default

Earlier today, Fitch announced it would be the first rating agency to declare Greece has defaulted, albeit on an interim basis. According to Reuters, Fitch Ratings will declare Greece in restricted default on its debt due to the steps taken in a new euro zone rescue package but will likely assign new ratings of a low speculative grade once a bond exchange is completed, the agency said on Friday. The agency said that the reduction in interest rates Greece is paying on its debts and extension of maturities gave it a chance of regaining solvency and would support its rating. "Fitch will assign new post-default ratings to Greece and to the new debt instruments once the default event is cured with the issue of new securities to participating bondholders," the agency said. "The new ratings will likely be low speculative-grade." Elsewhere, confirming that now that Greece is an explicit ward of the EFSF, read Germany and France its rating do not matter, Greek CDS tumbled the most ever, tightening by 500 bps to 1,500 in hours. However, since Greece now exists in a state of limbo when it comes to capital markets and since without the explicit support of the EFSF the country would be insolvent, there is little sense to look at its "risk" through the lens of fixed income any more. Lastly, as the following selection of analyst commentary indicates, there is nothing about this "solution" that is actually beneficial in the long run.

“I have little doubt that most of the silver that is on the SLV’s web site with a bar number is there somewhere. But what I am really concerned about is if it is hypothecated or not, meaning is there more than one owner on that same bar. And I can almost guarantee that there are multiple owners for almost every bar that they report. It does not mean that that bar does not exist. It takes ten contracts to be a market maker. So I have got ten contracts, I have got fifty thousand ounces, and I ship it to my buddy who is a hedge fund manager over in Idaho. That is my silver. I have just sent it over to him on a lease. I have leased it to him. Now he has taken that silver and he has swapped it with somebody at the SLV, so they have got bars there. And he swapped for those and now those are on the exchange showing as part of the deal. So you can have a lease and a swap, so you could have two or three claims on those same bars. And that happens over and over again." So cautions David Morgan, publisher of The Morgan Report on precious metals and proprietor of Silver-Investor.com. More so than perhaps any other, the silver market has been loudly and visibly accused of rampant price manipulation. And more recently, suspicion is growing that the exchanges and ETFs dedicated to trading the metal do not hold sufficient volume of it to meet their obligations. Is the silver market free and fair? Chris delves deeply into these important questions with one of the best-known silver experts.

With increasing chatter that no matter what Congress agrees on, if anything, vis-a-vis the debt ceiling, the preemptive spin has begun, with the first salvo coming out of UBS' George Bory who has released a note "The difference between downgrade and default" which paints a very placid picture of the consequences of the US losing it AAA rating. Coming from a credit strategist, Bory naturally looks at the tightly confined consequences of such an event within the rates space exclusively without any mention of other cross-linked securities. In UBS' view, we would expect i) 10-yr yields rise 20-25bps, ii) a steeper yield curve, especially long end, iii) Treasuries underperform bunds and other highly rated sovereign debt iv) Vol term structure inverts further, v) Corporate spreads tighten, especially at long end, vi) Bank credit quality re-rated lower. Altogether not too bad. The problem is that there are a few trillion in money market related rating triggers which would grind to a halt the repurchase of paper of a sovereign that no longer has the AAA mark, resulting in our opinion in a dramatic crunch in short-term liquidity, and set the stage for a Lehman-like monetary system paralysis. But that is a topic for another day. Since today reality is to be ignored (see "transitory default"), here is why according to UBS America can simply call Moody's and S&P's bluff.

As more news comes across the tape, we now learn that somehow Greece is expected to experience a default but not just any default: a "transitory" default. From Bloomberg: European officials are trying to orchestrate a second Greek bailout so that a default would only last for a few days, said two officials familiar with the discussions.

When observing the latest "hope" based rally in the EUR last night we said that we "can't help but be extremely skeptical that this short-lived bounce will promptly reverse." Sure enough, 8 hours and 110 pips lower, this appears to have been the case driven primarily by remarks by Eurogroup president Jean-Claude Juncker and Dutch FinMin Jan Kees de Jager, both of whom said that a selective Greek default "cannot be excluded." Specifically, Dutch Finance Minister Jan Kees de Jager said on Thursday he had seen willingness at the European Central Bank (ECB) to discuss the possibility of a selective default on Greek debt. "The ECB is continuously involved in talks about private sector involvement... We have recently seen some room at the ECB to discuss this topic. This is something different than a credit event. I am talking about a selective default," De Jager told the Dutch parliament. Juncker said essentially the same thing earlier, which precipitated the EUR tumble, as this shows that with the summit starting (11 am GMT), once again nobody in Europe has any idea what they are doing. Furthermore, horrible PMI data out of Europe (following last night's Chinese contraction) overnight certainly did not help. And lastly, a Spanish auction of 10 and 15 Year bonds for which the country had to pay record prices even as the Bid To Cover barely moved (and in the case of the 10 Year declined) also took away from any risk on sentiment.

That giant whooshing, and humming, sound you hear are all the printers at the basement of Marriner Eccles getting refills and start the warm up process. Because according to the Fed Charles Plosser the Federal Reserve is actively preparing for the possibility that the United States could default. Which can only mean one thing: an immediate paradrop of millions of $100 bricks to every man woman and child in the US since as we all know by know Tim Geithner has repeatedly confirmed the Treasury has absolutely no default plans. None.

We finally agree Greece will default. Why can't we all agree on the turmoil likely as a result? European CRE will get C-R-U-S-H-E-D in a volatile rate storm.

