FT: Mass selloff in Eurozone bonds

[Agloco]

Europe is screwing itself with austerity in exactly the same way the US is screwing itself with austerity.

No recovery is possible without strong economic expansion.

Both have about the same amount of total debt.

America lives in a glass house, why does it throw schadenfreude stones at Old Europe?

It was America's criminally fraudulent financial sector, aka "free market capitalism", that pushed industrial countries into catastrophe, not Europe.

It was America's corrupt/whoring ratings agencies, never punished, that rated toxic as AAA, but now they are to be believable when rating Euro countries?

(btw, by pushing bond interest rates higher, the ratings agencies are filling the pockets of the wealthy buyers of Euro debt)

Thanks. Does it always take special requests for you to post in a cogent manner?

[Winehole23]

http://www.marke ch.com/story/hun..._story_popular

[boutons_deux]

Thanks. Does it always take special requests for you to post in a cogent manner?

my idea densities and idea hierarchies greatly surpass your comprehension.

[Winehole23]

yeah it does. lol surpassing density.

[Winehole23]

Simon Johnson and Peter Boone think the outlook is bad: http://piie.com/publications/pb/pb12-4.pdf

[Winehole23]

wrong thread

[Winehole23]

Fitch downgraded the sovereign credit ratings of Belgium, Cyprus, Italy, Slovenia and Spain on Friday, indicating there was a 1-in-2 chance of further cuts in the next two years.

In a statement, the ratings agency said the affected countries were vulnerable in the near-term to monetary and financial shocks.


"Consequently, these sovereigns do not, in Fitch's view, accrue the full benefits of the euro's reserve currency status," it said.


Fitch cut Italy's rating to A-minus from A-plus; Spain to A from AA-minus; Belgium to AA from AA-plus; Slovenia to A from AA-minus and Cyprus to BBB-minus from BBB, leaving the small island nation just one notch above junk status.
Ireland's rating of BBB-plus was affirmed.


All of the ratings were given negative outlooks.

http://ca.reuters.com/article/topNew...80Q1RV20120128

[Winehole23]

Credit-default swaps can be dangerous because they have the ability to hit one side of the trade with a demand for an overwhelmingly large payout if a default occurs. Right now, it costs a bank $401,000 a year to insure $10 million of Italian government debt for five years, according to Markit, a data provider. If Italy took a serious turn for the worse, and its government debt seemed in real danger of default, that swap price would rapidly e higher, as happened with Greece.


If that occurred, the bank that sold the protection might then have to post a lot of cash to ensure it would make good on the swap. Large cash calls like that might drain some banks of liquid assets, causing systemic stress.


If an important part of the financial system overhaul were in place by now, there may be fewer questions about whether banks would be able to meet cash calls in stressed times. The change involves directing most swaps trades to clearinghouses, whose job is to ensure that the money flows underlying a trade are made. Clearinghouses would standardize collateral payments across the default swap market, and they might demand higher amounts of collateral than banks currently demand from each other.


Recognizing this weakness in the derivatives market, finance ministers and central bankers from the Group of 20 leading industrialized nations said in 2009 that they wanted to have clearing in place for all standardized derivatives by the end of 2012.


Yet, as of June, only 9.4 percent of the $29.6 trillion credit-default swap market is centrally cleared, according to the Bank for International Settlements. Notably, the credit-default swaps that pay out if a European government defaults appear to have been held back from central clearing by the British regulator, the Financial Services Authority, which declined to comment on why it had not yet approved these swaps.

http://dealbook.nytimes.com/2012/01/...ebt-maelstrom/

[Winehole23]

In Morgan Stanley’s fourth-quarter results a footnote made rivals sit up and take note: the US bank had reduced its net exposure to Italy by a whopping 69% in late 2011, from US$4.9bn to US$1.5bn.


While reduction to peripheral Europe has been a focus for many banks, the way in which Morgan Stanley pulled this off was arguably as significant as the end result. Other banks have been forced to slash government bond portfolios or buy credit default swaps to shield themselves against southern European countries.


