Sovereign Risk

Reggie Middleton's picture

How many of those Greek, Portuguese, Irish and Spanish bondholders have factored the near guaranteed "additional" haircut (/scalping) they will receive having to stand behind the IMF in the event of a (probably guaranteed) default or restructuring? Do you think the investors of European banks (that includes central banks) that are holding/and currently still buying a boat load of these bonds have factored this into their valuations?

Goldman On What The Neverending [Private|Public|Global|Galactic] Bailout Means For Market Indicators

  • 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) 
Reggie Middleton's picture

I told you it probably wouldn't work. Now, you really have speculators lining up to put on the short trade of the a lifetime. Methinks those lines may start to get pretty long as well as I spy the Asian markets as well as the US and European futures drop like rocks in desalinated pond water. Asking 2 trillion euro, can I get a bid for 2 trillion euro, going... going... gone!

Morgan Stanley Capitulates, Sees No Rate Hike Until 2011, Pushes Back Call For 4.5% On 10 Year By Two Quarters

The one biggest bond bear since December 2009, Morgan Stanley, has just thrown in the towel, and instead of expecting 4.50% on the 10 Year by June 30, the firm has now pushed back its target by 2 quarters. Which means that its longer 5.50% Target on 10 Years has been scrapped. The firm's strategists have also adjusted their call on Fed hikes (now expected to occur no sooner than 2011 instead of September 2010). Lastly, the firm's most vocal call, one for a substantial 2s10s steepening to 325 bps has also been moderated from Q2 to Q4. We also include the latest Rates Strategy slide deck from MS.

Chris Pavese's picture

It is important to note that in the near term, the contraction in private sector credit combined with the threat of fresh credit concerns ahead, will likely keep a lid on inflation pressures. This view is perhaps where we differ most from today’s consensus thinking, where many expect an immediate and permanent increase in inflation levels.

Summary Of The Biggest Bail Out Ever: Even Keynes Is Spinning In His Grave

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.

Here Are The Critical Credit/Liquidity Indicators To Keep A Watch For In The Coming Week

Call it Lehman 2.0, sovereign risk flare up, or plain old money run, the liquidity crunch from last week almost killed the US equity market, has generated an unprecedented swing in FX pairs, and is starting to move into key credit indicators and spreads. The "big bail out" from the weekend has come and gone (unless Trichet is preparing to release something at 5:59pm Eastern tomorrow), and if Goldman is correct will have no material impact on markets... Which means that the downward path of least resistance will continue. And with equity markets not only decoupling from the rest of the world, but from the credit market as well, as they migrate to a plane of existence of their own, replete with unicorns, rainbows and spittoons full of hopium, keeping an eye out on early stress indicators from the credit markets is critical - credit is and has always been a far better early warning of market health, or lack thereof, than the HFT controlled, rebate-driven trading action in the shares of C, FNM, FRE, AIG, and other bankrupt pennystocks which account for up to 40% of daily trading volume. Earlier today, we touched upon some of the key early warning indicators to watch for in determining if the European contagion is going airborne. Below, we share a presentation from Morgan Stanley's Jim Caron, Measuring Risk: Extracting Market Sentiment from the Interest Rate Markets, in which the credit strategist provides a much more detailed framework of what critical credit signals are and how to interpret them. We recommend that all those still trading, either with their own, or other people's money, familiarize themselves with this 27-page overview.

Surging Libor-OIS And Cross Currency Basis Swaps Indicate Europe's Response Is Too Little Too Late

