As the Yen Flash Crash seems Imminent, some thoughts on the Debt Ceiling, Greece and the risks of contagion
As we write the below, we observe a mini Flash Crash in the Yen. Some more sweating for the super leveraged Hedge Funds. Let’s see what happens if we drop below 75?
Now to the debt ceiling, Greece, the contagion risks and implications of a (inevitable) Default in Greece. From Bill Wilson,
While Obama sits here and plays rhetorical games with the $14.294 trillion debt ceiling, attempting to sucker Republicans into increasing taxes, there are strong headwinds from across the Atlantic that threaten the U.S. economy.
Greece’s default is inevitable. And the fate of the euro is in question.
The only real question currently facing policymakers in Brussels is whether banks foolish enough to lend money to a bankrupt socialist government will take losses, or if the European Central Bank (ECB) will simply print more money to bail out Greece’s creditors.
That decision will have major ripple effects. If bondholders take losses on Greek debt, American financial institutions like Bank of America, Goldman Sachs, and AIG are said to be on the hook for honoring credit default swaps sold to insure against Greece’s default on its €340 billion debt.
If, on the other hand, the banks are bailed out, and the ECB buys back the Greek bonds with printed money, then it is the central bank that is on the hook for any Greek default.
At that point, a Greek default would in principle lead to the ECB’s insolvency. The European Central Bank (ECB) is already on the hook directly for over €120 billion in Greek debt, including tens of billions of Greek debt it accepted as collateral when making other loans.
So, whether the ECB further intervenes at this point or not, a Greek default would hurt the ECB — and the euro — most of all.
Even if U.S. financial institutions foolish enough to insure against Greek default were still to be the ones on the hook to honor the swaps, nobody expects the global banking ruling class to really take any real losses on sovereign debt, no matter how richly deserved. The assumption is that these institutions cannot afford to honor the credit default swaps. So, who would bail them out?
The Rating Agencies acted way too late in the former crisis, now seem to have updated the excel sheets, and are delivering downgrade after downgrade. From Moodys;
Moody’s Investors Service has today downgraded Ireland’s foreign- and local-currency government bond ratings by one notch to Ba1 from Baa3. The outlook on the ratings remains negative.
The key driver for today’s rating action is the growing possibility that following the end of the current EU/IMF support programme at year-end 2013 Ireland is likely to need further rounds of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a precondition for such additional support, in line with recent EU government proposals.
The negative outlook on the ratings of the government of Ireland reflects these significant implementation risks to the country’s deficit reduction plan as well as the shift in tone among EU governments towards the conditions under which support to distressed euro area sovereigns will be made available.
The main driver of today’s downgrade is the growing likelihood that participation of existing investors may be required as a pre-condition for any future rounds of official financing, should Ireland be unable to borrow at sustainable rates in the capital markets after the end of the current EU/IMF support programme at year-end 2013. Private sector creditor participation could be in the form of a debt re-profiling — i.e., the rolling-over or swapping of a portion of debt for longer-maturity bonds with coupons below current market rates — in proportion to the size of the creditors’ holdings of debt that are coming due.
Moody’s would consider a further rating downgrade if the Irish government is unable to meet the targeted fiscal consolidation goals. A further deterioration in the country’s economic outlook would also exert downward pressure on the rating, as would further market disruption resulting from a disorderly Greek default.
Moody’s also notes that upward pressure on the rating could develop if the government’s continued success in achieving its fiscal consolidation targets, supported by a resumption of sustained economic growth, is able to reverse the current debt dynamics, thereby sustainably improving the Irish government’s financial strength.
From Gold Core,
Gold is trading at $1,543.94/oz, €1,108.99/oz and £976.81/oz.
Equities internationally and bonds in Greece, Ireland, Spain and Italy have fallen this morning while gold rose to new record nominal highs in euros and pounds (over EUR1,118/oz GBP980/oz respectively). The Italian 10 year rose above 6% for the first time and the Spanish 10 year yield rose to 6.12%. US stock futures are pointing to losses on the U.S. opening.
