Archive for the ‘Sovereign Debt’ Category

George Soros on European Fiscal & Banking Crisis and EU Summit on June 28-29, 2012

Monday, June 25th, 2012

Here I present key take-aways from George Soros’ in depth Bloomberg interview on the current European fiscal and banking crisis, Angela Merkel, the Spanish bailout, and Greece leaving the Eurozone.

The video is also below:

Banking & Fiscal Issues

  • “There is an interrelated problem of the banking system and the excessive risk premium on sovereign debt – they are Siamese twins, tied together and you have to tackle both.”
  • Soros summarizes the forthcoming Eurozone Summit ‘fiasco’ as fatal if the fiscal disagreements are not resolved in 3 days.
  • There is no union without a transfer.
  • Europe needs banking union.
    • Germany will only succumb if Italy and Spain really push it to the edge (Germany can live in the present situation; the others cannot)
    • Europe needs a fiscal means of strengthening growth through Treasury type entity
      • What is needed is a European fiscal authority that will be composed of the finance ministers, but would be in charge of the various rescue mechanisms, the European Stability Mechanism, and would combine issuing treasury bills.
        • Those treasury bills would yield 1% or less and that would be the relief that those countries need in order to finance their debt.
        • Bill would be sold on a competitive basis.
        • Right now there are something like over €700bn euros are kept on deposit at the European Central Bank earning a 0.25% because the interbank market has broken down, so then you have €700bn of capital that would be very happy to earn 0.75% instead of 0.25%, and the treasury bills by being truly riskless and guaranteed by the entire community, would yield in current conditions less than 1%.
        • Governments should start a European unemployment scheme, paid on a European level instead of national level.
        • Soros’ solutions, however, are unlikely to prove tenable in the short-term as he notes “Merkel has emerged as a strong leader”, but “unfortunately, she has been leading Europe in the wrong direction”.
          • “Euro bonds are not possible because Germany would not consider euro bonds until there is a political union, and it should come at the end of the process not at the beginning.
          • This would be a temporary measure, limited both in time and in size, and thereby it could be authorized according to the German constitution as long as the Bundestag approves it, so it could be legal under the German constitution and under the existing treaties.
          • The political will by Germany to put it into effect and that would create a level playing field so that Italy and Spain could actually refinance debt on reasonable terms.

Scenario Discussion

  • LTRO would be less effective now
  • At 6%, 7% of Italy’s GDP goes towards paying interest, which is completely unsustainable
  • Spain may need a full bailout if summit is not successful
    • Financial markets have the ability to push countries into default
    • Because Spain cannot print money itself
    • Even if we manage to avoid, let’s say an ‘accident’ similar to what you had in 2008 with the bankruptcy of Lehman Brothers, the euro system that would emerge would actually perpetuate the divergence between creditors and debtors and would create a Europe which is very different from open society.
    • It would transform it into a hierarchical system where the division between creditors and debtors would become permanent…It would lead to Germany being in permanent domination.
      • It would become like a German empire, and the periphery would become permanently depressed areas.

On Greece

  • Greece will leave the Eurozone
    • It’s very hard to see how Greece can actually meet the conditions that have been set for Greece, and the Germans are determined not to modify those conditions seriously, so medium term risk
    • Greece leaving the euro zone is now a real expectation, and this is what is necessary to strengthen the rest of the euro zone, since Greece can’t print money
    • By printing money, a country can devalue the currency and people can lose money by buying devalued debt, but there is no danger of default.
      • The fact that the individual members don’t now control the right to print money has created this situation.
      • A European country that could actually default. and that is the risk that the financial markets price into the market and that is why say Italian ten-year bonds yield 6% whereas British 10-year bonds yield only 1.25%.
  • That difference is due to the fact that these countries have surrendered their right to print their own money and they can be pushed into default by speculation in the financial markets.

On Angela Merkel

  • Angela Merkel has been leading Europe in the wrong direction. I think she is acting in good faith and that is what makes the whole situation so tragic and that is a big problem that we have in financial markets generally – she is supporting a false idea, a false ideology, a false interpretation which is reinforced by reality.
  • In other words, Merkel’s method works for a while until it stops working, and that is what is called a financial bubble
    • Financial bubbles look very good while they are being formed and everyone believes in it and then it turns out to be unsustainable…
    • The European Union could turn out to have been a bubble of this kind unless we realize there is this problem and we solve it and the solution is there.
    • I think everybody can see it, all we need to do is act on it, and put on a united front, and I think that if the rest of  Europe is united, I think that Germany will actually recognize it and adjust to it.

