Misery Economic Theater 2011

[Fusion_power]

Shoes are dropping all over the EU today with announcements that Merkel and Sarkozy want up to 60% shaved off Greek debts. In return, affected banks will receive $150 Billion in protection money. (Yes, I know it is mixing metaphors, but it is somehow apropos) Long story short, they still need to boost the EFSF to at least 3 Trillion just to stay ahead of the curve with Italy and Spain. Any way you slice or dice this, the result is the same. The EU will continue to be pressured so long as fiscally weak members remain in the union. That means ongoing intervention by stronger economies.

I noted that the offer of support to the banks was extended to EU banks. Wonder what they plan on doing for banks outside the EU that hold Greek debt?

DarJones

[ewmayer]

Mish on the "There will be no leveraged EFSF - Oh wait, there will be!" Bank-bailout-Greek-haircut soap opera season-ending (or maybe not) cliffhanger episode:

Good News for Bears: Torture by Rumor Ends

A deal has been reached. While many decisions are yet to be made the agreed upon deal looks something like this:

o A "voluntary" haircut of 50% on Greek debt
o Bank recapitalization set at 106 billion euros
o EFSF will use leverage to get to at least 1 trillion Euros
o Leverage will be via a combination SIV plus Insurance plan
o Banks get an additional 21 billion Euros in "official aid"
o The ECB is going to continue to buy Italian bonds come hell or high water

A group of 70 European banks will need to raise 106 billion euros in the next eight months.

Recapitalization Breakdown

o Greek banks need 30 billion euros
o Spanish banks need 26.2 billion euros
o French banks need 8.8 billion euros
o Italian banks need 14.8 billion euros
o Remaining countries 26.6

Banks that fail to raise enough capital on the markets will first tap national governments, falling back on the EFSF rescue fund only as a last resort.

The above details pieced together from EU Sets 50% Greek Writedown, $1.4T in Fund and Impasse on Greek Debt Relief Threatens EU Crisis Summit Deal

The fuzziest point in the deal is in regards to what banks get the additional 21 billion Euros in "official aid", with what strings, and where the money comes from.

Good News for Bears

Although many details are yet to be resolved, the bulls got everything they wanted except endless printing by the ECB. However, the sad fundamental situation remains unchanged

1. No structural problems have been solved
2. Banks most assuredly need more than 106 billion in recapitalization efforts. The idea that French banks only need to raise 8.8 billion is preposterous.
3. No investors in their right mind will fund Greek and Spanish banks to the tune of 56.2 billion euros
4. The haircuts were not voluntary

Instead of the rumor mill of potential actions working to lift the market 24 hours a day for three straight weeks, it will be up to the EU to make the plan work. However, the plan won't work because of point number one above: not a single structural problem has been solved.

Although this rally may run for a while longer on fumes of past rumors and blind hope, it will eventually wear itself out.

Bear market rallies tend to end on good news. What more good news is coming?

The bulls got nearly everything they wanted, putting an end to torture by rumor. What could possibly be better news for the bears?

My Comment: I am especially curious as to how they pulled off (or intend to pull off) the Greek-bondholder haircuts without it triggering a CDS default event as judged by the ratings agencies charged with setting the rules for such things. (Not that I have any particular faith in the RAs being upstanding citizens and uninfluencible by politicians, but they do seem to have been doing a semi-credible job this past year with respect to sovereign-debt issues.)

[Edit: Mish has an update on the CDS issue - Note that it's not the ratings agencies which have say here, but an outfit known as the International Swaps & Derivatives Association. That makes more sense, because it means "one stop shopping" as far as the EU FinMins having to threaten/bribe/cajole someone into declaring that a 50% haircut on bonds is a "voluntary restructuring" with the blessing of the bondholders.]


