FedUpUSA

Archive for the ‘Sovereign Risk’ Category

In this morning’s Cashin’s Comments, UBS’s Art  Cashin addresses what worries traders these days.

A Greek default has been on everyone’s minds lately.  But the traders  Cashin has talked to think that it’s just the tip of the iceberg.

The bigger fear is what happens in the credit default swap (CDS)  markets.  No one knows how big it is, who the counterparties are, and,  worst of all, whether the CDS contracts will actually trigger in what many would  consider a default.

Here’s an excerpt from Cashin’s note:

Is There More At Risk Than Greece In A  Greek Default – Recently, there has been a buzz building on trading  desks and trading floors that there may be a lot more at stake in a potential  Greek default than the media has been talking about.

As of now, most of the public discussion has  centered on potential contagion among the banks as most of the Greek sovereign  debit is held by the European banking community.

Traders, however, fear that the real risk is in  the area of credit default swaps (CDS).  They are insurance policies,  individually written, that basically say – if Greece defaults, we’ll pay you  what they should have.

Credit default swaps have grown exponentially  over the last decade.  Since they are individually written, there  is no clear visible record of how many CDS contracts are outstanding.  Also  unknown is who is involved.  The two parties obviously know who the  counter-party is but there is no public record that would allow a regulator or a  third party to find out who was involved. … No  one knows how much CDS exposure there is on Greek debt but is assumed to be a  lot.  Banks and others looked at the very high and attractive yields  on Greek bonds and began salivating.  But, what about that risk  – better buy some insurance. … Recall that, months ago, negotiators on the  Greek debt bumped into part of the CDS problem.  If the holders agreed to  take 50 cents on the dollar, would that trigger their CDS on that bond (paying  them the conceded 50 cents and making them whole).

At that  time, many contended that if the bondholder “accepted” the offer of 50 cents on  the dollar, that made the event voluntary and it would not “trigger” the CDS  payout.  That caused lots of folks to ask for a ruling from the ISDA (the  ruling group on CDS contracts).  If you “accepted” an offer with a gun to  your head, was it really voluntary? … But, traders fear a worse  outcome might occur if the CDS contracts do not kick in.  What  good is insurance that doesn’t pay off.  That could lead to the assumption  that all CDS insurance was useless.  That would stratify debt around the  globe.  Great credits could get all the money they wanted, but less than  great credit would be shut out because it could not be insured.  That could  make the future one in which “the haves” will have whatever they want and all  others nothing.  Welcome back to the Middle Ages.

Business Insider

Wall Street…who gave it a map of the future?

DOCUMENTS RAISE AWKWARD QUESTIONS FOR WASHINGTON, IMF & BERLIN

A written document giving firm dates and detailed actions for a planned Greek default has been in the possession of two top Wall Street bank currency trading bosses since the second week in January. The Slog has separate but corroborative sources affirming the existence of the document, and a conviction among senior bank staff that – at least at the time – the plan represented “a timetable, not a contingency”. The plan gives a firm date of March 23rd for default to be announced after the close of business.

Senior bankers on Wall Street have been given detailed documentation setting out a timetable to Greek default, including firm dates and technical ‘orders’ about last use of the euro as a currency there. The revelation arrived at Slogger’s Roost last Monday, since when I have been trying to obtain corroboration. This arrived in the early hours of today (Thursday). One of the banks is Barclays Capital (Barcap) run by controversial figure Bob Diamond. The other must remain anonymous for the time being, in order to protect sources.

The document asserts that Greece will officially be declared in default by all the ratings agencies after the close of business on Friday march 23rd . At the weekend all Greek bank accounts will be frozen, with emergency measures detailed to prevent the flight of capital. Included in the paperwork is a list of very limited exceptions to the ‘no withdrawals’ order. All major banks ‘are instructed  not to deal with euro exchange  as of open of business in Greece on Monday 25th march. All Greek markets will close for one day ‘at least’.

As yet, I have been unable to establish the source of the documents. But one of my informants admitted, “I have strongly suggested to Greek business friends and clients that they sell up fast, do a sale and leaseback on property, empty bank accounts, and change to a hard currency.”

