Hands up anyone who is surprised that the Bank of England has added another £50 billion to the quantitative easing pot? The same hands will also believe that the Greeks have agreed terms for the next bail out tranche with the Troika (the European Union, the IMF and the European Central Bank). This ongoing epic odyssey of the voyage to nowhere has grabbed the headlines, but the BoE’s quiet announcement is equally significant to us Brits. Central banks never utter the words quantitative easing, so the Bank calls it an addition to its “asset purchase programme”, which was only hiked to £275 billion back in October. The accompanying rhetoric states that inflation is on the way back down and may fall below their target of 2%, mainly as a result of the VAT increase last January falling out of the equation and lower energy prices, (despite Brent crude being over 10% higher Y-o-Y in sterling terms..); a convenient excuse perhaps.
UPDATE: Ironic timing (via Bloomberg)...*VENIZELOS SAYS GREECE FACES CHOICE OF STAYING IN EURO OR NOT, *GREEK DEBT SUSTAINABILITY NO WAY NEAR 120%, DE JAGER SAYS, and *ECB SHOULD CONTRIBUTE TO REDUCTION OF GREEK DEBT, JUNCKER SAYS
In an incredibly candid 'informal' discussion caught on video by Portugal's TVi24 television crew, German finance minister Wolfgang Schaeuble gives Portuguese finance minister Vitor Gaspar 'the nod' that after the Greek deal is done, Germany will relax the conditions of the financial assistance program for Portugal. While the soundtrack is a little flaky, it is clear that the German finmin notes they must remain resolute in their conditions against Greece in order to maintain the appearance of 'seriousness' with the fellow members of the Greek parliament and more importantly the people of Germany. It would appear that once they have flexed their muscles against the Greeks (think Lehman?) then (and only then) can (and will) they 'help' the Portuguese. Perhaps the hard default is the way they expect this to play out with the assumption they can post-hoc avoid contagion in some manner but nevertheless, Samaras' comments this afternoon on growth and a focus away from austerity do not sit in any way complementary to Schaeuble's comments in this candid-camera moment.
Portuguese TV is having a field day with the clip as they note: Vítor Gaspar was "looking like a student trying to impress the teacher," was how the commentator saw the episode. Adding, the minister "did everything but say that not only is doing everything right as even very fond of the austerity policy."
Is The ECB's Collateral Pool Expansion A €7.1 Trillion Imminent "Trash To Cash" Increase In Its Balance Sheet?Submitted by Tyler Durden on 02/09/2012 10:49 -0400
While a lot of the just completed Draghi press conference was mostly fluff, the one notable exception was the announcement that the European central bank would "approve eligibility criteria for additional credit claims" (see below). While purposefully vague on the topic, Draghi noted that the step is one of onboarding even more risk: "Sure, it's going to be more risky. Does that mean that we take more risk? Yes, it means we take more risk. Does it mean this risk is being unmanaged? No, it is being managed. And it's being - it's going to be managed very well because really there will be a strong overcollateralization for the additional credit claims. The conditions will be very stringent." While it remains to be seen just how stringent the conditions will be, but a bigger question is what is the total pool of eligible claims that can be used to flood the ECB in exchange for freshly printed cash. For that we go to Goldman whose Jernej Omahen a month ago calculated the impact of the expanded collateral pool which was formally confirmed today. To wit: "Scarcity of collateral was becoming an evident problem for a large number of banks, especially smaller and medium sized. In our view, the ECB’s collateral pool expansion was therefore a critical decision. Select corporate loans – which form over >€7 tn, or >30% of total balance sheets – will now be admissible for refinancing operations, through national central banks. Criteria on eligibility have yet to be determined – we are therefore not able to quantify the actual expansion of collateral pool at this stage. That said, the €7 tn starting points suggests it will be significant." In other words, and this is excluding anything to do with the LTRO, the ECB just greenlighted a potential expansion to its balance sheet all the way up to €7 trillion. Will banks use this capacity to convert "trash to cash" - why of course they will, and this goes to the very heart of the biggest problem with Europe: the fact that there are virtually no money good assets left as collateral, which requires the implicit rehypothecation of bank "assets" back to the ECB, to procure cash, to pay out cash on liabilities. How much will they do - we don't know yet. We will find out very soon. What we do know is that the ECB's €2.7 trillion balance sheet is about to expand dramatically, pushing the European central bank even further into bad bank status. And this is excluding the upcoming new usage of the Discount Window known as the LTRO in three weeks. Trade accordingly.
