Germany

Open Europe has published a briefing note outlining the ten questions and issues that still need to be resolved in the coming weeks in order for Greece to avoid a full and disorderly default on March 20. The briefing argues that, realistically, only a few of these issues are likely to be fully resolved before the deadline meaning that Greece’s future in the euro will come down to one question: whether Germany and other Triple A countries will deem this to be enough political cover to approve the second Greek bailout package. In particular, the briefing argues that recent analyses of Greece’s woes have underplayed the importance of the problems posed by the large amount of funding which needs to be released to ensure the voluntary Greek restructuring can work – almost €94bn – as well as the massive time constraints presented by issues such as getting parliamentary approval for the bailout deal in Germany and Finland. While the eurozone also continues to ignore or side-line questions over the whether a 120% debt-to-GDP ratio in 2020 would be sustainable and if, given the recent riots, Greece has come close to the social and political level of austerity which it can credibly enforce.

To stir them up and start a war with Iran ...

Yesterday, when the rumor (because it has not been confirmed by the ECB, and most certainly not by the Bundesbank) that the ECB would distribute its "gains" (i.e., personally fund the difference between cost basis and par on Greek bonds - incidentally, a development which BUBA president Jens Weidmann has said would only happen over his dead body) we urged readers  "to ignore the constant barrage of meaningless noise and flashing red headlines" as apparently nobody who trades the EURUSD has any clue what subordination means or has ever participated in any debt for equity transaction. Specifically, with regard to the idiotic EURUSD reaction we said: "Today [yesterday] is a great case in point of a tangential detour which does nothing to change the reality that Germany no longer wants Greece in the Eurozone (remember, oh, yesterday), and that the ECB is merely playing possum with PSI creditors who will block the deal with even greater vigor than before (anyone recall the FT story about the PSI deal being on the verge of collapse not due to the ECB but due to private creditors?) as the ECB's even bigger subordination will simply make the amount of hold outs even greater." We concluded by assuming that "algos will take the required 12-48 hours to figure out what just happened today." Well, the algos are still lost in idiot vacuum tube world, but at least the banks are starting to comprehend what the 'deal' really means and that the Nash Equilibrium is even worse than before. From Bloomberg: "A plan being considered by the European Central Bank to shield its Greek bond holdings from a restructuring may hurt the euro because it implies senior status for the ECB over other investors, UBS AG said. “There are at least two euro-negative dimensions, which will likely lead to euro weakness” as a result of the plan, Chris Walker, a foreign-exchange strategist at UBS in London, wrote in a research report today." Once again, we urge all FX traders to read our primer on subordination, and why and how it will define trading this year, as reactions such as the one yesterday confirm that the market is not only broken but also very stupid. Which is just as those in charge like it.

One of the redeeming features of the failed experiment known as Europe, at least to date, was that while everyone else may bicker, squabble and posture, Germany, or the true core of the Eurozone kept a cohesive front, and at least pretended to have a unified view vis-a-vis daily events. This is no longer the case, as the approach as pertains not only a broke Greece but every other insolvent European country has now caused a schism at the very top, and created a rift between Angela Merkel (whose political position was dealt a huge blow today with the resignation of German President Wulff) and Finance Minister Wolfgang Schauble. Goldman explains.

• German president resigns in blow to Merkel (Reuters)
• China central bank in gold-buying push (FT)
• Germany Seeks to Avoid Two-Step Vote on Greek Aid, Lawmakers Say (Bloomberg)
• Eurozone central bankers and the taboo subject of losses (FT)
• Bernanke: Low Rates Good for Banks in Long Run (WSJ)
• Cameron and Sarkozy to test rapport at talks (FT)
• Chinese Enterprises encouraged to invest in US Midwest (China Daily)
• Goldman Sachs Group Inc. and Morgan Stanley have reduced their use of "mark-to-market" accounting (WSJ)
• Regulators to raise trigger for rules on derivatives (FT)

And so we are back to the same fiscal feudalism that Germany demanded, and the Greece refused weeks ago. We have been pondering the ECB bond swap 'news-story' and the market's reaction to this with incredulity. Our earlier discussion of the deal (here and here) pointed to the problems and now Peter Tchir explains how this debt swap is actually a step towards a Greek default (thanks to the removal of the CAC-encumberance within the ECB). It is also a large step towards colonization as the FT notes that the bailout terms will contain "unprecedented controls" on Athens. It is our earlier comments on the unintended consequence of this ECB action - that of explicitly subordinating all other sovereign bondholders in Europe, and that this would likely raise the very large specter of legal action by other Greek bondholders arguing the ECB has received unfair treatment - that the FT also brings to investors' attention (which is seemingly being ignored on the eve of OPEX). Whichever way you look at this - it is not good for Greece and could have significantly negative implications for the rest of the European sovereign bond market just as investors are starting to dip a toe in the cool risk water once again.

