This week we had The Summit that was supposed to draw the road map to stop the rot, end the contagion, introduce stabeletee, increase confidence etc. The main goals were backstopping the banks and sovereigns and admitting the truth on Greece. The three pillars we got were the ‘voluntary’ Greek haircut, the bank recap and a sovereign debt guarantee under the Clancy-like acronym EFSF. All of these pillars are weak.
The Greek haircut is ‘voluntary’ and there were no details on how the haircut will be made so there will be uncertainty on what exactly will happen and when. It also leaves Greece with too much debt, and markets will end up waiting for more Greek crisis porn in the near future. Oh, and the market for CDS's - one of the few risk-mitigating things for investors - were almost destroyed in the process.
The bank recap deadline is far away and a lot can happen between now and then. At worst, banks can start diminishing their asset bases to meet the new capital requirements, which would lead to a credit crunch. The off-balance sheet holdings of the banks are also left in the dark, and there were no new rulings to increase transparency and good practices like mark-to-market and proper position lists. Transparency is a cheap solution and could have solved half of the banking crisis by removing any uncertainty and distrust in the interbank markets. Why none of these measures were introduced is a good question. Perhaps the state of the banks is worse than we currently understand (a problem that could be solved) or even worse, the eurocrats and the regulators are still in the banks’ leash.
EFSF is circular, has too little capacity and leveraging it does not increase the amount of ammunition. German court has already limited the scope of its activities. Tons of unanswered questions of what the fund will do, when, how, who decides, what are the definite no-no's etc. Also, what stops other countries from joining the path of Greece? van Rompuy? It seems that until the ECB’s mission and policy tools are updated, we will end up paying for a lot of frequent flier miles for our Dear Leaders.
This post is full of euro summit readings. I have previously posted a pre-summit linkfest and two post-summit autopsy reports, which might be worth your time. I will later post a "Best of The Week" as well. You can follow this blog on Twitter, Facebook or email me with ideas and requests. Have a great weekend!
- "MoreLiver"
Reposting on websites is authorized by prominently displaying the following sentence, including the hyperlink to this page, at the beginning or end of the post.
"”Weekender – The Summit Hangover” is republished with permission of MoreLiver’s Daily."
"”Weekender – The Summit Hangover” is republished with permission of MoreLiver’s Daily."
Quote of the Week: Imagine we are down at our local watering hole and you have 20 euros left in your account. We split it since we want to have two beers and some food. All the jobs are in China but we have no money for the bus ticket. Is the problem solved by me having your 20 euros in my pocket, plus the fiver we loaned from your mom? – Kari “The Street”, Friday night
Quote of the Week 2: Banks are an almost irresistible attraction for that element of our society which seeks unearned money. – FBI head J. Edgar Hoover, 1955.
Joke of the Week: Everyone is impatiently awaiting the details but it's not the devil that's in the details, it's all of hell – Polish leader Donald Tusk before the euro summit.
Brain Teaser of the Week: If you choose an answer to this question at random, what is the chance you will be correct? A) 25% B) 50% C) 60% D) 25%
Past
News (Fri evening) – BTH
Week in review – Dealbook / NYT
Weekly Scoreboard – BTH
Macro: Summary for Week – Calculated Risk
Credit: Weekly update – Danske Bank
EMEA Weekly – Danske Bank
Weekly bull/bear recap – Rational Capitalist Speculator
Succinct Summation of week’s events – The Big Picture
Future
Macro: Schedule for Week – Calculated Risk
This week in EU – euobserver.com
Weighing the week ahead – A Dash of Insight
Next Week’s Tape – MarketBeat / WSJ
Weekly Focus – Danske Bank (pdf)
Economic Calendar – fxstreet.com
Monthly Economic Calendar – fxstreet.com
Economic Calendar – BB
EU calendar – europa.eu
EM Week ahead – beyondbrics / FT
EURO CRISIS
Assessing the Damage of the European Banking Crisis – The Big Picture
Wonderful post from John Mauldin and Stratfor’s recent reports. Must-read.
EZ rescue or recession: Fallout of the October 2011 package – voxeu.org
The voluntary, ad hoc nature of the bank recapitalisation will induce banks to engineer a massive credit crunch. The renewed emphasis on national austerity will induce EZ members to engineer a massive fiscal contraction. All of this is to happen over the next six to nine months regardless of deteriorating macro prospects. The EZ is headed for a recession. This recession will undo all the October packages work – weakening banks, sovereigns and Greece. Expect another EZ crisis Summit before Spring 2012
Why the Euro Crisis Will Deteriorate Before It Will Get Be – EconoMonitor
The eurocrats had three goals to satisfy the markets: 1-2 trn super EFSF, bank recap of 100 bn, Greek haircut of 60-75%. These goals were not met, and denial is still prevalent: The eurozone crisis, too, will pass. But there is no return to “business as usual.” When the dust finally settles, the world will look very different.
Euro summit deal – an overview – Danske Bank (pdf)
Presentation slides
One Day After The Euphoria, Here Comes The Hangover – ZH
Tullet Prebon: Even the original 21% haircuts have not been fully accepted. In eight years, Greece will have 120% debt/GDP, EFSF funding is not certain, two-tiered bond market, no strategy to correct the imbalances that led to crisis.
