Ireland’s “String and Sealing-Wax Fix”; Irish PM Loses Confidence of Own Party; European Sovereign Default Risk Hits All Time High
by ilene - November 23rd, 2010 4:53 pm
Courtesy of Mish
News in Europe regarding Ireland, Spain, and Portugal is ominous. Credit Default Swaps (CDS) are soaring in Spain and Portugal. European sovereign risk jumped to an all-time high.
Lloyds TSB says "Ireland’s debt woes may spread because investors have lost confidence in policy makers".
Members of his own party are calling on Irish Prime Minister Brian Cowen to resign.
The quote of the day goes to Bill Blain, a strategist at Matrix Corporate Capital LLP in London who said "“Bailouts are nothing but a short-term string-and-sealing-wax fix”.
With that let’s take a look at some specific news.
Zero Confidence in Irish Solution
Lloyds says Ireland’s Woes May Spread on ‘Zero Confidence’
“The markets currently have virtually zero confidence that the bailout in Ireland will solve the European crisis even though fiscal austerity measures in both Portugal and Spain have been severe and prima facie, sufficient to ease market concerns,” Charles Diebel and David Page, fixed-income strategists in London, wrote in an investor note today.
“With markets effectively in a position to dictate policy, the risk is that the credibility crisis shifts to more sizeable European Union countries and thereby poses a greater risk to the system as a whole,” they wrote. That may also raise “valid questions about the prescriptive policy measures being sufficient to deal with issues of such magnitude.”
Credit Default Swaps Soar in Spain, Portugal
In spite of the Irish bailout, Spain, Portugal Bank Debt Risk Soars as Traders Look South
The cost of insuring Spanish and Portuguese subordinated bank bonds soared as traders of credit-default swaps turned their focus to southern Europe following Ireland’s bailout.
Swaps on Portugal’s Banco Espirito Santo SA rose to a record while contracts on Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest lender, climbed to the highest in more than five months. The benchmark gauge of European sovereign risk also jumped to an all-time high, while two indexes tied to bank debt surged the most since June.
Ireland’s rescue “achieves completely the opposite of what it allegedly tries to achieve, namely to calm markets,” Tim Brunne, at UniCredit SpA said in a report.
“Instead, the credit profile of both the sovereign and the impaired financial institutions has been weakened,” the Munich-based strategist wrote.
by ilene - May 25th, 2010 10:47 am
Courtesy of Rom Badilla, CFA – Bondsquawk.com
Bloomberg is reporting that liquidity is harder to come by as trading costs soar.
The gap between the cost to buy and sell corporate credit reached the widest in nine months in another sign that investors are increasingly wary of all but the safest government securities amid Europe’s sovereign debt crisis.
The bid-ask spread for credit-default swaps on U.S. investment-grade bonds surged to an average 8.86 basis points as of May 21 from 5.42 basis points a month ago, according to CMA DataVision prices. The difference jumped to a one-year high of 10.57 on May 7, from as low as 3.1 in 2007.
Higher trading cost is not just centered on Credit Default Swaps but also their cash bond counterparts.
The bid-ask spread for AA rated U.S. corporate bonds has increased to about 5 basis points from about 1 basis point earlier this year, said Mark Jicka, managing director at Mizuho Securities USA in New York. The gap for lower rated investment- grade debt has widened to about 10 basis points from 5 basis points.
Liquidity begins to suffer as bond investors sell their holdings, flooding the market with supply. Also, liquidity can tank as demand evaporates as dealers hunker down by either passing or giving “throw-away” bids to avoid building inventory and taking on risk on their balance sheet. Furthermore, most dealers will widen out the bid and ask for bonds in their inventory in order to be compensated for the risk of holding it and the event of any deterioration of the credit.
I have seen similar markets where liquidity is poor and finding an exit on a corporate or mortgage bond is difficult. The Long Term Capital Management episode in the late 90’s and the recent subprime crisis is a good example of poor liquidity during uncertain times.
When Wall Street begins to go into risk aversion mode where they are reluctant to buy bonds from an investor, its a clear signal that choppy waters are ahead.
Read Full Article
by ilene - May 18th, 2010 7:50 pm
Droppen Sie Dead? I think that means drop dead.
Courtesy of JESSE’S CAFÉ AMÉRICAIN
There is much surprise that the German government has declared a ban on naked short selling, including CDS, as of midnight tonight, with no prior notice or the niceties demanded by the banks when government chooses to act. This action seems to have perturbed some and confused many.
The reason for this may be quite simple.
