Back in February, as part of the latest Greek bailout of European banks, we noted that the most subversive part of the German-led proposal was nothing short of a gold confiscation scheme. Today, courtesy of The Telegraph, we learn that Germany is quietly reminding the world that the stealthy, but voluntary, accumulation of gold is what it is all about. As part of a newed push for quasi-Federalism, whereby Germany would fund a "European Redemption Pact", in which Berlin would, in the form of Germany-backed joint bonds, be responsible for any sovereign debt over the 60% Maastrtich limit, but with a big catch. The catch is that "a key motive is to relieve the European Central Bank of its duties as chief fire-fighter. "We have got to get the ECB out of the game of distributing money, and separate fiscal and monetary policy. Germany has only two votes on the ECB Council and has no way to control consolidation," he said. Germany would have a lockhold over the fund, able to enforce discipline. Each state would have to pledge 20pc of their debt as collateral. "The assets could be taken from the country’s currency and gold reserves. The collateral nominated would only be used in the event that a country does not meet its payment obligations," said the proposal. In other words: a perfectly legitimate, and fully voluntary scheme in which sovereign gold is pledged to a German "pawn broker" until such time as the joint bonds are extinguished, and if for some "unpredictable" reason, a country fails to meet its obligations, read defaults, all the pledged gold goes to Germany!
But why Gold? Why not spam. After all gold is selling off, spam is stable, and the dollar is soaring. Couldn't Germany merely demand that broke countries simply pledge all their USD reserves, and keep their worthless, stinking yellow metal? Apparently not.
Slowly, surely the largest investors in the world are no longer buying the debt of Europe. Recently the Chinese sovereign wealth fund, China Investment Corp., said that they were done and would no longer be buying European debt. The risks are just too great and the way Europe does business is also having a serious effect. You see, Europe does not count any contingent liabilities, sovereign guaranteed debt, derivatives, bank guaranteed debt, regional guaranteed debt or promises to pay for various entities as part of their calculation for their debt to GDP ratios. What can clearly be said then is that the numbers we are given, the data that is flouted day in and day out as accurate is nothing short of a con game built on a Ponzi scheme that rests on the back of a financial system that has been purposefully designed to distort the truth. Regardless of your opinion about all of this there are consequences to this type of manipulation that are in the process of becoming realized. Eventually, when hopes and prayers give way to reality, losses are taken and I submit that we are just at the beginning, just at the start, of seeing realized losses begin to hit balance sheets. The European nations and banks have performed a neat new trick, nailing themselves to the Cross, and it is now only for Pontius Pilate to pick up the spear and begin.
Despite closed US stock markets today, FaceBook stock still managed to decline, while Europe dipped yet once again on all the same fears: Greece, Spain, bank runs, contagion, etc. Shortly Europe will reopen, this time to be followed by the US stock market as well. While in turn will direct market participants' attention to a shortened week full of economic data, which as Goldman says, will likely shape the direction of markets for the near future. US payrolls and global PMI/ISM numbers are expected to show a mixed picture with some additional weakness already fully anticipated outside the US. On the other hand, consensus does expect a moderate improvement in most US numbers in the upcoming week, including labour market data and business surveys. As a reminder, should the Fed wish to ease policy at its regular June meeting, this Friday's NFP print will be the last chance for an aggressive data-driven push for more QE. As such to Zero Hedge it is far more likely that we will see a big disappointment in this week's consensus NFP print of +150,000. Otherwise the Fed and other central banks will have to scramble with an impromptu multi-trillion coordinated intervention a la November 30, 2011 as things in Europe spiral out of control over the next several weeks. Either way, risk volatility is most likely to spike in the coming days.
