Nationalization

One word: Spain, and more specifically, 6.00%+. That's where Spanish 10 Year bond yields are again, with Spanish CDS soaring to a fresh all time wide of 512 bps (+13.5 bps), and the Spanish-Bund spread blowing out to the widest since November. And to think it was only two days ago that the schizo market interpreted Spain's bank sector nationalization as good news. It may be for the bank sector (for a few days at least), but it sure isn't for the sovereign which would end up onboarding on the risk. Naturally, 48 hours later the market has figured out this fine nuance and is dumping everything Spain related once again. That this is surprising is an overstatement: we have seen all of this before, only last time it was Greece. Hopefully the same playbook works for Spain, and works better. The result - redness everywhere, especially in the aftermath of an implosion, and halt, in Italy's oldest and one of its biggest banks (guess which PIIG is next on the nationalization bandwagon), after Italian prosecutors on Wednesday ordered searches at the headquarters of Banca Monte dei Paschi di Siena and its top shareholder in a probe over alleged market manipulation linked to Monte Paschi's 2007 purchase of smaller peer Antonveneta. From Reuters: "Prosecutors in Siena, where Monte dei Paschi is based, said in a statement the offices of several Italian and foreign financial institutions based in Italy were also being searched by financial police as well as private homes, without elaborating. They said the searches were part of an investigation into possible market manipulation and obstructing the work of regulators with regard to raising the funds to buy Antonveneta." But probably the worst news comes from Bank of America which summarizes the Greek situation as follows: "If another election takes place, as seems very likely, Syriza could win. Their populist rhetoric is gaining momentum in Greece. Moreover, left voters from the Communist Party of Greece and Democratic Left are likely to vote for Syriza given its chance to win." Which naturally, is Europe's biggest nightmare. Sorry to say, but Europe appears very much unfixed and is about to break even more.

Two weeks ago, when commenting on the (first of many) nationalizations of energy companies (yes, the collateral shortage we have been discussing over the past year is particularly in effect when it comes to energy assets, although one does not need superficially complicated theories to explain it), in this case of Spanish YPF assets in Argentina we said "How soon until any and every government follows suit in a world in which excess liquidity sloshing around makes expropriation of vital energy producing assets a key prerogative? And how long until the resultant (accelerating) collapse in faith of the monetary system, leads government to declare "monetary self-sufficiency" and confiscate everything that is not nailed down. In exchange for worthless pieces of paper of course. Just to make it "fair"." The answer: two weeks. As of a few hours ago, Bolivia has followed in Argentina's footsteps and has just announced it is nationalizing yet another Spanish company's domestic assets, in this case Red Electrica.

To give you an idea of how bad things are with the cajas, consider that in February 2011 the Spanish Government implemented legislation demanding all Spanish banks have equity equal to 8% of their “risk-weighted assets.” Those banks that failed to meet this requirement had to either merge with larger banks or face partial nationalization. The deadline for meeting this capital request was September 2011. Between February 2011 and September 2011, the number of cajas has in Spain has dropped from 45 to 17.

To give you an idea of how bad things are with the cajas, consider that in February 2011 the Spanish Government implemented legislation demanding all Spanish banks have equity equal to 8% of their “risk-weighted assets.” Those banks that failed to meet this requirement had to either merge with larger banks or face partial nationalization. The deadline for meeting this capital request was September 2011. Between February 2011 and September 2011, the number of cajas has in Spain has dropped from 45 to 17.

There is no shortage of money in the world. Thanks to global Central Banks' extreme activism money supply has exploded. Since August 2011, the Fed has been less of a full-time player in this effort but in passing the baton, the rest of the world did not let them down with most notably the ECB having taken over with its own version of free-money printing for much of the first quarter - driving the ratio of outside (central-bank-driven) money relative to inside (the bank themselves creating money via credit) to record highs as a stealth nationalization of credit is underway (though as we noted earlier this morning - the transmission mechanism is not working). So where oh where is all that hard-earned free-money going? The story bifurcates here. In the US, non-financial corporates have grown their war-chests as high as they have ever been (and continue to do so) after being burned by short-term financing stresses and knowing (despite all outward media appearances) that the next abyss is potentially around the corner (given real-life growth estimates becoming more and more binary/extreme as opposed to normalized with a range). In Europe, the 'excess' has flowed to the core driving, as Sean Corrigan notes, what some surveys suggest is a consumer and housing boom (read mal-allocation of capital once again) in the decade-long stagnant German real-estate market. All that extra cash, however, while helping revenues and margins for non-financial corporates in the US has left wage growth languishing. So the sad reality of the Keynesian 'multiplier' dogma is that rather than garbage-in, garbage-out - it is freshly printed money-in, nothing-out-to-the-real-economy as each actor in the game becomes increasingly driven by a sense of self-preservation. Is it any wonder that energy/raw materials prices (as evidenced most recently by Whirlpool's comments this morning) are rising when firms are awash in cash? But of course, as the old-saying goes, a-biflation-a-day-keeps-the-Fed-hawks-at-bay.