After tonight, when hedge funds and the NY and London Banks call upon German financial firms and European governments to make payments on Credit Default Swaps or other financial instruments that are subject to the ban, the Germans will have a great big hammer in hand to help them to negotiate the terms.
Since the CDS will be deemed to be no longer legal, the option to default on them with the backing of the government may be an option. This seems quite similar to the stance that the Chinese government took on behalf of some Chinese firms that were caught on the wrong side of energy derivatives.
I have heard that there was a general disappointment in Europe and in parts of Asia at the lack of progress being made in the US Congress towards creating meaningful reforms in their financial system. In fact, there is a widespread belief that Washington is being dictated to by the Banks, and that their lobbyists are directing the conversation, and in many cases writing the actual legislation. The final straw was when the Obama Administration itself sought to water down and block key provisions of the legislation to limit the power and size of the Banks.
"To some degree this is a battle between the politicians and the markets," she said in a speech in Berlin. "But I am firmly resolved — and I think all of my colleagues are too — to win this battle….The fact that hedge funds are not regulated is a scandal," she said, adding that Britain had blocked previous efforts to do this. "However, this will certainly have taken place in Europe in three weeks," she said, without giving more details." Reuters, 6 May 2010
"German Chancellor Angela Merkel accused the financial industry of playing dirty. ‘First the banks failed, forcing states to
by ilene - May 14th, 2010 11:25 am
Courtesy of Marla Singer, Zero Hedge
On the 5th of March in 1946, in Fulton Missouri, at Westminster College, Winston Churchill delivered an address (since christened the "Sinews of Peace") lamenting the burgeoning power and influence being slowly but surely gathered up by the Soviet Union. Perhaps the address will be familiar to some of you owing to its most famous passage:
From Stettin in the Baltic to Trieste in the Adriatic, an iron curtain has descended across the Continent. Behind that line lie all the capitals of the ancient states of Central and Eastern Europe. Warsaw, Berlin, Prague, Vienna, Budapest, Belgrade, Bucharest and Sofia, all these famous cities and the populations around them lie in what I must call the Soviet sphere, and all are subject in one form or another, not only to Soviet influence but to a very high and, in many cases, increasing measure of control from Moscow. Athens alone — Greece with its immortal glories — is free to decide its future at an election under British, American and French observation.
Ironic, as I will address, that he should mention Greece.
Much less well known perhaps is this later passage:
Our difficulties and dangers will not be removed by closing our eyes to them. They will not be removed by mere waiting to see what happens; nor will they be removed by a policy of appeasement. What is needed is a settlement, and the longer this is delayed, the more difficult it will be and the greater our dangers will become.1
The "Iron Curtain" came, of course, to signify the cavernous ideological, and eventually concretely physical, divide between East and West. It took some 43 years before it was lifted once more, first and haltingly, in the form of the removal of Hungary’s border fence in mid-1989 and then, of course, finally via the fall of the Berlin Wall in November that same year.
Not to be compared with a production of Italian Opera, the Iron Curtain did not describe a sudden, smooth, abrupt descent over the stages of Eastern Europe. Quite the contrary, its drop was in stutters of discrete, fractional lowerings, such that it was a full fifteen years after Churchill used the term before its ultimate expression, the Berlin Wall, was finally…
Credit Default Swaps on Greece Hit Record High; IMF Calls Greece Crisis a “Wake-Up Call” on Sovereign-Debt Risks
by ilene - April 21st, 2010 1:35 pm
Credit Default Swaps on Greece Hit Record High; IMF Calls Greece Crisis a “Wake-Up Call” on Sovereign-Debt Risks
Courtesy of Mish
It will not be long before Greece is accepting aid from the IMF as credit default swaps on Greek debt surged to record levels, pushing up Greek borrowing costs. Please consider a pair of Bloomberg articles highlighting the problems.
Spillover Hits Portugal and Spain, Loonie Rises
The yield premium investors demand to hold Greek 10-year bonds instead of benchmark German bunds climbed to 5.01 percentage points, the highest level since at least March 1998. Canada’s dollar touched the strongest level since June 2008 versus the greenback as traders increased bets on higher interest rates.
“People are anticipating what will happen when you move liabilities from Greece to the balance sheets of Germany, France and other healthy economies,” said Sebastien Galy, a currency strategist at BNP Paribas SA in New York. “Euro-dollar should be lower.”
Credit-default swaps on Greece surged 31 basis points, or 0.31 percentage point, to a record 495, according to CMA DataVision prices. Contracts on Portugal jumped 27 basis points to 228, and those on Spain climbed 16 to 161 basis points.
