OH NO! More of the Same

Via Reuters:

Worries over the euro zone debt crisis and the region's banks hit global stocks and boosted the dollar on Wednesday after Italian lender UniCredit priced a rights issue at a huge discount and a German bond auction failed to impress.

The U.S. dollar index, which tracks the greenback against a basket of currencies, gained 0.6 percent to 80.10 points.

Banking sector fears were ignited by news UniCredit (CRDI.MI) had launched a 7.5 billion euro ($9.8 billion) two-for-one rights issue at a discount of 69 percent to its closing share price on Tuesday. The capital increase, meant to shore up its ravaged balance sheet, sent shares in Italy's largest bank by assets down 8.5 percent.

Germany sold 4.057 billion euros ($5.30 billion) of 10-year government bonds in its first auction of the benchmark maturity since one last November that raised fears Europe's debt crisis had begun to threaten its biggest economy. Bids for the Bunds amounted to 1.3 times the amount offered and were improvement over the previous sale - one the country's least successful debt since the introduction of the euro. The debt sold at an average yield of 1.93 percent, lower than the 1.98 percent from November.

In another sign of stress among euro zone banks, commercial lenders' overnight deposits at the European Central Bank hit a record high of 453 billion euros, data showed on Wednesday. However, key euro zone bank-to-bank lending rates continued to drop, pulled down by the ECB's recent record injection of almost half a trillion euros of ultra-long and ultra-cheap three-year liquidity. Euro zone banks received 489 billion euros late last month in the first of two opportunities to access the long-term loans.

Reuters article

Anyone who has read anything I have written here or on Seeking Alpha knows my opinion on this:  the situation is a train wreck. Austerity is necessary (not just in Europe either), but it is a mid to long term solution.  The ECB can QE all it wants, the banks are keeping the cash (or arbing vs sovereign debt) and not lending it out.  The banks have thin capital (especially if you adjust their risk/market models) and need a ton more.

While some European banks look cheap, I am not a buyer (LT2 will get interesting though), preferring instead to but European corporates in USD or hedging the currency risk.

European Debt Problems?

Nope, no problem here.

The European Central Bank stepped in to buy Portuguese bonds on Thursday, traders said, after yields on the country's debt hit euro-era highs on a perceived lack of progress towards resolving the bloc's year-long debt crisis.

Portuguese 10-year bond yields soared to 7.656 percent, surpassing the previous record set in November, before settling marginally lower on the day.

ECB - Publish the Test Results!

Saw this on DJN and the first thing that came to mind was "really?".  Now, forgetting for the moment the farce that was the first European stress test (we'll recall it was like a spa day), how could publishing results of the stress test be problematic?  The only reason I can think of is if the system has not improved as much as thought and there is a fear of "renewed" focus (ie. sell off).

European Central Bank governing council member Ewald Nowotny said Thursday he is sceptical about plans to publish detailed results of European bank stress tests, but acknowledges that there seems to be a political majority in favor of doing so.

The bank stress tests are viewed as an important tool to evaluate the stability of the financial sector and individual institutions in likely crisis scenarios.

The U.S. has chosen to publish specific details about the health of their banks, and the question has arisen as to whether Europe should follow suit.

The issue was discussed at the inaugural meeting of the new European financial sector watchdog, the European Systemic Risk Board, which has the ECB governing council members on its board.

"We have had a discussion on whether to publish detailed results, and I think there's a political majority that wants to do it in the same manner as the U.S., " Nowotny said.

However, he added: "I consider it [to be] very problematic to publish the stress tests." 

PIIGS Update - Spreads Muted

Spreads in the periphery are somewhat muted today as a result of official buying in Portugal, Ireland and Greece.


Periphery: yield vs GER lvls (chg on day) in bps
              2y         5y        10y       30y/15y for IRE
ESP    247 (+7)   271 (+11) 235 (+4)  261 (+2)
POR    301 (-3)   309 (+2)  309 (+0)  295 (-2)
GRE  1068 (+16) 1067 (+7) 879 (0)   566 (-4)
IRE    400 (-3)   497 (-10) 523 (-11) 476 (-15)
ITA    158 (-2)   169 (+2)  166 (+3)  194 (0)


Hearing real money selling into official buying.

Euro Comment

Saw this comment on the FT Alphaville.  Thought it was poignant (emphasis mine):

Spain CDS spreads will be 500bps unless we have a federal states of europe in pretty quick measure (which will not happen!)
Those with the privilege of having $ will just pick off the Euro countries one by one.
People have always said do not fight the fed, I have never heard someone saying "don't fight the ECB" 

As an aside:  Portugal also came out and said they will need NO money.  Always a bad sign when companies or countries try too hard to quell fear. 

Matthew Lynn on the Euro

I like Matthew Lynn.  Smart and witty - two things I aspire to.  Here are some excerpts of his thoughts on the Euro (it may seem like I am too focused on this, but I disagree - we are all currency traders now - and its my darn blog):

Who’s next? First Greece went bust. Now Ireland is on the brink of a bailout from the European Union and the International Monetary Fund.

When it happens, we’ll hear plenty of soothing words about how contagion has been stopped, the euro area has been put on a firmer footing, and the single currency saved. There will be a lot of grand rhetoric about the importance of the European project. Stern condemnations of the speculators will ring out across the continent.

Don’t listen to a word of it. The euro has turned into a bankruptcy machine. Once the markets have finished with Ireland, they will simply move on to Portugal and Spain, and after that to Italy and France.

In short, the problem wasn’t Ireland. It was the euro. The logic of that is inescapable. If it is the single currency that is at the root of the crisis, it won’t stop here. 

