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| “There is no plan, and we don’t need one” |
CRRAAZZYY weekend, journos told us the participants to the IMF’s annual meeting looked really worried. Quick, they thought, we need another rumor of a plan, or better yet, a rumor of rumor! The outcome from Saturday was that the Greek debt would be given a haircut of 50% (too little), the mostly French banks would be recapitalized and a SPV would be created in order to leverage the EFSF 8 to 1 to buy European bonds, ring-fencing the rest of the PIIGS from the core.
Massive two trillion, more than the worst estimates of the total cleanup cost! Fight leverage gone too far by introducing more leverage! Only to have ze German finance minister then tell that no leverage plans are in the air and the current size of EFSF (440 bn) is enough. Given enough time, he might have a point: in the not too inconceivable future, it could be enough to buy all the French banks and most of the PIIGS government debt.
What makes this all very sad is that somewhere there is an office creating these rumors of rumors. That office has probably been tasked to brainstorm ever-more gigantic Death Star-constructs, spread the word and then measure the relative market impacts of different plans. Whatever rallies the market most gets bonus points and goes to further development. We remember that Empire’s plan was to keep throwing Death Stars at the problem, and we know how that story ended – with three bad prequels.
Views: The Russian pressure on Cyprus: 20% of FDI to Russia comes from Cyprus (obviously Russian money circulated to avoid expropriation threat). The pressure is a message to the non-silovik oligarchs not to mess with the next Russian “elections.”
Joke of the Day: "Greece will always be in the euro and Greece will never go bankrupt” – Greek finance minister Venizelos in weekend’s IMF meeting
Joke of the Day 2: Anything said by the French central banker Noyer, van Rompuy or Olli Rehn. At least Noyer is lying as his work dictates, but van Rompuy and Rehn are just purely delusional.
“There is no plan, and we don’t need one”.
Now to today’s links. There are too many of them, I know. The ones marked with stars are above average, and the links get worse and/or less relevant towards the section’s end. I would like to thank my regular readers and apologize that for now I am posting once a day. Check Saturday’s massive post. in case you missed it. I updated the UBS rogue trader and the Calendar. Feedback is always appreciated. Leave a comment, follow me on Twitter, email me. The MoreLiver's Daily is also now on Facebook.
Monday Watch (Weekend headlines) – Between The Hedges
Today's Headlines (Monday evening) – Between The Hedges
News That Matters (Weekend headlines) – The Trader
Vols, Risk Reversals & Pin Risk (FX option vols) – tradingfloor
EURO CRISIS
** Revisiting the Eurodebate – A Fistful of Euros
Blames the key European politicians, especially the French and the Germans and the European Commission officials, who designed the Euro and the Eurosystem, delivering rock-bottom interest rates to countries in the grip of land fever, and one that couldn’t cope with a banking crisis although it included the biggest banking system in the world.
Euro Zone Death Trip – Krugman / NYT
(Bonus for the Hitler-card): Germany’s inflation expectations at 1% for the next five years. To get any competitiveness, PIIGS must resort to massive deflation, which is hard to do. Germany should remember how Chancellor Brüning made the depression in 1930-1932 even worse by sticking to gold standard and balanced budgets, followed by you-know-what.
Jean-Claude Trichet: Preventing spillovers on the global economy – BIS (pdf)
Jürgen Stark: The global financial crisis and the role of monetary policy – BIS (pdf)
Beyond the economics of the euro - analysing the institutional evolution of EMU 1999-2010 – ECB (pdf)
The Stability and Growth Pact - crisis and reform – ECB (pdf)
“Death Star”
**The Spirit Is Willing, But The Flesh Is Weak – ZH
Must-read: Peter Tchir reviews the rumor of rumors, and does some quick calculations to e.g. guess the yield on possible Eurobonds: around 4.2%.on GDP-based responsibility and over 5% on debt level-based allocation. If the worst PIIGS would be dropped out, numbers would be better.
** Six weeks to save the eurozone – alphaville / FT
RBS noted that the Death Start would be very dangerous to the finances of the AAA-countries, political hullabaloo coming because of legal obstacles, political tension and Germany not liking the idea of turning the ECB into Europe’s bad bank.
** Let them eat EFSF equity tranches? – alphaville / FT
Among others the simple point that as all the sovereigns are under threat, this is not some housing crisis-CDO containment operation – there is nowhere to hide.
** More questions than answers – BNY Mellon
EFSF expansion not ratified, now this week’s voters know about the possible huge expansions. Even if the expansion is passed, the new Death Star-measures would require another round of voting. As the head of S&P sovereign rating group said: “There is some recognition in the Eurozone that there is no cheap, risk-free leveraging options for the EFSF any more.”