There are those who think that Currency Wars are a brand new thing. They are not. More importantly, we now have finally moved on to the real deal:

• EU SAID TO PLAN WTO COMPLAINT AGAINST ARGENTINE IMPORT CURBS - BBG

This perfectly objective and otherwise impartial decision has nothing to do with recent collectivist decisions of what is for the greater good... At least one's greater good that is, which just happens to be the biggest problem with central planning at the global level.

At least Argentina kinda, sorta had the right idea: find an expensive foreign asset and nationalize it, impotent EU sound and fury be damned. Key word here: foreign. A few days later, the latest trade was escalation move appears to have gone viral, if with some curious, and serious, modification in the process. Minutes ago we learned that the Italian Finance police had seized a 20% stake in a heretofore unnamed firm (how does the police seize a stake? They pocket 20% of the electronic shares held in custody by the local DTCC? or they kidnap 20% of the Board of Directors? Inquiring minds want to know). We vaguely expected it would be a retaliatory move, and the firm would be based out of Latin America. No such luck. As Reuters fills in, the company "seized" is Premafin, "which controls Italy's No. 2 insurer Fondiaria-SAI as part of a judicial probe on market manipulation, the tax police and a judicial source said on Thursday."

Sure enough, just out from the FT: Argentina will not pay Repsol of Spain what it is asking ($10.5bn) in compensation for nationalization of YPF, says deputy economy min

... but will settle for what it ends up getting: nothing. Of course, in the meantime, there will be a lot of kicking and screaming, but that's great: Risk On - Off markets demand distractions. From the FT: "These acts will not go unpunished" said Antonio Brufau, Repsol’s executive chairman during a two-hour press conference on Tuesday, at which he attacked Argentina’s “revisionism” over YPF’s success, and its energy policy over the past decade." Said otherwise, this aggression will not stand, man. Ok, fine. Here is Argentina's counteroffer.

It would appear that the recent renewed excitement down in the Falklands was indeed the writing on the wall for a nation that is now desperate enough to nationalize foreign entities. Argentina, still unable to access capital markets years after its restructuring appears to be hitting an irrational wall again as its CDS has exploded wider recently, and even more so today with the YPF news, to near 1000bps - its widest in 4 months. Simply put this is not rational in any game-theoretic strategy and is frighteningly indicative of a supreme (irrecoverable) defection from friends-with-benefits status of the world - indicative only of massive internal problems in the South American nation. But do not worry, as Lagarde and her friends will just bring a bigger bag around to the next G-20 meeting as we are sure the IMF's members will have enough money to deal with Argentina AND Europe.

Update 2: SPAIN SEES FIRMS' INTERESTS AS NATIONAL INTEREST, OFFICIAL SAYS; SPAIN ANALYZING RESPONSE TO ARGENTINA OVER YPF, OFFICIAL SAYS. Oops.

Update: TRADING HALT: YPF (NYSE)-NEWS DISSEMINATION. Translation: YPF shareholders - you have been Corzined. The money has vaporized. Jon Corzine has been appointed to the newly formed Argentina based Board of Dictators. Have a nice day

There are those who naively believe that any time the tables turn against a government, that government will quietly sit in the corner and play by the rules as its power erodes to zero. Probably the best example of just this is Executive Order 6102 when FDR, in a country that supposedly honors contract laws, issued Executive Order 6102, which effectively nationalized all private gold, no questions asked. And while we may not be there just yet, we are getting close, as demonstrated by the most recent developments in Argentina, where president Cristina Kirchner asked Congress to "expropriate" oil and gas producer YPF (which is majority owned by Repsol YPF) thereby "allowing the government to share ownership of the company with oil-producing provinces, a spokeswoman for Ms. Kirchner said Monday." What is the pretext for this move formerly associated almost exclusively with lawless, "communist" third world banana republics? Why "hydrocarbon self-sufficiency" of course. How soon until any and every government follows suit in a world in which excess liquidity sloshing around makes expropriation of vital energy producing assets a key prerogative? And how long until the resultant (accelerating) collapse in faith of the monetary system, leads government to declare "monetary self-sufficiency" and confiscate everything that is not nailed down. In exchange for worthless pieces of paper of course. Just to make it "fair". And just to return the favor, the market just sent Argentina CDS up by 60 bps, to just shy of 1000 bps. You know, because it's only "fair."

Better stock up on the Depends now. 

