Creditors

The person who has caused global stock markets so much consternation by daring to play chicken with Germany until the bitter end conducts a  no holds barred interview with Germany's Spiegel. There is little love lost between the Syriza leader and the Germans, who were quite surprised to find a political leader who is willing to play blink with Germany, with the ECB, and the developed world until the very end, or June 17, whichever comes sooner. Tsipras' bottom line: "We're trying to convince our European partners that it's also in their interest to finally lift the austerity diktat." Alas, the European "partners", as evidenced by Lagarde's Guardian interview this weekend, have an image of Greece as a bunch of lazy tax evaders, who only seek to mooch on the German teat, resulting in 60% of Germans now pushing for Greece to be kicked out of the Euro, consequences be damned. Nothing new there. What is curious is Tsipras' answer to the question everyone wants to ask: "If Greece ultimately exits the euro, you will also bear some of the blame. You promised your voters the impossible: retaining the euro while breaking Greece's agreements with the rest of Europe. How can such a plan find success?" His response: " I don't see any contradiction in that. We simply don't want the money of European citizens to vanish into a bottomless pit...we think these resources should also be put to sensible use: for investments that can also generate prosperity. Only then will we in fact be able to pay back our debts." Yet the line that will draw the most ire out of the already exhausted German taxpaying public is the following:

"if our economic foundation is completely destroyed and the decisions of an elected Greek government are not responsible for it but, rather, certain political forces in Europe. Then they too will be guilty, for example Angela Merkel."

Well, in the US, it is all Bush's fault; in Greece, it appears to be Merkel's.

Europe continues to fight the wrong battle, and continues to spread contagion risk. It is clear that Greece has had a solvency issue now for over 2 years.  The ECB and Troika chose to treat it as a liquidity problem.  Maybe, they could have argued that in early 2010, but by the summer of 2011 it was obvious to any credit observer that the problem was solvency, yet they continued to treat it as one of liquidity.  That is scary because if they fail to see the problem correctly now, they will fail miserably.  Not only is the problem clearly solvency, but now forced currency conversion has been added to the mix. Any "solution" from the EU must now address that risk, and it is not the same as solvency.  Programs that can protect against solvency may do nothing for the redenomination risk. We keep playing with scenarios and find it hard to find out where a Greek exit doesn't result in a steep sharp decline in the market.  We could go through more ideas of ECB intervention, but in the end most will have flaws.  Dealing with currency conversion risk is huge.  Dealing with the contagion risk that has been created by the EFSF is huge. Will Europe force Greece out thinking they have a plan; that fails miserably and sparks the miserable series of consequences we’ve outlined?  Sadly, yes.

In twenty or thrity years, I expect future monetary historians looking back on this period of history to frequently misquote Ernest Hemingway:

How did the dollar die? First it died slowly — then all at once.

The slow death began with the dollar’s birth as a global reserve currency. America was creditor and manufacturer to the world, and the capitalist superpower. People around the globe transacted overwhelmingly in dollars. Above all else, people needed dollars to conduct trade, and they were willing to pay richly for them, and for dollar-denominated debt

We will only learn about currency risk exposures as and when the creditors disclose same to investors.  In the meantime, we’ll have lots of fun watching media spin their wheels over the game of “find the risk”

The word 'encumbrance' has received a lot of headlines in the last few months - and rightfully so - after we pointed out the impact that LTROs had in subordinating senior creditors of European banks. As Morgan Stanley points out, this is a considerable problem for bondholders as 'in a wind-down scenario, senior unsecured holders have recourse to fewer assets and hence face a higher loss given default (LGD)'. In understanding just how bad things are for European banks, it is important to focus on 'how much loss-absorbing capital there is beneath you in the bank’s liability stack, as this is the capital that will take losses before senior creditors in the event of a bail-in' which means looking at deposits as well as secured encumbrance. What is very apparent from the pictorial representations of banks’ liability structures is that rather than encumbrance from covered bonds/LTRO etc. the bigger issue for encumbrance of senior unsecured investors is the potential threat from depositor 'runs'. The hope of another LTRO is limited by collateral as policy-makers are well aware that, in a world where failing banks are to be resolved through resolution frameworks and senior creditors are to take losses to shield taxpayers’ funds, banks may not have enough ‘bail-in-able’ debt, given their growing reliance on secured funding sources. With deposits increasingly impaired - and/or the potential for contagious bank runs if we see Grexit, Europe's problem is 'all about the bank runs' now and we were told yesterday how far off that is - though the crisis 'event' may bring deposit guarantees (and the implicit exchange of sovereignty for monetary support) sooner.

