Portugal

LTRO #Fail 2: European Credit Supply And Demand Fading Fast

While the LTRO was heralded as a success for a month or so with the implicit money-printing-and-sovereign-reacharounds involved at the cost of senior unsecured bondholders, the sad reality is that not only are the effects of LTRO now almost entirely gone in both sovereign and financial funding costs but the massive 'injection' of freshly printed encumbrance did nothing for the real economy. In fact, as Barclays notes in these charts from the ECB bank lending survey, not only is demand weaker for credit (i.e. the consumer is pulling back in classic balance sheet recessionary style) but the banks themselves are tightening credit conditions (reducing supply) - the exact opposite of what the ECB had in mind. There is one exception to this vicious cycle - German real estate loan demand picked up modestly - we assume reflecting their flat housing market for the last 15 years and extremely low rates). Oh well, we are sure the next ECB action will be different in its banking reaction.

Translating "Growth" Into European

Pretend, from now on, that when you see this word it is written in Moldavian and needs to be translated. France and the periphery nations are screaming this word now while almost all of Europe is in recession and one that we believe will be much deeper than forecast. Consequently “growth” does not mean “growth” and the correct translation is “Inflation.” We have long said it would come to this in Europe and here we go. The troubled countries are going to beg and plead for Inflation and Germany, Austria, the Netherlands and Finland are going to resist. With Hollande the most likely next President of France you are going to see a stand-off between the socialist and the centrist countries so that a log jam will develop and the consequences of its uncoupling are anyone’s guess except that it will be likely violent and an extreme series of events. The governance of Europe on May 5 will not be what is found on May 6 and preparation for this should be high upon everyone’s list.

European Confidence Tumbles To November 2009 Levels, Euro-Wide Double Dip Inevitable

Following this week's ongoing battery of abysmal economic news out of Europe it will hardly come as a surprise that yet another indicator has been released and is pointing to a multi-year low in the deleveraging (elsewhere called incorrectly austere) continent, namely the Euro-area wide confidence index which just slide to the lowest leve since 2009, missing every single estimate and declining sequentially across the board... And with the UK, Greece, Italy, Portugal, Ireland, Belgium, Denmark, Holland, Czech Republic, and Slovenia now in re-recession, and Spain a definitive shoo in next week, the kicker is that German GDP will almost certainly now report a second consecutive GDP print in a few days, thus pushing the entire European continent in a double dip.

Germany Folding? Europe's Insolvent Banks To Get Direct Funding From ESM

We start today's story of the day by pointing out that Deutsche Bank - easily Europe's most critical financial institution - reported results that were far worse than expected, following a decline in equity and debt trading revenues of 23% and 8%, but primarily due to Europe simply "not being fixed yet" despite what its various politicians tell us. And if DB is still impaired, then something else will have to give. Next, we go to none other than Deutsche Bank strategist Jim Reid, who in his daily Morning Reid piece, reminds the world that with austerity still the primary driver in a double dipping Europe (luckily... at least for now, because no matter how many economists repeat the dogmatic mantra, more debt will never fix an excess debt problem, and in reality austerity is the wrong word - the right one is deleveraging) to wit: "an unconditional ECB is probably what Europe needs now given the austerity drive." However, as German taxpayers who will never fall for unconditional money printing by the ECB (at least someone remembers the Weimar case), the ECB will likely have to keep coming up with creative solutions. Which bring us to the story du jour brought by Suddeutsche Zeitung, according to which the ECB and countries that use the euro are working on an initiative to allow cash-strapped banks direct access to funding from the European Stability Mechanism. As a reminder, both Germany and the ECB have been against this kind of direct uncollateralized, unsterilized injections, so this move is likely a precursor to even more pervasive easing by the European central bank, with the only question being how many headlines of denials by Schauble will hit the tape before this plan is approved. And if all eyes are again back on the ECB, does it mean that the recent distraction face by the IMF can now be forgotten, and more importantly, if the ECB is once again prepping to reliquify, just how bad are things again in Europe? And what happens if this time around the plan to fix a solvency problem with more electronic 1s and 0s does not work?

