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Tuesday, March 6

6th Mar - Risk...OFF!

Greek PSI getting most of the attention in this risk-off day: small holdouts threaten the required participation rate for the bond swap, while Greece announces any holdouts will not be paid. Great, a staring contest to end the week. EURUSD doing what I pretty much expected it to do - coming down after the LTRO. I believe several pain points are hitting the market simultaneously: while LTRO brought liquidity, it also made risky assets in Europe slightly more risky – there simply is not any follow-through demand for them - especially since there are no pre-announced LTRO follow-ups. 

Spain looks like it will break the fiscal treaty even before it is in place, while Portugal is waiting for its turn to start having a friendly chat with the troika and the private investors. Meanwhile, the Dutch are about to read a think-tank report that leaving the euro would reap considerable monetary benefits and the one-time exit costs would be covered in couple of year's time. 

In US, QE3 is off the table for now and the news from Japan and China are not encouraging. There is nothing new in any of these developments, but it took some time for markets to realize the negatives. I believe the risk-off will continue for couple of weeks if not months – a Greek PSI deal might cause a “happy day” or two, but no more. We know what risk-off means in credit, equity and FX. Spreading financials vs. other stocks could be interesting for those who do not want go short. Time to go from denial to acceptance.

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Joke of the Day: European Union AT-AT walkers provide “technical assistance” to GreeceMarketBeat / WSJ

Euro Crisis Press Summary – Open Europe
  German opposition: support for ‘fiscal treaty’ conditional on introduction of growth programme and financial transactions tax
Markets – Between The Hedges

Debt crisis: live – The Telegraph
Europe Crisis Tracker – WSJ
Tracking Europe’s Debt Crisis – NYT
Germany for a major debate on the future of EuropeOpen Europe
In an interview with Welt am Sonntag at the weekend, German Foreign Minister Guido Westerwelle repeated that it was “important to open the next chapter of European integration”

Dutch Treat: More on a Possible Maastricht Breach by the NetherlandsCredit Writedowns
It commissioned Lombard Street Research to do a cost benefit analysis and that is due to be published Monday. However the details were reported over the weekend and they show a net benefit of dropping out and reintroducing the guilder. The costs associated would be recouped, theoretically, within two years.

Finnish PM could replace Juncker as Eurogroup
Finnish Prime Minister Jyrki Katainen has invited select EU leaders and ministers to a "winter retreat" in Finland in what could be an opportunity to lobby for the top job in the eurozone.

Homeric Similes And Spanish DebtA Fistful of Euros
But the great risk they are taking in doing this is raising the acknowledged debt level, up towards the “high risk area” of around 100% of GDP. When you add all the debt up we are already in the high 80% range, and two more years of “normal” deficit plus more funding for the financial sector should take it through the psychological barrier. Naturally investors are noticing this, and Prime Minister Mariano Rajoy’s “gaffes”, and at the end of last week the Spanish ten year bond spread with the Bund equivalent went above the Italian one for the first time since last summer.

The Rewards of Brinkmanship in EuropePIIE
The modern specter that has gone through Europe, the specter of a complete economic and financial collapse of the euro area, has at last lifted.

SocGen’s Baader Says Europe Can Contain Debt Crisis BB (mp3)

Armored Wolf’s Brynjolfsson Sees Weaker Euro BB (mp3)

Rift Grows Between Germany's Bundesbank and ECBSpiegel
There are growing divisions among European Central Bank leadership about how to handle the euro crisis, not to mention between the ECB and the Bundesbank, Germany's central bank. While ECB head Mario Draghi is pleased with his recent decision to flood the markets with cheap money, Bundesbank President Jens Weidmann warns of the dangers.

Explaining The European €2.5 Trillion Liquidity Catch 22 Closed LoopZH
the only way it can work is if Germany continues to recycle the CA surplus right back into the European periphery. There is, however, no ceiling to this activity, and in several years, the German TARGET2 "receivable" will be in the trillions, or well greater than its entire GDP.

Is Jens Weidmann Right About Bundesbank Target2 Risks?Credit Writedowns
The most likely resolution of Target imbalances in the case of a full Euro breakup would be a pooling of assets held by Target2 debtors to be handed over to Target2 creditors to settle the balance. This may leave the Bundesbank holding a set of peripheral-originated assets that may be worth less that face value but this scenario would result in losses to the Bundesbank that would be far short of the current value of its Target2 credit.

