Google Analytics

Tuesday, December 6

6th Dec - Waiter, this isn't what I ordered

Wow, what a day. After the bullrun in PIIGS bonds, thinly veiled threats from S&P, heavy-duty, hardcore summit-sitting and a test-balloon of the day (how about two rescue funds?!?). Most importantly, Bundesbank is practically broke so we can almost hear the sound of coming printing by the ECB – the only LOTR in town. The commentary on the EU summits is that the published plan is in fact an austerity union, not a fiscal union. The idea was to put a fiscal union in place, but this is the best they could do - or what Merkel could do. Sarkozy does whatever he is told. 

Categories today: Euro Crisis (general), The Plans, Two Bail-Out Funds, S&P Downgrade Threat and Bundesbank is Broke. Of importance today is to understand the material in the last two.

- MoreLiver

Then to the links: 

News (Tue evening) – BTH
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT

EURO CRISIS - GENERAL
Germany’s high-stakes betWonkblog / WP
For Germans, the question isn't whether to save the euro. It's when to save the euro. For the rest of us, the question is whether the Germans will wait until it's already too late.

Did Basis Traders Save The Euro-Zone (For Now)?ZH
These buyers-of-bonds simultaneously buy CDS protection to capture carry at a potentially lowered risk and look to profit from bond and CDS pricing converging.

ECB will cut rates againDanske Bank (pdf)
Danske expects a 25bp (possibly 50bp) rate cut on Thursday and non-standard measures by introducing 24-month LTROs, perhaps also easing collateral requirements.

Howard Davies on Europe’s Debt Crisis, SolutionsThe Big Picture
interview transcript of former deputy governor of BoE: Let’s bail the bankers out of this. The difficulty is regulators and the central banks did actually tell the banks that these were safe assets. The regulators told the banks that they ought to be holding more sovereign debt and that was counted as AAA and solid liquidity.

Step inside the mind of Willem Buiter — but tread carefullyalphaville / FT
Some of Buiter’s insightful thoughts on Merkozy’s latest attempt to end the eurozone crisis.

THE PLAN(S)
The problems with the ECB-IMF switcherooalphaville / FT
Nomura warns of three problems: national central bank balance sheets, IMF seniority might push private investors out, and IMF aid being “precautionary” – only usable for countries that are IMF’s “customers”, i.e. adhering to a full IMF program and already outside normal credit markets.

Can New Fiscal Rules Save the Euro? Three Details to Watch ForEconoMonitor
1) Will deficit rules avoid procyclicality?  2) Will there be a credible system of rewards and penalties? 3) Who will monitor compliance?

Winning the European Confidence Game Raghuram Rajan / Project Syndicate
Plans must be seen as 1) domestically devised (electorate buys them) with external monitoring (e.g. IMF), 2) support vehicle (e.g. EFSF), investor fears of bailout seniority should be alleviated with first-loss taking by the bailout vehicles in case of a default.

I am altering the PSI. Pray I do not alter it any furtheralphaville / FT
If you try and keep bondholders whole for as long as possible, you will only end up gouging them as much as possible, when the chickens come home to roost. The eurozone’s also sticking its fingers in its ears and pretending that the lessons of umpteen past sovereign debt crises don’t matter… For this is also about breaking promises.

Do Not Underestimate the Market Power of the Euro-Zone Fig LeafMarketBeat / WSJ
But maybe we’re expecting too much from these talks, or at least more than the market expects. Maybe it will be enough — at least for stocks in the short term — to once again paper over Europe’s problems, kick the can down the road, hang a fig leaf on their naughty bits, whatever you want to call it.

Corporate bonds to the rescue?alphaville / FT
Basel Committee is considering allowing banks to use corporate and covered bonds, perhaps even equities, to meet liquidity requirements. A look at the corporate vs. sovereign bonds.

TWO BAIL-OUT FUNDS – TEST BALLOON OF THE DAY
Financial Times: EU negotiators prepare "Bazooka"Calculated Risk
The story suggests negotiators are considering allowing the EFSF to continue even after the €500bn European Stability Mechanism (ESM) takes effect next July.

