Markets Live chat transcript for the chat ending at 20:32 on 9 Nov 2011. Participants in this chat were: John McDermott, FT Izabella Kaminska Joseph Cotterill, FT Cardiff Garcia
JM
Good afternoon
IK
Hello John
JM
It’s a bunga bunga bloodbath out there
IK
It’s a financial comet you mean?!
JM
A financial comet?
IK
Ah, just FT Alphaville speak..
JM
The emergency markets live trigger
JM
Has been pulled
JM
Let’s see where we are
IK
Financial comet ref FYI
JM
Old school, 2009
IK
but this time, it’s a real comet
JM
Dow Jones
11,785.82 -384.36 (-3.16%)
11,785.82 -384.36 (-3.16%)
S&P 500
1,231.67 -44.25 (-3.47%)
Nasdaq
2,630.06 -97.43 (-3.57%
IK
and it’s shaped like a giant pizza pie
JM
Deep-pan, I imagine
IK
Right.. and the quote everyone is watching
IK
10 year italian bond yields
IK
Last quoted at 7.247/7.148
IK
What on earth is going on?!
JM
CDS at record highs
IK
John – any ideas?
IK
TED says that ZH says that Germany says it might leave the euro
JM
568bps
JM
I think ZH were referring to this Reuters story
JM
Exclusive: French, Germans explore idea of core euro zone
IK
Can i point out that it is 9/11 today….
JM
Or 11/9
IK
or 11/9/11
IK
John give us more of the scoop on the core eurozone stuff
JM
Sure
IK
You said the quotes themselves weren’t actually that scary
JM
The headline is scary
JM
Or as scary as “explore” can be
JM
But it takes a while to get to the source
JM
8-9 paras… and finally
JM
“France and Germany have had intense consultations on this issue over the last months, at all levels,” a senior EU official in Brussels told Reuters, speaking on condition of anonymity because of the sensitivity of the discussions.
“We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don’t want to be part of the club and those who simply cannot be part.
“In doing this exercise, we will be very serious on the criteria that will be used as a benchmark to integrate and share our economic policies.”
One senior German government official said it was a case of pruning the euro zone to make it stronger.
“You’ll still call it the euro, but it will be fewer countries,” he said, without identifying those that would have to drop out.
IK
What I don’t understand John
JM
But there’s a new report
JM
Via TED
IK
Don’t people realise that Italy has a long history of budget deficits, a
government debt stock approaching 120% of GDP
and ongoing structural problems?
government debt stock approaching 120% of GDP
and ongoing structural problems?
JM
RMBS patents ruled invalidGerman Chancellor Angela Merkel’s Christian Democratic Union party wants to make it possible for European Union members to exit the euro area, Handelsblatt reported in a preview of an article to be published tomorrow, citing unnamed participants in the discussion.
RMBS patents ruled invalidGerman Chancellor Angela Merkel’s Christian Democratic Union party wants to make it possible for European Union members to exit the euro area, Handelsblatt reported in a preview of an article to be published tomorrow, citing unnamed participants in the discussion.
A commission within the party, that is crafting a framework to be presented at a party meeting, has proposed allowing a euro member who doesn’t want to or isn’t able to comply with the common currency rules to leave the euro region without losing membership in the EU, the newspaper said.
IK
ooooh
JM
That’s — wait — from Handsblatt, via BBG, via ZH, via TED
IK
Ooooh
JM
Now
JM
A couple of rogue Germans slipping the skinny to a couple of hacks
JM
Doesn’t normally send the stock indices of the world’s largest economy into downward spirals
JM
So the best we can do is just blame Silvio and move on
IK
well did you see the Buiter piece? That hardly helps
JM
Please share, he’s always a joy at times like this.
JM
Like bringing my drunk cousins to a tea party.
JM
Izzy is having some tech troubles.
JC
Hello, I’m here
JM
And is absolutely not swearing.
IK
It’s non copy and pastable so you will have to click through
JM
And has appeared to have changed into Joseph!
IK
but basically says that the ECB would fail its own stress tests
JM
What’s up JC?
JC
Sorry – was just looking for the way to the Core Eurozone bunker.
IK
haha
JC
Call me when you need
IK
Everything is going mad. Also my data has gone mad.