Irish Finance Minister saying that whatever the ECB does with Greece would be of interest to Ireland. So if ECB forgives Greek debt (directly or through EFSF), Ireland is going to want the same deal. Portugal won't be far behind. And why stop at ECB and not go for PSI as well?
This chart from Credit Suisse cuts through all the propaganda BS like a hot knife through butter.
Setting a precedent of official sector losses would raise huge questions over whether Portugal and Ireland will request similar treatment. However there are now no easy options. The current course of a second Greek bailout could just as easily have knock-on effects in the form of a second round of taxpayer-backed rescues. We have always argued strongly against taxpayers taking losses but, unfortunately, this is one of the few plausible options we’re now left with.
While hardly new to anyone who actually has been reading between the lines, and/or Zero Hedge, in the past few months, the Greek endspiel is here, and as a note by Goldman's Themistoklis Fiotakis overnight, the Greek timeline, or what little is left of it, "allows little room for error." Furthermore, "Due to the low NPV of the restructuring offer it is likely that part of this investor segment may be tempted to hold out (particularly owners of front-end bonds). How the holdouts are treated will be key. Paying them out in full would probably send a bullish signal to markets, yet it would be contradictory to prior policy statements about the desirability of high participation both in practical terms as well as in terms of signalling. On the other hand, forcing holdouts into the Greek PSI in an involuntary way would likely cause broad market volatility in the near term, but could be digested in the long run as long as it happens in a non-disruptive way (as we have written in the past, avoiding triggering CDS or giving the ECB’s holdings preferential treatment following an involuntary credit event could cause much deeper and longer-lived market damage)." Once again - nothing new, and merely proof that despite headlines from the IIF, the true news will come in 2-3 weeks when the exchange offer is formally closed, only for the world to find that 20-40% of bondholders have declined the deal and killed the transaction! But of course, by then the idiot market, which apparently has never opened a Restructuring 101 textbook will take the EURUSD to 1.5000, only for it to plunge to sub-parity after. More importantly, with Greek bonds set to define a 15 cent real cash recovery, one can see why absent the ECB's buying, Portugese bonds would be trading in their 30s: "Portugal will be crucial in determining the market’s view on the probability of default outside Greece... Given the significance of such a decision, markets will likely reflect concerns about the relevant risks ahead of time." Don't for a second assume Europe is fixed. The fun is only just beginning...
Back in July of 2011, when we first predicted the demise of the second Greek bailout package, even before the details were fully known in "The Fatal Flaw In Europe's Second "Bazooka" Bailout: 82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP" we asked, "what happens tomorrow when every German (in a population of 82 very efficient million) wakes up to newspaper headlines screaming that their country is now on the hook to 32% of its GDP in order to keep insolvent Greece, with its 50-some year old retirement age, not to mention Ireland, Portugal, and soon Italy and Spain, as part of the Eurozone? What happens when these same 82 million realize that they are on the hook to sacrificing hundreds of years of welfare state entitlements (recall that Otto von Bismark was the original welfare state progentior) just so a few peripheral national can continue to lie about their deficits (the 6 month Greek deficit already is missing Its full year benchmark target by about 20%) and enjoy generous socialist benefits up to an including guaranteed pensions? What happens when an already mortally wounded in the polls Angela Merkel finds herself in the next general election and experiences an epic electoral loss? We will find out very, very shortly." Alas, it has not been all that very "shortly", as once again we underestimated people's stupidity and willingness to pay the piper of a crumbling economic and monetary system. But our prediction is finally starting to come true. Spiegel has just released an article, which encapsulates what well over 50% of Germans think, who say that the time to let Greece loose, has come.