On Investing

  • Stay in cash
  • German yields are too low
  • If summit turns out well, purchase industrial shares, but avoid everything else (consumer, banks)

Conclusion: We are facing conditions reminiscent to the 1930s because of policy mistakes, forgetting what we should have learned from John Maynard Keynes.

Bank of Spain Nationalizes Bankia – Property Bubble Bursting

Wednesday, May 9th, 2012

According to ZeroHedge, the Bank of Spain has recently nationalized Bankia, the first of many nationalizations that have to occur in Spain because of poor underwriting by the cajas (regional banks/savings and loan institutions) and falling real estate prices. The Spanish housing price graph above shows how much further the property bubble went in Spain, where at one point, more than 15% of the labor force was working in construction.

With a government debt to GDP ratio of 70%, and another 30%+ of municipal debt, where is Spain getting the money to accomplish these bailouts?

By Alexander Lemming, Leverage Academy Associate

Statement on BFA-Bankia

The Board of Finance and Savings Bank (BFA) announced today the Bank of Spain its decision not to buy in the terms and conditions agreed to the securities issued in the amount of € 4.465m who signed the FROB (Bank Restructuring Fund). BFA has concluded that the most desirable to strengthen the soundness of the business project that began with the appointment of Jose Ignacio Goirigolzarri as president is to request the conversion of these titles in stock ordinary. This conversion must be authorized by the Bank of Spain and the other authorities Spanish authorities and community and will be conducted in accordance with the valuation process established in the indenture securities.

The Bank of Spain has worked hard in recent months with the group address BFA-Bankia to specify the measures to ensure compliance with the provisions of the RD-l 2/2012 for the sanitation Spanish financial system. BFA-Bankia late March presented a restructuring plan and restructuring that included measures that would comply with the RD-l, and standardize its financial  position.

After analyzing this reorganization plan, the Bank of Spain also ordered the entity measures complementary to streamline and strengthen management structures and management, increasing professionalization and a divestment program. These additional actions should serve to enhance the soundness of the institution and restore market confidence. The events of the past weeks and the growing uncertainty about the future of the company has made it advisable to go further and raise the providing resources to accelerate and increase public sanitation.

The changes in the presidency of BFA-Bankia is precisely oriented in the direction shown in professional management and allow the group to boost its restructuring program. The new address of the entity must submit in the shortest possible plan of reorganization strengthened that places BFA-Bankia able to cope with a full guarantee its future.

In any case, BFA-Bankia is a solvent entity that continues to function quite normally and customers and depositors should have no concern. (ZHedge)

Italian 10 year Yield Rises Above 7.4%, Country Theoretically Unable to Fund Itself at These Levels (Bankrupt), Prime Minister Offers to Resign

Wednesday, November 9th, 2011

November 9, 2011: After Italian Prime Minister Berlusconi offered to resign yesterday, the credit markets almost sighed in relief. But today, markets were punched in the jugular as LCH.Clearnet increased margin requirements on Italian bonds. Margins were raised because 10 year credit spread exceeded 450 bps, the same point at which Clearnet raised margins on the bonds of other peripheral countries in Europe.
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The pressure is certainly on the ECB and Italy now to find a solution to this debt crisis, as Italy is too large to be bailout out. Yesterday, known for his sex scandals and political corruption, Prime Minister Berlusconi was pressured to leave his post because Italian yields were creeping above 6.5%. According to the Times, “In the end, it was not the sex scandals, the corruption trials against him or even a loss of popular consensus that appeared to end Mr. Berlusconi’s 17 years as a dominant figure in Italian political life. It was, instead, the pressure of the markets — which drove Italy’s borrowing costs to record highs — and the European Union, which could not risk his dragging down the euro and with it the world economy. On Wednesday, yields on 10-year Italian government bonds — the price demanded by investors to loan Italy money — edged above 7 percent, the highest level since the adoption of the euro 10 years ago and close to levels that have required other euro zone countries to seek bailouts.”
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Currently, the Italian 10 year yield has exceeded 7.4%, and the 2 year note has risen more than 10 year rate. At this point, Italy is theoretically unable to fund itself and could theoretically be bankrupt. The margin call on bonds due between seven and 10 years was raised by five percentage points to 11.65%, for bonds due between 10 years and 15 years it was raised by five percentage points to 11.80%, while for bonds that mature in 15 years and 30 years the margin call was raised by five percentage points to 20%. The changes come into effect Nov. 9 and will have an impact on margin calls from Nov. 10, the French arm of LCH.Clearnet said.

