Google Analytics

Wednesday, May 16

16th May - US Close: European Roller Coaster

What a set-up today. Earlier, we had reports that the ‘bank jog’ in Greece is showing signs of turning into a full-blown run on banks. The political leaders had for the first time acknowledged that Greece could, in fact, leave euro. Greece had difficulties forming a government, and the Eurogroup meeting was adamant that Greece has to conform to the austerity program. Then...

Then separate news cause a panic in the markets – first rumors of LTRO, then Mr. Draghi , for the first time, states that Greece can leave the euro, if it wants to. The headlines that EFSF and ECB seem to have trouble coordinating payments to Greece go unnoticed. The announcement hits the screens: ECB is stopping providing liquidity to Greek banks. The obvious conclusion is that Greece is now kicked out of the currency union by closing the TARGET2-channel. Slowly markets understand that this is not the case and ELA funding can keep the banks running for now.

Markets know that ELA requires deposits at the recipient banks and thus has its limits in the current environment, so everyone gets scared again. Then Mario & friends announce that the fund transfers to banks will happen ‘soon’.

I have a strange feeling about this. Perhaps markets are in an overdrive, as we are in a truly critical moment of the crisis. Perhaps the eurocrats just blundered and did not coordinate their efforts that well today, causing plenty of risk-on, risk-off movement. Maybe they are just putting pressure on the Greeks ahead of the elections so that they can have full adherence to the Troika’s program in the medium term.

Or maybe they are pushing for the bank jog in Greece to turn into a full-blown bank run, in order to force Greece out of the union.

Today, a dedicated section on the Europe’s “Wild Ride”. Unless you want to understand what the hell happened today, skip that section (but read the last one there from alphaville).  Remember to follow ‘MoreLiver’ on Twitter and Facebook, and I just updated the JP Morgan Losses post.

Markets – Between The Hedges
The Closer – alphaville / FT
Market Commentary – A View From My Screens
Tyler’s European Summary – ZH
  European Banks Battered As Reality Sets In
Tyler’s US Summary – ZH
  Deja LOL As Financials Continue To Plunge
Morning Briefing (Asia) – BNY Mellon

Debt crisis: live – The Telegraph
The Euro Crisis Blog – WSJ
Tracking Europe’s Debt Crisis – NYT
FX Options Analytics – Saxo Bank
European 10yr Yields and Spreads – MTS indices

Thinking the UnthinkableKotok / The Big Picture
All that has changed. The unthinkable has occurred. We now have DIvergence instead of CONvergence. We now have DISintegration instead of Integration. The Eurozone is coming apart.

How Europe’s banking crises threaten the eurozoneFelix Salmon / Reuters
The Eurozone was never designed to cope with millions of Spaniards moving their money out of the country, behaving like middle-class Venezuelans with offshore accounts in Miami. And it also was never designed to cope with capital controls. But increasingly, it looks like we’re going to end up with one or the other. Or both.

Going, going, gone?Free exchange / The Economist
Most of finance is built on confidence. By fearing moral hazard, European leaders have destroyed confidence.

Merkel-Hollande Meeting Yields Greece Growth SignalBB
And this is why the markets turned earlier today.

Merkel, Hollande promise joint growth strategyReuters
New French President Francois Hollande and German Chancellor Angela Merkel acknowledged differences on Tuesday over how to boost growth in recession-plagued Europe, but pledged to forge a joint approach in time for an EU summit next month.

ECB steps into banking sector reformCinco Días
"The ECB will carry out an audit of the Spanish banking sector," Cinco Dias reports. The European Central Bank decided to "cooperate with the government" in the reform of the Spanish banking system, especially concerning the valuation of assets and the creation of a "bad bank" charged with liquidating toxic real estate assets.

David Cameron: Eurozone should 'make up or break up'The Telegraph
David Cameron has told eurozone countries they must choose whether to “make up” or “break up” in his bleakest warning so far on the debt crisis.

