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| There will be collateral, but of the wrong kind |
Huge post, but with the Greek "bailout" and coming default, LTRO just around the corner and bullrun in oil and stocks, there is plenty of material to go through. No-one seems to think Greece has any chance to pull through. More comments flying around that there is too much expectations loaded on LTRO. At the same time ECB is becoming reluctant to do more SMP - and so are the markets, as they were subordinated by the ECB in Greek debt. In case of further escalation of the crisis, what else is there left than a 25-bp rate cut, some minor SMP and all wishes on the rescue vehicles that have no paid-in capital?
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| The core banks are still hugely exposed to PIIGS |
Merkel's and Sarkozy's political problem of recapitalizing their banks by multiplying the initial capital need by a factor of ten or twenty and then distributing this cost around Europe was hardly a pro-European strategy, but it might have been an election-winning one. Nothing else matters.
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| The European CDO |
If you want more on the Greek bailout, see Eurogroup Special and Eurogroup Special II. You can follow me on Twitter or Facebook and email me for suggestions and requests. I also have an automated publication based on the twitter feeds I follow at paper.li
News – Between The Hedges
Markets – BetweenThe Hedges
Recap – GlobalMacro Trading
EZ crisis press summary – openeurope
Greece rushes to complete ‘prior actions’ to gain second bailout; Markets question debt sustainability and involvement of private sector in Greek bailout
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| Event tree for Greece from BNP Paribas |
Europe Crisis Tracker – WSJ
EURO CRISIS: GENERAL
Presentation: European Sovereign Bond Protection Facility – esbpf.eu
You must promise you are not from US to view this. h/t Alea
…it could well be the case that the FDP will adopt further attempts at 'differentiation', putting a strain on the unity of the coalition. This could have potentially serious consequences given that the eurozone crisis could well take another turn for the worse…
Deutsche Bank on current account imbalances: Peripherals are making good progress while no major change is occurring in surplus countries. The two “victims” are France and Italy, where current account deficits – albeit still more manageable than in most peripherals – continue to deteriorate.
An (EFSF) credit derivative is born – alphaville / FT
In short, the EFSF PCs will probably trade very differently to the normal way of buying protection on a sovereign, which is to buy CDS. Thus leaving a “basis” between the two derivatives.
In short, the EFSF PCs will probably trade very differently to the normal way of buying protection on a sovereign, which is to buy CDS. Thus leaving a “basis” between the two derivatives.
Why The Core Needs To Save The Periphery – ZH
core (France and Germany) remains massively exposed (in terms of Tier 1 Capital) to the PIIGS.
core (France and Germany) remains massively exposed (in terms of Tier 1 Capital) to the PIIGS.
Credit Suisse’s game theoretic look at the euro’s future
The Eurozone should be prepared for a new government in France – Sober Look
Hollande leading Sarkozy.
EU finance ministers on Tuesday (21 February) rubberstamped the bloc's accounts for 2010, but Britain, Sweden and the Netherlands opposed the move, noting that auditors found too many errors for the seventeenth year in a row.
Political sustainability and the euro deal – The World / FT
In both Greece and the Netherlands – and, more broadly, in both creditor and debtor Europe, new political forces are on the rise. And, in the end, it is the politics, not the economics, that is likely to seal the fate of the euro, as currently constituted.
The numbers, articles and roundup of analyst comments
Podcasts
Eurasia’s Rahman Says European Growth Is ‘Precarious’ – BB (mp3)
Pimco’s Andrew Balls Says Greece May Exit Euro Zone – BB (mp3)
EURO CRISIS: ECB
ECB Preparing To Close Liquidity Spigot? – ZH
Given the expectations priced into stocks (and remember credit has rallied but has recently started to weaken notably), any more hints by the ECB that LTRO 2 will be the last and that the liquidity spout is being shut down for now - leaving governments more responsible for growth - will not be taken well by the market.
Liquidity Floodgate Set to Backfire; Transmission Broken; Shutting Down the Liquidity Spigot – Mish’s
Diagram du jour: How the ECB transmission mechanism is broken – alphaville / FT
Nomura: In sum, it doesn’t appear that the interest rate channel has improved since 2008; a worrying conclusion given the myriad ECB unconventional policy interventions in that period.
Nomura: In sum, it doesn’t appear that the interest rate channel has improved since 2008; a worrying conclusion given the myriad ECB unconventional policy interventions in that period.
Insight: ECB preparing to close liquidity floodgates – Reuters
ECB wants its second offer of cheap ultra-long funds next week to be its last, putting the onus back on governments to secure the euro zone's longer-term future.
EURO CRISIS: GREECE
For Whom The Bailout Tolls – A Fistful of Euros
Long article on Greece and EZ’s future. Today’s best.
Greece Needs New Constitutional Provision Imposed by the Troika; Slight Problem, Constitutionally It Can't Do it – Mish’s
At this point, no statements by Greek politicians or the Troika are credible. Rather, I suggest statements are made by everyone to prevent further capital flight. If Greece was working on a plan to return to the Drachma they could not say so.
The really big picture here is that European monetary union is a marriage — and not a happy one, right now. In any marriage, if one partner falls on hard times, it’s incumbent upon the other to support them. If they can’t, or won’t, then divorce is surely in the cards.
