CDS

CDS

Moody's Expects Multi-Notch Downgrade Of Ireland, As Green Party Abdication Sends Irish CDS Wider On Day

Earlier today Moody's finally woke up from its slumber, threatening it would do a "multi-notch downgrade, albeit one that would leave the country still with an investment grade rating", which the people who have made a business model of being behind the curve said is now the most likely outcome of the review of Ireland's sovereign credit rating. Moody's (which rates Ireland Aa2 and has the country on review for downgrade) said that an aid package from the European Union and the International Monetary Fund would shift the burden of supporting Ireland's banks onto the Irish sovereign, and would therefore be "a credit negative for Ireland." Apparently bankruptcy is not covered under the "credit negatives" for Ireland. And while what Moody's does or thinks is completely irrelevant, what the Irish Green party (whose prior opinion we presented in a very distinct clip last night) has announced it will quit the Irish government in January, leaving PM Brian Cowen without a majority in the government, and leaving the door open for elections, and thus a complete undoing of the bailout. Looks like yesterday's announcement will be the shortest rescue in history. CDS is already seeing that, as Irish CDS was last seen lifting offers of 520 and wider, after a 507 close on Friday. And Futures already following the action. It will be another busy day for Brian Sack.

Market Recap: 11.18.2010

A recap of the day's key action in equities, futures, FX, rates, commodities and credit.

Frontrunning: November 18

  • Fed Orders 2nd Round of Stress Tests  (WSJ), translation: more capital raises for Bank of America, Wells Fargo and Citi.
  • Lenihan Says Ireland May Ask for Bank Package as Bailout Nears (Bloomberg)
  • One in 20 Irish Mortgages in Arrears (FT)
  • China Vows to Tame Inflation (Reuters)
  • Korea to Revive Tax on Foreigners' Bond Holdings to Slow Capital Inflows (Bloomberg)
  • IMF Says HK Currency Peg Boosting Property Prices (FT)
  • India Microcredit Faces Collapse From Defaults (NYT)
  • Vilsack: Food Costs Won't Surge  (WSJ)
  • Failed Models and the Real Costs of QE2 (Economics21)
  • California Shrinks Planned Tax-Exempt Sale, Expands Taxable (Bond Buyer)

Finland Opposes Aid To Ireland

After Greek CDS went offerless, and is about to pass 1,000 bps following news of Austria's defection from the EU rescue fund over Greece's endless lies, now we get the next defector: Finland, who it appears is opposing an Irish rescue. This is not too odd, since Finland actually has a viable banking system whose viability does not depend on the generosity of Irish and European taxpayers. What this means, however, is that European unity is finally coming apart at the seams.

Erik Nielsen's Resurgent Optimism Doused As Europe Is On The Verge Again

Who would have thought it only takes for PIIGS spreads to go back to all time records, and for Ireland and Portugal to be hours away from joining Greece in the bailout corner, for Goldman's Erik Nielsen to turn bearish again. To wit: "if investors are running for the door out of fear of being the last one left behind, then there’ll be a liquidity crisis (as there would be for anyone with a financing need), and they’ll need help." Way to stay ahead of the curve Erik. The problem is that while the economic reality below the surface cracks and collapses, investors are largely ignoring the perpetual words of optimism from Europe's politicians, and sellside cheerleaders (which begs the question - is it time to take this Goldman acknowledgment of reality as a buying opportunity?). What happened in Greece may have been brushed under the carpet for a few months, but the policy response there, which is identical to what is happening in Ireland and Portgula now, i.e., blatant lies, has left those holding relevant securities with a bitter taste in the mouth. And now, unlike before, the possibility of holder haircuts is distinctly on the table. Which is why we expect that before the Asian open, there well may be some key news out of Ireland (and/or Portugal)- no matter how much Nielsen believes that Ireland is not in a solvency crisis, with Bund spreads in the 700 range, no matter how much prefunding the government has, it will be irrelevant and will create yet another toxic debt spiral. The biggest threat is not so much to Ireland, which supposedly has its cash needs met through mid 2011, but contagion hitting other European countries, which do have solvency issues, yet have been spared the liquidity hammer so far. And with Italy CDS also hitting record highs, look for the core to start crumbling as everyone, especially Chiswick's perpetual optimist, to appreciate the gorgeous mushroom cloud over the European periphery.