I have little doubt that such a critical path analysis leading to default in Athens can be easily brushed aside as contingency planning. But this is not the impression Slog sources were given: and its existence is bound to further raise suspicions in ClubMed about the real intentions of ‘EU Nord’, Washington and the Troika – especially the IMF. In particular, the alleged creation of the document both supports (and/or coincides closely with):

1. Washington going cold on further IMF funding

2. IMF intervention in the Athens debt talks

3. Persistent rumours surrounding Wolfgang Schauble’s plans

4. Evidence previously assembled by The Slog  concerning Americo-German coordination

5. A string of delaying tactics by senior EU and Troika officials since mid January.

Reviewing the timeline of the Greek Debt Marathon, the back end of it is pretty obviously one of persistent sabotage from Berlin, Brussels, and the IMF:

1. It’s the second week of January 2012, and the bondholder deal is a few small steps away from lawyers crossing t’s and dotting i’s. Enter Schauble saying the haircut is nowhere near short enough. Bondholders’ leader Charles Dalloran walks out.

2. The Troika barges into the Athens/Bondholder talks, and they turn into chaos, then grind to a halt.

3. FinMinCom meets in Brussels and several encouraging noises are made about progress towards a deal ‘over the weekend’. Enter Merkel bearing demand to fire the Greek Government and replace it with an EU commissioner. This produces four more days of circular delay, following which Nicolas Sarkozy declares that the German demand was never a demand.

4. Lucas Papademos gets personally involved and strikes a deal with Dalloran. Then he extracts the support of all Party leaders for the deal. We’re almost there. Enter Schauble and Brussels saying no, your economy’s worse than we thought – we need a closer haircut and more savings.

5. The troika is now talking direct to the bondholders with Athens outside the loop. The creditors feel on the back foot. They agree to a lower percentage rate for the new bond issues and a 70% haircut. Venizelos meanwhile focuses on finding additional savings. Papademos intervenes again with leaders and creditors. We are now ‘hours away’. Mario Draghi says no, the haircut is too close for the ECB, and not enough for everyone else.

6. Draghi relents a little, the bondholders say they are “tentatively flexible”. We’re two small steps away from a deal. Enter Schauble moaning about £325m of savings unaccounted for…a thousandth of the total Greek debt.

6. Tempers get inflamed back in Athens. Greek leaders start muttering about doing what they have to do, getting the deal signed, and then having elections. Berlin and FinMinCom demand that all Greek Party leaders sign a document ordering them to stick to the deal regardless of election results. This loses another two days….but the bondholders are still keen to sign.

7. The German Bundesbank leaks a story to German newspaper Handelsblatt saying the Greeks will not be able to satisfy bondholder demands, and thus technical default is now a certainty. The story is traced back to the office of anti-bailout hawk Jens Weidmann.

8. Deutsche Mittelstands Nachtrichen runs a story claiming another 2.5 bn euro hole has been found in the Greek budget proposals. The story is deconstructed by The Slog and others and turns out to be complete bollocks. But the FinMinCom meeting in Brussels is postponed, and replaced with a conference call.

9. Merkel says she doesn’t trust New Democracy leader Antonis Samaras. Athenian leaders must now sign another pledge after the additional 325m euros of savings have been found and agreed. They all sign (Wednesday morning – yesterday – 15th February).

10. Yesterday afternoon, the EU finance ministers’ conference call begins to talk about cutting its losses. A firm proposal is tabled – by Berlin, it seems – to divide the next bailout tranche into smaller slices. The next Com meeting is put off for six days.

11. Schauble describes the Greek debt as “a bottomless pit”. Merkel joins the fray by suggesting the bailout be put back until after the April elections. This clearly makes no sense, as from March 16th Greece will be in technical default without more money. But Schauble adds that indeed, Greece should postpone its elections…..and “install a technocrat government similar to Italy’s.”

12. Wen Jiabao makes nice noises about what a fine place Europe is to visit, but van Rompuy and Barroso come away predictably empty-handed.

13. Thursday dawns with everyone wondering where we are. Venizelos accuses “forces trying to push Greece out of the eurozone”. German government spokesman Steffen Seibert calls this “false” and adds, “I can state quite clearly on behalf of the federal government that Germany has taken no such decision.” Nobody said you had, Ducky. Berlin briefs on amphetamines about Angela Merkel being ‘resolutely opposed to default’. A majority of market opinion leaders and bondholders think the EU is bluffing, reports the FT. But a French source tells The Slog earlier today he thinks Germany “is talking from a position of strength. There is no doubt in our minds [in the Elysees] that Berlin has the necessary plans in place.”