In contrast, Ruth Porat, Morgan Stanley’s CFO , explained during an investor call on January 19 that the bank began to restructure certain derivatives positions with Italy in December. These trades settled in January, leading to a material reduction in the bank’s net exposure to peripheral Europe from US$6.4bn to US$2.3bn excluding unfunded commitments, she added.


Rival dealers admit that Morgan Stanley has killed two birds with one stone here. Beyond the immediate boon of cutting its peripheral exposure, the US bank has removed a sizeable chunk of its sovereign swaps trades, which have become a major headache for all dealers under the new Basel III regulatory regime.


“It’s a huge number, and it shows just how big the [sovereign derivatives] exposures in the industry are that Morgan Stanley can get that kind of relief, and just how painful the widening of sovereign CDS has been for banks,” said one person who looks after sovereign clients for a major bank.


Legacy derivatives trades with sovereigns have become incredibly expensive for banks over the past few years. In a hangover from the days when sovereigns were considered risk-free, most treasuries are not required to post collateral when out-the-money on a swap, but receive cash from their dealer when they are in-the-money.



Under Basel III, the funding, counterparty credit and capital charges of these collateral agreements have become material for dealers, particularly when they are owed money on the swaps. One head of structured rates said his former bank recoiled in horror when it looked at marking its sovereign derivatives portfolio correctly. The widening of European sovereign CDS, which have quadrupled in many cases over the past year, has only compounded this problem for dealers.

http://www.ifre.com/derivatives-deal...046258.article

[Winehole23]

Exactly how Morgan Stanley managed to reduce its exposure so dramatically has left rivals scratching their heads. Two senior traders at separate banks believed Morgan Stanley exercised a provision in its collateral agreement with Italy that allowed it to unwind a trade if its mark-to-market breached a certain level.


Traders said it most likely related to a legacy interest rate swap, which Italy had used to lock-in rates for 30 years at about 4-5% on around €3-4bn of debt. Thirty-year rates being now more like 2.5%, Italy would be significantly underwater on the trade, and would therefore have to pay up as much as €2bn to unwind it, the traders estimated. A major unwind or restructuring would also explain volatility at the long-end of the euro swaps curve late last year, they added.


Morgan Stanley and the Italian Treasury declined to comment.

same

[Winehole23]

Britain's banks slashed $50 billion (£31.8 billion) from their exposure to France, Italy and Spain during the summer as financial ins utions ran scared from Europe's debt crisis, according to the Bank for International Settlements.


The latest figures from the Basel-based BIS, "the central banker's bank", revealed that UK banks' total exposure to the three European strugglers had fallen to $430.4 billion at the end of September, against $479.9 billion at the end of June.
UK banks' stocks of French, Spanish and Italian sovereign bonds were unceremoniously dumped as bond markets turned on vulnerable European nations. The BIS figures revealed UK bank holdings of French, Italian and Spanish sovereign debt dived 32% to $55.5 billion over the quarter, with holdings of Italian bonds suffering the biggest sell-off. Banks sought safety in German bunds, boosting their holdings by more than $40 billion during the period.

http://www.thisislondon.co.uk/standa...-pound-32bn.do

[Winehole23]

The Germans thus are proposing that Greece, a sovereign country, transfer its right to national self-determination to an overseer. The Germans argue that given the failure of the Greek state, and by extension the Greek public, creditors have the power and moral right to suspend the principle of national self-determination. Given that this argument is being made in Europe, this is a profoundly radical concept. It is important to understand how we got here.
There were two causes. The first was that Greek democracy, like many democracies, demands benefits for the people from the state, and politicians wishing to be elected must grant these benefits. There is accordingly an inherent pressure on the system to spend excessively. The second cause relates to Germany's status as the world's second-largest exporter. About 40 percent of German gross domestic product comes from exports, much of them to the European Union. For all their discussion of fiscal prudence and care, the Germans have an interest in facilitating consumption and demand for their exports.