Wonder why the Greek 2 Year bond just plunged, sending its yield to a laughable all time high 39.09% (a 312 bps move today alone)? Wonder no more. According to the ECB's Ewald Novotny the central bank has folded to German demands, and will now allow a "temporary" Greek default. Of course, what happens next will be a complete freeze in capital markets (see the chart below which shows borrowings on the ECB's Main Refinancing Operation while itis still available) but who cares: the central planners think they have it all under control.

Many associate exploding CDS as a feature of backward third world countries, or, as they are better known these days, PIIGS. It may thus come as a surprise to most that the default risk of not only the US, which we reported had recently hid a multi year high, but especially Germany and the UK have surged by well over 50% in the past month. In fact, Germany, by most objective evaluations, an economy that is far more resilient and productive than America's, has in the past 3 days seen its CDS surge to a level 10 basis points wide of the US. And if not the actual economy, what then? Why such monstrosities as Deutsche Bank and Commerzbank, which as reported previously have caused many to doubt are as viable as the stress tests represents, and whose combined asset bases are well over the total GDP of Germany. As the for the UK, after trading at around 55 bps for months, the spread has jumped to nearly 80 bps. So as Sigma X indicated earlier that it may now be time to shift attention to the UK, have the vigilantes already succeeded in penetrating all the way to the very core of the Eurozone? Or, courtesy of ISDA's criminal abdication of its responsibilities by pre-determining that no development in the future of Greece would be an event of default, perhaps the only natural response now is to buy protection on those names which have not blown out to ridiculous (read 600 bps or wider) spreads. Which, however, is very bad news for the Eurozone core, as going forward investors will simply hedge peripheral cash risk with core synthetic: a process which will result in the eventual wipe out of both instruments. But that's precisely what happens when the CDS administrator and "regulator" decides to play ball with the central planners instead of the siding with market participants: unintended escalating consequences galore.

What started off as a simple, if very much illegal, information gathering protocol (and yes, NOTW is most certainly not the only organization that hacked voice mails), and has since escalated to an epic shakedown of one of the world's most legendary media companies in which Murdoch himself now appears on the verge of leaving the company, appears set to ultimately result in a historic parliamentary collapse, with the Prime Minister of the UK David Cameron seen as the ultimate fallguy. As English booking agency reports, "David Cameron's odds of leaving the Cabinet have been slashed by Ladbrokes. The bookies have taken a steady stream of bets on the PM leaving office with the odds dropping from 100/1 to 20/1 and now 8/1 in a matter of hours." In other words anyone who bet that the shuttering of the NOTW was merely the first step in the News Corp. scandal and that it would reach as high as the pinnacle of UK leadership, has made a return well over 10 times in the past several days. And yet, as the Economist chimes in with a late night piece, the departure of Cameron at this point is far from certain. Which is arguably a far worse state of affairs: if there is anything the markets hate, it is uncertainty. If Cameron was sure to stay or go, it would have no impact on the UK's economy and financial markets. As it stands, and with Murdochgate getting worse by the minute, we would not be surprised to see UK CDS follow the US and Germany to multi-year highs, as the UK now openly becomes yet another target for the bond vigilantes who relish precisely this kind of uncertain inbetweenness.

Herman Van Rompuy just tweeted the following:

I have decided to convene a meeting of the Euro area Heads of State or Government on Thursday, 21 July, at 12.00 in Brussels. Our agenda will be the financial stability of the Euro area as a whole and the future financing of the Greek programme. I have asked the preparatory work to be brought forward inter alia by the Finance Ministries.

Perfect timing for the announcement of a "soft" Greek default: just a day before the US debt ceiling legislative deadline. Are we going to see a major market crash next week just so everyone is reminded of what all is at stake?

But the Johns in Washington (they are technically Johns, not prostitutes, since they are pimping the American people out) and the slavestream media will keep up their circus act regarding the debt ceiling being the only important issue ...

Gee, you think?

So much for the market "completely ignoring" the total chaos and complete cacophony out of the tragicomic DC soap opera which is transitioning into less of a comedy and into more of a tragedy with each passing day. For everyone still wearing rose-colored glasses here's a refresher: stocks dropped, the S&P expressed in dollar terms, or adjusted for loss in dollar purchasing power is now negative for the year, bonds tumbled despite a "strong" auction driven almost entirely by Direct Bidders on the margin, and, the kicker, US CDS is now at 56 bps: US default risk is now the highest since February 2010.

Barney Frank, fresh from being caught on live TV picking his nose during Bernanke's Humphrey Hawkins presentation, had a decidedly more sour outlook on the prospects for the debt ceiling. Spoiler alert: in tried and true fashion, the drama king blamed it all on the stupidity and inexperience of republicans. Asked when there is a chance the US will be put into default: "Yes. I take the freshmen republicans and people like Michelle Bachmann
at their word. I don't think they're kidding. I think they fundamentally
misread this situation as Bernanke, a Bush appointee after all, made
clear today. I think there are people that frankly have an unreal view
of the world. They believe that this is somehow a fake and that you can
push a button and make a lot of these debts go away. I believe there are
a substantial number of Republicans who are opposed to a huge debt and a
further group of Republicans who understand why it's important to raise
the debt limit, but are afraid of losing a primary to someone." Recapping Frank's view: why deal with a problem under my tenure, when very soon there will be a congressman who will replace me and he, or more likely she, can deal with the sordid mess I created. And this is not even counting the trillions in GSE off-the-books debt of which Frank was one of the key people responsible for letting it be the catalyst that blew up the credit bubble when Fannie and Freddie were nationalized just under 3 years ago.