Quietly, and with little fanfare, President Obama signed a “National Defense Resources Preparedness” Executive Order on Friday. As the name suggests, the order intends to shore up the country’s national defense resources in advance of a national emergency. To be fair, this is not the first time that such an order has been written. President Obama’s order, however, takes things much, much further.This is all playing out with nearly perfect historical precision. Time and time again throughout history as once great empires accelerated their declines, governments have taken steps to protect their interests against the people. In the past, they have imposed curfews, disarmed the population, curtailed civil liberties, and declared national emergencies, usually against some great faceless enemy from abroad who threatens their way of life. As it turns out, though, our great faceless enemy is not some mythical boogeyman living in a cave, nor some angry brown person who hates us for our freedoms… but the very people within the system who’ve taken an oath to ‘support and defend the Constitution of the United States against all enemies, foreign and domestic.’ Have you hit your breaking point yet?

That the German vote to pass the second Greek bailout package would be problematic is an understatement. Even as German parliamentarians are expected to pass the latest (but certainly not last as the G-20 meeting over the weekend demonstrated) hurdle to fund the Greek rescue, new revelations out of Greece have come to light exposing the true degree of capital flight out of the country, spearheaded by none other than the country's own corrupt politicians. Kathimerini reports: "As a political outcry grew on Friday over the revelation that an MP had transferred 1 million euros out of the country in May when authorities were struggling to appease Greek citizens’ fears of the repercussions of a possible default on their savings, Finance Minister Evangelos Venizelos told Parliament that a significant number of lawmakers had moved sums in excess of 100,000 euros out of the country. Earlier, addressing a cabinet meeting, Venizelos had told fellow ministers that there are several public figures among the Greeks who transferred a total of 16 billion euros abroad over the last two years. According to research conducted by the Finance Ministry’s information systems department, 9 percent of this money ended up in Swiss bank accounts." As such, it is obvious why German popular tabloid Bild has called for German lawmakers to reject the Greek bailout: at this point the farce is arguably too much for everyone, and the situation is playing out just as predicted here back in July. Merkel is due to address the Bundestag at 3 pm local time, or in just over an hour. Those curious about the blow by blow, can follow the developments out of Germany at the following live blog by Bild.

A week ago we presented an excerpt from Credit Suisse's most excellent piece "The Flaw" - merely the latest in one of the best overviews of the neverending Greek soap opera by William Porter. Yet every soap opera eventually ends. Although when it comes to Nielsen ratings, the denouement is usually a whimper. In the case of Greece, it will be anything but. Yet listening to the daily cacafony of din from Europe's leaders, who are likely more clueless than the average reader as to what is really going on, one may be left with the impression that there is a simple solution to the problem, and Greece may be "saved... in hours." It can't. In fact, as of today, Porter's s conclusion is: "we are left with a sense that the probability of delivering the largest default loss in history in a disorderly way on or before 20 March has increased relative to doing so in an orderly way."

In all the excitement over the December 21 LTRO, Europe forgot one small thing: since it is the functional equivalent of banks using the Discount Window (and at 3 years at that, not overnight), it implies that a recipient bank is in a near-death condition. As such, the incentive for good banks to dump on bad ones is huge, which means that everyone must agree to be stigmatized equally, or else a split occurs whereby the market praises the "good banks" and punishes the "bad ones" (think Lehman). As a reminder, this is what Hank Paulson did back in 2008 when he forced all recently converted Bank Holding Companies to accept bail outs, whether they needed them or not, something that Jamie Dimon takes every opportunity to remind us of nowadays saying he never needed the money but that it was shoved down his throat. Be that as it may, the reason why there has been no borrowings on the Fed's discount window in years, in addition to the $1.6 trillion in excess fungible reserves floating in the system, is that banks know that even the faintest hint they are resorting to Fed largesse is equivalent to signing one's death sentence, and in many ways is the reason why the Fed keeps pumping cash into the system via QE instead of overnight borrowings. Yet what happened in Europe, when a few hundred banks borrowed just shy of €500 billion is in no way different than a mass bailout via a discount window. Still, over the past month, Europe which was on the edge equally and ratably, and in which every bank was known to be insolvent, has managed to stage a modest recovery, and now we are back to that most precarious of states - where there is explicit stigma associated with bailout fund usage. And unfortunately, it could not have come at a worse time for the struggling continent: with a new "firewall" LTRO on deck in three weeks, one which may be trillions of euros in size, ostensibly merely to shore up bank capital ahead of a Greek default, suddenly the question of who is solvent and who is insolvent is back with a vengeance, as the precarious Nash equilibrium of the past month collapses, and suddenly a two-tier banking system forms - the banks which the market will not short, and those which it will go after with a vengeance.