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| Greek debt schedule - click for larger |
The Greek euroreferendum dominates the news. It hit the Italian bond yields, bank stocks and postponed a bond auction by EFSF, so basically all news are derivative of the situation in Athens. Perhaps the Greek government will fall next weekend. Maybe the referendum will happen after three months - but who knows what they will vote - and what will happen in case they vote no or yes. This is why there are so many links today on Greece.
No wonder the eurocrats are scared. By now the markets have analyzed the previous summit's material fully and pessimism rules. There will be no G20 miracles and Sarkozy will lose next elections, and no-one will mind. Further out, nothing is solved until ECB does what a real, manly central bank would do and goes nuclear, promising to backstop everything (except few crappy banks that will be the collateral damage in the moral hazard deal of the century). Of course, tomorrow's first press conference by Super Mario, after years of stabeletee, will do nothing, as that is the prudent thing to do. But maybe, just maybe, he will have funny catchwords of his own. I'll bet he will use the word credibility a lot. Coming out of the mouth of an Italian who used to work for Goldman Sachs the amount of irony will be tremendous.
Have Fun! - MoreLiver
Danske Daily – Danske Bank (pdf)
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT
Live Blog: Greece and the G-20 Summit – The Source / WSJ
EURO CRISIS
Crats, Maybe, But Not Much Techno – Krugman / NYT
The ECB has placed its faith in the confidence fairy, while imagining that it can run policy in a way that has never worked in several centuries of central bank experience. Meanwhile, the European policy elite has simply wished away the clear evidence that the euro zone needs to make an adjustment that is virtually impossible unless inflation targets are raised.
Very long article by Satyajit Das from Oct 27th
Markets Have Voted – allaboutalpha.com
Three problems: European identity crisis, more government, both citizens and policy makers in denial.
Aftershocks – Tim Duy’s Fed Watch
Eurozone recession, unintended consequences of the EFSF and its insurance component, ECB’s bond purchases are unfair: why should the Italians get an ECB backstop at 6%, while the Irish pay 8% and the Portuguese 12%? Politically, the ECB needs to backstop either everybody equally or nobody.
The ECB’s Risky Business – Project Syndicate
A common money and a common monetary policy cannot work properly with a banking system that is segmented along national lines. The most urgent step to stabilize the euro is not to follow the chimera of “euro economic government,” but to create the underpinnings of a truly integrated banking market with a common supervisor, a form of “federal” deposit insurance, and a “euro bank rescue fund” for the large cross-border institutions.
ECB Preview: Super Mario to the rescue – Danske Bank (pdf)
Expects no rate cut, possible signaling for unconventional easing and a rate cut in December. Market pricing in a 30% chance of a 0.25% cut now.
Market participants are frustrated at the endless political markets: “My economics degree and analytical background is useless in a political environment, where so much of this is about handicapping whether Europe comes up with a plan or not.”
GREECE
Roundups:
Greek Exit From Euro Zone Just a 'Matter of Time' – Spiegel
Roundup of views from six German newspapers: the common currency is even closer to the abyss.
In Praise of Papandreou's Referendum Decision; Eurocrats Terrified of Democracy; Parade of Cowards – Mish’s
Good roundup of views.
Democracy:
Financial crisis: Eurocrats are terrified of democracy – The Telegraph
It’s chilling to write these words, but EU leaders are evidently prepared to vitiate Greek democracy and wreck the Greek economy rather than allow the euro to break apart. Yet even if they succeed in Greece, they may find that their efforts are for nothing. Italian bond spreads yesterday were back at the level that usually triggers bail-outs. We are about to see quite how far the Brussels apparat will go in defence of its privileges.
The Greek referendum and the role of the democracy – Pragmatic Capitalism
The role of elected officials within a Democracy or a Representative Republic is to understand complex issues and act on them at times when the country is in need of decisive leadership. Papandreou has failed in this regard.
Greece’s Choice — and Ours: Democracy or Finance? – EconoMonitor
Robert Reich points out that in the U.S. the no-strings-attached bank bailouts would not have happened like they did if the people would have voted on the matter. It is up to the Greeks to decide if they are prepared for the Troika-led decades-long austerity – or if they want to break out and try it on their own.
Default option
Step away from the Greek political risk – alphaville / FT
Greek Prime Minister George Papandreou’s call for a bailout referendum more than any action before illustrates how Greece is holding a massive €300+bn “put option” on its own debt struck at zero. It is akin to the right, but not the obligation, to put back its debt to all holders at zero. This avoids decades of pain and austerity, but almost certainly means the end of Greece’s EU membership…
Hello, Greek mopping-up law? – alphaville / FT
Greece could change its laws, which for the largest part do not contain so-called Collective Action Clauses (CAC) to squeeze out minorities, and introduce an aggregated rule imposing new conditions on outstanding bonds.
Greece could change its laws, which for the largest part do not contain so-called Collective Action Clauses (CAC) to squeeze out minorities, and introduce an aggregated rule imposing new conditions on outstanding bonds.
