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Europe's Looming Bust Replies |
HenryTo
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HenryTo
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 Posted: Tue Feb 14, 2012 3:23 am Post subject: |
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Bridgewater back to their bearish selves.
| Quote: | European Sovereign Funding Calendar
Since the ECB stepped up its support by introducing the three-year LTRO in December, sovereign debt issuance has gone well: Spreads have improved dramatically, Spain and Italy have had several well-received auctions, and the ECB has been able to significantly curtail its direct purchases of sovereign bonds. However, the amount of gross issuance from peripheral European countries is massive, and in order to maintain reasonable prices, the buyers have to continue to purchase at basically the same strong pace for the foreseeable future. While both Spain and Italy are off to a strong start, there is a lot of issuance to get through over the course of 2012. The next several months are especially challenging due to large redemptions, especially in Italy, and the elevated issuance targets necessary to meet those redemptions. And even getting through that would still leave them needing to sell about half a trillion euros of debt before the end of the year. So far this year, there are signs that banks have been willing to put on the carry trade and that both domestic and foreign buyers have again been purchasing peripheral debt. Monday’s downgrades of Spain and Italy by Moody’s, the recent tightening of LTRO collateral standards by the ECB and the uncertainty around the Greek debt restructuring are just the latest reminders of how fragile the operating environment is right now, and there’s no guarantee that any of those buyers will continue to be there. |
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rffrydr
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| Posted: Tue Jan 17, 2012 8:56 am Post subject: |
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This viscous co-spiral between banks and sovereigns has probably been broken (assuming certain assumptions). Draghi already has my vote as "Man of Year"...trailing action by credit agencies is what you'd expect to see. 10yr auctions in Spain and Italy come in a couple of weeks....we'll know better then--if not differently.
Madman on wheat vs. chaff:
There's a tremendous reluctance to ever admitting that anything better is happening in Europe. It doesn't matter that the borrowing costs for the downgraded Spanish 12- and 18-month paper went for half of the interest rate that it sold at last month. It doesn't matter that you had a darned good trade if you bought last time. It doesn't matter, because all European countries are basket cases and in the end everything must fail.
| Quote: | Admit that's not the conventional wisdom ... it's the only wisdom.
If you have a note that yields 2% and will get paid off, and in the same currency as that with which you get in Germany, you should be hard-pressed to figure out why you accept negative interest rates if you are a corporate treasurer or financial institution that must get a return for your cash. If you are a Spanish bank you can take a three-year line of credit and bet with Spain over a 12-month period. If you are a European hedge fund and you need to have some return, you can buy Spanish paper. If you are an ECB official you can encourage the sovereigns to borrow short. All of these good things can happen, but everyone says they aren't happening and, more important, the ratings agencies are saying you aren't supposed to care.
Unless money isn't all brainless. Perhaps it is time to recognize that if you haven't sold this kind of paper, you should either have the money taken away or you will never sell it. If you buy it, you are being more optimistic and therefore smarter than the "only wisdom" people.
This is the reality. It is what is happening, not what people say is happening. The ratings agencies are simply verifying what everyone knew had to happen, so therefore these markets are free to be profitable ... whether we like it or not. |
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HenryTo
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HenryTo
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| Posted: Fri Jan 13, 2012 7:57 pm Post subject: |
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Bridgewater's latest on Europe.
| Quote: | The France Downgrade and the Breakdown of Greek PSI Negotiations:
On Friday, France was downgraded to below AAA by S&P, to AA+, and the Greek private sector debt negotiations broke down. The France downgrade is of low direct significance but is indicative of the limits to which France can participate in backstopping the periphery. The breakdown in Greece is of more direct significance. The breakdown of the Greek private sector debt negotiations shows the difficulty of achieving a successful resolution via a controlled restructuring. The goal of the restructuring is to reduce Greece’s debt to a sustainable level while protecting the public sector against losses. However, since the private sector owns only 55% of Greek debt, virtually all private holders would have to agree to the debt exchange and take a very large haircut to get a meaningful reduction in debt burdens. The breakdown of talks after months of effort raises the possibility of an imminent default. This could potentially mean a recognition of losses by public sector holders, such as the ECB who owns an estimated €35bn of bonds, and has made loans of €133bn to Greek banks directly and indirectly through the ELAs, backed by dubious collateral. This could further elevate the question of how to treat losses on bad collateral against ELAs, would likely sharpen questions about ECB losses on their overall sovereign bond portfolio and would intensify the questions about cross-country exposures related to TARGET2. And although the Greek debt problem is only a small part of the overall European debt situation, it could set a precedent for negotiations with other much larger heavily indebted Eurozone countries. |
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rffrydr
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| Posted: Sat Dec 24, 2011 9:39 am Post subject: |
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The World War I 'Christmas Truce'
One of the most touching moments of international Christmas spirit, it's still not entirely clear how the entirely unofficial "Christmas truce" came about. On Christmas Eve in 1914, hostilities spontaneously ceased in several locations in Western Europe, as Christmas singing in the trenches turned to tentative spoken exchanges between German, British, French, and Belgian soldiers. On Christmas Day, soldiers on both sides ventured into no-man's land to bury their dead and the one-time enemies exchanged food and drink. Legend has it, with some evidence, soccer balls were even brought out into this otherwise lethal territory.