Therefore, the Germans have used the ins utions and practices of the European Union to maintain demand for their products. Through the currency union, Germany has enabled other eurozone states to access credit at rates their economies didn't merit in their own right. In this sense, Germany encouraged demand for its exports by facilitating irresponsible lending practices across Europe. The degree to which German actions encouraged such imprudent practices -- since German industrial production vastly outstrips its domestic market, making sustained consumption in markets outside Germany critical to German economic prosperity -- is not fully realized.


True austerity within the European Union would have been disastrous for the German economy, since declines in consumption would have come at the expense of German exports. While demand from Greece is only a small portion of these exports, Greece is part of the larger system -- and the proper functioning of that system is very much in Germany's strategic interests. The Germans claim the Greeks deceived their creditors and the European Union. A more comprehensive explanation would include the fact that the Germans willingly turned a blind eye.



Though Greece is an extreme case, Germany's overall interest has been to maintain European demand -- and thus avoid prudent austerity -- as long as possible.

http://www.realclearworld.com/articl...s_99869-2.html

[Winehole23]

Elsewhere, governments of high-income countries can continue to support their economies, largely because they possess a central bank and an adjustable exchange rate. This combination has given them the ability to run large fiscal deficits. In post-crisis conditions, such deficits are both the natural counterpart and the principal facilitator of necessary private sector deleveraging. The euro zone has no such internal mechanisms. When private external financing dried up, as happened to a number of countries, affected members needed both financing — in the short run — and a mechanism for adjusting their external accounts — in the longer run — other than via deep slumps.



The euro zone lacks both capacities. It has turned out, as a result, to have limited ability to cope with the global financial disease. As Donald Tsang, chief executive of Hong Kong, remarked in Davos: “I have never been as scared as I am now.” Astute observers have a sense that little stands between them and a wave of sovereign and banking defaults inside the euro zone, with ghastly global repercussions.

http://www.cnbc.com/id/46215427

[Winehole23]

pics of the Greek riots yesterday

[Winehole23]

The stench of tear gas still hung in the air on Monday morning, chocking passers-by. More than 120 people were hurt in the rioting which also broke out in other Greek cities. Authorities said 68 police needed medical care after being injured by gasoline bombs, rocks and other objects hurled at them, while at least 70 protesters were also hospitalized.

Police arrested at least 67 people, while in several cases they had to escort fire crews to burning buildings after protesters prevented access.

The rioting began Sunday afternoon ahead of a historic vote in Parliament on yet more austerity measures. Lawmakers approved the bill in a 199-74 vote, to the relief of investors who pushed the Athens stock index up 5 percent on Monday.

There was nevertheless strong dissent among the majority Socialists and rival Conservatives, who along with a small right-wing party make up Greece’s interim coalition government. The parties disciplined the dissenters in their ranks, with the Socialists and Conservatives expelling 22 and 21 lawmakers respectively, reducing their majority in the 300-member parliament from 236 to 193.

http://www.washingtonpost.com/politi...F9Q_story.html

[Winehole23]

Sunday’s clashes erupted after more than 100,000 protesters marched to the parliament to rally against the drastic cuts, which will ax one in five civil service jobs and slash the minimum wage by more than a fifth.


The vote paves the way for Greece’s international creditors to release €130 billion ($172 billion) in new rescue loans to prevent the country from a potentially catastrophic default next month — bankruptcy could push Greece out of Europe’s euro currency union, drag down other troubled eurozone countries and further roil global markets.


The deal, which has not yet been finalized, will be combined with a massive bond swap deal to write off half the country’s privately held debt, reducing Greece’s debt load by about €100 billion.


But for both deals to materialize, Greece has to persuade its deeply skeptical creditors that it has the will to implement spending cuts and public sector reforms that will end years of fiscal profligacy and tame gaping budget deficits.


Eurozone finance ministers are to meet on Wednesday to approve the plan, after refusing to do so during a meeting last week, saying Athens had to first approve the new austerity measures.

same article

[Winehole23]

Because of the central bank’s cheap financing, some economists warn, sick banks now face less pressure to confront their problems — to clean out bad loans and other impaired assets, or even wind down operations if there is no hope of a turnaround. The European Central Bank, they say, could inadvertently spawn a cohort of “zombie banks,” burdened by nonperforming loans and assets that remain on the books, like the ones that helped make the 1990s a lost decade for Japan.