Even as the immediate factor for the 1000 point drop in the Dow is investigated for the next several months by the SEC, a process which will likely not come to any reasonable market structure regulatory recommendation before the SEC is forced to analyze the next subsequent (and even greater) crash, the one primary fundamental cause for the sell off in stocks this week was the ever deteriorating situation in Europe. As the euro tumbled on Thursday afternoon, which we noted 20 minutes before the stock market crash began in earnest, as implied correlation algos went berserk, and as viewers were witnessing the near-warfare in Athens live, things just got too real for speculators (investors is so 20th century). Various computerized trading platforms merely kicked on (or rather, off) after the initial panic had already set in, and liquidity evaporated, leading to the implosion in the market. And the primary reason for the initial market pessimism early on Thursday was the fact that even as the whole world was listening to Jean-Claude Trichet to say soothing words after the ECB's rate decision, the central bank president once again did not realize the gravity of the situation. And to speculators, long habituated to Bernanke's endorsement of infinite moral hazard and speculative mania, the fact that someone refused to play "ball" and leave open the possibility that failure is still permitted in our day and age was the last straw. Now, 48 hours later, we learn that the rumors, which we reported about the ECB preparing a bailout fund, were indeed true. Our sense is that at this point the ECB's action is "too little, too late" as contagion fear has already crept deep within the fabric of various overt and shadow funding/liquidity mechanisms. Additionally, the world is now convinced that Europe can only deal with problems retroactively, and who knows how big and unfixable the next problem will be: the ECB, which has lost most of its credibility after "inviting" the IMF to do a heavy part of the bailout, is about to become the laughing stock of global central banks. Trichet is seen merely as a powerless bureaucrat, caught between Merkel's electoral struggles and Bernanke's demands for contagion interception and implicit Fed supremacy over Europe. The contagion from the "isolated" Greek fiasco is rapidly spreading. Here are some of the ways in which markets are about to be affected.

Moody's Puts Portugal Aa2 Rating On Downgrade Review - Full Text

Today's rating action reflects the recent deterioration of Portugal's public finances as well as the economy's long-term growth challenges. "The review for possible downgrade will consider a repositioning of Portugal's ratings to reflect the potentially lasting deterioration in the government's debt metrics," says Anthony Thomas, Vice President-Senior Analyst in Moody's Sovereign Risk Group. "In the context of a small and slow-growing economy, such debt metrics may no longer be consistent with a Aa2 rating."

The weakening of Portugal's public finance position reflects the failure of successive administrations to consistently limit government budget deficits since Portugal joined the eurozone at its inception. "More recently, however, the government's has reiterated its objective to achieve or even surpass the deficit reduction targets published in its latest Stability and Growth Programme," says Mr. Thomas. "The well-structured debt profile means that refinancing risks are modest."

Reggie Middleton's picture

The chances of the Euro contagion being contained are quite slim, and the Spanish government is saying it is "madness" that they will be needing a bailout. While they may not be needing a bailout now, it is far from "madness" to speculate on such matters. After all, it is the Spanish government itself that set itself up for such speculation by using pie in the sky numbers to justify their claims of having things under control. Once their projections are seen for what they really are, we shall see what "madness" truly entails...

Reggie Middleton's picture

So everybody is asking if "Greece will make it through the Pan-European Sovereign debt crisis and if not, then who's next?" Well, we have spent at least 3 man-months answering this very question, and I am finally getting around to publishing these answers in a formal report. It is the calculations behind this very same report that has allowed me to call this Pan-European Debt thing quite accurately for the last 4 or 5 months - calls that were in direct contravention to practically every quoted political leader and most Wall Street banks may I add. Let's walk through recent history...

Greek Rescue Package Insufficient, Will Need More Money

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.

Moody's Announces Multi-Notch Downgrade Of Greece Imminent, Sarah Carlson Proves She Is In An "Analytic" Class Of Her Own

Moody's analyst Sarah Carlson, who by no means is a disgrace to her job, and is fully justified in keeping an A- rating on a country whose 2 Year debt was trading north of 20% until yesterday, when Europe decided to use US tapxayer money to bail out its own, finally finished the special olympics marathon (no pun intended), only a couple of years late. We wonder if any of the Moody's analyst corps will be offered as a (not so virgin) sacrifice to placate the angry gods of Berkshirehathawaya. We hear Buffett has a soft spot for the XX (chromosomes), even if it derives from companies in which he has already decided to liquidate his entire stock position (but slowly... slowly... don't forget uncle Warren is just the nicest guy in the world and would never take advantage of the market's stupidity).

Daily Credit Summary: April 28 - Skewered PIIGS

Spreads were mixed today with the major US indices managing modest gains as HY outperformed IG. This spread compression is optically misleading though as, in general, curves flattened in 3s5s and more technically indices outperformed weak single-names as the theme of the day appeared to be skew compression and profit-taking. Modest short-covering and single-name (sovereign and corporate) repricing was the mood of the day and while we rallied it seemed like there was very little conviction to it (despite IG closing at the day's tights) - though well off yesterday's tights.