Goldman On What The Neverending [Private|Public|Global|Galactic] Bailout Means For Market IndicatorsSubmitted by Tyler Durden on 05/12/2010 07:27 -0400
- The European Financial Stabilization Mechanism backstops EMU public finances without distorting incentives.
- The focus now turns to budgetary plans by individual countries, and the new rules on fiscal coordination.
- The ECB’s ‘interventions’ in sovereign bonds have so far targeted the smaller, weaker credits.
- Secondary trading in Spanish and Italian government bonds is slowly ailing; over time, this should help financial risk subside.
- The dispersion of EMU sovereign spreads will remain wide going forward, reflecting greater differentiation across fiscal positions.
- EMU GDP-weighted 5-yr government yield is now 2.4%, comparable to the US, and roughly 80% of Emu public debt is held within the Euro area (relative to only 52% in the US)
The race to the currency devaluation bottom is now in its final lap. And gold is the only alternative to the now imminent collapse of the fiat system: the world had a chance to take writedowns on losses, punish those who took risk and failed, and refused to do so. There is now no risk left, but it only means that eventually all the risk will come back and lead all capital markets to zero. The result will be the end of Keynesian economics as we know it. Do not trade in this broken market, do not hold your money in a bank as they are all now one hour away from a terminal bank run - buy and hold real, FASB mark-to-myth independent assets.
We now know that the European Union, as part of its most recent ridiculous idea for a global eurozone bailout, is planning on soon issuing its own bonds and thus becoming a defacto Treasury. How the hell it plans on doing this is simply beyond comprehension, but it certainly involves a lot of "financial innovation"... ergo - enter Goldman Sachs, from whom it would need a ringing endorsement to proceed with its plan. Alas, the just released note from Erik Nielsen is anything but favorable: "All in all this is good news, but it is unlikely in itself to calm markets; its all too “slow-burner” stuff." (and yes title is a ref: Douglas Adams - the EU has the answer, if only they could find the question now).
We recently highlighed the words of Erik Nielsen who stated that the E110 billion Greek bailout package will simply not be sufficient, expecting that at least another 40 billion will be needed for an effective rescue operation. Today, the WSJ and German Bild, get on board this theme, likely causing further anguish for Greece and for the euro, as it once again highlights just how incompetentEuropean bureaucrats are. Ironically, in their attempt to lowball the rescue numbers, they may have just doomed the package, because we are confident German opposition (and you should see the cover pages of all German newspapers - there are 99 headlines blasting the rescue for 0.5 praising it) will use this disclosure to mount an attack on the "openendeness" of the what may soon turn out to be a neverending rescue package. And this does not even contemplate Portugal and Spain.
ECB Will Accept Junk-Rated Greekman Brothers Debt As Collateral In Suspenion To Rating Threshold ProgramSubmitted by Tyler Durden on 05/03/2010 04:42 -0400
Did the ECB just learn the last bastion of rating agency insanity, aka Moody's, is about to downgrade Greece? Today Trichet decided to abandon all caution, and has proceeded to officially recognize all Greek toxic garbage as collateral for ECB-backed loans. Looks like the ECB president has been paying careful attention during Bernanke 101 in which his transatlantic colleague has been advocating the collateralization of a sovereign currency with all sorts of gamma decaying substances, for well over a year now. Now Ben is starting to get woefully behind the curve in the devaluation race. In the meantime, using simple math, we wonder: if Greece, which as so many have pointed out is only 2.7% of European GDP, ended up costing 110 billion euros, does that mean that a full blown bailout of Europe will be over $5 trillion? Surely this is a bargain compared to the $20+ trillion that the rescue of the US ended up costing. Looks like a slam dunk relative default pair trade to us.
Since we feel there is little need to post on the Greek "update" as we don't believe anything new has happened or anything has been resovled, we will instead provide that from Goldman's Erik Nielsen: "With the May liquidity crisis now practically dealt with, here are the risks for the rest of 2010 and 2011 (and beyond) as I see them: (1) Implementation of the program in the face of a social unrest; (2) the likely need for further adjustments when/if GDP doesn’t respond as expected; and (3) European approval of the second phase of their part of the package (which will emerge in their fiscal bills for the next two years.)"
Spreads were decidedly wider this week with HY notably underperforming IG but equity underperforming credit in general. US HY underperformance was the standout in credit markets with Europe ending very marginally wider in corporates as we suspect some of the technicals impacting index compression in the US started to unwind as risk appetites shrank.
Jan Hatzius, who along with Erik Nielsen, knows what the DOL and the IMF will announce and do about two weeks before the respective agencies do, has come out with his most recent preliminary NFP number. The verdict: +175,000, consisting of 125,000 from the Census. The unemployment rate will remain at 9.7%, unchanged from March's hilarious 9.749% (the gov't just like goldman rounds down the nearest trillion). Still, a bit off from VP Biden's prophecy of half a million jobs created each month "very soon."
Erik Nielsen said one week ago Greece would need €120 billion. Today the IMF announced it would provide €120 billion. Coincidence? Read all about it straight from the horse's mouth.
- IMF is likely to reach agreement this coming weekend. It'll then go to the Board for formal approval, which is a formality.
- The program will NOT be 100-150bn. Not realistic. But it will probably include a year of full funding (55bn), and indications of a long term commitment to help Greece.