Bill Gross of PIMCO Dumps U.S. Treasuries

Thursday, March 10th, 2011

As a follow up to our story on shorting treasuries using TMV, the Direxion Daily 30+ year treasury bear, the LA team wanted to discuss Bill Gross’s move to dump government securities.  Bill Gross runs the world’s largest bond fund and has surprisingly decreased his treasury holdings completely.  His fund is now in 23% cash, the highest cash balance since 2008.  PIMCO manages $1.24 trillion of assets, mainly fixed income securities.  According to Gross, if the U.S. transitions into quantitative easing v3 (QEIII), yields on government securities will may increase 150 bps by 2012, resulting in large gains for those net short the 30 year treasury.

According to Bloomberg, “Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits.

Pimco’s $237 billion Total Return Fund last held zero government-related debt in January 2009. Gross had cut the holdings to 12 percent of assets in January, according to the company’s site. The fund’s net cash-and-equivalent position surged from 5 percent to 23 percent in February, the highest since May 2008.

Yields on Treasuries may be too low to sustain demand for government debt as the Fed approaches the end of its second round of quantitative easing, Gross wrote in a monthly investment outlook posted on Pimco’s website on March 2. Gross mentioned that Pimco may be a buyer of Treasuries if yields rise to attractive levels.

Treasury yields are about 150 basis points too low when viewed on a historical context and when compared with expected nominal gross domestic product growth of 5 percent, he wrote in the commentary. The Fed is scheduled to complete purchases of $600 billion of Treasuries in June.

Gross in his February commentary urged investors to reduce holdings of Treasuries and U.K. gilts and buy higher-returning securities such as debt from emerging-market nations. “Old- fashioned gilts and Treasury bonds may need to be ‘exorcised’ from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint,” Gross wrote.

Emerging-Market Debt

Gross last month increased holdings of emerging-market debt to 10 percent, the highest since October, from 9 percent in January. He cut holdings of mortgage securities to 34 percent from 42 percent in January.

The Zero Hedge website first reported the change in assets today. Pimco doesn’t comment on changes in holdings.

Treasuries returned 5.9 percent in 2010, according to Bank of America Merrill Lynch Indexes. The securities lost 0.6 percent so far this year.

Ten-year Treasury yields have risen for each of the past six months, according to data compiled by Bloomberg, the longest run since June 2006, as the economy showed signs of improvement and prices of commodities climbed. The 10-year yield fell six basis points to 3.48 percent today.

Gross kept the holdings of non-U.S. developed debt at 5 percent in February.

Inflation Outlook

Gross’ fund has returned 7.23 percent in the past year, beating 85 percent of its peers, according to data compiled by Bloomberg. It gained 1.39 percent over the past month.

As the Fed maintains its target rate at a record low range of zero to 0.25 percent and has made an increase in inflation a cornerstone of its monetary policy, Gross noted that inflation may be a bigger factor than many suggest.

Gains in so-called headline inflation matter more for the U.S. than Fed Chairman Bernanke suggests and rising oil prices may cut U.S. gross domestic product by a quarter to half a percentage point, Gross said March 4 in a radio interview on “Bloomberg Surveillance” with Tom Keene.

“Bernanke tends to think this doesn’t matter — at least in terms of headline versus the core — we do,” Gross said.

Pimco’s U.S. government-related debt category can include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives, Treasury futures and options and bank debt backed by the Federal Deposit Insurance Corp., according to the company’s website. The fund can have a so-called negative position by using derivatives, futures or by shorting.

Derivatives are financial obligations whose value is derived from an underlying asset. Futures are agreements to buy or sell assets at a later specific price and date. Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen.

Pimco, a unit of the Munich-based insurer Allianz, managed $1.24 trillion of assets as of December.”

