default

It's all over but the crying at least as far as Greece is concerned. First, it was S&P's Kraemer telling Bloomberg yesterday the country is finished, now today for dramatic impact, we get Fitch's repeating the doom and gloom, stating that the country will likely default before its March 20 payment. From Bloomberg: "Greece is insolvent and will default on its debts, Fitch Ratings Managing Director Edward Parker said. The euro area’s most indebted country is unlikely to be able to honor a March 20 bond payment of 14.5 billion euros ($18 billion), Parker said in an interview in Stockholm today. Efforts to arrange a private sector deal on how to handle Greece’s obligations would constitute a default at Fitch, he said.  “The so called private sector involvement, for us, would count as a default, it clearly is a default in our book,” Parker said. “So it won’t be a surprise when the Greek default actually happens and we expect it one way or the other to be relatively soon." Europe’s debt crisis is likely to be “long and drawn out,” Parker said." And here we go again, with official attempts to make what appeared apocalyptic as recently as a month ago, seem trite, boring and perfectly anticipated. In other words, the fact that this like every other piece of bad news that should be priced in, is priced in, is priced in. And so on, at least according to the kleptocrats, until we finally learn that nothing is priced in but endless market stupidity.

Eurozone special: the only developed economy where credit markets still have a say.

I continue to believe that the large difference between the valuation of WFC and C is actually about right and is a function of the high-risk business model at C.  Say what you want about the piles of cash, Dick Bove, C has a gross yield on lending assets that is more than 350bp above the industry average, a function of a subprime internal default target for the average customer.  This is a deliberate business model choice and one that, frankly, makes it hard for me to justify buying C. 

A down day in the US on Tuesday could begin to trigger intermediate sell signals...~ Lee Adler

Time for the dominos to fall where they may: head of sovereign ratings at S&P Kraemer spoke on Bloomberg TV, and said the following:

• KRAEMER: GREECE, CREDITORS `RUNNING OUT OF TIME' IN DEBT TALKS -BBG
• KRAEMER: EURO LEADERS HAVEN'T TACKLED CORE UNDERLYING PROBLEMS -BBG
• KRAEMER SAYS EUROPE MUST DEAL WITH IMBALANCES, COMPETITIVENESS -BBG

And the punchline:

• KRAEMER SAYS HE BELIEVES GREECE WILL DEFAULT SHORTLY - RTRS

The only thing he did not add is that the default will be Coercive. What happens next is anyone's guess, but whatever it is it is certainly priced in. Also, let's not forget that the inability of the market to react to any news ever again is most certainly priced in.

When Zero Hedge correctly predicted the imminent rise of the "activist sovereign hedge fund" phenomenon first back in June 2011 (also predicting that the "the drama is about to get very, very real") few listened... except of course the hedge funds, such as Saba, York, Marathon, and others, which realized the unprecedented upside potential in such "nuisance value", long known to all distressed debt investors who procure hold out stakes, and quietly built up blocking positions in European sovereign bonds at sub-liquidation prices. Based on a just released IFRE report, the bulk of this buying occurred in Q4, when banks were dumping positions, promptly vacuumed up by hedge funds. More importantly, we learn from IFRE's post mortem of what is only now being comprehended by the market as having happened, is the realization that the terms "voluntary" and "collective action clauses" end up having the same impact as a retailer (Sears) warning about liquidity (and the result being the start of the death clock, with such catalysts as CIT pulling vendor financing only reinforcing this) to get the vultures circling and picking up the pieces that nobody else desires. As a reminder, it was again back in June we predicted that "the key phrase (or two) in the proposed package: "Voluntary" and "Collective Action Clauses"." Why? Because what this does is unleash the prospect of yet another word, which is about to become one of the most overused in the dilettante financial journalist's lingo: "subordination" or the tranching of an existing equal class of bonds (pari passu) into two distinct subsets, trading at different prices, and possessing different investor protections (we use the term very loosely) with the result being an even greater demand destruction for sovereign paper.