While next to impossible, now may be a good time to ignore the constant barrage of meaningless noise and flashing red headlines, which not only are contradictory but prove that Europe is literally making it all up as it goes along. Today is a great case in point of a tangential detour which does nothing to change the reality that Germany no longer wants Greece in the Eurozone (remember, oh, yesterday), and that the ECB is merely playing possum with PSI creditors who will block the deal with even greater vigor than before (anyone recall the FT story about the PSI deal being on the verge of collapse not due to the ECB but due to private creditors?) as the ECB's even bigger subordination will simply make the amount of hold outs even greater. So while algos take the required 12-48 hours to figure out what just happened today, here is SocGen's Suki Mann stepping back from the endless daily din, and summarizing what is really happening in Europe.

When Greece defaults, the fall-out will be much, much larger than people expect simply by virtue of the fact that everyone is lying about their exposure to Greece.

Most airport book stores are crammed with the very latest business books which promise to make you a better worker at whatever job you've got, guaranteeing you a much bigger salary. ("Good to Great", "Emotional Equations", "Entreleadership", "Switch", and a myriad of other worthless drivel). I was heartened to see Michael Lewis' Boomerang, which is something I knew would interest me. So that's what I bought.

The long-term link between demographic supply-demand shifts and the dynamics of asset price changes is hard to quantitatively dismiss and while it is just as difficult to trade these long-term shifts, as Credit Suisse notes, it is a useful context for considering tactical and strategic asset allocation. Based on projections of two interesting ratios (Middle-/Old-age ratio for equity multiples and Yuppie/Nerd ratio for bond yields), they find that US and European equity P/E multiples are set to structurally fall for the next decade (while Japan may see expansion) and similarly Japan is expected to see bond yields continue to structurally fall while US and European yields will rise (with US yields rising only modestly - though still painfully for governments - and UK quite significantly). While, of course, significant differences exist in the equity and debt market participation level and demand and supply mechanics of foreign investors, the relationships have stood the test of time and should warrant concern for the medium-term in both US and European markets as perhaps monetary policy's extreme experimentation is fundamentally fighting these trends that are exaggerated in the short-term by the cyclical-to-secular end of the leverage super-cycle.

The good people at Knight put together a comprehensive list of potential ratings for banks in Europe after Moody's came out with their outlooks. We agree that banks getting shifted to non-investment grade is a big deal.  We saw the impact for Portugal once it got taken out of the indices, and we think for banks it will be an even bigger deal to lose that investment grade status.  Sure, they can still go to the LTRO, but it is hard to function as anything other than a zombie bank once you lose that rating...

Global demand for gold reached 4,067.1 tonnes last year, the highest tonnage since 1997, due in large part to a nearly 5% increase in investment demand, which hit a record 1,640.7 tonnes. Asian countries like China, India, Vietnam, Thailand and others see bullion as a store of value against the growing inflation and the ongoing debasement of their currencies. The fundamentals for gold in 2012 look good.  Continuing low and often negative real interest rates will continue to support gold’s safe haven status. The Fed’s statement that it will continue to see rates remain very low until 2014 is very bullish for gold. Central banks were net buyers of gold and their demand surged nearly 6 fold (570%) to 439.7 tonnes in 2011 (compared with 77 tonnes in 2010), more metal than at any time since the end of the gold standard in 1971. The World Gold Council noted that, “The buyers are all ... in Latin America, Asia and the Far East and they are basically enjoying strong growth, fiscal surpluses and growing foreign exchange reserves." 

For a while now we have said that the very weakest link in Europe is not the banks, not the ECB, not triggered CDS, and not even the shadow banking system (well, infinitely rehypothecated Greek bonds within a daisychain of broker-dealers, which ultimately ends up at the ECB at a negligible repo discount, that could well be the weakest link - we will have more to say about this over the weekend) but two very specific insurers: Italy's mega insurer Assecurazioni Generali, which at last check had more Greek bonds as a % of TSF than anyone else, and Europe's biggest insurer and Pimco parent, Allianz, which is filled to the gills with pretty much everything (for more on Generali, or as we like to call it by its CDS ticker ASSGEN read here, here, here, and here). Well, Moody's just gave them, and the entire European space, the evil eye, and soon the layering of margin calls upon margin calls, especially if and when Greece defaults and a third of ASSGEN's balance sheet is found to be insolvent, will make anyone who still is long CDS those two names rich. Assuming of course the Fed steps in and bails out the counterparty the CDS was purchased from.

The following extract from a Bloomberg article suggests that the German mission of getting Greece to file for bankruptcy on its own, thus removing the perception that Europe has given up on the first (of many) terminal patient, own has almost succeeded. "Greek President Karolos Papoulias slammed Germany’s finance minister for recent comments about his country as stalled bailout talks stoked tensions between Greece and the northern European countries funding its rescue. “I don’t accept insults to my country by Mr. Schaeuble,” Papoulias, who fought in the resistance against the Nazis during World War II, said in a speech today. “I don’t accept it as a Greek. Who is Mr. Schaeuble to ridicule Greece? Who are the Dutch? Who are the Finns? We always had the pride to defend not just our own freedom, not just our own country, but the freedom of all of Europe."

Northern Europe to Greece: it’s over, baby....