- The program will not include a "private sector contribution", ie a demand for debt restructuring.
- the first European money, including in Spain, will be approved on Friday; others including Germany will followed very shortly after. It looks as if the European money will be disbursed in parallel with the IMF, with the first money going out before mid-May, safely in time for the May 19 "deadline".
- The ECB is extremely unlikely to intervene in Greek sovereign debt (what would they want to achieve by doing so?).
Where does it end? 100 billion? 1 trillion? 1 quadrillion? And yes America, this is your money, going to bail out Greece... Then Portugal... Then Ukraine....Then Dubai....Then Italy....Then Spain....Then Hungary....Then the Baltics...Then the UK....Then Japan... and by the time we have to bail ourselves out, there will be nothing left, except the Turbo Bernanke 3000 dry heaving with an empty ink cartridge and empty paper cart, while gold oz will be worth one quadrillion Benjamins (or is that Bernankes). In the meantime, as Erik Nielsen, who finally woke up, predicted, the final bailout cost of Greece alone will be €150 billion. So the IMF will do rookie mistake 101 and keep raising the bailout requirement incrementally, even as the depositor runs on Greek banks and the ongoing strikes and riots, destroy the country...But at least in the meantime the dollar will get devalued and Wells-JPM-BofA/REIT investors will be happy.
Goldman's Erik Nielsen On Why US Taxpayers Will Soon Burn Tens Of Billions To Delay The Greek BankruptcySubmitted by Tyler Durden on 04/27/2010 00:11 -0400
A very much downcast Erik Nielsen shares why the soon to be revised IMF/EU 3 year €150 billion (up from €40 billion) Greek bailout will be a waste of taxpayer money. And here is why American taxpayers will soon have to pony up to make sure Greeks can retire at 61. "I suspect that some haggling is now going on between the IMF and the Euro-zone on the burden sharing of a bigger program, but I rather doubt that the Europeans can do more than the already announced EUR30bn for the first year. If so, I suspect that the IMF will have to settle for something like a 12-months fully funded program worth a total of EUR50-55bn (or could it be an 18-months program worth some EUR80bn?)." Yet, as even Erik points out, this is just more US money thrown out. "even a fully funded program for 12-18 months imply important risks and could lead to debt restructuring. First, while the government will be fully funded, the private sector, including the banks, maybe still find financing at affordable rates difficult to come by. Second, there is a risk that the government will not meet the performance criteria and hence lose the promised official financing, and third, what comes after the fully funded program? If the situation is unsustainable now, it’ll take one heck of a policy program to make it sustainable in three years following more debt at interest rates well above the likely nominal GDP growth rate." All is good though - remember the Bernanke Directive #1: If an action results in the imminent weakness, suffering, pain or death of the dollar, with (preferably) or without the elimination of the US middle class, pursue such action with enthusiasm and vigor, in perpetuity.
"Greece will remain in the spotlight. Reportedly, PM Papandreou is planning to appoint a central coordinator for the government’s interactions with the IMF and the European counterparties. According to the FT, highly respected outgoing ECB vice-president Papademos has turned down the offer of the post, which – if confirmed - makes me wonder whether Papademos sees what I see, namely an overwhelming probability that we are indeed heading towards a debt restructuring, and being in the middle of this mess is just not the way he wants to end his fine career. IMF negotiations continue and will presumably pick up pace once Papaconstantinou returns to Athens, but on my schedule they really need to get done around May 6 so that disbursement can take place before May 19. In the European capitals, draft legislation for the loans is likely to be presented in several parliaments this coming week, including in Germany, but no decisions at least for another week or so. The whole thing is moving terribly close to the wire, so one must hope (and assume) that bridging arrangements are being put in place in case something slips." - Erik Nielsen, Goldman Sachs
The finance minister has failed to convince Conservative MPs to approve his chosen tactic to get the financial help package for Greece fast through parliament. The finance minister had planned to "attach" the financial help to a draft law that had already passed most of the usual parliamentary hurdles. This plan, however, has now been rejected by the Conservative MPs who demanded a specific stand alone law. This may significantly delay the whole process of parliamentary approval. There is the possibility of fast track legislation that would take only about two weeks but the opposition would need to approve this. All this does not imply that the financial help will not be approved by parliament in the end, but it has significantly increased the possibility that the German part of the package will be disbursed only later. - Erik Nielsen
The crisis everyone forgot just got worse than ever. And now that European and IMF rescuers are unable to get to Greece by air courtesy of Iceland's floating fiberglass factory, Greek 3 year just hit an all time record wide spread of 652 bps, even as the 10 Year is trading a 470 bps to Bunds or a 7.8% yield. Sorry G-Pap, no more guns or fire extinguishers.
And some more views on Iceland: "What if it spreads to the “big one”? Historically, eruptions of Eyjafjallajökull have often preceded eruptions by the bigger Mount Katla because there apparently are “eruptions channels” between the two. Katla’s last eruption was in 1918. Environmentalists believe that an eruption by Katla could lead to the melting of glaciers and flooding in Iceland as well as greater and more dense clouds down over Europe causing a negative impact on several sectors, particularly agriculture. The Geological office of the U.S. Interior Department says that “ash fall can have serious detrimental effects on agricultural crops and livestock depending mainly on ash thickness, the type and growing condition of a crop."