Sovereign Risk

Sovereign Risk

LCH Hikes Margin Requirements On Spanish Bonds

A few days ago we suggested that this action by LCH.Clearnet was only a matter of time. Sure enough, as of minutes ago the bond clearer hiked margins on all Spanish bonds with a duration of more than 1.25 years. Net result: the Spanish Banks which by now are by far the largest single group holder of Spanish bonds, has to post even moire collateral beginning May 25. Only problem with that: it very well may not have the collateral.

Moody's Downgrades 16 Spanish Banks, As Expected

As was leaked earlier today, so it would be:


In summary, the highest Moodys rating for any Spanish bank as of this point is A3. But luckily the other "rumor" of a bank run at Bankia was completely untrue, at least according to Spanish economic ministry officials, so there is no need to worry: it is all under control. The Banko de Espana said so.

S&P Opens The Pandora's Box: The Wall Of Refi Worry Is $46,000,000,000,000 Tall

In what S&P calls a 'Perfect Storm', the next four years will see a minimum of $30 trillion in companies' refinancing needs related to maturing bonds and loans and further they expect $13-$16 trillion more debt will be required to finance growth. With bond portfolios over-stuffed with corporate debt (since angst over sovereign risk has skewed asset allocation away from that cohort) the rating agency is concerned that ongoing bank deleveraging, these huge debt re-funding requirements, and the diminishment of central banks and governments to do anything about it leave serious problems with a credit overhang so large. Critically, especially as we hear calls for 'growth' plans from Europe, is the increasing likelihood that, as Reuters reports, this will potentially influence corporate credit quality and "alter the fragile equilibrium that currently exists in the global corporate credit landscape". While S&P expect the refinancing needs may well be met "This global wall of nonfinancial corporate debt will potentially compound the credit rationing that may occur as banks seek to restructure their balance sheets, and bond and equity investors reassess their risk-return thresholds" which "raises the downside risk in global markets" as an inability to finance growth may well be the catalyst for another risk flare. "Governments and central banks have less fiscal and monetary flexibility to prevent serious problems emanating from future market disturbances. A perfect storm scenario would likely cause financing disruptions even for borrowers that are not highly leveraged."

US Equities Ignoring US Sovereign Risk Warning

We have been warning of the pending fiscal cliff in the US and the somewhat inevitable debt ceiling debacle, election uncertainty, and the question of Fed independence in an election year as potential catalysts for risk flares in the US and abroad. For now, US equities are happy to ignore these events, still drawn in their Pavlovian-educated manner to US equities for their nominal enrichment. The trouble is - there are clear warning signs from some particularly noteworthy markets that all is not well (that appear more capable of comprehending fundamentals). Forget for a moment the overnight plunge and recovery in futures as this will bring only anchoring bias; a step back to 30,000 feet and we note that the spread on USA Sovereign CDS has risen by over 30% in the last month (now back at 40bps or 3-month wides) flashing a worrying warning signal for US equities if the past is any guide. Remember that US CDS are denominated in EUR and do not simply reflect the 'default' risk of the fiat-issuing USA but the devaluation or restructuring risks - and it appears market participants are getting nervous once again of the profligacy of the US government and the ineptitude of the central banks with their one-trick-pony experimentation. At the same time, central banks' broad repression has crushed volatility in every asset class - except, as Morgan Stanley notes - credit which is inferring considerably higher chance of a risk flare in the short-term. So while this week will bring cheers of growthiness and cooperation and decoupling, the all-seeing eye of credit markets remain far less sanguine.

Europe Opens Down 2% As Sovereign Risk Surges

Germany's DAX is the hardest hit so far of the major European equity markets (futures) with a drop of over 2.2% (underperforming the French CAC40 -1.5% for now). The EuroSTOXX 50 is down 2% and reflects the general state of affairs in European equity markets as they open - which is a little worse than the S&P futures market's move since the European close on Friday.  European credit markets are very quiet and illiquid thanks to the UK's May-Day celebrations (and its position as hub for CDS market-making) but sovereign bonds are trading across mainland Europe and are being sold relatively hard so far. Spain, Italy, and Greece are underperforming with the former two pushing towards recent wide spreads even if yields remain off recent highs. EURUSD rallied a little off its overnight lows as Europe opens but has started to give back some of those gains. As the cash markets open there is some buying-the-dip pressure in stocks - even as govvies remain offered while financials remain under significant pressure. US equity futures and Treasuries remain in sync as ES limps a little higher off overnight lows.