• Jon Huntsman Will Leave Republican Presidential Race, Endorse Mitt Romney, Officials Say (WaPo)
• Dont laugh - Plosser: Fed Tightening Possible Before Mid-2013 (WSJ)
• Greece’s Creditors Seek End To Deadlock (FT)
• France Can Overcome Crisis With Reforms – Sarkozy (Reuters)
• Nowotny Says S&P Favors Fed’s Bond Buying Over ECB’s ‘Restrictive’ Policy (Bloomberg)
• Bomb material found in Thailand after terror warnings (Reuters)
• Ma Victory Seen Boosting Taiwan Markets as Baer Considers Upgrading Stocks (Bloomberg)
• Japan Key Orders Jump; Policymakers Fret over Euro (Reuters)
• Renminbi Deal Aims to Boost City Trade (FT)

Although gold had its largest drop in the last 2 weeks on Friday, (-1.6%), it was 1.3% higher on the week and trading higher this morning.  Many analysts feel that current sovereign, macroeconomic and geopolitical risks are not reflected in gold's price. Friday's news of France's loss of its AAA rating has put the European Financial Stability Facility (EFSF) at risk. The Eurozone economy resembles a large ship sailing in rough seas since France fund's 20% of the EFSF fund and 8 other members were also downgraded. This will almost certainly lead to the EFSF's downgrade which would result in the fund too paying more to borrow as credit costs rise.  There are icebergs lurking in increasingly murky Eurozone waters. The European downgrades were long expected and may have been priced in the markets. The risk of a non orderly Greek default and of contagion in the Eurozone remains and is not priced into markets. It would lead to the euro falling sharply against other fiat currencies and particularly against gold.

With Fed officials a laughing stock (both inside and outside the realm of FOMC minutes), Bank of Japan officials ever-watching eyes, and ECB officials in both self-congratulatory (Draghi) and worryingly concerned on downgrades (Nowotny), the world's central bankers appear, if nothing else, convinced that all can be solved with the printing of some paper (and perhaps a measure of harsh words for those naughty spendaholic politicians). The dramatic rise in central bank balance sheets and just-as-dramatic fall in asset quality constraints for collateral are just two of the items that UBS's economist Larry Hatheway considers as he asks (and answers) the critical question of just how safe are central banks. As he sees bloated balance sheets relative to capital and the impact when 'stuff happens', he discusses why the Eurozone is different (no central fiscal authority backstopping it) and notes it is less the fear of large losses interfering with liquidity provision directly but the more massive (and explicit) intrusion of politics into the 'independent' heart of central banking that creates the most angst. While he worries for the end of central bank independence (most specifically in Europe), we remind ourselves of the light veil that exists currently between the two and that the tooth fairy and santa don't have citizen-suppressing printing presses.

Pres. Barack Obama has launched new international diplomatic poker with “a trailing hand”. It is impossible to exaggerate the forces at play, economic as well as political, foreign and domestic, and their interplay.

All your questions about the historic European downgrade should be answered after reading the following FAQ. Or so S&P believes. Ironically, it does an admirable job, because the following presentation successfully manages to negate years of endless lies and propaganda by Europe's incompetent and corrupt klepocrarts, and lays out the true terrifying perspective currently splayed out before the eurozone better than most analyses we have seen to date. Namely that the failed experiment is coming to an end. And since the Eurozone's idiotic foundation was laid out by the same breed of central planning academic wizards who thought that Keynesianism was a great idea (and continue to determine the fate of the world out of their small corner office in the Marriner Eccles building), the imminent downfall of Europe will only precipitate the final unraveling of the shaman "economic" religion that has taken the world to the brink of utter financial collapse and, gradually, world war.

