Ireland

Going into the US open, European equity markets have carried across some risk appetite from last night’s Wall Street news that 15 out of 19 major US banks had passed the Fed’s stress test scenarios. This risk appetite is evident in Europe today with financials outperforming all other sectors, currently up over 2%. Data released so far today has been relatively uneventful, with Eurozone CPI coming in alongside expectations and Industrial Production just below the expected reading for January. Taking a look at the energy complex, WTI and Brent crude futures are seen on a slight downwards trajectory so far in session following some overnight comments from China, highlighting the imbalance in the Chinese property market, dampening future demand for oil. Looking ahead in the session, the DOE crude oil inventories will shed further light on the current standing of US energy inventories.

Germany just launched a €480 billion fund that it will use to backstop its banking system should a Crisis hit. And in the fine print, which no one has caught,... the fund will also allow German banks to dump their EU sovereign bonds... as in German banks'  PIIGS/ EU exposure disappearing in an instant. So... why would Germany do this?

Greece defaults & if it works, what makes anyone with a thirdof a synapse think that Portugal/Ireland will NOT jump in line to stiff creditors? This is more the end of the beginning than the beginning of the end of the crisis.

D.C. is fudging the books big time according to the CBO.

Minutes ago we presented Goldman's twisted and conflicted take on Greece in a post PSI world. Needless to say, virtually everything goldman says is to be faded. Which is why not surprisingly, the next analysis, a far more accurate and realistic one, does precisely that. In a just released report from Europe think tank OpenEurope, the conclusion is far less optimistic: "The deal sets the eurozone up for a political row involving Triple-A countries. At the start of this year, 36% of Greece’s debt was held by taxpayer-backed institutions (ECB, IMF, EFSF). By 2015, following the voluntary restructuring and the second bailout, the share could increase to as much as 85%, meaning that Greece’s debt will be overwhelmingly owned by eurozone taxpayers – putting them at risk of large losses under a future default. This deal may have sown the seeds of a major political and economic crisis at the heart of Europe, which in the medium and long term further threatens the stability of the eurozone."

Only in Greece, can you wipe out €100 billion of debt, and have the new debt that replaces it trade at 20% of face value.  So 85.8% of Greek law bonds “participated”.  The government intends to use the Collective Action Clause to force the holdouts to participate.  It is unclear if the government has actually used the clause already, or just intends to.  Once they use the CAC, that will be a Credit Event for the CDS. English law bonds saw participation less than 70%.  The deadline has been extended until March 23rd.  As discussed all along, the English Law bonds gave some protection to holders and that clearly gave them the confidence to hold out.  Given the Event of Default covenants, and the right to accelerate, some bondholders may push to accelerate after the Greek law bonds get CAC’d. The market now knows that the PSI will be “successful” and a massive amount of debt will be wiped out, but the new bonds are being quoted “when and if issued” at prices ranging from the high teens to mid twenties.   Why are the new bonds so weak?  SUBORDINATION! 

Being an intrinsically destabilizing force, financialization led to the global financial crisis of 2008. Central banks went into panic mode, printing and injecting trillions of dollars of new infectious material into the global economy in the hopes of sparking a new even grander cycle of financialization. But you can't create a new cycle of plague when the hosts are either dead or already infected. The world has run out of sectors that can be financialized; that plague has already killed or infected every corner of the global economy. Ironically, all the central banks' attempts to reinflate the speculative leverage-debt bubble are only hastening the disease's decline and collapse. The global markets are cheering today because the plague-riddled corpse of Greek debt has been turned into a grotesque marionette that is being made to "dance" by the European Central Bank before an audience that has been told to applaud loudly, even though the ghastly, bizarre spectacle is transparently phony. Greek debt is already dead; it can't be reinfected and killed again, and neither can the debts of Ireland, Spain, Portugal, Italy et al. Housing is also already dead, though the still-warm body is still twitching in certain markets around the world.

What a difference 24 hours makes, or 48 for that matter. After an almost 2% decline on Tuesday on virtually no news, the market looks set to get all that back and more - all since about 10:30 yesterday - also on no real news. PSI results continue to come in. It looks like it will beat 75%. It seems that all banks and most regulated entities are voting in favor of PSI - as expected. It looks like Greece and the EU will discuss the results tomorrow. I expect CAC's to get done on Monday. It would be surprising, and controversial, if the don't use the CAC's and pay some holdouts at par. After Greece walks away from over $140 billion of debt, it will be hard for other countries to resist that temptation. Now that politicians realize they can make the banks do whatever they want, they will be tested to use that power.

Not many websites, analysts or authors have both the balls/temerity & the analytical honesty to take Goldman on. Well, I say.... Let's dance! This isn't a collection of soundbites from the MSM. This is truly meaty, hard hitting analysis for the big boys and girls. If you're easily offended or need the 6 second preview I suggest you move on.