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Quantitative Easing II: A Video Tale of Mr. Ben Bernanke

Thursday, November 18th, 2010

Today, Ben Bernanke defended his second economic stimulus package, using monetary easing to lower interest rates and spur both spending and lending.  The first $2 trillion package apparently wasn’t enough, so now another avalanche of capital will flow into the United States economy and abroad.  When criticized by China and other East Asian economies now being flooded with excess capital flows, Bernanke claimed that both growth and trade are not balanced and that emerging market currency pegs were to blame.  Now begin the currency wars between the mature and emerging economies…can anyone actually win?  Bernanke claims that emerging market growth will be stimulated as the developed nations recover; therefore, a weaker U.S. currency could be better for everyone.  Only time, our inflation rate, and the price of gold will tell. (Paulson’s gold fund has certainly been on a tear…)

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This video should provide some humor to the current situation.  The section on Mr. Dudley’s role at Goldman Sachs is pretty revealing…

[youtube]http://www.youtube.com/watch?v=PTUY16CkS-k[/youtube]

According to Bloomberg, “Federal Reserve Chairman Ben Bernanke, took his defense of the U.S. central bank’s monetary stimulus abroad, saying it will aid the world economy, and implicitly criticized China for keeping its currency weak.

The best way to underpin the dollar and support the global recovery “is through policies that lead to a resumption of robust growth in a context of price stability in the United States,” Bernanke said in prepared remarks to a conference later today in Frankfurt. Countries that undervalue their currencies may eventually inhibit growth around the world and risk financial instability at home, he said.

The Fed chief is confronting criticism from officials in countries including China and Brazil who say the Nov. 3 decision to buy $600 billion in Treasury securities has weakened the dollar and contributed to flows of capital to emerging markets. The policy has also come under fire in the U.S., where critics including Republican members of Congress have said it risks fueling inflation and asset bubbles.

“Globally, both growth and trade are unbalanced,” Bernanke said, with economies growing at different rates. “Because a strong expansion in the emerging-market economies will ultimately depend on a recovery in the more advanced economies, this pattern of two-speed growth might very well be resolved in favor of slow growth for everyone if the recovery in the advanced economies falls short.”

Group of 20

While Bernanke didn’t identify China, he took aim at “large, systemically important countries with persistent current-account surpluses.” Bernanke’s comments come a week after leaders of the Group of 20 developed and emerging nations meeting in South Korea failed to agree on a remedy for trade and investment distortions. At the summit, President Obama attacked China’s policy of undervaluing its currency.

Bernanke said that the “sense of common purpose has waned” after officials around the world united to fight the financial crisis. “Tensions among nations over economic policies have emerged and intensified, potentially threatening our ability to find global solutions to global problems,” he said.

China has tied the yuan to the dollar to promote exports that helped produce the fastest gains in gross domestic product of any major economy. China, which surpassed Japan’s GDP to become world No. 2 in the second quarter, recorded 9.6 percent annual growth in the three months through September. It holds about $2.6 trillion in foreign reserves, the most in the world.

International Panel

The Fed released the text of Bernanke’s speech in Washington ahead of the address scheduled for at 11:15 a.m. Frankfurt time at a European Central Bank conference on monetary policy. He will then speak on a panel at 11:45 a.m. with ECB President Trichet, International Monetary Fund Managing Director Kahn and Brazil central bank President Meirelles.

In the panel discussion, Bernanke will say that “financial conditions eased notably in anticipation” of the Fed’s stimulus announcement, “suggesting that this policy will be effective in promoting recovery,” according to a text released by the Fed.

It’s Bernanke’s first trip abroad since the Federal Open Market Committee made the decision, dubbed QE2 by economists and investors, to implement a second round of so-called quantitative easing. Bernanke said the term is “inappropriate” because it usually refers to policies that change the quantity of bank reserves, “a channel which seems relatively weak, at least in the U.S. context.”

Global Call

In the speech, Bernanke called on policy makers around the world to “work together to achieve a mutually beneficial outcome — namely, a robust global economic expansion that is balanced, sustainable and less prone to crises.”

German Finance Minister Schaeuble said Nov. 5 he was “dumbfounded” at the Fed’s actions, which won’t aid growth and will instead contribute to imbalances by driving down the currency. U.S. monetary policy is creating “grave distortions” and causing “collateral effects” on faster-growing economies such as Brazil, Meirelles said in October.

Bernanke said that different economies “call for different policy settings.” In the U.S., inflation has slowed since the most recent recession began in December 2007, and “further disinflation could hinder the recovery,” he said.

“Insufficiently supportive policies in the advanced economies could undermine the recovery not only in those economies, but for the world as a whole,” he said.

Jobless Rate

America’s unemployment rate at 9.6 percent last month is currently “high and, given the slow pace of economic growth, likely to remain so for some time,” Bernanke said. He said that “we cannot rule out the possibility that unemployment might rise further in the near term, creating added risks for the recovery.”