“It’s a huge bet,” said Charles Wyplosz, a professor of economics at the Graduate Ins ute in Geneva. “If the crisis ends up well, the E.C.B. will have pulled off a miracle. If things go wrong, then commercial banks will be in a much worse situation than they were before.”



Professor Wyplosz said the central bank might be making the banking system more fragile by encouraging ins utions to load up on risky assets, especially government bonds from troubled euro zone countries like Spain or Italy. Banks can use those assets as collateral for more loans from the central bank.



In December, the European Central Bank invited banks to borrow money at the benchmark interest rate of 1 percent for three years, compared with a previous maximum maturity of one year. Banks could borrow as much as they wanted provided they posted collateral. They jumped at the opportunity: 523 banks borrowed 489 billion euros, or $647 billion.



The central bank will offer another round of three-year loans at the end of this month, and last Thursday it loosened its collateral rules to encourage smaller banks to join in.

http://www.nytimes.com/2012/02/13/bu...cern.html?_r=1

[Winehole23]

As the experience of Japan showed in the 1990s, zombie banks tended to keep lending to troubled borrowers to avoid recognizing losses from bad loans. As a result, the healthiest and most productive companies struggled to find credit.



“Zombie banks support zombie companies,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels. “Zombie banks will not extend credit to borrowers that need it. This is bad for the economy.”

same

[Agloco]

http://www.realclearworld.com/articl...s_99869-2.html

I read this with fascination a few weeks back. It seems that the Germans are on the march again, albeit in a more abstract fashion.

Sie werden über Griechenland nehmen mit Geld diesmal. Ziemlich unglaublich. (RG will need to check my German....... )

[Winehole23]

As anticipated in November 2011, Moody's Investors Service has today adjusted the sovereign debt ratings of selected EU countries in order to reflect their susceptibility to the growing financial and macroeconomic risks emanating from the euro area crisis and how these risks exacerbate the affected countries' own specific challenges.
Moody's actions can be summarised as follows:



- Austria: outlook on Aaa rating changed to negative



- France: outlook on Aaa rating changed to negative



- Italy: downgraded to A3 from A2, negative outlook



- Malta: downgraded to A3 from A2, negative outlook



- Portugal: downgraded to Ba3 from Ba2, negative outlook



- Slovakia: downgraded to A2 from A1, negative outlook



- Slovenia: downgraded to A2 from A1, negative outlook



- Spain: downgraded to A3 from A1, negative outlook



- United Kingdom: outlook on Aaa rating changed to negative

http://www.moodys.com/research/Moody...ide--PR_237716

[TDMVPDPOY]

greece is pretty dumb man, without the bailout and declaring bankrupt...they are still in the same with govt cuts anyway

[Winehole23]

storm is bigger, tbh

[Winehole23]

Holland and Italy, two of the Eurozone’s largest economies, have gone into recession, new figures show.


The economies of both countries suffered a second successive quarter of shrinkage, each contracting by 0.7 per cent during the last three months of 2011.
Germany’s economy also contracted in the fourth quarter, down 0.2 per cent from the previous quarter. This was the country’s first shrinkage since 2009.


Together, all 17 nations making up the Eurozone witnessed a 0.3 per cent contraction in the fourth quarter, but have managed to avoid a collective recession with growth of 0.1 per cent in the third quarter.

http://www.myfinances.co.uk/investme...into-recession

[Winehole23]

A Spanish town is looking to the past to safeguard the future of its ailing economy by reintroducing the peseta.


Fed up with the failing euro, rebellious locals in Villamayor de Santiago have reverted to using the old currency, which was phased out a decade ago.

Read more: http://www.dailymail.co.uk/news/arti...#ixzz1mTRRO4of

[Winehole23]

The country introduced the peseta in 1868, joined the euro in December 2001 and phased out the old currency in February 2002.


However, unlike other euro countries such as France and Italy, it never set a deadline for exchanging pesetas into euros.

http://www.dailymail.co.uk/news/arti...#ixzz1mTRpag2u