Guest Post: Will Bond Investors And Savers Have To Hold Forced Government Loans At Some Point In The Future?

If central planners decide to circumvent the already manipulated bond market and enforce much lower interest rates by implementing forced loans, there would be a big uproar for some time in the market. However, the negative wealth effect on the private sector would be more foreseeable and stretched out over a longer period of time. This definitely would decrease uncertainty. In my opinion, this measure would actually help to break through the downward spiral and avoid the much more devastating course towards a restructuring event with its negative side effects.

The New European Normal... Is Squiggly

Eurostat just updated their statistics for government debt to GDP for 2011, so here is an updated graph over Belgium, Italy, Greece, Portugal, Ireland, Spain, France, UK, Netherlands, Germany and Sweden and the development of their gross government debt to GDP from 1996 to 2011. Countries not matching the new Merkozy-limit of a maximum of 3% budget deficit were Greece, Ireland, Portugal, Spain and... France. But we can forget the old euro convergence criteria of 2% deficit and at most 60% debt to GDP as instead of working back to the green 'safe' quadrant, the PIGS are heading in the exact opposite direction missing both deficit and debt convergence criteria.

Citi's Englander On What Can Go Wrong In The Next 11 Days?

As usual the market remains on tenterhooks for its next fix of Central Bank largesse and the following 11 days provide some rather large potholes for those addicted to the sweet nectar of freshly printed extreme monetary policy. Citi's Steven Englander provides some much-needed reality checking on what the market is expecting and what the FOMC/ECB might deliver, and all importantly, what the implications for risk-assets in general will be. The possibility of misunderstood language at the FOMC meetings seems very high even as the announcement of additional measures remains unlikely and perhaps more notably the Euro has sold off sharply when the ECB does not present a policy response to rapidly deteriorating market conditions - especially in light of the implicit tightening we have seen in Euro-zone aggregate rates. Rock meet hard-place.

Mark Grant: "I Do Not Believe, Any Longer, That The Catastrophe Can Be Avoided"

According to Mark Grant, it's over: "There are only two ways out of the current dilemma and that is growth which is not possible as the European economies contract and fare worse as the result of the austerity measures or Inflation; which Germany can’t stomach. The “at the very bottom of the barrel” answer then is not an economic response at all but a question of politics. The answer is actually when some nation cannot take it anymore; either the funding and the increase in national debt and the resultant credit downgrades or in receiving and the pain inflicted upon the populace. From the funding perspective it will be when the debts of the givers begin to match the debts of the borrowers. From the recipients it will be when the core nations decide that no more money will be given and so they will leave the funding nations and their banks with the debts and return to their own currencies and devalue. Which one comes first can only be answered by Divine Providence but I do not believe the train wreck can be stopped. I do not believe, any longer, that the catastrophe can be avoided and I would begin to immediately plan for an event that will eclipse the American financial crisis of 2007-2009 because this one will be far worse."

Guest Post: Epic Fail - Part One

No wonder one third of Americans are obese. The crap we are shoveling into our bodies is on par with the misinformation, propaganda and lies that are being programmed into our minds by government bureaucrats, corrupt politicians, corporate media gurus, and central banker puppets. Chief Clinton propaganda mouthpiece, James Carville, famously remarked during the 1992 presidential campaign that, “It’s the economy, stupid”. Clinton was able to successfully convince the American voters that George Bush’s handling of the economy caused the 1991 recession. In retrospect, it was revealed the economy had been recovering for months prior to the election. No one could ever accuse the American people of being perceptive, realistic or critical thinking when it comes to economics, math, history or distinguishing between truth or lies. Our government controlled public school system has successfully dumbed down the populace to a level where they enjoy their slavery and prefer conscious ignorance to critical thought.