Irish Bank Borrowings From ECB Jump To €130 Billion, Or €100,000 For Every bp In Anglo Irish Sub CDS

According to the ECB, borrowings by Irish-based lenders’ from the European Central Bank rose to €130 billion as of Oct. 29, up almost €10 billion from €121.1 billion at the end of September. Adjusted for size, this is roughly equivalent to US banks borrowing a few hundred trillion from the Fed, give or take a few trillion. "Pass thru" institutions include both international and domestic banks in Ireland. In other words, the ECB continues to buy the bonds issued by Ireland, to provide the funds to Irish banks so they can buy their own bonds, and when all this fails, the ECB can step in and provide money to the government directly. Elsewhere, the CDS of Anglo Irish bank blew out by 20% yesterday, and have surged by over 10,000 bps since the end of October to nearly 13,000. Luckily, the end game is known: Ireland will be bailed out by the ECB, the country will become another Greece, lying each and every day about its deficit and economic recovery, until yet another country gets mauled. At some point the Fed/ECB/IMF's rescue ploy will fail. Then, it will be best to be far away.

PIIGS CDS Hit All Time Wides

It has been a few month since everyone was throwing the word "contagion" around just to sound smart. Prepare to get a whole lot more of that. PIIGS CDS are now at a fresh all time record, way wider than during the May days, that lead to the flash crash and Greece's bankruptcy. All this means that the fair value of the market is now even lower than where it was on May 6, but the tail risk has been internalized by not only US but European taxpayers. That rubber band will snap again. Just a matter of time.

Guest Post: When To Sell Gold

By now you have plenty of reason to congratulate yourself for having boarded the gold bandwagon. The early tickets are the cheap ones, and you’ve already had quite a ride. The best of the ride, I believe, is yet to come, and it should be very good indeed. It should be so much fun that your wallet may start to feel a bit giddy – which can be dangerous. So it would be wise to consider, now, how things will be and how they will feel when the current bull market in gold reaches its “end of days.” Because it will end. Buying at the right time is the key to building profits. Selling at the right time is the key to collecting them.

ICE Starts Accepting Gold As Initial Margin Collateral For All Energy And CDS Trades

Repeat after us: gold is not a currency. But, just in case we are wrong, pretty soon one may see it accepted as pseudo legal, non-federal reserve note equivalent just about everywhere. First: the ICE, where "Gold bullion will be permitted for initial margin only and will be accepted by the clearing house by electronic transfer in increments of 1 troy ounce, and will be priced daily using the London Gold Fixing Price in US Dollars." In other words, the ICE will gladly take your gold. Period.

As Ambac Files For Chapter 11, Fed Is On The Hook With $10MM In Short CDS Exposure

Ambac Financial Group has just filed for Chapter 11, using a filing which is so fresh it even forgot to lock the input forms (see attached). The case is 10-15973 in Southern District of New York. The actual filing is not surprising, as we noted earlier that Ambac was likely going to file imminently. What is also not surprising is that the form 1, erroneously, lists assets of between 0 and $50,000 and liabilities of over $1 billion, even as Exhibit A clarifies assets as $394.5 million and liabilities of $1.6824 billion. Obviously someone was in a rush. Keep in mind this is a stock that Cramer was previously pitching to his very few viewers. Ambac's bankruptcy lawyers are Dewey and LeBoeuf, and Blackstone gets the coveted role of financial advisor. None of the relevant unsecured creditors have been disclosed as most are in DTC form, with BNY listed as custodian. Yet one definitive loser in the Ambac bankruptcy is none other than 'our' own New York Fed. As the Maiden Lane I holdings list as of June 30, when the Fed consumed Bear Stearns most toxic 'assets' and gave Jamie Dimon a clean sheet to buy the clean stripped bank for $10/share, it also adopted a bunch of Ambac CDS. And as of June 30, the Fed held $10 million in ABC CDS. Now that there is a credit event, it will be impossible for the Fed to continue claiming that its rescue portfolios are doing just swimmingly (or so we hope, for BlackRock's sake). Furthermore, the Fed will be forced to payout on the CDS which will likely end up pricing in the settlement auction somewhere very close to zero, implying a near total wipe out on the entire $10 million in short CDS. And lucky Fed: as of March 31, the Fed had actually held a net $50 million in ABC short protection, so in Q2 it covered $40MM worth of short protection. So now all eyes turn to Ambac soulmate MBIA... where the Fed is short $84 million worth of CDS.