We’re but an hour into the working day EU time (1hr ahead of GMT) and already the main EU players are busy installing further roadblocks. Boss of radio Luxembourg Jean-Claude Juncker said, “Further considerations are necessary regarding the specific mechanisms to strengthen the surveillance of programme implementation and to ensure that priority is given to debt servicing.” An intention as vague as that could take forever to fulfil….or until March 23rd.

A senior German official quoted by Reuters has added: “Questions remain that are very important to Germany and other member states about the sustainability of the programme.”

Ultimately, not even the Germans can see into the future: this is get off the pot time….but only if you’ve been devious for some time about being on the pot in the first place. The Slog’s recent profile of Angela Merkel demonstrated beyond too much doubt that the Fuhrerine in Berlin is more than capable of being devious.

In the last three weeks, several EU officials have pumped out the line – over and over again – that Greek default is no longer the bogeyman people thought it was….or to be more precise, they told us it was. “It would have led to a credit crunch immediately and hurt us all,” said a senior eurozone official. “Now, the odds [of such a catastrophic impact] are something like 10-20%. It’s still possible, but it’s not a certainty.”

First of all Draghi pumps money into the banking system, then the Troika/Berlin axis slows everything down. Now awkward facts come to light about the existence of ‘a plan’ which would protect America – by dumping the Greek contagion – and help the eurozone by concentrating  the bailout cash available to save the bigger players: Italy, Spain and France. An unpleasant phrase is doing the rounds in Brussels at the moment: ‘amputate and corterise’. It’s certainly beginning to look like that. And without doubt, that’s the way Mario Monti sees it.

Were I Greek, Portuguese or Irish, I’d be a worried man this morning.

The Slog

Don’t be fooled folks, the Greek “tragedy” is nothing more than arm-waving and the people of Greece have already voted on it — from the streets.

“There is no cause for major relief: In effect parliament only decided not to denounce further aid payments at this stage,” Commerzbank foreign-exchange analysts said in a note Monday. In particular, the analysts worried whether there would still be the political will to follow through on reforms when Greece gets a new government after fresh elections, which could come as early as April.

No such thing (follow-through) will happen. 

Simply put, the politicians are unwilling to have the same honest discussion and debate with the citizens there that we must have here in the United States.  The root cause of the problem is the same, the debt trajectory we are on is identical to that which caused Greece to blow, and not only are we not facing it, neither are they.

Olli Rehn, the European Commission’s head of economic and monetary affairs, said Greece has been living beyond its means for a decade and must undertake demanding reforms.

Yeah yeah.  We ought to re-write that:

Olli Rehn, the European Commission’s head of economic and monetary affairs, said Greecethe entire Western World has been living beyond its means for a decade and must undertake demanding reforms.

Reform = you cannot spend more than you take in via taxes.

Period.

So when will we see actual reform?  The fact of the matter is that since GDP = C + I + G + (x – i) when “G” decreases (government spending) by cessation of deficit policies GDP will inevitably contract, at least on a temporary basis.

This is why nobody is serious about doing it, but the longer we take to do it the worse it gets as the compounding of artificial demand builds into the system capacity that there is no organic requirement for, nor can the employment and standard of living that goes with it be supported.

The argument is always and forever that we must “grow” out of the mess.  The fact is that we never have.  In each and every case since 1980 there has never been a time when we have in fact “grown out of the recession.”  Note that this includes Presidents Reagan, both Bush I and II and Clinton.

Not one quarter folks, up until the crash, and then only because debt defaulted so fast that it fell below GDP’s rate of change.  The paradox is that while this was being decried and the screaming reached a fever pitch it was actually good from a perspective of sustainability!

In other words the exact opposite of what people claimed “should” be done was the correct path — do nothing, allow the corrective process to run its course, and in doing so allow sustainability to return.  Instead we are desperately trying to prop up the bubbles we blew over the last 30 years.

David Walker was on CNBC this morning again claiming that we “lost our way” over the last ten years.  He’s lying.  What we have here is a geometric series and I’m going to prove it.

Over 20 years, from 1980 to 2000, the slope of the line of debt accumulation was approximately 12 degrees.  From 2000 to 2008, or approximately 9 years, it was 26 degrees (more than double the slope over less than half the time) and from 2008 to today it was 64 degrees or again more than double the slope over less than half the time.  Note that this is just the public debt — the problems in entitlement programs (internal debt) are even worse!

This is a chart of a runaway geometric series.