Cross Currency Rates
Irish government bonds have reached a new euro era record high with the 10 year rising to 13.57% – up from 11.6% only 5 days ago. Ireland’s “bail out” is clearly not working as contagion deepens in the eurozone.
Ireland Govt Bond 10 YR
Gold’s new record highs in euros and pounds was barely covered in the non specialist financial press in Europe. The fact that the safe haven remains the most poorly reported upon market in the world remains bullish from a contrarian perspective.
The lack of coverage is due to a lack of knowledge as to gold’s importance in a portfolio and also the blind belief that gold is a bubble. Some financial ‘experts’, normally ones who failed to warn regarding property bubbles, overvalued stocks and massive lack of diversification in investment and pension portfolios, continue to simplistically say that gold is a bubble and is ‘risky’.
A little knowledge remains a very dangerous thing.
Oxford Economics have released a comprehensive and excellent report, ‘The impact of inflation and deflation on the case for gold’. It studies gold’s benefit to investment and pension portfolios in inflation and deflation. Founded in 1981, Oxford Economics is one of the world’s foremost global forecasting and research consultancies.
Quick Intra Day update on the Italian market. The MIB Index is reversing big time. Index is now trading plus, after being down some 4.5%. Like we wrote earlier today, European Chart Update the market is beaten again, and will most probably make hammer formations today, and fool everybody once again. Greed and Fear at it’s best. Below Italy Update;
Some charts of European Indices.
- Dax is approaching 200 day moving average, again.
- Stoxx is at support levels.
- Spain has broken out of a huge formation, which will take the Index further down, but we are reaching some short term support levels.
- Italy has been in free fall mood and trading in “uncharted territory”, so very hard to predict any levels.
All in all, after having had the steepest rally last week, everything has fallen apart, yet again, and with increasing fear factor, and vol back up, there could be some short term opportunities going long again…..
Quick CDS Updates;
Greece 2325/2525 (+100)
Portugal 1145/1195 (+50)
Spain 371/381 (+24)
Ireland 1045/1095 (+50)
Italy 319/329 (+19)
The market is trading very badly this morning with focus on the Rotten Economies of Europe. For those having done the homework, Europe is not a Black Swan. Let’s see if the market driven by Algos, can sustain some real flow, when fund managers rushed in buying equities last week. Remember, last week was the sharpest rally in many hundred years. The previous super rallies have been followed by some rather dark periods. For more reading check the link Sharpest Rally.
And yes, there is an Alternative way for the Euro.
Lastly, don’t forget the map we are following. Peripheral Europe is falling, next step core Europe and then we move to the other side of the pond. Welcome to Irrational Exuberance.
As thetrader has pointed out over the past months, Spain is the pink elephant in the room, and needs to be addressed accordingly. Beside Spain’s rotten Property Sector, we reported about Castilla La Mancha’s hidden Debt some weeks ago. We are now getting reports they have been digging some more and found the hidden Debt is double the previous hidden Debt. Welcome to Spanish accounting. WSJ reports;
The new leader of Spain’s Castilla La Mancha region said on Monday that it has a budget deficit more than twice as large as had previously been thought, raising new concerns over the true state of regional finances and helping to send Spain’s risk premium to records.
Castilla La Mancha President María Dolores de Cospedal said her government will on Tuesday present the first results of the audit she announced after being elected on May 22.
“With the debts we’ve found unpaid as of June 30, the deficit is much higher than we were told,” she said in an interview with Onda Cero radio station. “[Tuesday] we will see the exact figure…but it will likely be much higher than 4%,” added Ms. Cospedal, who is also the No. 2 national official of the opposition Popular Party.
The outgoing regional government of Socialist José Maria Barreda had said Castilla La Mancha had a budget deficit equal to 1.78% of local gross domestic product in April, well in excess of the 1.3%-of-GDP limit for 2011 set by the central government in Madrid for each of Spain’s 17 regions.