The asset purchases will be used in a way that’s “measured and responsive to economic conditions,” Bernanke said. Fed officials are “unwaveringly committed to price stability” and don’t seek inflation higher than the level of “2 percent or a bit less” that most policy makers see as consistent with the Fed’s legislative mandate, he said.

Bernanke, 56, also appealed to human concerns to justify the Fed’s policy.

“On its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years,” he said. “As a society, we should find that outcome unacceptable.”

The former Princeton University economist devoted the majority of his speech to discussing global policy challenges and tensions.

China’s Criticism

China’s vice foreign minister, Mr. Tiankai, said Nov. 5 that “many countries are worried about the impact of the policy on their economies,” echoing concerns raised across Asia over stronger currencies and possible asset-price inflation.

Bernanke used one of nine charts to show how countries including China and Taiwan are intervening to prevent or slow appreciation in their currencies. Allowing stronger currencies would help result in “more balanced and sustainable global economic growth,” Bernanke said.

The comments echo views of Obama administration officials including Treasury Secretary Geithner, who said Oct. 6 that “it is very important to see more progress by the major emerging economies to more flexible, more market-oriented exchange-rate systems.”

Depression Lesson

Bernanke, a scholar of the Great Depression, drew a comparison between the current period and events leading to the 1930s economic disaster. The U.S. and France maintained “persistently undervalued” exchange rates by preventing inflows of gold from feeding into money supplies, which created deflationary pressures in other countries and helped bring on the Depression, Bernanke said.

“Although the parallels are certainly far from perfect, and I am certainly not predicting a new Depression, some of the lessons from that grim period are applicable today,” Bernanke said. “In particular, for large, systemically important countries with persistent current-account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.””

Google Launches Trading Floor to Manage $26.5 Billion in Cash Reserves

Sunday, May 30th, 2010

According to Google Treasurer Callinicos, the firm has started a trading team and is currently hiring for entry level and experienced trading positions.  Callinicos is very well respected in the finance and technology industries, after serving as Treasurer of Microsoft at a time where the company was generating 7% cash returns.  In 2004, the company was able to pay out a one-time $32 billion dividend.

Specifically, Google is looking for bond traders and portfolio analysts.   The firm currently has the 3rd largest cash reserves of any company, after Microsoft and Cisco.  The trading team will also be used to buy back shares after Google purchased AdMob in a $750 million stock transaction recently.  The transaction was cleared on May 21st.  Surprisingly, Google has been public about not returning cash to shareholders, and instead internally generating value.

The trading floor at Google opened up in January.  Traders at the firm have a primarily role of preserving capital and generating reasonable returns, so that Google has adequate capital to continue to make acquisitions.  The investment team has grown from six people at the outset to 30 people as of today.  Many of the traders at Google are from Goldman Sachs and J.P. Morgan.  Google’s technology allows traders to see 98% of positions in real time, whereas most bank can only monitor 60-70% of transactions in real time.

Google has pulled away from U.S. government notes and has moved $4.9 billion into corporate bonds and agency mortgage-backed securities.  The company has also invested in emerging market sovereign debt.  Unfortunately, Google’s trading salaries are not as lucrative as those on Wall Street, but the company culture is much more laid back and focused on capital preservation.

The firm is currently looking for risk analysts, sovereign debt traders, and MBS traders.  A recent hire, Ranidu Lankaj, had a full ride at Yale, worked for 2 years at Lehman Brothers, and published his first Sri Lankan rap record at age 19. (Source: Bloomberg Businessweek)

European Union Proposes $928 Billion Crisis Aversion Plan…It’s About Time!

Sunday, May 9th, 2010

After months of avoiding the debt refinancing troubles of Greece, the European Union came together this weekend in a crisis summit to address the falling Euro and credit malaise in the EU.  Describing short investors as a “wolf pack” plaguing the continent, ministers vowed to counter financial markets from causing the Greek debt crisis from spreading.  The plan offers $805 billion (600 billion) to the continent (440 billion euros from EU, 100 billion from IMF, 60 billion Euro stabilization fund) for crisis measures.  This comes after the IMF approved a 30 billion Euro bailout for Greece today.

If the IMF commits 220 billion Euros, the plan could reach $928 billion!

Why 600 billion Euros at the outset?  European economists predict that if Ireland, Portugal, and Spain eventually come to require bailouts similar to Greece’s, the total cost could be some 500 billion euros.

