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Troika Finds Greece Already Likely To Miss Bailout Budget Targets

The money for Greece has not yet been wired, and already a deeper dive into the previously released Troika report shows  what is glaringly obvious to anyone who follows the actual collapse of the Greek economy: that the country is already on course to miss its budget targets for the immediate future (for insane EU assumptions on what the Greek economy should look like through the lens of a Eurocrat, see our chart of the day). The Telegraph reports: "Athens has probably cut spending enough to bring its primary deficit down to 1.5pc this year as agreed. But "current projections reveal large fiscal gaps in 2013-14" according to a leaked draft report by the European Union (EU), the European Central Bank (ECB) and the International Monetary Fund (IMF). In its report, the troika said Athens will have to impose further fiscal cuts of as much as 5.5pc of GDP to meet next year's targets." And while Europe may be terminally fixed, translated this means that the aborigines of the southern colony of Bavaria Sachs will see their wages cut even more, and even more people will be unemployed soon just to appears the first lien debt holders. This in a country of 10.8 million where just 36% of the population works. So Greece, which today received a rare bit of highly irrelevant but good news, when Fitch became the first rating agency to upgrade the country's credit rating from Default to B- (even as its new bonds saw their yield surge to 19% on the second day of trading), will in a few short months be forced to once again deal with even more consequences of being the proud recipient of the inverted European bailout, whereby the country's gold is used to fund Eurobank capital shortfalls.

A Bit Of Humor Amid The Financial Insanity

Back to basics with some definitions:

DEFAULT, n. Semi-mythical celestial occurrence that passes by Earth every 76 years. 
I was worried for a second about that Greek default, but I realise there's nothing to see now and all is well.

FEDERAL RESERVE, n. A wholly owned subsidiary of Goldman Sachs.
The Federal Reserve voted to give a few more billion dollars to Wall Street.

US GOVERNMENT, n. Another wholly owned subsidiary of Goldman Sachs.
We seem to be running out of Goldman Sachs alumni here in the Treasury. No, wait, we've still got hundreds of 'em. 

A Visual Simplification Of The CDS Market

CDS is once again (still) in the spotlight. We have moved on from debating whether or not a Credit Event has occurred in the Hellenic Republic, to concerns about whether the CDS market will settle without a problem. There is a lot of talk about “net” and “gross” notionals and counterparty risk.  What I will attempt to do here, is build a CDS world for you. We will look at various counterparties, the trades they do, and the residual risks in the system. It will be loosely based on Greek CDS but some liberties will be taken. None of the institutions are real world institutions (in spite of how much they sound like some people we know). It is a simplification, but to make it useful, it has to be robust enough to give a realistic picture of the CDS market/system.

Presenting Bridgewater's Weimar Hyperinflationary Case Study

Last month, the world's biggest hedge fund, Bridgewater, issued a fascinating analysis of deleveraging case studies through the history of the world, grouped by final outcome (good, bad and ugly). As Dalio's analysts note: "the differences between deleveragings depend on the amounts and paces of 1) debt reduction, 2) austerity, 3) transferring wealth from the haves to the have-nots, and 4) debt  monetization. Each one of these four paths reduces debt/income ratios, but they have different effects on inflation and growth. Debt reduction (i.e., defaults and restructurings) and austerity are both deflationary and depressing while debt monetization is inflationary and stimulative. Ugly deleveragings get these out of balance while beautiful ones properly balance them. In other words, the key is in getting the mix right." Of these the most interesting one always has been that of the Weimar republic, as it certainly got the mix wrong.

After Greece, Here Are The Four Things That Keep Bank Of America Up At Night

The Greek CDS auction has not yet taken place, nor has one quantified how many Greece-guaranteed orphan bonds with UK-law indentures have to be made whole (at a cost to Greece of course, no matter how much Venizelos protests), and somehow the world is already moving on to bigger and better risk strawmen. Because if one sticks their head in the sand deep enough, it will be easy to ignore that European banks have gradually over the past year or quite suddenly (as in the case of Austrian KA Finanz) taken about €100 billion in now definitive losses on their Greek bonds and CDS exposure. Luckily, just like in the US, there is now over $1.3 trillion in fungible cash sloshing in the system, allowing banks to 'fungibly' fund capital shortfalls and otherwise abuse every trace of proper accounting, when it comes to a post-Greek default world. The problem is that none of this actually solves the fundamental insolvency issues plaguing the 'old world', but what it does do, is force the accelerated depletion of an aging and amortizing asset base. That's fine - as Draghi said the ECB can "always loosen collateral requirements even more." So while we await to hear just who will sue Greece and Europe, and how much cash will have to be paid out to UK-law bondholders (before the Greek default is even remotely put to rest), here is a listing of what Bank of America (recall - BofA is the one bank most desperate to remove any lipstick from the pig due to its need for more QE) believes will be the biggest risks to its outlook going forward. In order of importance: 1) Oil prices (remember when a month ago we said this then ignored issue may soon hit the very top of investors worry lists?), 2) Europe; 3) US Economy; and 4) China. That about covers it. Oh and massive debt issuance supply too as well as the even more epic straw man that is this Thursday's stress test. Remember: stress tests will continue until confidence in the ponzi returns!

Phoenix Capital Research's picture

The coming years will be marked by a seismic change in the economic landscape in the US. Firstly and most importantly, we are going to see economic growth slow down dramatically. The reasons for this slow down are myriad but the most important are: 1) Age demographics: a growing percentage of the population will be retiring while fewer younger people are entering the workforce. 2) Excessive debt overhang.

Phoenix Capital Research's picture

Folks, this is a DE-pression. And those who claim we’ve turned a corner are going by “adjusted” AKA “massaged” data. The actual data (which is provided by the Federal Reserve and Federal Government by the way) does not support these claims at all. In fact, if anything they prove we’ve wasted money by not permitted the proper debt restructuring/ cleaning of house needed in the financial system.

Guest Post: Money from Nothing - A Primer On Fake Wealth Creation And Its Implications (Part 1)

What is fraud except creating “value” from nothing and passing it off as something? Frauds interlink and grow upon each other. Our debt-based money system serves as the fraud foundation. In our debt-based money system, debt must grow in order to create money. Therefore, there is no way to pay off aggregate debt with available money. More money must be lent into the system to make the payments for old debts. This causes overall debt to expand as new money for actual people (vs. banks) always arrives at interest and compounds exponentially. This process is called financialization. Financialization: The process of making money from nothing in which debt (i.e. poverty, lack) is paradoxically considered an asset (i.e. wealth, gain). In current financialized economies “wealth expansion” comes from the parasitic taxation of productivity in the form of interest on fiat lending. This interest over time consumes a greater and greater share of resources, assets, labor, and livelihood until nothing is left.

Mark Grant On The Increased Risks of Owning European Sovereign/Bank Debt

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.  

Summary Of Key Events In The Coming Week

While hardly expecting anything quite as dramatic as the default of a Eurozone member, an epic collapse in world trade, or a central banker telling the world that "he has no Plan B as having a Plan B means admitting failure" in the next several days, there are quite a few events in the coming week. Here is Goldman's summary of what to expect in the next 168 hours.

View From The Bridge: And They Think It’s All Over…

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.

Encumbrance 101, Or Why Europe Is Running Out Of Assets

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).