Barclays

Many lessons are available to learn from the Greek debt crisis. Several more are probably to come as the intended and unintended consequences of what the Europeans have done begin to infect the bond markets. I point this morning to the vast differences now between the ownership of American debt and European debt and, as the immediate effects of the LTRO begin to wear off, several dawning realizations that I think will cause European debt to gap out against American debt regardless of the yields of Treasuries.  

So Greece has been saved – is that right? Well according to ISDA (the International Swaps and Derivatives Association) a “Restructuring Credit Event has occurred with respect to the Hellenic Republic” which in the vernacular means the Greeks are bust; tell us something we don’t know! The importance of this statement is that credit default swaps (CDS) on Greek debt are now triggered and holders will have their losses made good. There were any number of scurrilous rumours that ISDA would not declare a credit event to preclude their illustrious members from paying out, but when the net downside of $3 billion needs to be shared out amongst the likes of Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, UBS, BNP Paribas and Societe Generale, then a quick whip round in the bar after close of business and the jobs a good’un.

Since the much-heralded 3Y LTRO program was envisioned and enacted, we have been clear in our perspective that while this appears to have signaled a removal of downside (contagion-driven) tail-risk for banks (and implicitly to sovereigns), the market's perceptions are once again short-termist. Missing the 'unintended-consequence' for the 'sugar high' is the forest-and-trees analogy that we have seen again and again for the past few years but we worry that this time, given the sheer size of the program, that the ECB has got a little over its skis. By demanding collateral for their bottomless pit of low-interest loans, the ECB has not only reduced banks' necessary deleveraging needs (and/or capital raising) but has increased risk for all bond-holders (and implicitly equity holders, who are the lowest of the low in the capital structure remember) as the assets underlying the value of bank balance sheets are now increasingly encumbered to the ECB. Post LTRO, Barclays notes that several banking-systems (PIIGS) now have encumbered over 15% of their balance sheets but LTRO merely extends a broader trend among European banks (pledging collateral in return for funding) and on average (even excluding LTRO) 21% of European bank assets are now encumbered, and therefore unavailable for unsecured bond holders, ranging from over 50% at Danske (more a business model choice with covered bonds) to around 1% for Standard Chartered. As the liquidity-fueled euphoria starts to be unwound, perhaps this list of likely stigmatized banks is the place to look for higher beta exposure to the downside (especially as we see ECB margin calls start to pick up).

Looks like it's time to start looking for somewhere else to peddle those Treasuries -- but then, when hasn't it been?

The biggest sovereign debt restructuring in history is now, well, history. The headlines are finally come in:

• GREECE ISSUES STATEMENT ON DEBT SWAP
• GREECE COMPLETES DEBT SWAP
• GREECE SAYS EU172 BLN OF BONDS TENDERED IN SWAP
• GREECE GETS TENDERS, CONSENTS FROM HOLDERS OF 85.8%
• GREECE SAYS 69% OF NON-GREEK LAW BONDHOLDERS PARTICIPATED

We learn that €152 of the €177 billion in Greek law bonds have tendered, which is 85.8%. This means that €25 billion in Greek law bonds have not - these are the hedge funds that could not be Steven Rattnered into participating, and will now sue Greece for par recoveries.This is also the number that ISDA will look at today to determine if, in conjunction with the CAC, means a credit event has occurred. And yes, the CACs are coming, as is the Credit Event finding:

• GREECE SAYS WILL AMEND TERMS OF GREEK LAW BONDS FOR ALL HOLDERS

ETF fund flows have been a uniformly positive source of capital into U.S. risk markets in 2012. Looking a little deeper at the decidedly 'risk-on' flows, Nic Colas (of Convergex Group) notes perhaps their most provocative feature has been their high degree of net concentration.  When you look at the entire “ETF Ecosystem” of listed funds, just 6 funds represent all the net gains in assets over the past month ($5.4 billion in net inflows) – LQD, HYG and JNK in fixed income, VWO in emerging markets, VXX in risk, and GLD in commodities. With 1,433 different ETFs listed on U.S. markets now, Colas likens the comprehension of the $1.2 trillion in AUM across these ETFs to how well you know your spouse as we know ETF flows are important (just like a wedding anniversary date or what day the trash is picked up at home) but with their still-evolving proliferation it seems a daunting task to keep tabs on them. All in all, this brief analysis points to more of a pause in investor sentiment rather than the opening for a more full-blown correction in the coming weeks.

Exquisite.

European stock futures have trended higher today in relatively light volumes as the market awaits key interest rate decisions (BoE & ECB) and with the deadline for the Greek debt swap deal looming. The latest talk this morning has been that the participation in the PSI deal has been well received and coupled with speculation of a Chinese RRR cut overnight and stops tripped in the E-mini S&P and Eurostoxx futures earlier this morning, contributed to a large portion of the move higher. As a consequence, the USD index has weakened (-0.5%) which has lifted the EUR/USD pair back firmly though the 1.3200 level to the upside and Brent/WTI crude futures are seen higher ahead of the NYMEX pit open. Looking ahead we await the ECB press conference as well as the latest jobs data from the US due at 1330GMT.

"We are a hair's breadth or, more exactly, one recession away from a market panic on outright deflation -- a panic that will send the central banks into a printing frenzy that will make their balance sheet expansion so far seem like a warm-up act for the main show." Albert Edwards

All you need to read.

The European Central Bank's recent LTRO programs have effected a significant increase in the amount of encumbered assets -- those pledged as collateral in repo transactions, central bank funding operations, and covered bond issuance as lenders increasingly demand over-collateralized borrowing arrangements to protect against credit risk -- on balance sheets across the pan-European banking system.

We shared our thoughts on the implication for more possible QE, sterilized or not, earlier, as did the market: why is risk higher, and with it the threat of inflation, if the Fed is doing perfectly innocuous sterilized easing? Maybe because it does not matter if the Fed intervenes sterilized or unsterilized, as long as the Fed intervenes, period? Now we present the knee jerk reaction of several Wall Street experts, all of whom are about as confused about this development, which is neither here nor there in terms of actually achieving any of the Fed's goals, as we are.

Swiss money manager and long term bear Marc Faber, aka "Dr Doom", says political risk in the Middle East has increased significantly with war between Iran and Israel “almost inevitable”, and precious metals and equities investments offer some safety. "Political risk was high six months ago and is higher now. I think sooner or later, the U.S. or Israel will strike Iran - it's almost inevitable," Faber, who publishes the widely read Gloom Boom and Doom Report, told Reuters on the sidelines of an investment conference. Brent crude traded near $123 per barrel in volatile trade on Tuesday on fears of a disruption in Iranian supplies. Israeli Prime Minister Benjamin Netanyahu showed no signs of backing away from possible military action against Iran following a Monday meeting with U.S. President Barack Obama. "Say war breaks out in the Middle East or anywhere else, (U.S. Federal Reserve chairman) Mr Bernanke will just print even more money -- they have no option...they haven't got the money to finance a war," said Faber. "You have to be in precious metals and equities ... most wars and most social unrest haven't destroyed corporations - they usually survive," he said. He said that Middle East markets had largely bottomed out, though regime changes from the Arab Spring revolutions were unlikely to be investor-friendly.

All you need to read.

Re: LTRO2, banks, CRE and the oppurtunity to see just how much free really costs...