Warnings
German Commentators Warn of Greek Gamble – The Source / WSJ
Greece’s referendum could lead some Germans to ask why the Greeks should be allowed to vote on being rescued, but Germans shouldn’t get a say on whether they and their children should pick up the bill.
Germans warn of Greek euro exit after referendum gambit – The Rational Capitalist Speculator
Friday will be important. If the confidence vote fails, then more than likely there will not be a referendum.
Exit or not:
Do Greeks Want to Stay in the Euro Zone? That Is the Question. – The Source / WSJ
It would be much more appealing for the Greeks to default on debt held by foreigners than on debt held by their own, which means defaulting on Greek debt held by the ECB and foreign banks.
Greek referendum is coin-flip on euro exit – Paul Mason / BBC
But if Greece votes no - and goes for euro-exit - there are several plans in the process of being published that explain what you have to do. Close the banks for days, ration food and energy, institute strict capital controls - with most probably a few fast patrol boats at Glyfada harbour to check every departing yacht for cash and bonds.
The goal of Papandreou’s move presumably is to renegotiate the terms of the deal imposed on Greece. To get the heretofore dictatorial Troika to take him seriously, he’s effectively threatened the nuclear option of blowing up the rescue package, which means default. And the disruption of a default suddenly changes the calculus of a Euro exit. The incremental short-term damage would not be that much worse, and the longer term benefit of regaining sovereignity, controlling its currency, and as a result, being able to depreciate the drachma would likely more than offset the costs.
Other:
Revenge of the Sovereign Nation – The Telegraph
The markets cannot wait three months to find out the result, and nor is China going to lend much money to the EFSF bail-out fund until this is cleared up. The whole edifice is already at risk of crumbling.
(after Greek news) Mr. Oettinger in an interview with Germany’s Die Welt newspaper: “What message can he still use to convince countries like China, Japan, Russia or Brazil to buy European government bonds? The situation is difficult enough, and now we lose another three months at least.”
For French President Nicolas Sarkozy, the summit of global leaders in Cannes on Thursday and Friday was to be the crowning glory of his presidency of the Group of 20 industrial and developing nations.
G20, Papa’s meeting with Merkozy, role of China and U.S., the Greek government, Greek framing of austerity.
Italian debt was hit hard by the referendum news, particularly at the short-end.
Friday’s confidence vote in the Greek parliament will be extremely important in our view…EU will be extremely anxious to avoid the negative fallout that is likely to be generated by a failed referendum.
Greek 13-Week Cash-(Out)Flow Forecast – ZH
Six bullets in the barrel – ekathimerini.com
On Greece: Maybe deep down this is what we wanted. Maybe we cannot tolerate a peaceful home. Now, once again, our worst enemy is ourself. And he is armed.
EFSF
Bond Sale Postponed Because of Market Conditions; Fake Haircuts, Fake Help – Mish’s
When was the last time the Fed postponed a US treasury sale due to market condition?
The EFSF’s funding funk – alphaville / FT
Investors want more clarification on EFSF structure, see what Greece is up to. What this means for demand in the future?
3 Little Things That Aren't So Little – ZH
Peter Tchir: The EFSF pulling a 3 billion bond sale due to market conditions is pretty bad. These bonds are cleaner and safer than the binary default options the EFSF plans to be selling in the future. Shouldn't the EFSF generally be expecting to issue in choppy market conditions?
The First-Loss Insurance Providing EFSF Is A Truly Unique Vehicle – ZH
Peter Tchir: Without knowing the exact format, the EFSF first-loss insurance looks a lot like a Binary or Digital CDS. Those trades have a fixed payout if a Credit Event occurs. They never became that popular in the regular CDS market because you were more exposed than ever to some form of technical default, and recoveries in general are very volatile – ranging from 0 to par.
If one were tasked with designing a CDO that would be guaranteed to fail…it would be hard to come up with a better structure than what EU is proposing for the EFSF.
BRICS
Capital flight: bad now, worse to come? – beyondbrics / FT
Capital outflows of $70bn this year from Russia
CDS
Sovereign CDS – still not dead yet, regulations helping – alphaville / FT
When will the CDS Time Bomb Go Off? – HistorySquared
A better solution would be to segregate customer deposits, regulators demand transparency and move many of these products to the exchanges where proper collateral is required. Then they should allow banks, their bondholders, and shareholders to be disciplined by the market, which will avoid the moral hazard created by socializing risk and privatizing reward.
OTHER
Momentum Finished? – Turnkey Analyst
Author decides to look also at value and size factors: size and value worked, momentum worked until it fell off a cliff: value got killed in 2008 and momentum in 2009 rally.
Export Miracle Over! – ZH
Global manufacturing PMI: new orders fell like it is 2008 again. Especially the second chart is nasty.
Manufacturing Export Order Indices – Rational Capitalist Speculator
FOMC statement – alphaville / FT
Capitalism need not be about greed and gambling – John Kay
A semantic confusion leads us to use the word market to describe both the process which puts food on our table and the activity of gambling in credit default swaps. That confusion has enabled people to claim the virtues of the former for the latter.