The person who has caused global stock markets so much consternation by daring to play chicken with Germany until the bitter end conducts a no holds barred interview with Germany's Spiegel. There is little love lost between the Syriza leader and the Germans, who were quite surprised to find a political leader who is willing to play blink with Germany, with the ECB, and the developed world until the very end, or June 17, whichever comes sooner. Tsipras' bottom line: "We're trying to convince our European partners that it's also in their interest to finally lift the austerity diktat." Alas, the European "partners", as evidenced by Lagarde's Guardian interview this weekend, have an image of Greece as a bunch of lazy tax evaders, who only seek to mooch on the German teat, resulting in 60% of Germans now pushing for Greece to be kicked out of the Euro, consequences be damned. Nothing new there. What is curious is Tsipras' answer to the question everyone wants to ask: "If Greece ultimately exits the euro, you will also bear some of the blame. You promised your voters the impossible: retaining the euro while breaking Greece's agreements with the rest of Europe. How can such a plan find success?" His response: " I don't see any contradiction in that. We simply don't want the money of European citizens to vanish into a bottomless pit...we think these resources should also be put to sensible use: for investments that can also generate prosperity. Only then will we in fact be able to pay back our debts." Yet the line that will draw the most ire out of the already exhausted German taxpaying public is the following:
"if our economic foundation is completely destroyed and the decisions of an elected Greek government are not responsible for it but, rather, certain political forces in Europe. Then they too will be guilty, for example Angela Merkel."
Well, in the US, it is all Bush's fault; in Greece, it appears to be Merkel's.
- Merkel Prepares to Strike Back Against Hollande (Spiegel)
- China to subsidise vehicle buyers in rural areas (Reuters) - what could possibly go wrong
- Bankia’s Writedowns Cast Doubts on Spain’s Bank Estimates (Bloomberg) - unpossible, they never lie
- Shares in Spain's Bankia plunge on bailout plan (AP) - oh so that's what happens when a bank is bailed out.
- SNB’s Jordan Says Capital Controls Among Possible Moves (Bloomberg)
- Greeks Furious Over Harsh Words from IMF and Germany (Spiegel)
- Tehran defiant on nuclear programme (FT)
- Finally they are getting it: Greece needs to go to the brink (Breaking Views) - of course, Citi said it a week ago, but it is the MSM...
- OTC derivatives frontloading raises stability concerns (IFRE)
- Wall Street Titans Outearned by Media Czars (Bloomberg)
There are still 3 weeks until the next so very critical Greek elections (which if we are correct, will have an outcome comparable to the first, and not result in the formation of a new government absent Diebold opening a Santorini office), meaning the power vacuum at the very top in Europe will persist, and while the market demands some clarity about something, anything, nothing is likely to be implemented by a Germany which is (rightfully, as unlike the US, Europe does not have the benefit of $16 trillion in inflation buffering shadow banking) concerned by runaway inflation if and when the global central banks announce the next latest and greatest global bailout, which this time will likely by in the $3-5 trillion ballpark. However, none of this will happen before the market plummets as Citi explained last weekend, and Europe has no choice but to act. Luckily, as the events calendar below from Deutsche Bank shows through the end of July there are more than enough events which can go horribly wrong, which ironically, is precisely what the market bulls need to happen for the central-planning regime to once be given the carte blanche to do what it usually does, and believe it can outsmart simple laws of Thermodynamics, regression to the mean, and all those other things central bankers believe they can simply overrule.
Europe continues to fight the wrong battle, and continues to spread contagion risk. It is clear that Greece has had a solvency issue now for over 2 years. The ECB and Troika chose to treat it as a liquidity problem. Maybe, they could have argued that in early 2010, but by the summer of 2011 it was obvious to any credit observer that the problem was solvency, yet they continued to treat it as one of liquidity. That is scary because if they fail to see the problem correctly now, they will fail miserably. Not only is the problem clearly solvency, but now forced currency conversion has been added to the mix. Any "solution" from the EU must now address that risk, and it is not the same as solvency. Programs that can protect against solvency may do nothing for the redenomination risk. We keep playing with scenarios and find it hard to find out where a Greek exit doesn't result in a steep sharp decline in the market. We could go through more ideas of ECB intervention, but in the end most will have flaws. Dealing with currency conversion risk is huge. Dealing with the contagion risk that has been created by the EFSF is huge. Will Europe force Greece out thinking they have a plan; that fails miserably and sparks the miserable series of consequences we’ve outlined? Sadly, yes.
Back when Dexia was nationalized in the fall of 2011, one of the running jokes was that it was the bank that had one of the highest grades in the European Stress Test conducted just months prior. Here is another joke: we now know that Spain's Bankia is the next major financial institution which is being nationalized, and whose bailout costs are literally growing by the hour. Was Bankia one of the Stress Test 2011 failures? Why of course not... But 5 other Spanish banks were.