Let’s avoid another Lehman Brothers…

Greece

According to Reuters, “European Union finance ministers on Sunday promised to counter the “wolfpack” of the financial markets as they sought agreement on a 600 billion euro ($805 billion) plan to keep Greece’s debt crisis from spreading.

The compromise measure under discussion included loan guarantees by euro zone countries worth 440 billion euros, a 60 billion euro stabilization fund and a 100 billion euro top-up of International Monetary Fund loans, EU sources said.

Financial markets have been punishing heavily indebted euro zone members, threatening to plunge them into Greece’s plight. The safety net being assembled was meant to protect other countries with bloated budgets, such as Portugal, Spain and Ireland.

Jitters over euro zone finances have set global markets on edge, and provided a backdrop for a nearly 1,000-point drop in the Dow Jones industrial average on Thursday, whose trigger remains a mystery.

Hopes the EU package would successfully tackle the crisis helped lift the euro, which gained almost 2 percent against the U.S. dollar and 3 percent on the yen in early Asia trade. U.S. stock futures also surged at the start of trade on Sunday.

Moving swiftly to bolster Greece and instill some confidence in shaky markets, the IMF approved a 30 billion euro rescue loan as part of a broader combined EU-IMF bailout for the country totaling 110 billion euros. The IMF said 5.5 billion euros from the three-year loan would be disbursed immediately.

To secure the funds, Greece has committed to budget-cutting measures so sharp that they have already caused violent protests.

“Today’s strong action by the IMF to support Greece will contribute to the broad international effort underway to help bring stability to the euro area and secure recovery in the global economy,” IMF Managing Director Dominique Strauss-Kahn said in a statement.

‘WOLFPACK BEHAVIORS’

But whether the coordinated international actions would settle global markets, which have been roiled in recent days, remained to be seen. Policymakers around the globe have become worried about the knock-on effects should the crisis spread.

“We now see … wolfpack behaviors, and if we will not stop these packs, even if it is self-inflicted weakness, they will tear the weaker countries apart,” Swedish Finance Minister Anders Borg told reporters in Brussels as he arrived for the EU meeting.

Britain’s finance minister Alistair Darling stressed the need to stabilize markets, while ministers from France, Spain, Finland and other euro zone states vowed to defend their shared currency.

U.S. President Barack Obama and German Chancellor Angela Merkel spoke by phone earlier on Sunday about the importance of EU members acting to build confidence in markets.

Economists estimate that if Portugal, Ireland and Spain — three other heavily indebted euro zone countries — eventually come to require bailouts similar to Greece’s, the total cost could be some 500 billion euros.

As details of the financial barriers that the EU was putting up to ward off speculators against Greece and other debt-laden countries became public, G20 finance officials held a teleconference to discuss the crisis.

Last week, fears that a euro zone debt crisis could rock banks and the global economy like the September 2008 collapse of U.S. bank Lehman Brothers swept through markets, pushing global stocks to near a three-month low. It was unclear whether the EU crisis package would stem the tide.

“All in all this is good news, but it is unlikely in itself to calm markets; it’s all too ‘slow-burner’ stuff,” said Erik Nielsen, chief European economist at Goldman Sachs. He said he expected the European Central Bank would soon need to take some type of emergency action.

EU sources said ECB governors met to discuss the crisis, but no details were available.

MARKET TURMOIL

The 16 nations that use the single currency have been criticized for contributing to market uncertainty by responding too slowly to the crisis in Greece.

An IMF board source told Reuters that some board members had shared those concerns and raised worries that the crisis could spread to other euro zone countries.

A euro zone summit last week asked for a European stabilization mechanism.

Some economists said the move was welcome, but that it would cure the symptoms, rather than the disease.

“By putting in place additional safeguards for the euro area financial system, governments finally appear to be rising to the challenge of the sovereign debt crisis,” Morgan Stanley said in a research note to clients.

“But, like the measures taken before — for the benefit of Greece — a stabilization fund is just buying time for distressed borrowers,” it said.”

Morgan Stanley Sovereign Credit Outlook: Greece Fears Continue to Drive Bond Yields Higher

Wednesday, May 5th, 2010

What should have been a 1 month affair has now become a 6 month ordeal for the world credit markets.  As of today, May 5th, the European equity markets are in fact negative for the year and the world MSCI index has given up its entire gain for 2010.  It is ironic how a country that only makes up 2.3% of Europe’s GDP could cause the Euro to fall from 1.40 to 1.28 in a matter of weeks.  Euro shorts have multiplied despite efforts by banks such as Citi to put targets on the currency at 1.35+.  Commodity markets have also been roiled, with the VIX jumping 15% yesterday as well.  Worries that Portugal would be downgraded again have multiplied investor concerns.  Investors around the world wait in fear as policy measures will be discussed by Germany and other European nations on May 7th.  Riots in Greece have killed three so far in retaliation to austerity measures linked to the proposed bailout by the European Union and the IMF.

