the trader
“Elite Bonds”-New Words for Bad Ideas
We have learnt of many new words and phrases during the European Crisis. EFSF, PIIGS, Contagion and now the latest fashion word is the “Elite Bonds”. The “Elite” countries are now to issue bonds, to save the “Non Elite” countries. Again, the Europeans come up with nice phrases for bad ideas. Next up is “Leveraged Elite Bonds”…From the Euobserver;
Berlin is planning to team up with five other top-rated eurozone countries and issue joint ‘elite’ bonds, Die Welt newspaper reported Monday.
The ‘elite’ bonds would be issued by Germany, France, Finland, the Netherlands, Luxembourg and Austria – all with triple A assessments from credit rating agencies – in a bid to raise more money at low interest rates for themselves and, under strict conditions, for the troubled southern euro-countries, EU diplomats involved in the negotiations said.
The UK is also being “closely” consulted on the matter, the article said.
The Sunday edition of the paper had reported that Chancellor Angela Merkel and French President Nicolas Sarkozy are involved in secret talks on creating a tighter fiscal union with the euro-area, a club of the ‘super-Europeans’ willing to abide by the strict budget discipline proscribed by Berlin. (Full article here.)
News That Matters
Ft.com
Moody’s Investors Service warned on Monday the rapid escalation of the euro zonesovereign and banking crisis threatens the credit standing of all European government bond ratings, reports Reuters. ”While Moody’s central scenario remains that the euro area will be preserved without further widespread defaults, http://ftalphaville.ft.com/thecut/2011/11/28/766191/crisis-threatens-all-eu-ratings-moodys/
Retail sales on Black Friday rose by their biggest margin since 2007 to hit a new record, the FT reports, while online sales grew even faster, according to initial estimates. Store sales on the frenetic shopping day that follows the US Thanksgiving holiday expanded by 6.6 per cent from the previous year to $11.4bn, http://ftalphaville.ft.com/thecut/2011/11/28/765991/big-gain-in-black-friday-sales/
Brussels is threatening to sue Britain unless ministers significantly alter a landmark tax deal with Switzerland, in a dispute that will cast doubt over the £4bn to £7bn of expected proceeds for the Treasury,http://ftalphaville.ft.com/thecut/2011/11/28/766101/eu-threatens-legal-action-of-uk-swiss-tax-deal/
France and Germany are urgently preparing contingency plans to jump-start tighter eurozone economic governance, the FT reports, amid a growing realisation in Berlin that a deal endorsed by all 27 member states may take too long. http://ftalphaville.ft.com/thecut/2011/11/28/765971/tighter-eurozone-fiscal-plans-canvassed/
and much more….
“Grunderkrach” in Germany while Monti is feeling the pressure
As contagion is spreading throughout Europe, the unthinkable might just happen. How solid is Germany actually? From the Telegraph;
The past week has seen investors shun an auction of German government bonds, or bunds, while the country’s cost of borrowing has risen and at various points during the past few days has surpassed that of the UK. Underlying all this is the rapidly crumbling assumption in the markets that Germany is willing, and more importantly able, to underwrite the euro.
Once the credit rating agencies catch on to the market’s nervousness, then a downgrade, or threat of one, becomes more likely. It has happened to the US and France is being threatened too. There is no hiding place from the bond vigilantes, not even in Berlin, as this past week has shown.
Received wisdom is that the German fiscal position is unassailable. It’s true the annual budget deficit there is just 4.3pc of GDP but total debt will rise to 83.2pc of GDP this year, not far off Portugal at 93.3pc and already ahead of France (82.3pc) and Spain (61pc). The German economy, and its management, is seen as being too strong to allow its debt position to get out of hand. But on Tuesday the Bundesbank reminded us that such assumptions are prey to unforeseen events – notably the central bank’s decision to downgrade its forecast for German growth next year to just 0.5pc. (Full article here).
And some reading on Monti’s problems…
Nostalgia
History is supposed to teach us. Remember these words? By BBC some 10 years ago;
The Greek Finance Minister, Ioannis Papandoniou, described it has an historic day that would place Greece firmly at the heart of Europe.
But the president of the European Central Bank, Wim Duisenberg, warned that Greece still had a lot of work to do to improve its economy and bring inflation under control.
In 1999, Greece was left out of the eurozone for failing to meet the EU’s economic criteria.
To qualify for euro membership, the Greek Government had to adopt a tough austerity programme, making deep cuts in public spending.
“We all know that our inclusion in EMU (European Monetary Union) ensures for us greater stability and opens up new horizons,” he said. Full article here.