How Greece could get itself kicked out of the euro (without even trying)Wonkblog / WP
But at some point the ECB may just decide it’s not worth pouring endless euros into rickety banks in an unstable country that might leave anyway…So at a certain point, Greece could face a situation in which it no longer has enough euros for its day-to-day operations…At that point, the country would have no choice but to leave the euro.

On Europe's Plan B, Greek Bank Runs, and Why We Need New SunglassesMark Grant / ZH
If Greece defaults on its debts it is a $1.3 trillion dollar number, forget the drivel that you read in the press because it will not just be the sovereign debt but the municipal debt, the derivatives, the bank debt, the corporate debt and all of the obligations of the country that will fall into the sinkhole of no return.

What Happens If Greek Payments Stop: Thought Experiment On "The Day After"ZH
Goldman Sachs: There is no automatic relationship that could force the ECB to stop the flow of liquidity to Greek banks at that point. Rather, the ECB will have to take a set of key decisions:

If Greece Quits Euro, Its Ruin Will Be PointlessView / BB
The crucial innovations that Germany and its allies in austerity have resisted so far -- jointly guaranteed euro bonds, and the ECB as a lender of last resort for distressed sovereign borrowers -- would have to be adopted. The measures that would have stopped things ever getting this bad would finally have to be taken up.

The Endgame in Greece—How a Bank Run Can Be Part of the SolutionPIIE
Utilizing the threat of bank runs does take euro area brinkmanship to a dangerous new level. Euro area leaders should think carefully about proceeding down this road. It should only be contemplated if euro area leaders are willing to proceed to pan-euro area bank deposit insurance and other dramatic integration measures to avoid the spread of contagion and bank runs to other member states. If they are prepared to do so, they can call Alexis Tsipras’ bluff by fomenting a bank run in Greece before the new elections are held.

Greece 'Considered' Leaving Single CurrencySky News
Richard Parker, who advised George Papandreou, the nation's leader until late last year, said the government investigated the prospect of exiting the single currency in some depth even in the early stages of the crisis. Until now, the country has steadfastly denied that it ever contemplated leaving the euro.

Capital Flight From Greece Accelerates, €5bn in May, Exodus Even Hits Time Deposits; Fed, ECB, BOE, BOJ Balance Sheet ComparisonMish’s

Frankfurt Police Clear Occupy Camp as Euro Resentment GainsBB
5.000 policemen, 30.000 protestors. Union of the willing?

Rumor Time: Stocks, EUR Surge On Renewed LTRO 3 SpeculationZH

Draghi Signals ECB Won’t Keep Greece in Euro Area at Any CostBB

ECB Said to Stick to Current Crisis Stance as Tools ReviewedBB

Did Draghi Just Give Greece The All-Clear To Leave?ZH

Greek Banks Wait on EU Approval for Capital Boost, Imerisia SaysBB

Germany Demands That ECB Pays Back EFSF Guarantee, FTD ReportsBB

ECB Stops Monetary Policy Operations To Some Greek BanksZH

Euro Erases Gain on Report ECB Halts Actions With Greek BanksBB

Euro Drops After ‘Major Confusion’ Regarding Greek Bank OperationsMarketBeat / WSJ

Shifting ECB liquidity to ELA, Greek bank recap editionalphaville / FT
The really important point to end on is that as soon as the EFSF bonds are transferred over (hopefully Wednesday’s misconstrued mess will focus a few bureaucratic minds), these Greek banks can go back to pledging the EFSF collateral at normal ECB ops. The brief spell in ELA ends. Incidentally, these brief switches in and out of ELA have also taken place in Irish banks and in Dexia when collateral requirements shifted against banks a few times, only to shift back later. World didn’t end then.

 Twist ending and selling off. More to come? Source: dshort
Factors Institutional Investors Are FavoringThe Big Picture
Every year since 1989, Merrill Lynch surveys a few 100 institutional investors using a broad variety of quantitative, valuation, process and modeling questions. Their responses get summarized in a 39 chart, 27 page report.

Hitchhiker’s Guide To The ETF GalaxyETFdb

Three Charts On Why This Time Is 'Not' Different For StocksZH

The ultimate Facebook IPO linkfest: part oneAbnormal Returns