Devastating war shortly resumed for another four years. Though the Christmas truce of 1914 is the famous and most well-established case, the University of Aberdeen announced in 2010 that one of its historians, Dr. Thomas Weber, had found a "letter written by a soldier of Scottish descent serving with a Canadian regiment, which suggests that festive ceasefires continued to take place throughout the war but were often downplayed in official war records." Apparently "heavy artillery, machine gun, and sniper fire ... had been ordered in anticipation of new Christmas truces." But what this letter showed, argued Weber, is that "[i]n fact, soldiers never tried to stop fraternising with their opponents during Christmas."
--The Atlantic
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rffrydr
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| Posted: Wed Dec 21, 2011 11:10 am Post subject: |
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..."This is the vortex into which we will resume our descent come January. Happy holidays!"
The Vortex, in thought as it is in nature, is an ending.
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HenryTo
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rffrydr
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| Posted: Sat Dec 10, 2011 9:24 am Post subject: |
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Really, I think the S&P pan-europe downgrade was the FIRST good and true thing these guys have achieved since '05. "Grading" sovereigns (other than Uruguay or Liberia and such) is necessarily a political act. You lay out some numbers but then have to rise above and choose a time and place....and spin. Judging europe on their own self-image, thus threatening an unthinkable German downgrade, on the eve of treaty summit was a political thrust non pareil.
Watching the rain of skepticism fall down from City/Wall St traders yesterday there was a common theme: you've just instituted, wait for it..... the Maastricht Treaty II. And we all no where that got us. Ha ha ha
Yet the tone wasn't mirthful--rather that of a trader scorned by his own market. Lotta people wanted and expected a lotta points down. Of course that's coming in the day and weeks ahead.
Well the scorn cuts both ways. Little do these guys remember that long before the ink was dry on the interminably drawn out Treaty processional the "free market" had whooshed in anticipation, as is its way, passage and convergence. Never had a big fat bonus been so easily achieved. Where are they now? Hangin' out with Chuck Prince their yachts reading Hank Paulson's memoirs. Europa just went with the flow. Greece....well, they just bathed in ancient splendor.
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rffrydr
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| Posted: Wed Dec 07, 2011 11:06 am Post subject: |
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One of my favorite columnists, FT's John Kay, writes a provocative article equating europe's salvage mission of the last two years with a "martingale" bet:
http://www.johnkay.com/2011/11/23/it’s-madness-to-follow-a-martingale-betting-strategy-in-europe
This daring inversion puts that most glaring mistake of tyro market players...nay, gamblers, squarely on the shoulders of markets-adverse european politicians.
Clever rhetorical flourish but really isn't this folly just a pre-condition for the nation-building now required? And now being initiated?
Place your bets: Red or Black. Time...a lot of it by german estimation, will tell.
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rffrydr
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| Posted: Mon Dec 05, 2011 7:14 pm Post subject: |
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Plenty of shouldn't, wouldn't, couldn't...you'd have to be crazy to try today...
http://media.bloomberg.com/bb/avfile/News/Surveillance/v3yFAs9BYJok.mp3
...culminating in a big fat (wudda been) downgrade:
http://ftalphaville.ft.com/blog/2011/12/05/781251/the-sp-statement/
As I have said earlier, now these jokers have nothing to loose. Indeed I'm not at all surprised we rallied back in the face of that.
Meanwhile much has been done in the last few months. Two bodies-politic sent packing, no more Slovakian interludes, one PIG on road to recovery, heavy sovereign debt marked and the ultimate insult to europe, Brit debt breathing down their necks. A sensible ECB head has come to power. Germans are bullying the bully--and have tasted fear. Italy is focused and serious...and moving at remarkable speed--and justly and rightly rewarded today (as with all the public and soccer star buyers last week). Word of mouth can really work here.
Banks have been "redistributed" timely and efficiently and Global (qua asian) leadership has been brought to bear from the only institutions left not subject to tabloid ideology and executed efficiently against any and all expectations. Corp. debt remains stalwart. Swiss are flooding, China's easing, pensions are getting marked up and investment institutions are facing Xmas bonus with little invested (despite cash levels). Hedge Funds have thrown up their arms, disgorging into their Sept redemption period and, despite heavy volatility, the market is rewarding with higher lows. Leaders have now even erased this "double dip."
