Europe's Latest Can-Kicking Euphoria Fading Quick

It wouldn't be Europe if the insolvent continent did not announce, to much pomp and circumstance, another final rescue for a broke country which was nothing but a short-termist can kicking exercise. It also wouldn't be Europe if the leaders did not do much if any math when coming up with said "rescue", and it certainly wouldn't be Europe if the initial EURphoria following such an announcement was not promptly faded. Sure enough, all three have now occurred with the EURUSD soaring to over 1.3000 in the moments after last night's soon to be obsolete announcement, only to see a gradual and consistent sell off over the next several hours, dropping to a week low of just under 1.2940 as details emerged that... there were not details. To wit, as Market News reported:


In other words, the use of funds for the third Greek bailout has been more than detailed. The only tiny outstanding issue - the source of funds.

But don't worry: Europe's magic money tree is second to none when it comes to fruiting "confidence", "hope" and other such European synonyms to BS.

Not helping things is the accelerating selloff in Greek banks, which were down as much as 10%, on the realization that a bond write down from par to 35% implies a major balance sheet hit, and an impairment of repo-eligible collateral, which also means said Greek banks will need to raise even more capital, which in turn means that of the EUR44 billion or so coming Greece's way, even more will have to be diverted to bailing out its insolvent banking system.

Of course, who in their right mind could conceive that you can't fix "more debt" with "more debt."

Finally, reminding everyone of what we have long been warning, namely that without the incentives to fix money destroying behavior, said behavior will continue. And with the market effectively shut out as a motivating force (and the ECB its replacement as a motivating farce), countries such as Spain have no reason to fix their broken houses. Sure enough:

  • Spain’s central govt budget deficit swelled to 4.13% of GDP in Jan-Oct vs 3.74% a year ago, Budget Ministry says.

End result: this.

And so, Europe goes from fixed to unfixed... again... in the span of hours.

And back to square minus one.

A more comprehensive recap of the major overnight events from Jim Reid:

We finally have the latest in the series of new deals for Greece overnight. The Troika measures agreed are based around three main elements: a) a restructuring of maturities and interest rates on existing loans, b) returning of SMP profits, and c) a debt buyback. In terms of the first element, interest rates on Greece’s first bailout loan will be reduced by 100bp, to 50bp above interbank rates (meaning some lenders will be funding at a loss). Meanwhile loans under Greece’s second programme will have interest payments deferred by 10 years and maturities delayed by 15 years. The second element will see the ECB pass to the Greek government profits on Greek bonds that the central bank bought through the SMP.

The final element of the measures is a debt buyback where headlines suggest that officials have agreed to buyback debt at 35cents on the euro. Other than this, officials gave little away in terms of buyback details saying that they feared thatfurther disclosure would cause a run-up in Greek bond prices (although buyback prices have been capped at last Friday’s closing levels). The combined measures are designed such that Greece can reach a target debt-to-GDP ratio of 124% by 2020 and Ms Lagarde even confidently said that a target of “substantially below” 110% by 2022 can be reached. This is certainly not the first time that Greece needed an overhaul to its bailout programme. While further debt relief is designed to create a more sustainable fiscal path for Greece the reality is that a lack of growth (or inflation?) may cause further fiscal slippages down the road.

The agreement means that Greece will receive EUR34.3bn in December once national parliaments approve the changes to the bailout package – broken down into a EUR10.6bn payment for budgetary financing and EUR 23.8bn earmarked for bank recapitalisation. Eurogroup President Juncker said that the Troika is aiming to finalise the payment by Dec 13th, or just one day before Greece’s next major debt redemption of EUR5.4bn which is due on Dec14th. In addition to the above  disbursement, a further EUR9.3bn will be paid in three tranches over the first quarter of 2013, linked to “the implementation of the MoU milestones (including the implementation of the agreed tax reform by January) to be agreed by the Troika”.

The reaction from overnight markets has been generally positive, although earlier gains following the Greek headlines have been pared as the initial excitement wears off a little. In equities the Hang Seng (+0.26%) and KOSPI (+1.1%) are higher while the Shanghai Composite (-0.95%) is underperforming. The EURUSD initially rallied 0.3% to break through the 1.300 level but has since trimmed earlier gains to settle around the 1.298 level as we type (or up just 0.1% overnight).

Back to yesterday, apologies to any readers if they saw me in lycra on TV last night. On the way home I cycled past a TV reporter's piece to camera outside the Bank of England and couldn't resist slowing down as I passed. Hopefully it didn't put Mark Carney off his new job as BoE governor - effective from the middle of next year. 2013 is shaping up to be an interesting year for Central Banks with this BoE change announced yesterday, a possible new beginning for the BoJ post the elections in 3 weeks, building speculation as to who will eventually replace Bernanke by January 2014, the ongoing shape of the US's QE infinity purchases, the operation of the ECB's new OMT program and perhaps interestingly a buildingreflection of 100 years of the FED.

The Federal Reserve was formed in 1913 so we may get lots of attention in 2013 as to how it has changed finance for better or for worse in the century since inception.

Talking of 2013, we are currently over mid-way through writing our 2013 Outlook. Every year I always think the one I'm working on is the toughest yet but with hindsight some of the previous ones have been fairly simple relative to predicting the next 12 months! Any last minute thoughts and advice from our readers would be more than welcome!!

Briefly recapping yesterday’s markets, the S&P500 (-0.2%) broke a five-day winning streak that saw the index gain 4.1% since the middle of the month. The index was down -0.8% at one stage yesterday, before reports that Obama and Boehner had spoken over the phone on Saturday helped drive a late +0.6% rally into the close. That such a headline could cause the market to turn is continued evidence of the hyper-sensitivity of markets to fiscal cliff negotiations. While we’re on the subject, the WSJ is reporting that Obama is planning his second meeting in as many weeks with CEOs and business leaders on Wednesday as part of a very public push to gather support for his position on taxes. So we can expect more soundbites in coming days. Sector performance wise yesterday’s rally was driven by IT (+0.68%) and Utilities (+1.19%) with the latter reversing some of its recent underperformance (utilities were down -0.9% during the S&P 500’s five-day streak of gains).

Returning to Europe, DB’s Gilles Moec wrote that the Catalan election results make the potential for any Spanish MoU more difficult given the uncertainty it creates on the distribution of the austerity drive between Madrid and the regions. A coalition between the incumbent party CiU and Esquerra Republicana, which supported CiU's motion for a referendum on sovereignty, is most probable at this stage. However its likely that the CiU will need to clarify its exact view and timing of a referendum. Despite the uncertainty, Spain's 10yr yield closed little changed at 5.584%. The Spanish IBEX index closed 0.44% lower yesterday, in line with the Stoxx600’s move (-0.49%).

Turning to the day ahead, the focus should shift back to the dataflow. In the US, the data releases of note include durable goods orders, consumer confidence, as well as an update on Q3 house prices from the FHFA and Case-Shiller. Ahead of that, France’s consumer confidence and jobless data are due.


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