 |
| From Macro Man's excellent post. |
Summary: I’ve written a longer editorial in my previous post and there have been a lot of material to review, so just a quick summary: huge risk-on-day, given the news. I guess the coming out of the closet by Erste is deemed just as positive as Dexia’s fall. At least banks are starting to acknowledge the fact that there are indeed skeletons in their closets and strange warts in their intimate parts (naked short CDS’s etc) that they are finally showing to their family doctor – namely investors, regulators and eventual bail-outers.
Admitting that there is a problem is a step to the right direction – but I am afraid markets are too carried away by the Merkel/Sarkozy announcement of a later announcement of a plan.One thing supporting the theory that now they are at least trying: Europe's evil grand vizir van Rompuy decided to move the next Eurocouncil meeting by a week.
Slovakia’s vote on EFSF coming up tomorrow, here’s some background reading: The Economist, WP, Spiegel, Reuters, FT. A 'yes'-vote is probable, but a 'no' is possible.
Joke of the Day: Berlusconi’s undersecretary suggests mandatory drug tests on stock exchange traders, as drugs might explain part of recent stock volatility – alphaville / FT
Joke of the Day 2: Dexia CEO says Dexia’s problem is not capital but liquidity.
Site: I changed the site design over the weekend. On Friday evening I posted I’d buy that for a dollar with some very good euro links, on Saturday Weekender, my “week in perspective & week ahead” and a new weekly post Best of The Week, just a collection of the week’s highlighted links – good to see if you’ve missed something and perfect for Sunday readings.
The Steve Jobs page has been updated, and you could preorder the coming biography Steve Jobs by Walter Isaacson. Read my and others’ comments on the excellent book Red-Blooded Risk and buy it – you have until G20 meeting to comply. Feedback is always appreciated: leave a comment, follow me on Twitter or email me. The MoreLiver's Daily is also now on Facebook.
News: Today’s headlines (Mon evening) – Between The Hedges
FX options: Vols, Risk Reversals & Pin Risk – tradingfloor.com
TV: Bloomberg, CNBC, BBC World News
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EURO CRISIS
Dexlexia, Scrabble Countries, And Humpty Dumpty – ZH
Peter Tchir: “The likely outcome is that any solution will be a strictly German/France one at the sovereign debt level, and a national one on the bank level…In the end, we will likely continue to bounce higher on plans of plans, and sell off as those plans don’t work, and the economies fail to rebound.”
Credit Suisse’s analysis: Greece is equity; Ireland and Portugal junior mezzanine; Belgium, Italy and Spain are senior mezzanine, France/Finland/Netherlands/Austria are senior, and Germany is in a super-senior class of its own due to its size and special status as issuer of “risk-free” bonds: ECB will have to step up and provide a credible and unconditional backstop to Spanish and Italian spreads and therefore prevent the crisis escalating to the senior mezzanine tranche.
EU presidents give bloc pre-G20 pep talk – euobserver.com
“We will also demand from our G20 partners a constructive contribution to face the global economic challenges.”, also demanding boosting IMF’s tools and resources. So now they want everyone else too to bail out European banks.
Contagion and the European debt crisis – ECB
ECB Vice President Vitor Constâncio, conclusions of the speech: “most pieces of evidence point to the existence of very significant financial and sovereign contagion risks in the euro area at the present juncture.” – thank you for telling us, compare the language to the next link:
Euro zone leaders must take "decisive steps" – Reuters
U.K.’s prime minister Cameron urged European leaders to adopt a "big bazooka" approach to resolving the currency crisis, warning they have just a matter of weeks to avert economic disaster.
Given the multiple equilibria in bond yields (moderately high yields increase demand, but too high yields decrease the demand), ECB could simply state a red line yield limit for Spanish and Italians and pledge to support the bond prices.
George in debt and no income (Greece) and Hans (Germany) with credit and income. If Hans loans too much money to George, his credit will also go bad. That’s why Hans has a limit, and George must default on his debts.
Berlusconi Shows Why Investors Should Be Nervous – The Source / WSJ
Italy flirting with recession, its finances probably worse than stated: “If Italy’s actual underlying gross debt is higher and/or if the state of its deficit is worse than the reported numbers, then the issue swiftly becomes one of solvency rather than liquidity.”
THE M&S “PLAN”
The Merkozy Line – Macro Man
“one of the prerequisites of a successful European bailout plan is to "Keep It Complicated Stupid" to prevent the public asking to many focused questions about what is really going on whilst providing just enough clarity for the markets to regain comfort.”
Merkel and Sarkozy Agree To Fleece Taxpayers Instead of Bank Owners – HistorySquared
“they want their taxpayers to take the losses. They just want to figure out how to make this happen without losing power. It seems like both can agree to the US taxpayer to shoulder losses, so expect talk of the IMF playing a larger role to escalate. It’s tough to say why Sarkozy and Merkel act like slaves to the banks, but they do.”