Meanwhile, there is growth where there was supposed to be none and US hasn't fallen into the black hole.
But all of this debt?! PIIGS at e3000. And an EFSF with what? e100B? e256B? e1000B? Desperation hue and cry. There is something under every rock. There is no "mark-to-market" for this. Wall St. has learned nothing.
The problem of levering the world's equity markets to european banks is that the world now too carries the binary outcome pricing model. So the risk isn't just SP 960...it's SP 1450. If treaty-writing takes a couple of years that just could be the "range." Kingdoms can be lost and won in that kind of range.
Somebody on the Bloomie did a study of Dow VOL back to 1900. We are giving the Great Depression a run for its money now--on a daily/weekly basis. But apparently, longer periods are not indicating anything unusual. ....forest for the trees.
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rffrydr
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| Posted: Sat Dec 03, 2011 9:04 am Post subject: |
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...And sounding, at long last, like a European doing so:
| Quote: | | ... Mrs. Merkel mixed her appraisal of the challenges with words of encouragement, sounding like the European stateswoman her position as the leader of the largest economy in the bloc makes her, and not just the German chancellor. She touched on the sacrifices made in Spain, Portugal and “above all in Greece,” and their contributions to the stability of the euro. |
--NYT
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HenryTo
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HenryTo
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| Posted: Fri Dec 02, 2011 2:10 pm Post subject: |
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Stratfor's latest update.
| Quote: | As European leaders prepare for a crisis summit next week, STRATFOR CEO George Friedman argues that German determination to dominate trade may be a principal cause and that some of the smaller European countries may not be able to survive without protection.
Colin: China’s manufacturing sector contracted in November, for the first time in three years. Russia is worried about investment plans and privatization, and even prosperous Australia has cut public spending to match an income shortfall, all blaming the slowdown in the deteriorating eurozone. The head of the EU’s monetary committee talks out the crisis. Poland chides Germany and tells it to show more leadership. And a critical EU summit is coming up in eight days time.
Colin: Welcome to Agenda with George Friedman. George, it sounds like not much has changed really.
George: Well, I think everybody’s focused on the financial fallout, that’s certainly significant, I’m interested in a deeper issue that’s inherent in Europe, which is the idea of free trade. From my point of view, one of the problems that caused this financial crisis was the fact that the European Union was built around the world’s second-largest exporter. Rather than having positive balance of trade, the peripheral countries in Europe had negative balance of trade because Germany was sending half its exports into these countries. Germany depends on these countries. Unless these countries can become competitive with Germany, they are constantly be overwhelmed by the trade flow which, in turn, is going to lead to both the development of black markets off the books, protected industries in many ways, and simultaneously, tax bases that are contracting. So everybody is spoken about how absurd southern Europe’s social spending was, the other way to look at it is the size of the economy makes it impossible. Can Europe continue, in other words, with pure free trade? Is it possible to solve the underlying financial crisis, the imbalance between expenditures and the size of the economy, without some degree of protection. We have to remember that the Germans developed in a protected environment. So did the Japanese. The Chinese, today, operate in that. We don’t live in a free trade world, or at least we haven’t lived in one, you know, for very long. So, the real question in my mind, that’s coming to the fore, is not the financial problem, that’s the expression of the underlying problem. And I really do wonder now whether the Euro will survive or not, that’s interesting in some ways, but whether or not the European Union as conceived with open borders and absolutely free trade, whether that is going to be able to survive.
Colin: Of course, there are quite a few groups, particularly trades unions, who are advocating protection. But once you down that road, you get into what the free traders call “beggar thy neighbor” policies.
George: Well, the argument would be that the current situation of Europe is “beggar thy neighbor.” I have a larger industrial plant, Germany says. Part of the reason I have that industrial plant is was I was able to protect it in the 1950’s, when it was developing. I’m going to use that plant to sell products. I must sell products because my industrial plant is way too big for domestic consumption. If I don’t sell products, I’m going to wind up with 15, 20 percent unemployment. So “beggar my neighbor,” I’m going to sell those products. I’m not going to allow them temporary protection. I’m not going to allow them the sorts of things that they require to grow. Well, we see that one of the outcomes of that has been this financial crisis. It has other roots as well. I mean its not the only one, but it’s certainly one of them. So, the argument that you wind up in a trade war, may well be the case, but I don’t know that with the politics that is developing here, how the pro-Europeanist elite survives. The situation in Europe is fairly disastrous. You have a political elite that is dedicated Europeanist. By political elite, I mean not just the politicians, I mean the bankers, I mean the journalists, and they have just committed themselves to the idea that Europe must survive. And in many countries, a middle and lower class that’s being really pressed by this crisis, certainly it’s not only happening in Europe, it’s happening in the United States and other countries, but in Europe, it’s particularly intense and it’s particularly sensitive because you have very old animosities. You have countries that remember Germany in a different way. Many of these wonder whether or not the Germans are doing this for their own best interest or so on and so forth.