"We think the ramifications of a Greek exit are more serious than the market anticipates", is how Morgan Stanley starts their European strategy report this week. They have raised their probability of a Euro break-up to 35% but the most likely outcome they foresee is a Euro divorce with Greece's exit preceded by strong contagion via three main transmission channels: the sovereign, the banking sector, and the political situation. Italy, Spain, Ireland, and Portugal are unsurprisingly the most at risk of material contagion and they recommend investors stay positioned defensively across risky assets as we remain in the 'Crisis' stage of the so-called C.R.I.C. cycle - and they note that unlike so many knife-catching US equity and Italian bond buyers, it is not sensible to try to pre-empt the Response phase of C.R.I.C. cycle. There appears to be four scenarios (and evolutions) for the future of Europe (from Renaissance to Divorce with Staggering On and an awkward 'Italian Marriage' in between) and we drill into the four additional possibilities under the divorce scenario for insight into the effects various risky asset classes will feel in each case.
Euro bonds “didn’t find much support” at the EU conference.
“A majority of European Union leaders at a Brussels summit this week backed joint euro-area bonds.”
Encapsulated in these two comments is the problem that Europe is now facing. Two views, two radically different positions and no agreement on a middle ground because there is not one. Of course the periphery countries, the weaker nations want Eurobonds because it would dramatically drop their cost of funding. Of course Germany and their stronger EU countries do not want it because it would dramatically raise their cost of funding. Nations, in the end, will act in their own self-interest, this has been proven more than enough times in history, which is why I stand by my conclusion that Eurobonds will not be forthcoming regardless of the polite rhetoric attached to them.
The story of Facebook’s disappointing IPO is a gripping tale, and it holds some valuable lessons. But it concerns an event that has already happened. Forget Facebook — there are far more interesting events in play and that will affect you, if only at the margins. They haven’t happened yet, and they may not happen at all. But if they do, you’d sure as hell better have a plan.
We will start with an appetizer of Liquidity Tenders and Securities Market Program Bond Purchases, move on to a plate of Emergency Liquidity Assistance, sample a pre-entre of Pro-Growth measures and ECB Covered Bond purchases, dive into an entre of Fed Swap Lines, medium rare, with a side of Emergency Liquidity Assistance, and finally unwind with a desert plate of Firewalls. To close we will dream of tomorrow' menu which some say may feature the mythical Eurobonds and even the, gasp, legendary Europan Bank Deposit Guarantee... Please charge it all to the taxpayer, of course.
Whether it is the EU running to the G-20, nations in Asia, the IMF or Spain and Italy and their brethren calling for Eurobonds the distinction is easily made; you pay or you pay or you pay because I cannot. That is the cry in the wilderness as politely, very politely, quite politely everyone says, “No thank you.” The curtain is going down on the show and the normal pleas are being made to keep the spectacle in operation but the pocketbooks are closed and Germany and the rest are not going to bet the family farm when the final act draws nigh. The Elves in the boulders cackle and the “invisible people” move on and sigh as the ending of one more chapter is inscribed in the Book of Life.
A quick look at the Fresh-Start Greek Government Bond (GGB2) complex shows that as of this morning it has tumbled to fresh all time lows across the curve, and now trades at a more than 50% loss to the March PSI conversion price. The reason for this dump is not so much on fear of a Greek exit, but once again a reflection of precisely what we expected would happen, and as explained in our January Subordination 101 post. Last week, the fact that a PSI hold out, holding English-law bonds managed to get par recovery while all the other lemmings have so far eaten a nearly 90% loss, has sparked a realization among all the other hold outs that since they have covenant protection, they should all demand the same treatment. And indeed, another one has stepped up, only this time not a holder demanding par maturity paydown, but one who has read their bond indenture and was delighted to find the words "negative pledge." As Bloomberg reports "a holder of Greek bonds that weren’t settled in the biggest-ever debt restructuring said he’ll demand immediate payment unless the government posts collateral against his investment. Rolf Koch, a private investor who says he holds 500,000 Swiss francs ($528,000) of the notes due in July 2013, argued that he’s entitled to equal treatment with Finland, which made getting collateral a condition of contributing to Greece’s second bailout. He wrote to the paying agent, Credit Suisse Group AG, invoking the bonds’ so-called negative-pledge clause, according to the text of a letter seen by Bloomberg News."