Peter Tchir: The idea works well when people aren’t thinking there is a real chance of default, but as that increases, the EU may wish they had stuck to their original plan of having raised 440 billion of cash that they could lend directly. Basically, if the markets deteriorate, the first loss protection, is worth more, but provides less leverage.
Central bankers plan a party – Humble Student of The Markets
Will Greece have to come to the table again for relief in the future? What does the EU do when Portugal or Ireland asks for debt relief?
Fitch: ECB Needs to Play Big Role in Euro Bailout – MarketBeat / WSJ
Continuing SMP (buying PIIGS bonds) and ultimately as the lender of last resort.
The ruling euro-sceptic ODS party in the Czech Republic wants to push for a referendum on the country's future eurozone accession, claiming that the rules have changed since 2003 when Czechs said yes to the EU and the euro.
Greek negotiator has heart attack – euobserver.com
EFSF / 'DEATH STAR'
EFSF FAQ – efsf.europa.eu (pdf)
23 pages. EFSF’s homepage.
How badly do you want EFSF first-loss protection? – alphaville / FT
Investor Q&A to EFSF recently updated, with comments.
Super EFSF Gets AAA Rating Affirmed, With Some Catches – MarketBeat / WSJ
Citi: reduces the risk of a small loss at the expense of increasing the chance of a big one later, DJ: if France goes, EFSF goes.
German constitutional court suspends key parliament committee – euobserver.com
"If those involved in the procedure are willing to forgo an oral trial, the Senate will decide before Christmas," she said. If the court were to back the two complainants, it would likely mean that eurozone decision-making is slowed down as either the full budget committee or the parliament would have to be involved.
German Constitutional Court Halts EFSF Approval, Issues Temporary Injunction On Further Bailout Decisions – ZH
Bundesverfassungsgericht risk — again – alphaville / FT
Full statement text.
Someone has to actually lend the money to EFSF.
Peter Tchir: The problem is that EFSF doesn't take default off the table. It may delay the time to default (by helping roll debts as they mature), but all it mainly does is shift who would take the loss. The guarantors can't handle losses that big.
BANK RECAPS
Europe’s Dying Bank Model – Project Syndicate
Once EFSF fails, only deep restructuring or a public bailout will help. The bailout will work only if it done by the ECB.
What will the Chinese want for their help (WTO) and would they do anything anyhow?
CDS
It’s not easy, being Isda – alphaville / FT
A credit event is difficult to define so that it is not too tight or too loose.
Sovereign CDS posterchildren – alphaville / FT
As the survivability of CDS markets is questioned, a look at recent trends to see where the demand comes.
TMM would like to introduce their readers to the humble Bond Future. That long-standing, well-understood derivative that has provided liquidity, transparency and price discovery to bond markets in many countries for 40 years. Bond futures with deliverable bond baskets allow basis trading, speculation and hedging, without the idiosyncrasies of CDS contracts. But of course, futures markets aren't that profitable for banks... well, you reap what you sow, right?
If You’re Not Into Greek CDS Any More, Maybe You Can Buy This Monstrosity – Dealbreaker
The irony that Europe is both (1) screwing with your ability to get paid on CDS on shaky European sovereign debt (sort of) and (2) hoping people will buy more shaky European sovereign debt because they can get tradeable first-loss protection,
If Greek CDS Don’t Trigger, Why Would EFSF? – The Source / WSJ
If insurance written by market participants for market participants is invalidated by sovereigns, what is the value of insurance contracts being offered by the sovereigns themselves?
Why the Greek CDS market is OK – Felix Salmon / Reuters
The only reason that Greek CDS spreads didn’t spike when the latest euro bailout was announced is that they were essentially already pricing it in. If and when Greek CDS spreads come down even as Greece’s creditors are forced to take a 50% haircut, I’ll concede that the sovereign CDS market is broken. But for the time being, it seems to be working OK.
Greek CDS shenanigans – FinanceAddict
It was the fiercely rendered wish by the people, Merkel, Sarkozy, Juncker, that if a voluntary agreement with the banks was not possible, we wouldn’t resist one second to move toward a scenario of total insolvency of Greece, which would have cost states a lot of money and which would have ruined the banks. – how voluntary is that?
Fitch says 50% Haircuts would Constitute Default; No Official Ruling from ISDA Yet; Wrong Decision Could Kill CDS Market; How Will Setup be Resolved? – Mish’s
Argues that the Greek CDS market is only 3.7bn, so ISDA is not going to destroy the whole product and will announce an official triggering of the swaps.
OTHER
“Something structural has changed in current fundamentals” – alphaville / FT
Decline in oil price because of Libya back, growth concerns, minimal shortage risks and most importantly, liquidation of long positions by fund managers
Correlation Inflation – The Capital Spectator
While correlations are currently high, it need not be like that in the future, so diversification now makes sense. Also, for some asset class pairs correlations are relatively modest.
Which Firms are Responsible for Characteristic Anomalies? A Statistical Leverage Analysis - SSRN
Our results indicate that traditionally-used risk factors hardly ever explain the anomalies, while idiosyncratic risk together with distress risk is of great importance for the size and the book-to-market anomalies. In contrast, no rationale seems entirely convincing in explaining the momentum anomaly.
DIVERSION
Difference Engine: Re-inventing the web – Babbage / The Economist
FiveBooks interviews: Mark Thoma on Econometrics – The Browser
Termite Bellies and Biofuels – Smithsonian
Termites' digestive system could act as biofuel refinery – physorg.com