Also, Germany`s Merkel clearly, blatantly flat-out lied to the German parliament just a few weeks ago when she promised "there will be no leveraging of the EFSF". Despite this the parliament overwhelmingly voted to allow leveraging of the EFSF, without even demanding details as to how this will accomplished. There are several different Ponzi-financial proposals floating around for how to do this, one is startlingly reminiscent of the lunacy that was going on during the recent housing/debt bubble, involving creative financial engineering of stuffing crap debt instruments into a structured-financial vehicle, giving the whole thing a bogus top-notch ratings based on the perhaps 1% of quality loans inside it, selling it to some poor slobsucker investors, and using the thus-generated capital to make more bad loans. Lather, rinse, repeat. Yeah, that all ended really well, too.


Barry Ritholtz had a funny post yesterday describing market reaction to the rumors of newsishness regarding a proposed accord for a possible hypothetical solution discussion round for fixing Europe all up, and stuff:

Rally! Ugly Fade! Reversal Wednesday!

I was all set to write how ugly this morning’s fade was, and how problematic it is for the breakout thesis, when this puppy lit up around noon on some nonsensical rumor out of Europe.

It seems that the European leaders have come to some sort of an agreement about the near term deliberations. They now apparently have mapped out all of the details about their strategy for their next meeting, where they will make a plan to debate what sort of tactics they want too engage in on their next group summit to kick around an agenda for their next symposium, where they may discuss the bank problems. Over breakfast. Or not.

Meanwhile, the S&P trading range has held, and markets are still in breakout mode. Until they fade, in which case they obviously were not in breakout mode, but rather breakdown mode. In which case they will go lower, until they find support (unless that breaks) and then they go lower and find support (that holds) in which case they can reverse. Unless they don’t. If that happens, you might have been caught leaning the wrong way, which helps set the stage for the next turnaround. Unless it doesn’t. Which goes to show you how dangerous crowded trades can be. Unless they continue, cause after all we know the trend is your friend and you can’t fight the tape and its tough to be a contrarian and long and strong is the posture you want. Until it all goes into reverse, and then the trend is not your friend and you should not have gone along to get along with a tape that was a bull trap and it looks like we are heading lower. Unless we don’t.

[garo]

Bears got killed today. And look at that Euro go. 1.4247 today's high. Looks like Barry's original breakout thesis was right.

[Andi47]

Originally Posted by ewmayer

My comment:

A haircut of 100 billion €uros: how much is the reduction of annual debt service? How much is this in % of the Greek GDP?


For me it looks like Greek economy is spiraling down faster than the government can set austerity measures - and each austerity measure pushes economy further down. So I think that Greek real economy (i.e. economy producing real goods and not just financial products) desperately needs some funding (e.g. from ESEF?) for stabilization - otherwise Greece will need another "haircut" within a few years.

[Fusion_power]

The fundamentals have not changed. This party will end when reality sets back in. As Andi noted re Greece, There is a real economy that produces goods and services, a government economy that is a burden on the real economy, and a financial economy that moves money around and produces not much of anything. So far they have poured money into the government and financial. That is a waste in the end, it does not go where it is needed.

If you scan all the buzz from Europe, the significant issue is that they are pushing hard to stabilize Italy and Spain. Propping up Greece may be necessary, but it is misdirection because Greece is not large enough to destabilize the EU alone. Sarkozy may complain that Greece should have never been admitted to the EU, but can he make a statement like that about Italy?

Have you ever seen anything done by a government that really worked like it is supposed to? Do you realistically expect that propping up Greece is going to achieve the intended result?

DarJones

[Andi47]

Originally Posted by Fusion_power

<snip>
Sarkozy may complain that Greece should have never been admitted to the EU, but can he make a statement like that about Italy?

Have you ever seen anything done by a government that really worked like it is supposed to? Do you realistically expect that propping up Greece is going to achieve the intended result?

DarJones

Re: Sarkozy: IIRC he(?) complains that Greece should have never been admitted to the Eurozone. If Greece would still have its own currency, they would have been able to devalue it and thus cheat out of their debt. With the Euro, this is not that easy.

Italy: According to the Eurozone, yes (not "never", but it has been admitted to the Euro a little bit to early), according to EU no.

Re: propping up Greece: No, I don't expect this - unless they (EU, ESEF) give money to the real economy. Otherwise Greek economy will continue spiraling down while Greek government is struggling to set austerity measures at least as fast as economy crashes... it's a vicious circle.