The Canadian currency, known as the loonie, traded at 99.90 Canadian cents per U.S. dollar after reaching 99.31, the strongest level since June 2008.
Wake-Up Call on Sovereign-Debt - Public Unions Protest
Greece began talks today on activating a 45 billion-euro ($61 billion) emergency aid package as the International Monetary Fund called the country’s fiscal crisis a “wake-up call” on sovereign-debt risks.
Greek officials joined counterparts from the euro-region, the IMF and the European Central Bank to begin hammering out the deficit-cutting measures Greece will have to accept to be able to tap the funds. The government needs to raise about 10 billion euros before the end of May, and its soaring financing costs are lending urgency to the talks.
“There is no chance that Greece will be left hanging in the month of May, whether borrowing from the market or borrowing from our partners,” Finance Minister George Papaconstantinou said yesterday in Athens. He said the talks will take at least 10 days.
The surge in Greece’s deficit will push the country’s debt
by ilene - April 16th, 2010 7:35 pm
Courtesy of Mish
Lost in the turbulence of a market focused on fraud charges against Goldman Sachs (see Rant of the Day: No Ethics, No Fiduciary Responsibility, No Separation of Duty; Complete Ethics Overhaul Needed), there are some interesting derivatives blowups in Europe to consider, similar in nature to swaps that blew up Jefferson County, Alabama.
Please consider Saint-Etienne Swaps Explode as Financial Weapons Ambush Europe
The worst global financial crisis in 70 years arrived in Saint-Etienne this month, as embedded financial obligations began to blow up.
A bill came due for 1.18 million euros ($1.61 million) owed to Deutsche Bank AG under a contract that initially saved the French city money. The 800-year-old town refused to pay, dodging for now one of 10 derivatives so speculative no bank will buy them back, said Cedric Grail, the municipal finance director. They would cost about 100 million euros to cancel today, he said.
Saint-Etienne is one of thousands of public authorities across Europe that tried to shave borrowing expenses by accepting derivatives deals whose risks they couldn’t measure. They may be liable for billions of euros, according to the Bank of Italy and consulting and law firms in France and Germany. As global economies climb out of recession, the crisis is hitting Saint-Etienne in central France, Pforzheim in western Germany and Apulia, an Italian regional government on the Adriatic. They may pay for their bets into the next generation.
From the Mediterranean Sea to the Pacific coast of the U.S., governments, public agencies and nonprofit institutions have lost billions of dollars because of transactions officials didn’t grasp. Harvard University in Cambridge, Massachusetts, agreed last year to pay more than $900 million to terminate swaps that assumed interest rates would rise.
Under the interest-rate swap deals popular with European municipalities, a bank would agree to cover a locality’s fixed debt payment and the government or agency would pay a variable rate gambling its costs would be lower — and taking on the risk that they could be many times higher.
Use of swaps in Europe soared in the late 1990s and early 2000s because banks pitched them as the easiest way to reduce costs on fixed-rate loans, according to Patrice Chatard, general manager of Finance Active, which helps more than 1,000 localities across Western Europe manage
by ilene - April 16th, 2010 12:33 pm
Courtesy of Zero Hedge
Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."
Kenneth Lench, Chief of the SEC’s Structured and New Products Unit, added, "The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress."
The SEC alleges that one of the world’s largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.
According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.
by ilene - April 10th, 2010 6:14 pm
Courtesy of John Mauldin at Thoughts from the Frontline
It’s Time for Reform We Can Believe In
The Fed Must Be Independent
Credit Default Swaps Threaten the System
Too Big To Fail Must Go
And This Thing About Leverage
What Happens If We Do Nothing?
New York, Media, and La Jolla
Casey Stengel, manager of the hapless 1962 New York Mets, once famously asked, after an especially dismal outing, "Can’t anybody here play this game?" This week I ask, after months of worse than no progress, "Can’t anybody here even spell financial reform, let alone get it done?" We are in danger of experiencing another credit crisis, but one that could be even worse, as the tools to fight it may be lacking when we need them. With attacks on the independence of the Fed, no regulation of derivatives, and allowing banks to be too big to fail, we risk a repeat of the credit crisis. The bank lobbyists are winning and it’s time for those of us in the cheap seats to get outraged. (And while this letter focuses on the US and financial reform, the principles are the same in Europe and elsewhere, as I will note at the end. We are risking way too much in the name of allowing large private profits.) And with no "but first," let’s jump right in.