Another Day, Another Market-Moving Headline From EuropeMarketBeat / WSJ
This all follows the threat by Standard & Poor’s that it could downgrade some AAA euro-zone nations, which would undercut the EFSF’s ability to lever up to blow money all over the place. Having a second mechanism in place could sort of solve that problem. The question for the EU summit sherpas — I didn’t know such things existed — will be who on earth is going to be willing to pony up another gigantic bailout fund.

FT Releases Mother Of All RumorsZH
In other words, Europe has now given up on nuances and has resorted to nuclear rumormongering: it is commingling all failed funds, adding the IMF, and promises to add Marsian capital as soon as said capital is discovered. That the EFSF was unable to raise €3 billion (and only did so with underwriters retaining half of the issued bonds) on its way to €1 trillion (let alone €2) remains irrelevant.

No Private Losses And EFSF x2Peter Tcir / ZH
Where do they plan on getting the first 440 billion, let alone the next 500 billion?  Who is going to raise that money?  GermanyFrance?... I really thought they were making progress, that they had a script that could work.  Now I think they have once again proven they don't understand credit, they don't understand credit market concerns, and that they are back to grasping at straws.

More talk of a magically bigger firewallalphaville / FT
…4) Selling EFSF bonds hasn’t exactly gone swimmingly thus far, and this proposal would effectively double the amount that would have to be raised. You can do all you like to the supply of eurozone bailout ideas, but if demand ain’t there…5) WHERE WILL THE MONEY COME FROM?

S&P DOWNGRADE THREAT
Negative reactionButtonwood’s / The Economist
To an extent, the euro zone is damned if it does, and damned if it doesn't. Failing to have a plan to reduce its debts will result in a downgrade but austerity plans will hit economic growth that will also result in a downgrade.

Standard & Poor’s threatens Europe. Will it matter?Wonkblog / WP
Having any EZ triple-A downgraded would also cause a downgrade of the EFSF.

S&P plays spoiler in the Euro crisisCredit Writedowns
S&P cite five main reasons for this move. And it’s important to note that most of them are factors almost entirely out of the ECB’s control…December 9th will be the day of truth. In the meantime however, politicians will put S&P and Munchau in the party-pooper camp. That fact that they’re entirely correct is, of course, irrelevant.

The End Of Act ITF Market Advisors
Maybe it really is simple, and
Europe gets an agreement to agree and they get taken off watch, but I think S&P has opened a can of worms, and it will impact EFSF long term, and France may not be let off the hook so easily.  The rating agencies will also likely wait to reverse their decision until after policies are implemented. 

Here we go againDaiwa
It is difficult to see why the ratings agencies would withdraw their threats to downgrade the bulk of euro area sovereigns. And since, more than anything, that would strike a fatal blow to the EFSF, even if we see a relatively peaceful run-up to Christmas in the markets, the New Year could see the crisis return with a vengeance. 


The Eurozone's moment: why S&P is turning up the heatThe Curious Capitalist / TIME

S&P Jumps Into Politics Again With EU Outlook WarningBB

The first cut is the deepest... Eurozone's AAA nations at risk?Saxo Bank

BUNDESBANK IS BROKE / TARGET2
Eurozone Crisis, Act Two: Has the Bundesbank reached its limit?voxeu.org
If you thought the Eurozone crisis was coming to an end this week, this column argues that we may barely be reaching the end of Act One.

How Germany is paying for the Eurozone crisis anywayalphaville / FT
In other words, the Target2 system is indirectly propelling the German Bundesbank to sell off all its assets to finance the lending of other Eurozone central banks. So much so, it hardly owns any assets of its own all anymore… So what could it do next to raise funding instead? There are two obvious choices, say the authors: sell gold (€132 bn worth) or sell off the Bundesbank’s international reserves (some €49.5bn) . Unfortunately, neither are likely to be palatable to the general German public. This leaves only one workable alternative for now: Drawing deposits from the system and distributing them over to the deficit running NCBs.

How the ECB could be forced to print moneyFelix Salmon / Reuters
And when the Bundesbank runs out of money to lend those central banks? The ECB will have no choice but to step in and print all the money necessary to stop those banks from going bust. And that, I think, is how we’re going to see the ECB finally take on the lender-of-last-resort role it has been so reluctant to adopt until now.

Why France could be on the wrong side of the Eurozone crisisalphaville / FT
France-related Target2-debts have surged since last July from 10bn to 100bn while French central bank’s loans to French banks have increased from 40bn to 150 bn.