There is no solution that comes from “slowing it down” — you must stop this right now.

I recognize that nobody wants to talk about it, say much less do it.  But mathematical relationships do not care whether you want to talk about them or not.  They just are, and Walker is trying to put this into some sort of perspective that aims at Bush and Obama.

He’s full of crap.  The problem goes back to 1980 when we crossed beyond fiscal sustainability.  Every President since that time and every Congress has been part of a gigantic Ponzi Scheme that will inevitably blow up unless we act to stop it now.

Do you want to see what a 21st century economic depression looks like?  Just look at Greece.  Once upon a time, the Greek economy was thriving, the Greek government was borrowing money like there was no tomorrow and Greek citizens were thoroughly enjoying the bubble of false prosperity that all that debt created.  Those that warned that Greece was headed for a financial collapse were laughed at and were called “doom and gloomers”.  Well, nobody is laughing now.  You see, the truth is that debt is a very cruel master.  Greeks were able to live way beyond their means for many, many years but eventually a day of reckoning arrived.  At this point, the Greek economy has been in a recession for five years in a row, and the economic crisis in that country is rapidly getting even worse.  It was just recently announced that the overall rate of unemployment in Greece has soared above 20 percent and the youth unemployment rate has risen to an astounding 48 percent.  One out of every five retail stores has been shut down and parents are literally abandoning children in the streets.  The frightening thing is that this is just the beginning.  Things are going to get a lot worse in Greece.  And in case you haven’t been paying attention, these kinds of conditions are coming to the United States as well.  We are heading down the exact same road as Greece went down, and the economic pain that this country is eventually going to suffer is going to be beyond anything that most Americans would dare to imagine.

All debt spirals eventually come to an end.  For years, Greece borrowed huge amounts of very cheap money, but there came a point when the debt became absolutely strangling and the rest of the world refused to lend the Greek government money at such cheap rates anymore.

Greece would have defaulted long before now if the EU and the IMF had not stepped in to bail them out.  But along with those bailouts came strings.  The EU and the IMF insisted that the Greek government cut spending and raise taxes.

Well, those spending cuts and tax increases caused the economy to slow down.  Tax revenues decreased and deficit reduction targets were missed.  So the EU and the IMF insisted on even more spending cuts and tax increases.

Even after all of the spending cuts and all of the tax increases that we have seen, the debt to GDP ratio in Greece is still higher than it was before the crisis began.  Today, the Greek national debt is sitting at 142 percent of GDP.

Now the EU and the IMF are demanding even more austerity measures before they will release any more bailout money.

Needless to say, the Greek people are pretty much exasperated by all of this.  They created this mess by going into so much debt, but they certainly don’t like the solutions that are being imposed upon them.

Protesters in Greece are absolutely outraged that the EU and the IMF are now demanding a 22 percent reduction in the minimum wage.

Most families in Greece are just barely surviving at this point.  Unfortunately, Greece is probably looking at depression conditions for many years to come.

Over the past three years, the size of the Greek economy has shrunk by 16 percent.

In 2012, it is being projected that the Greek economy will shrink by another 5 percent.

Sadly, that projection is probably way too optimistic.

Over the past couple of months, it has been like someone has pulled the rug out from under the Greek economy.  Just check out the following numbers from an article in the Telegraph by Ambrose Evans-Pritchard….

Another normal day at the Hellenic Statistical Authority.

We learn that:

Greece’s manufacturing output contracted by 15.5pc in December from a year earlier.

Industrial output fell 11.3pc, compared to minus 7.8pc in November.

Unemployment jumped to 20.9pc in November, up from 18.2pc a month earlier.

I have little further to add. This is what a death spiral looks like.

Can you imagine unemployment going up by 2.7 percent in one month?

This is what a 21st century economic depression looks like.

And needless to say, civil unrest is rampant in Greece.

The following is how a USA Today article described some of the protests that we saw in Greece this week….

Scores of youths, in hoods and gas masks, used sledge hammers to smash up marble paving stones in Athens’ main Syntagma Square before hurling the rubble at riot police.

The country’s two biggest labor unions stopped railway, ferry and public transport schedules, and hospitals worked on skeleton staff while most public services were disrupted. Unions were planning protests in Athens and other cities around midday.

Greek citizens are exasperated by the endless rounds of austerity that are being imposed upon them.  They wonder how far all of this is going to go.