The market is now pricing in Greek sovereign CDS trigger – Sober Look
If bonds trade at 25, the CDS should trade at 75 if there was a 100% chance of trigger. Since the CDS now trades at 73, it is pricing in a decent probability of this credit event.
Choose-Your-Own Adventure: The Greek Default Edition! – MarketBeat / WSJ
BNP’s fantastic chart
According to a paper by three political scientists at the University of Illinois, Greece’s membership of the European Union was helped by a shift of opinion among the ruling elite of core European nations such as Germany, who regretted their prior hands-off posture toward the Mediterranean dictatorships.
A Breather And Some Time To Sort Through Some Details – TF Market Advisors
Greek CDS event looks inevitable, ECB more reluctant to do SMP
As Greece Deems 66% CAC Bondholder Acceptance Sufficient, Has It Threatened To Scuttle Its Bailout All Over Again? – ZH
If Greece does rule that the 66% threshold is enjoining, it means that a collective class of UK-law bonds has just had their covenant protection stripped, despite them being issued under UK-law, something which will set the entire sovereign bond market on fire, as it takes the threat subordination to a whole new level
The epistemics of Greek default – Felix Salmon / Reuters
Greece owes €14 billion to its bondholders on March 20. It is not going to make that payment, and instead bondholders who are currently owed 100 cents on March 20 will find themselves instead with a mixture of securities worth maybe 26 cents on the open market. When the CDS get triggered, that fact is going to get hammered home. Because although it has long been priced in to the market, it still isn’t broadly understood.
Bailout Just Buys More Time – MarketBeat / WSJ
STOCK MARKETS
Earnings Season Update – Still Not Good – The Big Picture
Estimated earnings growth rate for Q1 2012 falls to 0% today… Stocks are simply rallying on the hope of a growing QE world and QE3 specifically. Printed money is a powerful force for risk assets. Part 2 here.
Taking A Global Look at Risk and Correlations – allaboutalpha.com
it is becoming more difficult over time, in much of the world, for investors to create significant diversification within the (domestic) equity portion of their portfolio, because the correlations of stock pairs have been increasing. China’s stocks are an exception to this rule.
ENERGY
Gazprom turns on gas and blames EU – beyondbrics / FT
So it sounds as if Medvedev is exploiting Gazprom’s supply problems to discredit increasingly influential European spot markets that are undermining the way Gazprom traditionally trades gas.
This crude oil rally may turn out to be short-lived – Sober Look
The two key items that provide support to rapidly appreciating crude prices, the Eurozone stabilization and Iran's ambitions, in fact do not have a strong foundation.
Dangerous Ideas – chrismartenson.com
Some efforts go even further and flatly state that energy independence is right around the corner. Nothing could be further from the truth. There is a very clear relationship between economic growth and sufficient quantities of high quality energy.
EMERGING
Look To Elections, Politics As Big Drivers For 2012 – MarketBeat / WSJ
This year, elections in 60 countries (40% of world’s GDP). Roundup of the most important ones.
Emerging Markets Briefer Feb 2012 – Danske Bank (pdf)
OTHER
Is Collateral Becoming Scarce? – De Nederlandsche Bank (pdf)
This study quantifies the trends in demand for and supply of collateral and concludes that collateral is likely to become scarcer but not scarce in absolute terms. It also discusses the expected economic effects and policy implications of this conclusion.
Will it continue? It’s certainly hard to imagine that things in Europe will change any time soon.
Liquidity-Versus-Capital Debate Divides Stanford – View / BB
Simon Johnson: Regulators would do well to push back hard against the financial-sector lobby as it seeks to undermine or undo a key component of the Dodd-Frank reforms.
Presenting Morgan Stanley's Commodity Thermometer – ZH
Shows what products MS is bullish and bearish on, and why.
Political constraints in the aftermath of financial crises – voxeu.org
Political environments appear systematically different in the aftermath of a financial crisis relative to before the crisis. This column argues that the ensuing gridlock and the delay in potentially beneficial policy reforms should come as no surprise.
Currency Unions and Breakups – HistorySquared
nice roundup of currency unions of the past. Their end came, and no harm was done
The Irrational Risk of Thinking We Can Be Rational About Risk – Big Think
h/t Alea
Foreign exchange: What a carry-on – Buttonwood’s / The Economist
a risk premium involved; sometimes high-yielding currencies do suffer massive devaluations and carry traders lose a great deal.
Why lashing governments to the mast will always prove futile – John Kay
Governments will in the end always put voters ahead of prior commitments or external obligations. That democratic imperative has costs and benefits – but, overall, the benefits of popular accountability far exceed the cost.
Economy: Business Cycle Update – The Short Side of The Long
The economy and the stock market are two different animals. As stocks tends to lead the business cycle, a contrarian stance always needs to be taken on board when viewing economy… This is definitely not the time to be deploying new capital on a large scale.
DIVERSION
Google to Sell Heads-Up Display Glasses by Year’s End – Bits / NYT
Suspected $150m Rogue Trade Investigated By City Police – HITC
Amazing Old (and Free) Visualization Books – Chart Porn
It turns out that most of these chart and visualization methods have been around for decades – it’s just that they used to draw them by hand.
2 Former Executives of Failed Icelandic Bank Charged With Fraud – DealBook / NYT