In each country, it will be a different trigger that causes a collapse in financial confidence. The root cause is the same, though. When the euro was launched, it was a big bet that sharing the same currency would make a group of very different economies converge, and so allow the European Central Bank to operate a single monetary policy for all of them.

It was an interesting theory, but it turned out to be wrong. The economies are just too different to allow a single central bank to manage all of them. Interest rates are always wrong everywhere. How that expresses itself varies. In Greece, it was a fiscal crisis. In Ireland, a banking collapse. In Spain, a construction bubble that burst. In Germany, a massive trade surplus. But, like a river looking for the sea, it always comes out somewhere.

This crisis will keep moving from country to country. The only permanent fix is splitting up the euro into more manageable currency areas. Until the euro area’s leaders recognize that simple truth, every bailout they come up with is only going to shift the attacks elsewhere.

The rest of the article is here:  Lynn on the Euro

As I am not as witty or smart (according to some, I couldn't possibly understand their 7th grade math, what with all the advances in math in the last 20 years), I will leave it at that.

Speigel Interview with German Finance Minister Schauble

I was reading the Speigel Interview with the German Finance Minister Wolfgang Schauble (available here: Speigel - Schauble) and I wanted to post some comments I thought were interesting and relevant.

SPIEGEL: But the German economy benefits from the fact that German industry has focused primarily on foreign markets and wages have hardly gone up in years. The Americans see this as unfair.Schäuble: The German export successes are not the result of some sort of currency manipulation, but of the increased competitiveness of companies. The American growth model, on the other hand, is in a deep crisis. The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies. There are many reasons for America's problems, but they don't include German export surpluses.

Amen, brother.  The US fingerpointing serves no end but political ones, and the last I checked finances, when left to politics, suffers a severe fate.

SPIEGEL: Last week, the US Federal Reserve Bank decided to flood the economy with $600 billion in new money. Will this stimulate the economy as hoped?  Schäuble: I seriously doubt that it makes sense to pump unlimited amounts of money into the markets. There is no lack of liquidity in the US economy, which is why I don't recognize the economic argument behind this measure.

Okay, thought I was the only one confused by the Fed's actions.  Guess not.  Confused might be the wrong word - inability to swallow the logic is perhaps a better way to phrase it.

SPIEGEL: Sounds good. But first the measures will have to be approved by the individual governments, on the one hand. On the other hand, it's completely unclear what the participation of private investors will look like. Schäuble: We are in the process of working out the details within the German government and at the European level. It's already clear today that the new mechanism will not apply to old debt but only to new loans. I imagine that all bonds issued by euro countries will contain clauses in the future that specify exactly what happens to the claims of creditors in case of crisis.

Found this interesting.  I imagine it could look like something of the old Landesbank structure given the grandfathering of debt and, therefore, the implicit guarantees.  This would serve to bifurcate the debt after an adoption, with "old debt" trading tight to "new debt" and the possibility - in the event of a restructuring - of massive international legal arguments and cases.

Europe - Sovereign Flare Up? No, Just Back in the Press

From BenZinga:

It would appear that sovereign debt concerns in Europe are beginning to push themselves back into the forefront. Investors are dumping both Irish and Greek bonds, driving yields and CDS premiums to near record levels.

Yesterday, Irish credit costs hit a record high as bonds fell after the resignation of Jim McDaid, a member of parliament for Ireland's Fianna Fail party. The resignation added to concerns that the government would fail to muster the votes for planned spending cuts and tax hikes.

“Investors are worried about political factions coming into agreement about getting fiscal policy back on track,” said Andrew Wilkinson, senior market analyst for Interactive Brokers.

Despite higher yields and rising CDS premiums on Irish and Greek debt, the Euro has been holding up quite well. Six months ago, when the EuroZone crisis was in full swing, the Euro currency traded below $1.20. Currently, however, the EUR/USD is trading at $1.4015.

I would posit that they never went away.  The difference now is that I believe folks have determined that the EU will allow an "orderly" restructuring of sovereign debt.  Do they have a choice?  I have long maintained that with many of these governments, fiscal austerity will be promised - but delivered is another story.  The people will not change their ways because the government has told them to.  They have been through this many times (at least those countries most affected) and will simply run the ruling party out of town.  Euro might hold these levels, but I am not convinced.  Still like the commodity/rate currencies over the USD or EUR.

European Sovereign Risk - Going to Get Worse

From the WSJ:

The European Central Bank increased its purchases of government bonds last week amid rising concerns in financial markets about the ability of Greece, Ireland and Portugal to repay their debts.

Despite spending more than €61 billion ($79.58 billion) since May on government bonds, the ECB has failed to prevent yield spreads between government debt in Greece, Ireland and Portugal and their safer German equivalents from hitting or approaching record highs, making it harder for struggling countries on Europe's fringe to finance their mounting debt levels.

The latest increase in debt purchases "is an illustration that the sovereign-debt crisis is surfacing again, but it's not as severe as May," says Carsten Brzeski, economist at ING Bank in Brussels.

On Monday, yields spreads between Irish and German 10-year bonds—a key measure of investors' perception of the risk associated with Irish bonds—exceeded four percentage points, a record, and more than double the spread that existed on May 10 when the ECB started buying government debt.

Portuguese yield spreads also hit a record Monday, at more than four percentage points above safer German equivalents. That spread was just 1.89 percentage points on May 10, a sign, some analysts said, that the ECB hasn't been able to affect market sentiment. Greek spreads are near record highs at more than nine percentage points above German government bonds.

Personally I believe that sovereign risk in the EU is going to get worse as we enter the fall and austerity measures are going to be felt by the citizens of the country.  I am curious as to who is buying the government bonds - is it still the banks?  While yields on EU sovereign debt are attractive, I believe they will go higher.