Ireland

When these two agree, look out!

In an interview with Italian newspaper Milan Finanza on Saturday, JP Morgan CEO Jamie Dimon said that he could lose up to $5 billion from the firm's exposure to the PIIGS countries. As Reuters reports, "Dimon said the bank was exposed to the five countries (PIIGS) to the tune of around $15 billion. "We fear we could lose up to $5 billion ... We hope the worst won't happen, but even if it did happen, I wouldn't be pulling my hair out," he said. Dimon said Europe was the worst problem for the banking sector. "But the EU and euro are solid even if the states will have to be financially responsible and do all they can to develop common social policies," he said." While it is admirable of JPMorgan to disclose some of its dirty laundry, as this was a topic that received hardly any mention in the firm's prepared quarterly release, and is predicated surely by the fact that its Basel III Tier 1 Common of $122 billion dwarfs this possible impairment, there are some questions left open. Such as what happens if and when Greek CDS, now most likely before March 20, were triggered? And the logical follow up - what happens when Portugal, Ireland, Spain and Italy, and who knows who else (Hungary?) follow suit and decide that a coercive restructuring is actually not suicidal, even though it most certainly is once a given threshold is reached. In other words, how long can Europe tolerate the same two-tiered sovereign debt market that S&P warned about so explicitly yesterday? Finally what happens to JPM's Tier 1 Common when the European dominos impact not only the directly exposed PIIGS nations, and specifically their bonds, but all those other banks, insurance and reinsurance companies, whose current viability makes up the balance of JPM's remaining $117 billion in Tier 1? Because in its essence, stating that JPM is "fine" even if Europe were to collapse is analogous to Goldman telling Congress it would collect on its AIG CDS if and when the CDS market were to implode absent the government bailout of AIG, which itself was accountable for over $2 trillion of the entire CDS market itself.

All your questions about the historic European downgrade should be answered after reading the following FAQ. Or so S&P believes. Ironically, it does an admirable job, because the following presentation successfully manages to negate years of endless lies and propaganda by Europe's incompetent and corrupt klepocrarts, and lays out the true terrifying perspective currently splayed out before the eurozone better than most analyses we have seen to date. Namely that the failed experiment is coming to an end. And since the Eurozone's idiotic foundation was laid out by the same breed of central planning academic wizards who thought that Keynesianism was a great idea (and continue to determine the fate of the world out of their small corner office in the Marriner Eccles building), the imminent downfall of Europe will only precipitate the final unraveling of the shaman "economic" religion that has taken the world to the brink of utter financial collapse and, gradually, world war.

Now that a "few good hedge funds" have finally made CDS a credible instrument all over again but trampling all over ISDA putrid, corrupt and meaningless corpse, here is an update of Eurozone CDS.

Markets are moving positively across the board today following comments from Fitch, dampening speculation that France may be downgraded from its Triple A status. Fitch’s Parker commented that he does not expect to see France downgraded at all throughout 2012. However he added that there are continuing pressures for France from national banks and EFSF liabilities, Parker also reinforced German confidence stating that Germany’s Triple A rating is safe. Markets were also experiencing upwards pressure from strong French manufacturing data performing above expectations and successful Austrian auctions today, tightening the spread between France and Austria on 10-year bunds.

While Ireland's bond performance is often held up as evidence that living-standard-crushing austerity can indeed lead to positive developments, Citgroup's chief economist William Buiter suggests, in a speech in Dublin today, that they should begin negotiating a new rescue package as soon as possible. Buiter, via The Irish Times, points to the fact that Ireland currently pays around 6% for its 'rescue-money' which could be refinanced (theoretically) at around 3% via the EFSF. He said Ireland was not like Greece but it was in very bad fiscal shape because of its bank guarantee (isn't that what Italy and Portugal are doing with the new Ponzi-bonds?). He said that clearly something had to be done about the "continuing massive sovereign funding gap" that Ireland had and which still existed after three and a half years of "fierce" fiscal austerity. While Merkel's comments today on central bank support as illusory and spending EU money appropriately, it would seem that Ireland remains in a strong negotiating position. We await the term 'referendum' to confirm the discussions have begun - and given the timing (the day before IMF-EU official's fifth review) we would expect to hear it soon.

A gold standard, abandoned mostly due to a shortfall in the amount of the metal required to back the monetary system? A common bloc designed to simplify trade and commerce? Macro-economic reform of the union from the centre? Voluntary adoption by England who was not part of the union? Ah, well almost. Anyway, my point is this: In the mid-700s it probably seemed inconceivable that Europe would be united under a common ruler, much less a common currency and, by the mid-800s, it probably seemed equally inconceivable that such a union could split asunder - but  such is the nature of unions (and currency blocs for that matter). As the individual members undergo the individual stresses associated with running individual and idiosyncratic economies under a common banner, it is inevitable that there will be periods when maintaining the status quo becomes impossible. It was true of Europe in 800 - it holds true today.

European nations need to roll over hundreds of billions if not trillions of Euros’ worth of debt in 2012. And this is at a time when even more solvent members such as France and Germany are staging weak and failed auctions.