Daily US Opening News And Market Re-Cap: April 23

European stocks are trading lower as North America enters the market with participants coming to terms with the political events of the weekend. The collapse of the Dutch government has clouded the future for fiscal harmonisation in the Eurozone and the outperformance of the far-right in the French Presidential elections has highlighted the discontent of the populous with mainstream politics. As such, all European bourses are trading significantly lower, with the Bund seen trading higher by around 70 ticks. European government bond yield spreads against the German 10-yr reflect the caution, with the Dutch/German spread widening by over 10BPS and the Spanish yield holding above 6% for most of the session.

Israel's Key Energy Provider, Egypt, Cuts Off All Natural Gas Supplies

Two months ago, we warned that while the world had decided to blissfully move on from last year's topic #1, the MENA revolutions, and specifically the massive power vacuum left in their wake, things in the region were far from fixed. Quite the contrary, and as we added back then "it is very likely that the Mediterranean region, flanked on one side by the broke European countries of Greece, Italy, Spain (and implicitly Portugal), and on the other by the unstable powder keg of post-revolutionary Libya and Egypt, will likely become quite active yet again. Only this time, in addition to social and economic upheavals, a religious flavor may also be added to the mix". Yet nobody cared as after a year of daily videos showing Molotov Cocktails dropping like flies, people had simply gotten habituated and needed some other source of excitement. Nobody cared also when a week ago Art Cashin warned that the hidden geopolitcal risk is not Spain but Egypt. Today, Egypt just reminded at least one country why perhaps caution about the instability caused by having a military in charge of the most populous Arabic country and the one boasting "the Canal", should have been heeded after Egypt just announced that it is cutting off its natural gas supplies to Israel, which just so happens relies on Egypt for 40% of its energy needs.

Europe Is Now Red For The Year

A sea of red is flowing from European equity markets and it seems they are unable to stem the flow as IBEX (the Italian Spanish equity index) nears March 2009 lows (down 18% YTD) but dispersion across European indices is very high from the DAX +14% YTD to Italy, Greece, and Spain very much in the red YTD. However, for the second week in a row, European equity markets (as tracked by the narrow Dow-equivalent Euro Stoxx 50) close with a negative return year-to-date -0.3%. The broader BE500 index is still up around 5% (compared to over 10% YTD gains in the S&P 500). European high yield credit is back at 3-month lows and investment grade credit at 2-month lows. This week, however, followed the exact same path as last week with equity and credit trading in a wide range but notably this week credit markets dramatically underperformed the ever-hopeful equity market with financials underperforming the heaviest. European sovereigns are generally wider close-to-close on the week but just like corporate credit and equity, they generally followed a similar path to last week with a broad range trade - though a clear trend generally wider overall. Italy underperformed Spain on the week and Portugal, as we noted earlier was the big winner on what looked like basis trade-driven flows as opposed to whole new world of relief. Ahead of the G-20 meetings, it did not seem like there was much hope in sovereign credit - even as financials and corporates did lift a little off their multi-month lows and having seen the headlines of the G-20 draft, it appears there is no magic bullet there anyway - no matter how big they think their bazooka is.

Spanish 10 Year Briefly Crosses 6.00% And Portugal Active

European sovereigns peaked in spread yield early this morning before the surprisingly positive German confidence data but while France, Belgium, Austria and more significantly Portugal are all improving, Spain and Italy remain far less positive in this small downtrend after two days of significant selling pressure. Both are now around 35bps post the US non-farm-payroll data with Spain cracking back above 6% yield (and remains above 500bps in 5Y CDS). For those wondering what is going on in Portuguese spreads, it appears CDS-Cash basis traders are very active, according to desk chatter, with the spread between extremely 'cheap' bonds and CDS compressing to 7 month narrows here - bonds remain 232bps wide of CDS though as liquidity, ECB subordination, and CDS trigger concerns remain (though this is in from over 700bps difference at its worst in late January 2012).