IMF preparing 600 billion Euro rescue plan
The IMF is preparing a recue plan wort 600 billion Euros to help (save) Italy. La Stampa reports today, citing IMF sources. IMF’s “generous” loan would buy Italy up to 18 months, in order to get the budget cuts and start the economic recovery. IMF would guarantee interest rates between 4-5%, far lower than the rates the market is “forcing” Italy to pay. How they will pull this money, is to be seen, but the IMF won’t be able to do it “solo”. The ECB will most probably need to get involved…
“This scenario is because resistance from Berlin to a greater role for the ECB in helping states in difficulty — starting with Italy — could be overcome if the funds are given out under strict IMF surveillance,” the report said. Monti needs to move quickly, as the market is getting increasingly nervous about the Italian future. One thing is sure, Berlusconi will use this situation, and will return, stronger than ever.
Full article in Italian here.
The Sinking Euro
The Euro seems to be facing the same faith as Titanic. All ingredients are there, including the band playing the violin concert, while the clever people were jumping on to the life boats. The Economist on the sinking Euro;
THE designers of the good ship euro wanted to create the greatest liner of the age. But as everybody now knows, it was fit only for fair-weather sailing, with an anarchic crew and no lifeboat. Its rules of economic seamanship were rudimentary, and were broken anyway. When it struck a reef two years ago, the water flooded one compartment after another.
“The situation is extremely serious, more so perhaps than at any point in the last 18 months,” José Manuel Barroso, the European Commission president, said this week. He announced two last-ditch initiatives to avert doom. One is a “green paper” on options for joint Eurobonds. To balance this mutualisation of debt, he also proposed stronger monitoring of national budgets by Brussels, including the right to recommend changes before they are submitted to parliaments, and fiercer oversight of countries “in severe difficulties”. (Full article here)
Despite the hole in the ship, and all the problems the Euro and eventually the EU are facing, there might be one possible solution to the problems. It is called the ECB. If Italy goes further into the abyss, and the ECB doesn’t step up as the lender of last resort, we are probably looking at the full disaster scenario, and a break up of the Euro. The Economist on the possible solution to the EZ crisis;
European banks’ asset sales face disastrous failure
We all know banks are in trouble. With financing getting very tight, those assets must be sold. Banks are holding assets, they can’t really support. Expect more financial engineering as those crap assets must be “handed” over. Must read on the assets sales failure by IFR;
European banks are being forced to abandon their efforts to sell off trillions of euros worth of loans, mortgages and real estate after a series of talks with potential investors broke down, leaving many already struggling firms with piles of assets they can barely support.
Lenders have instead turned their attention to reducing the burden of carrying such assets over months and years, with many looking at popular pre-crisis “capital alchemy” arrangements to minimise capital requirements and boost their ability to use the assets to tap central banks for cash.
Remember Spain’s new PM? No comments, no news….
What is happening in Spain? Why haven’t we heard nothing from the new PM Rajoy regarding the economy? We have covered the Spanish economy extensively over the last months. Although Spain doesn’t look as bad as Italy on paper, SPain has other problems, which shouldn’t be neglected. The huge unemployment, the lost youth generation (unemployment reaching 50%) and the collapsed property sector, will haunt Spain for many years. The new PM has inherited an Economic Mess, and therefore we ask ourselves; Is Mr Rajoy already planning to ask for aid?. Reuters reports;
Spain’s new centre-right government, due to be officially sworn in mid-December, is considering applying for international aid as one of its options to shore up its finances, sources close to the party say.
Market Recap
Market recap by Macro Story below. Yes, it was an interesting session today, but the move up earlier today was probably telling us to cover the shorts. Despite our bearishness, we believe the market is reaching levels where the reward of shorting further is limited. Let’s see if Apple closing below the 200 day average is telling us Contagion is Global now…..
For an abbreviated US equity session that was actually pretty exciting today. Early morning weakness was met with opening bell strength and then a reversal into the close. The ES (SPX futures) once again was the tail trying to wag the dog. In other words if you can get the ES to move perhaps every other asset class will follow in sympathy.
Interesting to note though that strategy is simply not working in this market. Into the close RUT (Russell 2000) was down 1.1% while the ES down .6%. In fact the RUT put in a major reversal candle today closing on the lows. Few other notables then some charts.
Belgium Lowered to AA on Financial Sector Risks to Public Finances; Neg Outlook
S&P does it again. The race towards the downgrade of core Europe is on. With Belgium about to issue bonds on Monday, it might actually turn out to become a Black Monday. After Hungary’s downgrade earlier today, Belgium this Friday evening, Austria is not far away. It will be another looong weekend. Stay tuned, and watch what Dagong says.
“Belgium downgraded by S&P because of risk that government will be forced to take on more liabilities of weak financial sector”. We wonder exactly what government…?
As we have posted over the past months, the fiat system is falling apart. The one chart says it all, click here.
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