“Ms. Merkel and Mr. Sarkozy gave no details of their plan and with Mr. Sarkozy still giving no explicit support to German proposals for recapitalizing European banks, the two leaders have essentially asked financial markets to just trust them. And believe it or not, the markets are doing this.”
Expect neither ‘Sustainable’ nor ‘Comprehensive’ from Euro Area Leaders – EconoMonitor
Five required elements: 1) debt write-down, 2) liquidity for solvents, 3) fiscal integration, 4) austerity & competitiveness, 5) macropolicies and institutions to enforce Treaty rules. Does not look like that.
Germany wants every country to bail out their own banks, while French want a common bailout.
DEXIA, ERSTE, ETC.
Erste Group Reveals Stunner: Reports Billions In Previously Undisclosed Underwater Sovereign CDS; Who Is Next? And How Much More Is Out There? – ZH
“soon many other banks' counterparties will demand a pound of flesh in daily variation margin, for even the tiniest amount of CDS exposure, which in turn will lead to a sudden and very dramatic liquidity crunch as unlike quarterly reporting where banks can fudge numbers and data all they want, when it comes to counterparty exposure, other banks know better than anyone just how bad the bank on the other side of the phone is. And will act accordingly.”
Erste’s extraordinary loss, and CDS philosophy – alphaville / FT
Austria’s biggest lender getting hit in Hungary (-500bn). Also announcing that it will mark-to-market its short CDS contracts (-180bn). Is this the next Dexia?
Erste: tossed by the storms – beyondbrics / FT
With a summary of the extraordinary charges.
CEE banks: Erste rattles the rest – beyondbrics / FT
Banks with CEE exposure have been hit more than others. This might ease a bit. But problems in euro area would be like kicking a downed opponent.
Undexia – alphaville / FT
LOL of the day: Dexia CEO says Dexia’s problem is not capital but liquidity.
Video Explanation Of The D(r)exia Bail Out – ZH
The cost of an RBS bailout – alphaville / FT
After the previous bailout, a new capital injection would incur taxpayers a huge paper loss – £8bn: “Expect to hear a lot about how RBS has shrunk its trading book and why it’s a much less risky bank than it was.”
“Note that the sight of the Greek state taking over a bank drove other Greek bank shares down by anything between 4% and 23% Monday–proof that the markets aren’t in any mood to differentiate between the defunct and the merely threatened.”
BRIC
China’s sovereign wealth fund bought shares in four state-owned banks on secondary markets, “aimed at supporting the steady operation and development of major financial institutions and stabilizing their stock prices.”
Luxury Sector Signaling Chinese Slowdown – The Short Side of Long
The price run in the lux stocks has been largely attributable to Chinese demand, with some stocks trading at high multiples. Now they are tanking.
Wanted: EU Strategy – The Source / WSJ
The BRICs are willing to to help, but they want to see a plan first. Merkel and Sarkozy gave them only an announcement of announcement of a plan due in couple of weeks.
Should the BRICs ‘Save’ the Eurozone? – EconoMonitor
“Neither the BRICs nor China can save Europe; but they can support sensible efforts to sustain the major European economies.”
OTHER
On the clairvoyance of sovereign CDS – alphaville / FT
Interesting look at how CDS’s price default risk. Not only fundamentals, but risk aversion and contagion.
Alessandro Carboni: The sovereign credit default swap market: price discovery, volumes and links with banks' risk premia – Bank of Italy working paper (pdf)
Among other things, CDS spreads of sovereigns led banks before 2010, but then banks led sovereigns.
Volcker’s ‘Delta one’ loophole – alphaville / FT
"A bank could be free of the Volcker restrictions if it is hedging a specific position or a portfolio of risks across multiple trading desks. Hedging trades would need to have a “reasonable,” not a full, correlation with the underlying risk. Banks could also win exemptions if they are hedging a risk they are “highly likely” to face in the future."
On the Leaked Volcker Rule – Economics of Contempt
Longer commentary.
Huge Employment Chart Roundup – The Big Picture
“Ron Griess of the Chart Store goes mad with this enormous collection”
ETF phantom liquidity – alphaville / FT
The derivative-like nature of ETF’s explained with shoes as an analogy.
#OWS
'Leaderless' Group Organizes – WSJ
This is Why They Hate You and Want You to Die – The Reformed Broker
“You blew the second chance you got with TARP to re-enter society as a productive component of commerce. You went back to bonus-swilling, full-retard mode as though nothing ever happened and 13 million people weren't sitting around in their post credit-bubble joblessness for three years now.”
 |
| Read more and buy it |
DIVERSION
Time-Capsules of Culture: 7 Essential Anthologies of Interviews – brain pickings
Richard Feynman, the late physicist, is hero of new graphic novel – WP
300-page graphic novel biography of Feynman. Strong buy. Buy here!