The moment BTPs broke above 500bps over Bunds this morning, it was clear that the ECB was in buying (and confirmed by desk chatter). Early in the day, European corporate, financial, and sovereign credit markets were in quite positive territory with the former at highs of the year. As downgrade rumors broke, and then were exacerbated by the increasing realization that Greek PSI is not going to happen, sovereigns broke wider rapidly and corporates and financials fell off a cliff (their biggest drop of the year so far) with XOver (the European high-yield credit index) widening 30bps almost instantly. EURUSD took out recent lows trading back to 1.2624, its lowest since August 2010 and EFSF (the much-heralded firewall) widened 9bps off its tights. The last hour or so of trading was dominated by improvements in BTPs and OATs as the SMP went to work and this provided some relief across all assets leaving European stocks at day's highs and modestly lower (after nearing the lows of the year so far earlier), non-sovereign credit marginally wider but sovereigns (Belgium, Spain, and Austria worst) still decently wider. While the impact of the downgrades on EFSF's structure and Germany's willingness to shoulder even more implicit guarantees is critical, we wonder if the PSI talks breakdown is the more important driver as investors face yet another a-ha moment and just as when the USA was downgraded, that the impossible may actually be possible (disorderly Greek default). In the US, ES (the e-mini S&P 500 futures contract) has also rallied nicely off the earlier lows but is holding at VWAP (and is in line with broad risk drivers for now).

Just like the imminent French downgrade, nobody could have possibly anticipated a few hedge funds blowing up the Greek bailout. Oh wait - we did... in June.

• GREEK BOND SWAP NEGOTIATORS NOW LESS OPTIMISTIC ABOUT REACHING A DEAL - SOURCE CLOSE TO TALKS
• GREEK BOND SWAP NEGOTIATORS WARN FAILURE TO REACH DEAL WOULD BE CATASTROPHIC FOR GREECE, EUROPE - SOURCE
• IIF SAYS GREECE TALKS `PAUSED' AFTER NO `CONSTRUCTIVE' RESPONSE
  
• IIF SAYS GREECE TALKS HAVEN'T PRODUCED `CONSTRUCTIVE' RESPONSE
• IIF SAYS TALKS ARE `PAUSED FOR REFLECTION

But the IIF just told us yesterday how things are going swimmingly. Maybe that is not all that surprising...

Yesterday when we discussed the imminent demise of Sears following the CIT liquidity withdrawal we said "ignore the stock price which is now purely a function of momo chasers in either direction, and just focus on the CDS." Sure enough, nowhere could we see a better example of just how unprecedented the disconnect between stocks and credit is than in Sears, which unfathomably saw its stock close higher on the day, following a grotesquely stupid market reaction to an announcement that Tepper was forced to buy SHLD stock (which as DealBook explained was an indication of liquidation, confirming that stocks are now purely traded on headline reaction without absolutely any insight into what is going on). Yet the real question is what is going on in CDS land, and what is going on is basically a confirmation that it is game over for the company: as the chart below shows, default swaps in the name are over 700 bps wider today, and have doubled in the past two days, closing the 11th at 1275 bps, and 48 hours later trading double, at 2432 bps. Expect the stock, once it can be shorted again when Tepper has no choice but to release it from HTB state, to plummet quite shortly as the reality dawns for even the momos.

• China’s Forex Reserves Drop for First Quarter Since 1998 (Bloomberg) - explains the sell off in USTs in the Custody Account
• Greek Euro Exit Weighed By German Lawmakers, Seen as Manageable (Bloomberg)
• Greek bondholders say time running out (FT)
• Housing policy to continue (China Daily)
• Switzerland’s Central Bank Returns to Profit (Reuters)
• US sanctions Chinese oil trader (FT)
• Obama Starts Clock for Congress to Vote on Raising Federal Debt Ceiling (Bloomberg)
• Turkey defiant on Iran sanctions (FT)
• ECB’s Draghi Says Weapons Working in Debt Crisis (Bloomberg)
• Greece to pass law that could force creditors in bond swap (Reuters)