How much higher can taxes go in Greece?  Greece already has tax rates that are among the highest in Europe….

Greece has the third highest rate of VAT in Europe, second highest gas/petrol tax, third highest tax on social insurance contributions, fifth highest VAT on alcohol, highest property tax and one of the worst corporate tax rates, without the quality of living or competitiveness to match.

How much farther can government pay be cut?  Greek civil servants have had their incomes slashed by about 40 percent since 2010.

How would you feel if your pay was reduced by 40 percent?

Large numbers of Greeks are rapidly reaching the end of their ropes.  The following is from a recent article in the Independent….

“People are scared and haven’t really realised what’s happening yet,” George Pantsios, an electrician for the country’s public power corporation, said. He has only been receiving half of his €850 monthly wage since August. “But once we all lose our jobs and can’t feed our kids, that’s when it’ll go boom and we’ll turn into Tahrir Square.”

Instead of turning violent, others are simply giving in to despair.  According to the Daily Mail, large numbers of Greek children are being abandoned because their parents simply cannot afford to take care of them anymore.  The note that one mother left with her little toddler was absolutely heartbreaking….

One mother, it said, ran away after handing over her two-year-old daughter Natasha.

Four-year-old Anna was found by a teacher clutching a note that read: ‘I will not be coming to pick up Anna today because I cannot afford to look after her. Please take good care of her. Sorry.’

Sadly, there are an increasing number of Greeks that are giving up on life entirely.  The number of suicides in Greece rose by 40 percent during just one recent 12 month time period.

But we haven’t even seen the worst in Greece yet.  The worst is still yet to come.

And the people of Greece are going to get angrier and angrier and angrier.

According to one recent poll, about 90 percent all of Greeks are unhappy with the interim government led by Prime Minister Lucas Papademos.

This week, that government has started to fall apart.  Over just the past few days, 6 members of the 48-member government cabinet have resigned.  Not only is there real doubt if the new austerity measures will be approved, there is very real doubt if this government will be able to hold together much longer.

Frustration with the EU and the IMF has reached a fever pitch in Greece.  Just check out what Reuters is reporting….

In a letter obtained by Reuters on Friday, the Federation of Greek Police accused the officials of “…blackmail, covertly abolishing or eroding democracy and national sovereignty” and said one target of its warrants would be the IMF’s top official for Greece, Poul Thomsen.

So what is going to happen next in Greece?

The truth is that nobody knows.

But whatever kind of “deals” are reached, the reality is that nothing is going to keep Greece from continuing to experience depression-like conditions for quite some time.

Unfortunately, Greece is not an isolated case.

Portugal, Ireland, Italy and Spain are all going down the same path and Europe does not have enough money to bail all of them out.

To get an idea of how much money it would take to bail out the financially troubled nations of Europe, just check out this infographic that was recently posted on ZeroHedge.

A day of reckoning is coming for the United States as well.  As CNBC recently noted, the U.S. debt problem is far worse than the European debt problem is.

That is why I have written over and over about the U.S. national debt and about how the U.S. government is spending too much money.

Right now, the U.S. government is still able to borrow gigantic mountains of very cheap money and is spending money as if tomorrow will never come.

Well, just like we saw in Greece, when debt gets out of control a day of great pain eventually arrives.

What we are watching unfold in Greece right now is coming to America.

You better get ready.

The Economic Collapse

Oh no, it’s just Greece, right?  Uh, wrong.

BUDAPEST (Reuters) – Hungary is seeking an international credit line of 15 to 20 billion ($20 to $26.3 billion) euros, the secretary of state heading the prime minister’s office, Mihaly Varga, was quoted on Saturday as saying.

Hungary is seeking backup from the International Monetary Fund and the European Union to reassure investors it has financing even if it gets cut off from debt markets later this year.

Uh huh.  Remember that Hungary has been having some wee problems of late with regard to its government, the EU and IMF.

Hungarian bond yields are over 11%, which is not good at all in a world of ZIRP.  This effectively precludes most borrowing.

The problem with these pleas and “rescues” is that they continue to belie the real problem, which is that governments cannot continually borrow more than they tax.  It is simply not possible on a long-term basis for this to work, as compounding eventually gets you.  It might not immediately, but in the longer run it will with certainty.

Do I expect Hungary to eschew that which it must?  Not right away, and perhaps not at all until there’s a disaster, but in the end all governments must reconcile their budgets to this underlying fact — like it or not.