The Next Circle Of Spain's Hell Begins At 5% And Ends At 10%

Three weeks ago we discussed the ultimate-doomsday presentation of the state of Spain which best summarized the macro-concerns facing the nation and its banks. Since then the market, and now the ratings agencies, have fully digested that meal of dysphoric data and pushed Spanish sovereign and bank bond spreads back to levels seen before the LTRO's short-lived (though self-defeating) munificence transfixed global investors. However, the world moves on and while most are focused directly on yields, spreads, unemployment rates, and loan-delinquency levels, there are two critical new numbers to pay attention to immediately - that we are sure the market will soon learn to appreciate. The first is 5%. This is the haircut increase that ECB collateral will require once all ratings agencies shift to BBB+ or below (meaning massive margin calls and cash needs for the exact banks that are the most exposed and least capable of achieving said liquidity). The second is 10%. This is the level of funded (bank) assets that are financed by the Central Bank and as UBS notes, this is the tipping point beyond which banks are treated differently by the market and have historically required significant equity issuance to return to regular private market funding. With S&P having made the move to BBB+ this week (and Italy already there), and Spain's banking system having reached 11% as of the last ECB announcement (and Italy 7.7%), it would appear we are set for more heat in the European kitchen - especially since Nomura adds that they do not expect any meaningful response from the ECB until things get a lot worse. The world is waking up to the realization that de-linking sovereigns and banks (as opposed to concentrating that systemic risk) is key to stabilizing markets.

Second Baby Squid Rumored To Be In The Running For Bank Of England Head

Two weeks ago we reported the somewhat surprising news that according to the FT, current Bank of Canada head, and former co-head of sovereign risk at Goldman Sachs had been "informally" approached by the Bank of England to be Mervyn King's replacement when the latter's contract runs out in June 2013. Once the news broke, the tenuous arrangement to have a former-Goldmanite at virtually every single developed world central bank seemed to have hit a snag as both the Bank of Canada and Carney himself were forced to deny that any interest by the BOE had been expressed. Of course, what was missing from the public discourse is that this was likely one of those "reverse inquiry" type of career moves, whereby the candidate himself, or rather the employing firm - in this case Goldman Sachs, makes the decision whether or not the candidate would be suitable to head the Goldman subsidiary known as the Bank of England. Which is why it is with even less surprise that we now learn that it is none other than the firm's most permabullish strategist Jim O'Neill, who after coining the globalist wet-dream term "BRIC" was sent in exile to chair the firm's worst performing division, GS Asset Management, that is rumored to be the latest replacement for Mervyn King.

Europe Slumps To Three-Month Lows As Spain Nears 2009 Lows

As we noted this morning, the perfect 'reality-check' storm hit Europe this morning and with Draghi dismissing hope for more printing and nationalism raising its ugly specter, broad European equity markets made nearly their largest drop in five months. With the BE500 (Europe's S&P 500 equivalent) at three-month lows and Spain's IBEX within a few points of the March 2009 lows, things are becoming critical once again. Spanish yields jumped back over 6% but Italian spreads actually underperformed on the day +14bps vs Spain +12bps as Holland 5Y CDS blew past 130bps to near crisis-peak levels - leaving GDP-weighted European sovereign risk at three-month highs. The LTRO Stigma has broken above 150bps for the first time since before the LTRO as the realization of the implicit subordination of LTRO-encumbered banks is crushing unsecured bond-holders (on average trading at 350bps near four-month wides). EUR-USD basis swaps deteriorated a little remaining near their worst levels in three months but EURUSD remains miraculously just above 1.31 (though almost 100 pips off Friday's close) as repatriation flows are not helping correlation-driven algos in the US anymore.