Colin: Yes, and you have the Polish foreign minister jumping in, yesterday, suggesting that Germans were self centered, and, interesting for a Pole, telling them “You Germans have got to start leading.”
George: Well, the problem is what does leadership mean? And where are they going to take Europe. Germany is leading, but the interests of the different countries are so different, the Germans ultimately have their primary responsibility to themselves. They’re badly trying to keep the European Union in place, including allowing the Greeks not to pay their loans and so on, because it’s the Germans that must have these markets. Remember, if the Germans can’t export to these markets, they’re going to be experiencing a catastrophic recession, perhaps a depression. They must have the European Union functional. And so, many of the things that the Germans are doing is designed to keep that market alive. And you could even argue that German and other countries’ lending practices over the past three years, the loans that can’t be paid back, were primarily designed to maintain demand for their products, and keep the process going. At this point, you are in a situation where that isn’t working any longer. So, calling for German leadership simply puts the Germans is in a position where they have to answer the question, “Am I a German or a European?” And the answer comes back, “I’m a European because it’s in the best interest of Germany.”
Colin: The chairman of the EU monetary affairs committee says, “We’re now in a very critical period.” We’ve heard that before, of course. But the crunch point does seem to be coming up with the European summit on December the 9th.
George: I think that the crunch point is well past. I think that the framework holding the European Union together really has dissolved to the point that you really just have a collection of nations. It seems to me that these talks, that are coming up, face a fundamental question. They’re going to be about whether or not the other countries of Europe are going to give a degree of sovereignty to the EU, and particularly to the Germans and the French, who will be in a position to come to their ministries and oversee many of their operations, setting limits to what they can. The Irish have already made it clear that they’re not going to go along with this. I don’t know how many governments in Europe and Italy and Greece could possibly survive, if they agreed to what the German recommendation is. And that’s the problem. There are solutions to this. The solutions either require these peripheral countries to absorb a massive contraction of their standard of living and/or give up sovereignty that many of them have fought for, maintaining formal control. But if you can’t control your internal fiscal life, you know, what do you really have? If you don’t have your budget, you have don’t your government. I think you’re winding up in a situation where the price, that the Germans are asking to keep it going, is too high. Paradoxically, the Germans are the ones who can’t really afford to let it go. So you have, you know, not a crunch. It is a reality that is reared up, and everybody is trying to solve what I think is a fundamentally insoluble problem.
Colin: Well, I suppose we should end an optimistic note. Central banks, led by the Fed, have decided to make it easier for the Europeans and other to get hold of dollars, which may stave off crisis for a few days or so.
George: But I think the most interesting part of this is, you know, we talked about the Chinese bailing out at the Europeans for the Russians. The lender of last resort, in the end, is still the United States. And that is one of the interesting things when we look at the international balance of power for all the wretched things that have happened in the United States, for all the miscalculations, for all the incompetence, banality and everything else, when push comes to shove it was the Americans that the Europeans turned to and the Americans that were able to provide something of a solution. I think it is a temporary solution — I don’t think it really solves any underlying problem, but it is a couple of aspirins to take on the fever. It won’t last for a while and I don’t think the enthusiasm for it is appropriate. I’m far more interested in the fact that, in the end, the United States has retained his role, wisely or not, as the lender of last resort and, just as money is fleeing to the United States for safety, so too the United States has the ability to address this question. Whether it is wise or not is another issue that happened to tell us about how this world works.
Colin: George Friedman there, ending Agenda for this week. Thanks for joining us, and until the next time, goodbye. |
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rffrydr
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| Posted: Fri Dec 02, 2011 7:34 am Post subject: |
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And so the Germans give the market what it says it wants: discipline. The immediate shower of money that it really wants will not be forthcoming. That should be reward in itself if the goldbugs are held to their word. But things have changed. The market understands it can't control itself. It's crying out for a master. This will be discipline on a grand scale and will achieve the "fiscal integration" once held out facetiously...as a bridge too far. Indeed the market's "solution" was really just fig leaf to cover its much more carnal instinct and desire--lacerate Europa.
But you can't eat it all.... Unlike Soros' breaking the British pound, this move took on a death spiral of its own. The lilting elephant stands to collapse on top of this pack of feeding jackals. The feeding frenzy has given way to a sated realization that this best meal may be their last.
Hedge Funds are out. Sept was their "redemption month" and now they wait for a new year--for a recovery. But it won't be the same market they come back to. I think they'll learn to live with it.
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