Please see Morgan Stanley’s outlook below.

Contagion Call Slides

According to Ms. Petrakis of Bloomberg, “May 6 (Bloomberg) — Greece’s Parliament will debate today the austerity measures demanded as a condition of an internationally led bailout as the nation mourns the three victims of Athens protests against the plan.

Prime Minister George Papandreou, whose Pasok party holds a 10-seat majority in the legislature, will tell lawmakers today that the wage and pension cuts are necessary to secure the 110 billion-euro ($141 billion) package and avoid default.

“No one was happy with the new measures,” Papandreou told parliament yesterday after the killings, which he called a “brutal murder.”

“We have compassion for every family who has seen their plans for the future slip seemingly further away,” he said. “But we took these measures to secure a future which might not exist otherwise.”

Greece agreed to the austerity package on May 2, pledging 30 billion euros in budget cuts in the next three years to tame the euro-region’s second-biggest deficit. Papandreou was forced to seek the aid after soaring borrowing costs left Greece cut off from markets. The measures have fueled months of protests that culminated in yesterday’s general strike. Three bank workers were killed when a small group of protesters threw fire- bombs at a bank.

Papandreou is pushing to get parliamentary approval before a European Union summit in Brussels tomorrow on the plan that will help ready the funds for distribution. The country faces 8.5 billion euros in bond redemptions on May 19.

Bonds Drop

Yesterday’s violence deepened losses in Greek debt. The yield premium investors demand to buy Greek 10-year bonds over comparable German debt, reached 719 basis points. The country’s 2-year notes yield almost 16 percent, 26 times more than Germany.

“I want to believe it is easy to overestimate this problem,” said Erik Nielsen, chief European economist at Goldman Sachs Group Inc, in a conference call yester. “One should not be overly concerned so far.”

Europe is scrambling to activate the aid package to try to stop the fallout from spreading to other high-deficit countries such as Spain and Portugal. Yield premiums on those countries’ debt have also jumped and the euro has slid more than 10 percent this year, to the lowest in more than a year.

Chancellor Angela Merkel appealed to the German Parliament yesterday to approve the nation’s share of the loans, saying the stability of the euro was at stake. Germany will pay 22.4 billion euros, almost 30 percent, of the euro-region funds offered to Greece over three years, and public opposition to the bailout is running high. German lawmakers will vote tomorrow on the aid.

Anarchists’ Blaze

The debate in the Greek parliament will be overshadowed by the violence of yesterday’s strike that turned deadly when protesters, who police described as self-styled anarchists, set fire to a branch of Marfin Egnatia Bank SA, killing two women and a man trapped inside the building.

Athens police swept through the anarchist stronghold of Exarhia yesterday, arresting 25, and detaining 70, according to a police statement. A total of 29 officers were injured in yesterday’s protests, the statement said.

Opposition leaders warned Papandreou not to try to exploit the deaths to push through the austerity measures.

“The tragic death of three people is absolutely condemned,” Aleka Papariga, the head of the Communist Party of Greece, said yesterday on state-run NET TV. “But it can’t be used by the government as an alibi for the people to accept these anti-democratic measures — measures that will come every three, six, nine months.”

More Strikes

The violence may not be enough to end the protests. Local government workers are continuing their strike for another 24 hours, with garbage collectors due to begin a walkout tomorrow morning, according to the state-run Athens News Agency. Stavros Koukos, the president of the federation of bank unions OTOE, told Alter TV that a 24-hour strike would be held tomorrow after the deaths of the three bank employees.

The bill on the measures will debated all day with a vote expected late in the day.

Elected in October on pledges to raise wages for public workers and step up stimulus spending, Papandreou revised up the 2009 budget deficit to more than 12 percent of gross domestic product, four times the EU limit, and twice the previous government’s estimate. EU officials revised the deficit further on April 22, to 13.6 percent of GDP.

Papandreou has said the austerity measures are needed to lower the shortfall to within the EU limit of 3 percent of GDP in 2014. Still, they will deepen a yearlong recession and lead to a 4 percent economic contraction this year and boost unemployment already at a six-year high of 11.6 percent.