…any spare bank assets that aren't nailed down are pledged to the central bank. Any interbank lender would be behind the ECB in the queue should the worst happen. That's why a lot of money is placed back at the ECB; it may not pay much interest but it's safe. So instead of a once-thriving interbank market, we now have a lot of commercial banks that are "wards" of the ECB.

BizDaily: The next credit crisis?BBC (mp3)
EZ banks on life support, will there be another credit crisis? ECB hopes LTRO-financing will save the day. Plus,
Canada’s strict banking regulations and Burma’s new dawn

ECB preview: ECB easing coming to an endDanske Bank (pdf)

Anxiety over PSI and the Greek bond swapCredit Writedowns
If the CACs are triggered, this is likely be fallout in the peripheral countries, including Spain and Italy. There is also likely be negative repercussions on financial sector shares. Currencies like AUD and NZD as well as SEK would likely be sold off. Among the majors the USD and JPY are likely to outperform. Emerging market currencies would in general also be sold off. Equities would be sold. Core bonds, like Germany, UK and US would likely outperform.

Now witness the firepower of this fully armed and operational collective action clause, etcalphaville / FT
Threat from Greece: No money for holdouts from the PSI. If the PSI deal goes through, debt sustainability looks grim. Only ones left to haircut are official creditor holdings.

A Couple More Quick Thoughts On “Not Paying” PSI HoldoutsTF Market Advisors
If Greece uses the CAC clause and gives everyone new bonds, the CDS will settle against the “cheapest to deliver” bond, which, depending on shape of yield curve, etc., would be the longest dated of the new bonds… There is nothing to stop Greece from paying the ECB on their bond holdings while not paying other bondholders.

Athens' Pitifully Hollow Warning to Bond Holdouts; Self-Serving, Misguided Hype by IIF on "Implications of a Disorderly Greek Default and Euro Exit"Mish’s
Throwing still more money at Greece now will not prevent Greece, Portugal, and Spain from leaving the eurozone later. Instead it will up costs down the road just as Miracle Monti's misguided LTRO programs will likewise do. The only solution that works is a breakup of the Eurozone, and the sooner the bureaucrats accept that simple fact, the better off everyone will be.

LTRO Stigma Surges As PSI Concern 'Stuns' EuropeZH
selling appears to be driven by three main factors: 1) the LTRO Stigma has surged back to record wides (after a brief lull into LTRO2); 2) rather amazingly investors are starting to get concerned that the Greek
PSI deal may not happen; and 3) weak macro data.

More PSI Troubles: Greek Swiss Franc Bondholders Organize, Will Hold OutZH
The group holds the 650 million Swiss francs ($708 million) of 2.125 percent notes due 2013.

BizDaily: Greek shadow economyBBC (mp3)
Greek culture of avoiding taxes, expert on hidden economies interviewed, the Greek haircut week explained, and FT’s Kellaway explains why copying can be good.

Exotix’s Sterne Says Greek ‘Haircut’ Will Be ApprovedBB (mp3)

Oil Price Outlook - "Nothing To Spare", Crude Could Reach $200ZH
Erste’s 2012 outlook and full report on scribd (82 pages)

How to arbitrage the oil/natural gas BTU spreadTurnkey Analyst

Can China’s mighty demand for commodities return? ZH, Sober Look
Credit Suisse: As the economy shifts its growth engines away from infrastructure, construction and exports toward consumption, especially service consumption, the propensity of demand for commodities is bound to decline.

Stay Long GoldZH
Morgan Stanley’s research note, with plenty of charts.

Bank of England preview: Soft landing?Danske Bank (pdf)

BIS: Clearing CDS through a CCP could cost “G14 dealers” $100B in margin requirements ZH
BIS Paper Reminds Us That All’s Well In The Derivatives Market Dealbreaker
original working paper: BIS (pdf)

1984 v. Brave New WorldLetter of Note
Huxley’s letter to Orwell from 1949

EU learns perils of viral
The European Commission was left red-faced on Tuesday (6 March) after a video clip meant to promote the benefits of enlargement was interpreted by several viewers as being xenophobic.

Western Civilisation: Decline – or Fall?John Mauldin / The Big Picture
I had my nose in Niall Ferguson’s newest book, Civilization: The West and the Rest, at every possible moment during my recent trip to Hong Kong and Singapore. It’s powerful and very, very timely, and I strongly recommend it. To help get the word out, I asked Niall for a short, somewhat personal piece on the thinking behind the book – in other words, what moved him to write it?

Consuming Content Random Roger
News, analysis, where and how to get it and how this has changed.