Europe's EFSF 'Firewall' Risk At 3 Month Highs, Accelerating At Fastest Rate In 6 Months

The last two weeks have seen the market's perception of the risk of Europe's 'firewall' rise at its fastest rate in six months (the peak of the crisis). At 142bps wider than Bunds, EFSF bonds now trade at their widest in three months and look set to break out to peak-crisis levels. We are sure the Japanese will still back-up-the-truck at the next issuance of self-referential ponzi bonds, but not only is the credit risk of this staggering CDO rising fast, as Bloomberg notes, the market's anticipation of the PPCs (Partial Protection Certificates), that - akin to CDS - provide an uncollateralized protection for 'some' of the potential losses investors may face in buying sovereign debt at issuance, is dreary at best and "not something that appears immediately hugely attractive". CDS already trade on these bonds and the only willing players taking advantage of that market in size are the basis traders currently; as real money "will buy peripheral bonds outright, because they’re attractive enough, or they won’t buy them at all, and financial engineering [is not] necessarily going to change that dynamic.” Just as we have again and again pointed out, the reality is that investors have seen through these self-guaranteed and 'irrelevantly convoluted' attempts to kick the can and Draghi's rejection of the IMF-Geithner calls for more crisis-fighting (as noted by Bloomberg this evening) - arguing that they have done enough by cutting rates and issuing bank loans, perhaps reflects a Europe that knows it is on the brink. This was further reinforced by the Bundesbank's Joachim Nagel, who, in a moment of sublime reality-awareness, ruled out any direct EFSF 'help' to the banks "as that would pass on the risk of a bank bailout to all European taxpayers" - but why does Geithner care so much - we thought US banks were 'safe' and unexposed to Europe (eh Jamie?).

On The Goldman Path To Complete World Domination: Mark Carney On His Way To Head The Bank Of England?

Back in November we penned "The Complete And Annotated Guide To The European Bank Run (Or The Final Phase Of Goldman's World Domination Plan)" in which we described what the long-term reality of Europe, not that interrupted by the occasional transitory LTRO cash injection and other stop-gap central bank measure, would look like. And yet there was one piece missing: after Goldman unceremoniously set up its critical plants in Italy via Mario Monti and the ECB via Mario Draghi, one key target of Goldman domination was still missing. The place? Why the center of the entire modern infinitely rehypothecatable financial system of course: England, which may have 1,000x consolidated debt/GDP, but at least it can repledge any asset in perpetuity thus giving the world the impression it is solvent (no wonder AIG, MF Global, and now the CME are scrambling to operate out of there). Which is why we read with little surprise that none other than former Goldmanite, and current head of the Bank of Canada, is on his way to the final frontier: the Bank of England.


It will come as no surprise that the Spanish 'experiment' with the euro is not going well. Spain now relies more heavily on the ECB than at any time and today's bill auction sums up all that is wrong about our financial markets when an event that absolutely should be expected to be a non-event (a sovereign nation selling a small amount of short-dated debt) becomes a catalyst for algorithmic excess. In perhaps the greatest analogy for today's auction, Micheal Cembalest pronounces "throughout my career, central banks having to buy or finance sovereign debt to avoid a debt crisis was like going to the prom with your sister: there’s something very unnerving about it, even though it looks normal from a distance." It did not take long for the honeymoon following LTRO2 to end and despite today's exuberance, Italian and Spanish equity markets (as well as financial credits) have collapsed as Spain's sovereign risk has skyrocketed. While Spanish bank holdings of Spanish govvies, ECB lending to Spanish banks, and Spanish credit risk are surging so is one other much more worrisome fundamental trend - that of corporate non-performing loans. Dismissing the dichotomous relationship between consumer and residential delinquency calmness relative to unemployment's explosion (much as the market has in its pricing of bank stocks), the JPM CIO remains underweight Europe arguing that while contrarian calls are often the most profitable, this time being underweight European equities is the gift that keeps on giving.