Week ending 2 September 2011

Negotiations between troika officials and the Greek department of finance broke down and the troika team left Athens (2 Sept). They are not scheduled to return before mid-September at the earliest. According to a troika statement “the mission has made good progress, but has temporarily left Athens to allow the authorities to complete technical work, among other things, related to the 2012 budget and growth-enhancing structural reforms.” For which read there is a flaming row with the troika essentially deciding that Greece is again off the rails from the point of view of meeting particularly budget deficit targets set in the bail-out agreement.

As a result of the breakdown shares on the Athens exchange understandably fell sharply Friday.

In addition to the (now departed) troika there is a second team currently in Athens: the US consultants BlackRock are going through the banks’ accounts, conducting a stress test (this is the team brought into Ireland to do a similar evaluation of the Irish banks, leading to the big recap of banks there last March).

A key issue in any (now inevitable) restructuring (or any other term you wish to use in place of the ‘d’ word) is private sector involvement (PSI), for which read bond holders taking a (big) haircut. The focus will be on designing a structure and terms that do not trigger an ‘event’ as far as governments, ratings agencies, banks and bondholders (through the ISDA) are concerned. To this end the Greeks have signed up the NY law firm Cleary, Gottlieb and in particular that firm’s Lee Buchheit (a man who knows a thing or two about sovereign defaults) to advise.

The Germans are getting more worried by the day: it was announced Friday, that Merkel will meet van Rompuey on Monday evening next officially to talk about eurozone (EZ) crisis management reform. But Greece will be on the agenda. A spokesman for Merkel, Steffen Seibert, is quoted as saying “What matters for the [German] government is that Greece fulfills its responsibilities quickly and puts into practice its decisions and commitments. The troika needs to determine whether this is happening sufficiently.” Well it isn’t – which is why the troika team has walked off the pitch to take a ten-day time out.

In all of this Merkel is also looking to her political situation. The series of seven Land elections for 2011 concludes in September – the culmination being Berlin on 18 September. The other two states/dates are Mecklenburg-Vorpommern (4 September) and Sachsen-Anhalt 11 September

Merkel is having to look three ways – to Europe and the need to save the EZ and the currency (TBTF); to an electorate and a parliament that is distinctly opposed to any more bail out/ECB bond buying; and a Constitutional Court that is to decide on 7 September the constitutionality of bail outs and the ECB bond purchase programmes. Thus Monday’s meeting with Rumpypumpy and today (Friday), the comments of Bundesbank President Jens Weidmann openly expressing his reservations about the ECB’s bond purchase program on the ground that it undermines the credibility of the ECB and central banks. According to a Dow Jones wire service “With the purchase of government bonds –already exceeding €115billion after the spreading of debt crisis in Italy and Spain- the distinction between monetary and fiscal policy are less clear, leading to loss of credibility, said the President.” On one view this signals tensions within the ECB, not least between Weidmann (and Germany) on the one hand and Trichet on the other. However, the DJ report concludes “Brussels sources note that there is a link to the “hardening” of Weidmann’s pressure with Merkel’s line in her election campaign” – for which read Brussels reckons it will be allright on the night.

Also scheduled for next week is a Greek t-bill auction. Greece will sell €1 billion of 26-week treasury bills at an auction on Tuesday 6 September. The average yield at the most recent previous auction was 4.85 per cent. The auction is against a backdrop of the yield on Greek 2 year bonds going to in excess of a record 40 per cent in late August.

The Markit SOVX index is back above a marker level of 300: this afternoon it stands at 311.75 (at 15:31 hrs), up more than 4 per cent while the spread on Greek CDS is at an all-time record of 2300.

On the other hand yields on Spanish, Italian and Irish debt have narrowed during August – which has prompted some talk of a decoupling of the ‘other’ peripherals from Greece and the effectiveness of ECB intervention. On the other hand looking for downside, there is the view (at e.g. Zero Hedge) that “The move tighter always seemed suspect because there was so little actually money used.  The market had just decided not to fight the ECB.  Now they might.  The ECB has spent a decent amount of money already, is sitting on inventory that is now possibly already under water, and has a leader near the end of his term.  Watch this move closely, but it wouldn’t be surprising to see the market take another run at these artificially low yields now that the ECB seems to have lost some control on the situation.”

We will see (who is right).

The picture on the other side of the pond is nightmarish, more so by the day. The US mortgage and foreclosure crisis seems endless. The latest news is that the attempt by the state Attorneys General to come to a proposal that will get the banks off the hook of their liabilities arising from fraud, malfeasance, incompetence and plain theft (which on a widespread view is a deal with the White House behind it) has unraveled. It was already coming unstuck as the New York AG refused to sign up for it. Now a federal agency the Federal Home Financing Agency (FHFA, which supervises Freddie and Fannie) has filed suit ahead of a fast approaching lapse of time provision (NYT). The banks are now highly unlikely to get the deal they sought: no liability, no prosecution and voluntary settlements (such as BoA’s recent $8.5bn provision) without prejudice and in exchange for the AGs walking away from prosecutions. One of the banks named in the FHFA filing is Deutsche. Foreclosure pipelines are jammed, prices still falling, swathes of property under water (negative equity), employment, non-farm payroll (NFP), treading water on figures out Friday and unemployment just shy of 10 per cent. The Street is now screaming for QE3. All eyes next week on Obama address to joint Houses (scheduled for Wednesday 7 September). No announcement from the Fed until later in the month.

With summer officially over from next week (although US closed for Labor Day week-end) it must surely look like a blood bath in prospect for financial markets globally (and certainly in Europe).


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