Currency Swaps (And Why Asset Confiscation Is Inevitable)

With equity valuations no longer levitating but in a different, 4th dimension altogether, and credit spreads compressing dramatically (and unreasonably)... It is in situations like these, when the crash comes, that the proverbial run for liquidity forces central banks to coordinate liquidity injections. However, something tells me that this time, the trick won’t work. Over almost a century, we have witnessed the slow and progressive destruction of the best global mechanism available to cooperate in the creation and allocation of resources. This process began with the loss of the ability to address flow imbalances (i.e. savings, trade). After the World Wars, it became clear that we had also lost the ability to address stock imbalances, and by 1971 we ensured that any price flexibility left to reset the system in the face of an adjustment would be wiped out too. From this moment, adjustments can only make way through a growing series of global systemic risk events with increasingly relevant consequences. Swaps, as a tool, will no longer be able to face the upcoming challenges. When this fact finally sets in, governments will be forced to resort directly to basic asset confiscation.

Italian Bank Holdings Of Italian Debt Rise To All Time High

Wondering why the Italian bond market has been stable and "improving" in recent months, with yields relentlessly dropping as a mysterious bidder keeps waving it all in despite the complete political void in the government and what may be months of uncertainty for the country, and despite both PIMCO and BlackRock recently announcing they are taking a pass on the blue light special offered by BTPs? Simple. As the Bank of Italy reported earlier today, total holdings of Italian bonds by Italian banks hit an all time record of €351.6 billion in February.

European Financials Drop To 7-Month Lows

European bank stocks are officially in bear market territory, now down over 22% from their highs with today's drop closing the index at seven month lows. Financial stocks have played catch down to credit's early warning weakness but still have more room to run. The correlation between financials and sovereigns has been notably broken down in the last few weeks - as it seems an external funding source has saved European sovereign debt (perhaps one that just wants to get away from its vicious cycle-like devaluation and diversify into anything non-JPY-denominated). On the day, Portugal blew wider at the open (+22bps) only to be magnificently bid back to unchanged by the invisible hand. Spain and Italy drifted slightly tighter on the day. Stocks were similarly low range today. Swiss 2Y closed at 3-month lows as EURUSD retraced back from its highs to close practically unchanged from Friday at 1.3000.


Fed Injects Record $100 Billion Cash Into Foreign Banks Operating In The US In Past Week

Those who have been following our exclusive series of the Fed's direct bailout of European banks (here, here, here and here), and, indirectly of Europe, will not be surprised at all to learn that in the week ended February 27, or the week in which Europe went into a however brief tailspin following the shocking defeat of Bersani in the Italian elections, and an even more shocking victory by Berlusconi and Grillo, leading to a political vacuum and a hung parliament, the Fed injected a record $99 billion of excess reserves into foreign banks. As the most recent H.8 statement makes very clear, soared from $836 billion to a near-record $936 billion, or a $99.3 billion reserve "reallocation" in the form of cash - very, very fungible cash - into foreign (read European) banks in one week.

Italy Crashes Most In Six Months Despite EURUSD Strength

Wherever you looked today in Italy, shares were halted. From Saipem to Seat and From Banco Popolare to BMPS, individual stocks fell between 5% and 45% in some cases. Spain also fell alongside its incorrigible risk-on peripheral neighbor as dividend suspensions, outlook cuts, rating downgrades, and a growing concern about the banking system's legitimacy wear on sentiment. Italian sovereign risk was largely unchanged but as the US opened it started to bleed wider - but in general bonds ignored the stress in stocks. FX markets also were un-phased as EUR continued to test higher. CHF did, however, strengthen notably (against the USD, EUR, and mostly against the JPY - up 28% in the last six months!). The CHF strength did nothing for demand for Swiss rates though as they pushed higher to 10-month highs. The big problem though lies in credit. Just as in the US, credit markets in Europe are massively divergent from stocks' exuberance - and today's surge in Europe's VIX also echoes the disconnect we are seeing evolve in the US. Things are shifting...