S&P Reminds Europe Of Its Toxic Catch 22, Warns EFSF Expansion Will Lead To More Sovereign Downgrades, Rendering EFSF Itself Useless – ZH
The IMF and markets: It Means Fear – Buttonwood’s / The Economist
The plans are ways to rescue PIIGS without a direct transfer from northern taxpayers. That’s why the plans are complex and involve ECB (not accountable to public) for rough stuff. No approval from all the parliaments will be required.
Euro Offsite – Macro Man
Eurozone SPV: What Could Possibly Go Wrong? Here Are a Few Possibilities – Market Beat / WSJ
“First, the scheme relies on the private sector to lend to the EFSF in times of trouble. But that’s precisely when the private sector is least likely to be lending.”
Multi-trillion plan to save the eurozone being prepared – The Telegraph
Rumors: firebreak around PIG, to save Italy and Spain: recapitalize banks privately and with EFSF, enlarge EFSF, 50% Greek default.
Multi-Trillion Euro Bailout Plan Allegedly in the Works; Plan Has Failed Already – Mish’s
Response to the Telegraph’s article
Germany Demands "Managed" Greek Default And 50% Bond Haircuts In Exchange For Expanding EFSF, Peripheral "Firewall" – ZH
Germany's economic elite has said it would agree to an EFSF expansion and hence installation of European firewall, but at a price: a "controlled" default by Greece and 50% haircuts for private bondholders.
EU looking at trillions in shock-and-awe plan to end crisis – euobserver.com
EFSF
** Goldman Recaps Germany's Eurozone Stance On The Eve Of Thursday's Critical, And Much Despised, EFSF Expansion Vote – ZH
Calendar here.
Can European Politicians Beat the Clock and Stave Off a Crisis? – naked capitalism
Given the narrow political majorities in key countries, both Greece and the core EZ, getting a working long-term solution based on the EFSF is very hard.
Euro banks
Retour au futur, le rumeur de French bank recap – alphaville / FT
Given the rumors of recapitalizing the French banks by €10-15bn, the French CB governor was quick to state “There is no plan, and we don’t need one”. Nomura: Just marking-to-market the PIIGS debt would require €60bn more capital.
In Galling, Pathetic Whine, Deutsche Bank CEO Warns Against Opening "Pandora's Box" – Mish’s
“There is no polite way to say it so I may as well be blunt: Josef Ackermann is a liar.”
German Banking Group Warns of Contagion, Requests Taxpayers to Take Hit for Stupid Loans Made by Stupid Banks – Mish’s
“Schmitz is pleading for passage of the EFSF to dump losses made by stupid risk-seeking banks on the backs of overburdened taxpayers. The "private investors" he wants to bail out are the banks and the bondholders.”
Europe’s banking crisis is no longer a liquidity crisis, nor is it a European version of ‘subprime’ – it’s a sovereign coordination crisis – EconoMonitor
Greece
Actually, 10 out of 13 Greek municipalities defaulted on their debt to the Delos temple in fourth century BC. Afterwards the temple only loaned money to private sector. Ten years ago an ex-IMF MD reminded in a speech that sovereign defaults are as old as the world.
Peter Tchir; the default has already been priced in. Now is just as good time as any, especially to stop the contagion.
Greek police protest troika, German and French embassies – euobserver.com
More Greek Platitudes As IMF Faces Shortfall and Deflects Back to ECB – ZH
FINANCIAL CRISIS
** Deutsche Bank Charts a Danger Map For A Crisis Prone And Credit Troubled World – ZH
Excellent research report, some charts, key summary and a link to full doc.
** Blood on the Street – The Psy-Fi Blog
Forget micro or macro, follow political incentives, procyclicality destroys economic equilibrium models, positive biases everywhere, esp. corp earnings – which are at historical highs, and have always been mean-reverting. As monetary policy is impotent and no room for fiscal positive surprises, stock markets could continue down.
Rogues, copper, recent CHF move… The macro focus has made many markets unusually volatile even for a crisis period.
OTHER
Russia pressures Cyprus. My view at the top of this post.
** CDS Implied Probability of Default – Be Careful – ZH
Peter Tchir makes good points on CDS prices and conclusions one can make on them. Key issues recovery rate, curve and the special case of sovereigns.
Record Correlations + Record Low Mutual Fund Cash + Soaring Dispersion = Recipe For Redemption Driven Disaster – ZH
Goldman’s ok research note if you’re into equities
Is Apple the new Microsoft? – Abnormal Returns
The stock prices has recently been a linear function of Apple’s cash, without much growth expectations. Links to other recent Apple-articles.
You can’t go faster than the speed of light – And other lies – Bruce Krasting
DIVERSION
A Curated Linkfest For The Smartest People On The Web – Simoleon Sense
Share Traders More Reckless Than Psychopaths, Study Shows – Spiegel
A Victim of Soycumstance – The Epicurean Dealmaker
Is investment banking management an oxymoron just like military intelligence?