“The greatest challenge of the days is maintaining social cohesion and social peace,” Greek President Karolos Papoulias said in an e-mailed statement. “Our country has reached the edge of the abyss. It is the responsibility of all of us that we not step forward into it.”

Dubai World Restructuring Underway

Monday, March 8th, 2010

Dubai shocked creditors when it decided to postpone interest and principal payments in November of 2009.  Since then, Moelis & Co. has been working with creditors to settle on repayment.  Some creditors still expect full repayment, while others would take a haircut for immediate cash. Certain assets have been “ring-fenced,” such as DP World’s port business, which may list in the UK.  By ring-fencing the asset, it will not be available for creditors.

Amran Abocar of Reuters writes: “Dubai World could put its plan to a creditor coordinating committee that includes HSBC and Standard Chartered in London this week but was being delayed by efforts to value the assets of its Nakheel unit, builder of Dubai’s palm-shaped islands, bankers said.

While some of the 97 creditors expect to see the option of full repayment on the table, others are willing to take a “haircut” in order to get some money back fast, bankers said.

“We are not willing to take a big haircut … in that case we would go back to the committee to see what our options are,” said one Gulf-based banker, who asked not to be named. “Full repayment should be an option, timing is less of an issue.”

Dubai World shocked global markets in November, when it requested a standstill on its debt repayments and said it would come up with a restructuring plan.

Dubai has said the plan would be “fair” but a plan could propose extending debt maturities and Dow Jones said creditors may get as little as 60 cents on the dollar.

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“There are those banks who want to have the money immediately and take a haircut and those who can wait for a longer time,” said one banker at an Asian lender which is among the creditors.

“If one of the lenders doesn’t accept both options, they can go for a legal case. It’s in the interest of the bankers and the company there is some agreement.”

Despite those divisions, hopes of progress in the talks cut the cost of insuring Dubai’s debt against default and boosted Nakheel’s 2011 bond on Monday.

Dubai’s five-year credit default swaps (CDS) fell about 20 basis points to 488.7, their lowest level since Jan 28. They had risen as high as 654 basis points on February 15 after a report that Dubai World was mulling a two-part deal, including one that may repay lenders 60 percent of the outstanding debt over a period of seven years.

Dubai’s stock market index rose over 1 percent on Monday on hopes of progress in the debt negotiations.

“Investors are front-running a possible uptrend that could follow a Dubai World announcement,” says Mohammed Yasin, Shuaa Securities chief executive.

“This should continue for a while. Volumes are low, but it’s not that there’s no money around, just that it is waiting for an outcome (on Dubai World) to provide some clarity.”

RING-FENCING ASSETS

Dubai World has ringfenced key assets from its restructuring plan including ports operator DP World, which has said it may seek a secondary listing on the London Stock Exchange.

A report on Sunday said DP World may offer new shares to shareholders and Dubai World could sell part of its 77 percent stake as it bids to become part of the FTSE 100 share index.

The move would help boost DP World’s liquidity and raise the stock’s free float shares to 35 percent.

Bankers said Dubai World’s debt restructuring plan would not include a proposal to raise capital or contain any surprises like Abu Dhabi’s last-minute bailout in December, which allowed Dubai to repay Nakheel’s maturing Islamic bond.

“It’s more of a local issue than a global issue now because the news is out, people know they want to restructure,” said a European fund manager, who used to hold Dubai World debt. “Given that they paid out on Nakheel in December, creditors will be looking for full payment on the other bonds.”

But a source familiar with the matter said last month that the Nakheel bond maturing in May was unlikely to be repaid.

But Dubai’s debt crisis is still causing ripples around the region. Moody’s downgraded seven Abu Dhabi government-related entities late last week, due to the absence of an explicit, formal guarantee of government backing.

Abu Dhabi, the wealthiest emirate in the seven-member United Arab Emirates federation and home to most its oil, dismissed the downgrade, saying it had the money to meet its commitments to the firms, especially three which are wholly state-owned.

Major creditors to Dubai World also include Bank of Tokyo-Mitsubishi, a unit of Mitsubishi UFJ Financial Group, Lloyds and Royal Bank of Scotland, Emirates NBD and Abu Dhabi Commercial Bank.”

Japanese Deflationary Pressures, UBS

Friday, March 5th, 2010

UBS commentary on deflationary environment in Japan, and need for fiscal expansion.  Check it out.

Japan Economic Comment UBS Research