I think the system is ill in several points (list is not exhaustive):

* banks (and other investment companies) are too mighty - there are too many system-relevant banks which are doing highly speculative stuff. (I don't suggest smashing the banks into pieces - I rather suggest impeding speculation.)
* doing highly speculative stuff is waaaaay tooooooooooooo easy - therefore money goes to stock markets instead of real economy. (In german there is the word "Dienstmädchen-Hausse" (literally translated "hausmaid's hausse", what is the correct translation?) when everybody - even hausmaids - are speculating on stock markets. If "everyone" is taking out loans and speculating with the borrowed money, that's even worse...)
* Maastricht-criteria are too loose. I think making new debt as high as 3% of GDP every year WILL eventually lead into financial desaster - even for nations which are currently (or have been until recently) rated with AAA.

[Christenson]

I don't think there's a proper English translation for "Housemaid's market" without an explanation, though "House of cards" might work....

The question is how to ensure that the various financial markets are actually lending money to the "real" economy...that is their non-parasitic purpose. Stocks exist so projects larger than one man can finance can be carried out, with real benefits to the real economy.

We are at a level of speculation not seen since 1929, or maybe the dutch Tulip boom.

There are also some real negatives to borrowing money on the stock market...think of the slavery to quarterly reports, leading lots of companies to forego long-term projects with much larger real gains. Not that borrowing money from venture capital is any better....

[Andi47]

Originally Posted by Christenson

The question is how to ensure that the various financial markets are actually lending money to the "real" economy...that is their non-parasitic purpose. Stocks exist so projects larger than one man can finance can be carried out, with real benefits to the real economy.

We are at a level of speculation not seen since 1929, or maybe the dutch Tulip boom.

There are also some real negatives to borrowing money on the stock market...think of the slavery to quarterly reports, leading lots of companies to forego long-term projects with much larger real gains. Not that borrowing money from venture capital is any better....

<laymans thoughts>

I think it needs a bit of regulation - and a (if possible worldwide!) tax on financial transaction: There are (to my eyes dangerous) highly speculative papers "promising" obscenely high yields, but bearing the risk of really bad loss. And to me it seems that stock traders are (or have been) inventing derivatives of derivatives of derivatives... to make even more money at the stock exchange. I mean ... when I just click into a homepage dealing with stocks: what the *peep* are things like (open end) knock out certificates, sprint certificates and such?
When it is too easy to speculate at the stock markets for high yields (but also high risks), this might lead to money going to stock markets (and bubble away) while the real economy is struggling to get out of recession.

</laymans thoughts>

[cheesehead]

Originally Posted by Christenson

I don't think there's a proper English translation for "Housemaid's market" without an explanation,

Either of these?

http://www.investmentmoats.com/stock...near-to-burst/

http://arabnews.com/saudiarabia/article508532.ece

[ewmayer]

Originally Posted by Christenson

I don't think there's a proper English translation for "Housemaid's market" without an explanation, though "House of cards" might work....

Not a literal translation, but the analogous phrase I've heard in English for when you know you're in a speculative bubble is "When the shoeshine boy [cabdriver] is giving you stock market tips."

[Fusion_power]

We have a first today.
http://www.bbc.co.uk/news/15519124

Jon Corzine, who took over as chief executive of MF Global last year, made big bets on sovereign bonds issued by European countries, it is claimed.

The unsteady future of the eurozone meant investors downgraded the firm's prospects.

It was first reported at the weekend that Mr Corzine was seeking a buyer for the business.

MF Global's roots go back nearly 230 years to a sugar brokerage on the banks of the River Thames in London.

The firm was spun off from a hedge fund in 2007 and is one of the world's largest players in exchange-traded futures and options.

Draw your own conclusions about the cause and effect involved here. You can bet they were leveraged to the hilt and that a ton of their "assets" stink to high heaven because they were chasing high rates of return.

Anyone want to speculate who will be next?
Who's on first?
no, Whats on first. Who's on second.
do you remember the short stop?

DarJones