Last Monday I had lunch with Richard Fisher, president of the Federal Reserve Bank of Dallas. Mr. Fisher is a remarkably nice guy and is very clear about where he stands on the issues. My pressing question was whether the Fed would actually accommodate the federal government if it continued to run massive deficits and turn on the printing press. Fisher was clear that such a move would be a mistake, and he thought there would be little sentiment among the various branch presidents to become the enabler of a dysfunctional Congress.
But that brought up a topic that he was quite passionate about, and that is what he sees as an attack on the independence of the Fed. There are bills in Congress that would take away or threaten the current independence of the Fed.
by phil - March 10th, 2010 7:33 am
7 W’s in the title - that has to be some kind of alliterative record!
What could we possibly be worried about with the market making new highs? Well, I’m a little concerned that Shanghai housing prices fell 10% in a week. That’s the kind of behavior that may make you think they may have a bit of a bubble that’s popping. Of course they held up well compared to Shenzhen, where prices dropped 14% in the first week of March. That was matched by a 14% decline in iron ore shipments from Australia as China’s demand fell from 11M tons in January to 8.7M tons in February. So, if you were wondering how much China’s $600Bn stimulus spending was affecting their economy – 14% is the effect of them simply slowing it down a little.
Japanese Machinery Orders fell 3.7% in January and Producer Prices fell a deflationary 1.5% in the World’s second-largest economy (for now). “The gap between supply and demand in the domestic economy has yet to shrink,” said Morita at Barclays Capital. “It’ll be very difficult for companies to pass on those costs. That’s not good for their profits.” The Baltic Dry Index is topping out just over our 3,200 target, signaling a possible end to the great commodity run of 2010. Devan Kaloo, head of Aberdeen’s Global Emerging Markets is predicting that emerging markets (we are long EDZ, now $47) may fall as much as 15% this year. “The markets will see a correction this year,” Kaloo, whose Aberdeen Emerging Markets Institutional Fund has beaten 93 percent of competitors in 2010, said in an interview in New York. “People get over-optimistic and expect too much out of earnings and global growth.”
Sure, I know I’ve been saying this for a while but it sounds so much more official when a guy in charge of $22Bn says it! China’s 4 trillion yuan ($586 billion) stimulus package, coupled with record bank lending in 2009, helped the benchmark Shanghai Composite Index rally 80 percent last year. The gauge has dropped 6.4 percent in 2010. “From a stock-picking perspective, we can find better opportunities” than China, Kaloo said. “The government pumped money into the financial system, but soon they’ll run out of money,” which will hurt the earnings of Chinese companies.
Amazingly, much of the tech growth we’re seeing in Asia is resulting from a mad rush to produce 3-D TVs in time for the holidays – something I believe may…
by ilene - March 8th, 2010 5:00 pm
Courtesy of JESSE’S CAFÉ AMÉRICAIN
If another author had said this I might not pay it so much attention. Lately some have been given over to a tabloid approach to overstatement and sensational headlines to attract attention. This is a strong temptation as the blogosphere expands, similar to the development and evolution of newspapers as a popular medium in Victorian London for example.
But as you know, I have a great deal of respect and admiration for Janet Tavakoli and her knowledge in this area. If she is seeing a new demand for Credit Default Swaps on the US payable in gold I would credit it since this is her area of expertise and industry connections, but would ask for some particulars, which I have done. This would match up with some other data I have seen from other sources, and desire to continue to put the puzzle pieces together without traveling false trails.
It does make sense, of course, to price a US default in something other than dollars. The question that comes to mind though, is not the suggested method of payment, but the nature and quality of the counter-party who could stand reliably behind such a claim without it being a fraudulent contract by its very nature.
If the US should default, what major financial institutions will be in a position to have written and then uphold the terms of these CDS, payable in anything at all? Surely only a sovereign bank like the US Fed, the Treasury, or the IMF, or some other central bank could be so capable. But what possible motivation could a non-profit-seeking official institution have in writing CDS on a US sovereign default? Perhaps more likely a private bank or GSE, with the buyers thinking it has some sovereign guarantees that would be upheld in extremis.
Truly, remember AIG? It was insolvent when payment was demanded, and acted improperly in paying collateral to Goldman ahead of its inevitable insolvency, and then receiving the support of the Treasury to pay obligations in full, above all others. It ought to have been placed in a receivership and its assets allocated with the previously disposed collateral clawed back. This kind of private arrangement between parties involving the sovereign wealth of nations may be indicative of things to come. The recent example of…