If there was one analogy for the failing artificial Eurozone system we had not heard so far, was one comparing it to Hogwarts (thank you Harry Potter). Now, courtesy of Tullet Prebon that is no longer the case: "Albus Mario Dumbledore and Harry Constancio Potter are due to assemble next Thursday for the next episode of the sovereign Voldemort saga. It is foretold that during the press conference the headmaster will unveil his wand and deliver an almighty spell, ‘Expelliarmus Debtus’, whereupon the dreaded Troika Dementors will be vaporised disappearing into the austerity vortex, leaving the Muggles to live happily ever after."

The bond market has always had clever names for bonds in specific markets.  Eurobonds, Yankee bonds, Samurai bonds, and now, Ponzi bonds.  I’m not sure what else to call these new bonds, but Ponzi bonds seems as good as anything. NBG issued these bonds to themselves, got a Greek government guarantee (how can a country that can’t borrow, provide a guarantee?) and took these bonds to the ECB to get some financing.  The ECB won’t buy National Bank of Greece bonds directly, they won’t buy Hellenic Republic bonds in the primary market, but they will take these ponzi bonds as collateral?  Greece, and Italy, is sacrificing the people and the country for the good of the bank. The market had made some attempt to charge banks with bad risk management, awful assets, and opaque books, more than they charged the country they were domiciled in.  But rather than let the market (and common sense) rule, a mechanism to let banks fund themselves cheaper than the countries they rely on, was created. Asides from giving Ponzi a bad name (at least until the ECB just admits that they are printing faster than even Big Ben) this is tying the banks and the countries ever closer.  A long, long, time ago (1 month) it was conceivable that a bank could fail and the sovereign survive.  That is becoming less clear.

The abysmal hit rate of Byron Wien's predictions over the past several years (ostensibly since the inception of this silly practice nearly three decades ago) has been the source of much laughter on the pages of Zero Hedge: see here and here. It has also been the source of much profit, due to the Blackstone Vice Chairman's uncanny ability to bat just over 0.000 with laser-guided precision and consistency. Below, as reported by Bloomberg, are the latest set of forecasts which are to be faded with impunity as soon as is possible.

When losing is "winning".

When we commented on the October 26 European "EFSF Bailout" which has since been long forgotten, the one take home message from the embedded 50% cut in Greece debt is that "this means that Portugal, Ireland, Spain and Italy will promptly commence sabotaging their economies (just like Greece) simply to get the same debt Blue Light special as Greece." This was followed up by a post that half confirmed or thesis: "Bloomberg notes that Ireland has not even waited for the ink to be dry before sending out feelers on just what the possible "rewards" may be: "Greece’s failure to cut spending and boost revenue by enough to meet targets set by the European Union and International Monetary Fund prompted bondholders to accept a 50 percent loss on its debt. While Ireland won’t seek debt discounts, the government might pursue other relief given to Greece, including cheaper interest payments on aid and longer to repay it, according to a person familiar with the matter who declined to be identified as no final decision has been taken." There is one very important addition here: "While Ireland won't seek debt discounts" yet." A month later, the "yet" is "now."

Not only is Germany at the epicentre of the Italian-Spanish-French save-us 'discussion', they have now managed to add Ireland to their 'Uber Alles'. Reuters is reporting the leak of confidential Irish budget information by German lawmakers and Irish parliamentarians are seething - viewing the leak as 'incredible' and 'unprecedented'. Given the new laws, Germany now has the right to be fully informed about bailout countries' progress before new tranches of funds are paid out. As the Irish Daily Mirror put it perfectly "Germany is ourt new master." It is evidently clear that sovereignty is indeed blurring at the edges - cue Nigel Farage.

There's that name again: BlackRock, the world's largest asset manager, and the firm that was forced to deny last Wednesday it is in any trouble courtesy of accumulating unknown amounts of Italian bonds (how about a nice little Cusip list there Rick Reider?), just made the news following a report in Reuters that the firm anticipates massive haircuts in 3 of the 5 PIIGS. From Reuters: "Debt restructuring in Greece, Portugal and Ireland with write-downs for private creditors of 75 percent to 80 percent are needed to help stop Europe's debt crisis turning into a global meltdown, said BlackRock, one of the world's largest asset managers. "Governments are falling, bond yields are zig-zagging by whole percentage points and markets around the world are locking up: the euro zone turmoil risks turning into a global crisis," BlackRock said in a research note on Monday." So, let's see: Greece, Portugal and Ireland... But not Italy of course? The country that has the second largest amount of debt in Europe is somehow excluded from a very conflicted BlackRock's "objective" analysis. Why is that? "BlackRock also said the European Central Bank should buy more bonds and that policymakers should provide more details on the rescue fund and implement fiscal discipline without hurting growth, according to the note." Is BlackRock betting the farm that the ECB will bail it out? That didn't work too well for MF... Seriously, Rick, some CUSIP level breakdown of your Italian exposure would be terrific. Even if it is at the "net" level. We can wait. So can the market.