Markets are exhibiting very risk-averse behaviour ahead of the US open, with European equity markets making heavy losses across the board with flows into the safer assets. This follows Greece dominating the headlines once again, with a report from the IIF warning of dangerous ramifications for Europe should Greece default. These reports got the European session off to a bad start, with losses made throughout the morning. Market talk of a delay in the Greek debt swap deal deadline has also been circulating, however this was swiftly denied by the Greek Debt Agency chief as well as the Greek Finance Ministry, although this failed to reassure markets and they continue on a downward trend into the US open. Eurozone GDP data released earlier in the session showed a contraction in the last quarter of 2011, although expected, this has reignited concerns of a recession in Europe. The ECB have recorded yet another record level of deposits from European banks in its overnight lending facility, with institutions depositing EUR 827.5bln on Monday night.

Insolvency will keep dragging the Euro-Area economy down until sovereign and bank balance sheets are repaired, but as Lombard Street Research  points out: eliminating the Ponzi debt without fracturing the entire credit system is impossible. The Lehman default occurred 13 months after the US TED spread crossed 100 basis points. The European equivalent crossed 100 basis points in September 2011, so its banking crisis would occur this autumn if a year or so is a normal incubation period. A Greek or any other significant default will precipitate a European banking crisis in the foreseeable future. Markets are already speculating on Portuguese negotiations for haircuts and Ireland can’t be far behind and the contagion to US (and global) banking systems is inevitable given counterparty risks, debt loads (and refi needs), and capital requirements (no matter how well hidden by MtM math). The contagion will likely show up as a risk premium in the credit markets initially as we suggest the recent underperformance of both US and European bank credit relative to stocks is a canary to keep an eye on.

We’re fast approaching the end of the line here. It’s clear that the EU is out of ideas and is fast approaching the dreaded messy default they’ve been putting off for two years now. Indeed, Greece is just the trial run for what’s coming towards Italy and Spain in short order. NO ONE can bail out those countries. And they must already be asking themselves if it’s worth even bothering with the whole economically crushing austerity measures/ begging for bailouts option. Which means… sooner or later, Europe is going to have to “take the hit.”

Okay, we don’t know if that is a good translation of Dead Bank Walking into Portuguese, but we didn’t think zombie banks was sufficient. As Portugal's sovereign spreads have risen by 200bps in the last 3 weeks and now trade at a wholly unsustainable 1200bps over Bunds, we thought it worth looking at how large (and under-capitalized) the Portuguese banking system was. Perhaps more critically just how zombified they were with regards to their Central Bank liquidity needs - the picture is not encouraging. As tensions continue to mount internally, it seems the LTRO's lull should be used to wipe out the weak banks or recap the less-than-dismal banks as that is the only real firewall. With the Greek PSI/restructuring dangling in the dust, it seems increasingly likely (as the IIF just noted) that Portugal is next and imminent given market pricing, despite the 'uniqueness' of their Hellenic neighbors.

While everyone was busy ruminating on how little impact a Greek default would have on the global economy, the IIF - the syndicate of banks dedicated to the perpetuation of the status quo - was busy doing precisely the opposite. In a Confidential Staff Note that was making the rounds in the past 2 weeks titled "Implications of a Disorderly Greek Default and Euro Exit" the IIF was doing its best Hank Paulson imitation in an attempt to scare the Bejeezus out of potential hold outs everywhere, by "quantifying" the impact form a Greek failure. The end result: "It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed €1 trillion."  In other words, hold out at your own peril. Of course, what the IIF does not understand, is that for hedge funds it is precisely this kind of systemic nuisance value that makes holding out that much more valuable, as they understand all too well that they have all the cards on the table. And while a Greek default could be delayed even if full PSI was not attained by Thursday, it would simply make paying off the holdouts the cheapest cost strategy for the IIF, for Europe and for the world's banks. Unless of course, the IIF is bluffing, in which case the memorandum is not worth its weight in 2020 US Treasurys.

I recall the early days of the Greek crisis when everyone asked why Greece was so important because it is such a small country. I responded that they had a total of $1.1 trillion in debt (sovereign, municipal, corporate, bank and derivatives) and I remember the blank stares. Now, if the newest bailout goes through, they will have more than $1.3 trillion in debt and while they could not pay the initial amount they certainly cannot pay any larger amounts so that it can clearly be stated that what is going on is the central banks of Europe and the ECB/EU lending money to Greece only as a conduit to pay back their own banking institutions. If you object to my math here recall that as the private sector involvement reduces the notational amount of sovereign debt but that the Greek banks are also going to be lent money so that the decrease in sovereign debt which excludes the ECB/EIB and IMF debt is not the headline bandied about in the press. So we have the hard date of March 9 when either the threshold for the exchange is met or not, the imposition of the CAC clause or not, the next “Question” to the ISDA if the CAC is triggered asking if there has been a credit event to trigger the CDS contracts, the possible consequences of a CDS trigger, the decision on the bailout funds by the EU and finally the March 20 hard date when Greece must make its bond payments or default. Regardless of your opinion, it may now be stated precisely, that there is a lot of risk on the table and on that basis alone I would assume a quite defensive position until this all gets played out. The risk/reward ratio is now strongly slanted towards Risk.