Did France, Italy and Greece think they are the only ones who can float strawmen in the media? No. Once again, Germany shows us how it is done. From Tomorrow's edition of Deutsche Wirtschafts Nachricthen: "The Greece-exit is a done deal: According to the German economic news from financial circles EU and the ECB have abandoned the motherland of democracy as a euro member. The reason is, interestingly, not in the upcoming elections - these are basically become irrelevant. The EU has finally realized that the Greeks have not met any agreements and will not continue not to meet them. A banker: "We helped with the Toika. The help of the troika was tied to conditions. Greece has fulfilled none of the conditions, and has been for months now." So more posturing? Or is Germany truly just so sick and tired of bailing out not just Greece (which pockets between 0% and 20% of any actual bailout cash), and indirectly French banks which as of this moment are the biggest pass thru beneficiaries, and of course the ECB with its tens of billions in old par GGB holdings, that this article is, gasp, founded in reality? Is Europe approaching its own Lehman moment when everyone says "just screw it", and let the dice fall where they may? Many said Lehman could never be allowed to fail. They were wrong. Just as many are saying that Europe will never let Greece leave as the costs to the continent are just too great. Well, judging by tonight's epic fiasco of a Euro-summit, the last thing we would attribute to Europe's leaders is clear and rational thought.

A quick look at the Fresh-Start Greek Government Bond (GGB2) complex shows that as of this morning it has tumbled to fresh all time lows across the curve, and now trades at a more than 50% loss to the March PSI conversion price. The reason for this dump is not so much on fear of a Greek exit, but once again a reflection of precisely what we expected would happen, and as explained in our January Subordination 101 post. Last week, the fact that a PSI hold out, holding English-law bonds managed to get par recovery while all the other lemmings have so far eaten a nearly 90% loss, has sparked a realization among all the other hold outs that since they have covenant protection, they should all demand the same treatment. And indeed, another one has stepped up, only this time not a holder demanding par maturity paydown, but one who has read their bond indenture and was delighted to find the words "negative pledge." As Bloomberg reports "a holder of Greek bonds that weren’t settled in the biggest-ever debt restructuring said he’ll demand immediate payment unless the government posts collateral against his investment. Rolf Koch, a private investor who says he holds 500,000 Swiss francs ($528,000) of the notes due in July 2013, argued that he’s entitled to equal treatment with Finland, which made getting collateral a condition of contributing to Greece’s second bailout. He wrote to the paying agent, Credit Suisse Group AG, invoking the bonds’ so-called negative-pledge clause, according to the text of a letter seen by Bloomberg News."

Just when one thought it was safe to come out of hiding from under the school desk after the latest nuclear bomb drill (because Europe once again plans on recycling the Euro bond gambit - just like it did in 2011 - so all shall be well), here comes David Rosenberg carrying the launch codes, and setting off the mushroom cloud.

Wondering why PCX is plummeting, and slowly taking the entire energy complex lower? It is due to the following report from DebtWire as of last night, and reposted this morning.

Michael Hudson argues that Mr. Krugman is a conservative in disguise.

"So lets "run" through the mechanics of a Greek bank run. ... The end is of course ECB printing, Eurobonds and every developed market central bank dumping massive liquidity into the global financial markets as systemic risks rise - QE, LTROs, Currency swaps, and every funding facility under the sun come into play. The path to this end game will be bumpy, but make no mistake, the developed market central banks will dump so much fiat on the system to cover the losses, that risk free real rates will plummet to levels so negative that anyone left holding cash or cash equivalents will see massive destruction of real wealth. We may have to push risk assets a bit lower from here, but the global central banks will be firing howitzers and tomahawks very shortly, not bazookas!"

The policy responses and hints of policy responses are starting to come out.  What will they be, how big will they be, and what will they accomplish remains to be seen, but the market is due to rally on almost anything. We expect some announcements out of Europe.  A policy shift towards “growth” and some new ECB plans. We don’t think they will work well, especially if they don’t address the root of depositor fear in Spain, Ireland, Portugal, and Italy, but with so many indicators pointing to oversold conditions, the markets could snap back, and that is the way Peter Tchir of TF Market Advisors is leaning.

The Elite Financial Players Are Manipulating the Game So that They Get the Stimulus ... and the Little Guy Gets the Austerity

As was leaked earlier today, so it would be:

• MOODY'S CUTS 16 SPANISH BANKS AND SANTANDER UK PLC
• MOODY'S CUTS 1 TO 3 LEVELS L-T RATINGS OF 16 SPANISH BANKS
• MOODY'S DOWNGRADES SPANISH BANKS; RATINGS CARRY NEGATIVE

In summary, the highest Moodys rating for any Spanish bank as of this point is A3. But luckily the other "rumor" of a bank run at Bankia was completely untrue, at least according to Spanish economic ministry officials, so there is no need to worry: it is all under control. The Banko de Espana said so.

The dollar was a median step towards a newer and more corrupt ideal.  Its time is nearly over.  This is open, it is admitted, and it is being activated as you read this.  The speed at which this disaster occurs is really dependent on the speed at which our government along with our central bank decides to expedite doubt.  Doubt in a currency is a furious omen, costing not just investors, but an entire society.  America is at the very edge of such a moment.  The naysayers can scratch and bark all they like, but the financial life of a country serves no person’s emphatic hope.  It burns like a fire.  Left unwatched and unchecked, it grows uncontrollable and wild, until finally, there is nothing left to fuel its hunger, and it finally chokes in a haze of confusion and dread…