Since the start of the year, global markets have been apparently buoyed by the understanding that Draghi's shift of the ECB to lender-of-last-and-first-resort via the LTRO has removed a significant tail on the risk spectrum with regard to Euro-banks and slowed the potential for contagious transmission of any further sovereign stress. In fact the rally started earlier on the backs of improved perceptions of US growth (decoupling), better tone in global PMIs, and potential for easing in China and the EMs but it does seem that for now the ECB's liquidity spigot rules markets as even in the face of Greek uncertainty, as George Magnus of UBS notes, 'financial markets are most likely to defer to the ECB's monetary policy largesse' as a solution. Both Magnus and his firm's banking team, however, are unequivocal in their view that the next LTRO will unlikely be the last (how many temporary exceptions are still in place around the world?) and as we noted earlier this morning, banks' managements may indeed not be so quick to gorge on the pipe of freshly collateralized loans this time (as markets will eventually reprice a bank that holds huge size carry trades at an inappropriate risk-weighting) leaving the stigma of LTRO borrowing (for carry trades, substitution for private-sector funding, or buying liquidity insurance) as a mark of differentiable concern as opposed to a rising tide lifts all boats as valuations reach extremes relative to 'broken' business models, falling deposits, and declining earnings power.
They expect a EUR300bn take up of the next LTRO, somewhat larger than the previous EUR200bn add-on - but not hugely so - as the banks face a far different picture (in terms of carry profitability) and yet-to-be-proven transmission to real-economy credit-creation that will make any efforts at a fiscal compact harder and harder to implement as its self-defeating austerity leave debtor countries out in the cold. The critical point is that unless the market believes there will be an endless number of future LTROs, covering the very forward-looking private funding markets for banks, then macro- and event-risk will reappear and volatility will flare.
Overnight excitement from the RBA (no rate cut) and concerns at China's GDP growth given a European recession did nothing to initially slow risk markets early on as they reached up to yesterday's highs as ES (the e-mini S&P 500 futures contract) and BE500 (the broad Bloomberg equity index for Europe) pushed higher out of the gate (as AUD strength sustained carry trades - which appear now to be leaking back off). EUR managed to get back to yesterday's highs and found resistance and once it began to leak lower (and USD lower implicitly) then equities (and commodities on China un-easing concerns) started to stumble pretty hard. Following China's Shanghai Composite, European stocks are now down around 1% and credit is slowly gathering pace to the downside (though not as weak as stocks for now). Portugal showed some strength early on but has given that back as most sovereigns are trading 0-3bps wider in 10Y cash spreads for now (likely the trigger for non-sovereign credit). Some comments from Juncker on special Greek accounts and Klass Knot on the Euro's success top off a quiet morning with some risk off starting to gather pace.
Our bullish premise rests on Greece being fixed.
If you think the EU Crisis is over, think again. True we’ve got until March 20th for the Greek deal to be reached, but things have already gotten to the point that Germany has essentially issued its ultimatum. Either Greece hands over fiscal sovereignty, or it defaults in a BIG way.
Three weeks ago, Zero Hedge was the first to bring the world's attention to the legal (and explicit trading/risk) ramifications of European sovereign bonds. We noted the ECB/IMF's subordinating impact on unsuspecting sovereign bond holders but much more explicitly showed the huge gap in market perception between domestic- and foreign-law bonds (and the fact that they have very different ramifications given the rising tendency for retroactive CACs or simply local-law changes to accommodate restructurings). The arbitrage of "dumping all weak protection bonds and jumping to the 'strong' ones" which we preached is indeed occurring and now three weeks later, JP Morgan is suggesting its clients take advantage of this same arbitrage strategy (citing the very same thesis and legal justifications as we did) as domestic law bonds offer significant advantages to the sovereign (and therefore implicit disadvantages to the lender or bond holder just as we said) relative to foreign law bonds. While we are flattered that our analysis is deemed worthy of mainstream sell-side research regurgitation, we caveat the celebration with the concern that perhaps JP Morgan already took advantage of the information a 'fringe blog' provided to the world (as we know many funds did given the requests for more explicit bond details) and is now looking to unwind the profitable (though modestly illiquid) positions it has been accumulating for the past three weeks.
- Greeks Struggle to Resolve Their Differences (WSJ)
- China May See Deeper Slowdown on Crisis: IMF (Bloomberg)
- Banks to take a hit on US home loans (FT)
- Europe’s banks face challenge on capital (FT)
- Smaller Interest-Rate, Credit-Default Swap Trades Seen On Horizon (WSJ)
- Pro-European elected Finland president (FT)
- Push Sputters for Credit-Default Swap Futures (WSJ)
- China Money Rate Rises as Central Bank Gauges Demand for Bills (Bloomberg)
- China Takes On Skeptics of Aid to Euro Zone (WSJ)
Rarely do we have two Friday Humor pieces in a row, but the following seminar announcement from the Banco de Portugal, of all places, is truly priceless...