JM
Take the Tube from Aldwych.
JC
(Why does France think it’s in the core eurozone?)
IK
I can’t tell if i’m seeing flash crashes, Reuters glitches or mad quotes
JM
JC, what do we make of these two-tier reports?
IK
JC – don’t you know anything! France is naturally the core Eurozone
JM
Strikes me as mutton news dressed as lamb scoops.
JM
Or something like that.
IK
Le core
JC
Mutton news, maybe
JC
But at the worst possible time
IK
Can I just point out, there was a film about this very thing
IK
The only way to save Earth from catastrophe is to drill down to the core and set it spinning again.
JC
Izzi – haha
JM
Turtles all the way down
JC
This is also like 2012 (the film)
JC
Where they all run away to the arks
JC
For the love of mercy, don’t show these films to German officials
JC
You will give them ideas
JM
Question: how long before the ECB has to say something about its intentions?
JM
Towards Italy
IK
And don’t forget the Comet!
JM
Stark seems to be keeping the same line
JC
….
JM
No lender of last resort
JC
They’re not going to come out and say ‘we will support government x’
JM
shotHotBot has some interesting comment from Buiter
IK
Anyway – thank god i invested in those US Treasury ETFs!
JM
Ok, we’re having tech issues
IK
I think I’m ok now…
IK
woo hoo…
JC
We’re back
JM
Great
IK
Anyway, this totally reminds me of 2008
JC
We are, clearly, in the ‘to be pruned’ part of the internet.
IK
Except instead of banks announcing their subprime writedowns
IK
They are now announcing their sovereign writedowns
JM
Back
JM
I’ve been pruned
JM
It’s bonsai markets live
JM
Here’s Buiter, courtesy of shothotbot
JC
Izzi – completely. It’s a mini-Minsky Moment
JM
The European Central Bank (ECB) would fail European Banking Authority (EBA) stress tests, which are usually reserved for corporate financial firms, says Willem Buiter, chief economist at Citi.
However, this is not the key issue that Europe should be worried about or concentrate on, he adds.
Yes, the ECB would fail the EBA stress test miserably but this is a complete nonsense issue, says Buiter, a former consultant to the International Monetary Fund, the World Bank and the European Commission. It is irrelevant to subject a central bank to a form of stress testing that is used for corporations and financial institutions, as the ECBs loss absorption capacity, its economic capital, bears no relationship to conventional forms of regulatory capital or equity.
The EBA, the European Unions watchdog, started to impose tougher new stress tests on lenders to document and provide transparency around their reserves and systems, as an official way of gauging the level of risk a financial institution held and whether it would be able to cope with an economic crisis.
In July, the EBA revealed the results of the stress tests, which are aimed to assess the resilience of 90 banks across 21 countries against an adverse but plausible scenario, and banks therefore [are] incentivised to strengthen their capital positions ahead of the stress test.
However, this is not the key issue that Europe should be worried about or concentrate on, he adds.
Yes, the ECB would fail the EBA stress test miserably but this is a complete nonsense issue, says Buiter, a former consultant to the International Monetary Fund, the World Bank and the European Commission. It is irrelevant to subject a central bank to a form of stress testing that is used for corporations and financial institutions, as the ECBs loss absorption capacity, its economic capital, bears no relationship to conventional forms of regulatory capital or equity.
The EBA, the European Unions watchdog, started to impose tougher new stress tests on lenders to document and provide transparency around their reserves and systems, as an official way of gauging the level of risk a financial institution held and whether it would be able to cope with an economic crisis.
In July, the EBA revealed the results of the stress tests, which are aimed to assess the resilience of 90 banks across 21 countries against an adverse but plausible scenario, and banks therefore [are] incentivised to strengthen their capital positions ahead of the stress test.
JM
And….
JM
And…
JC
Ho Ho – But the issue is, it’s extremely expensive to do a rights issue
JC
So to boost capital ratios, you go to the other side of the ratio – assets
JC
and sell them
JM
Sorry, still having tech issues
IK
im still here
IK
was just trying to find an old post of mine
JC
Sorry about this, we really are weathering a tech storm
JM
It must be that emergency test
JC
Ah, but on Buiter stress-testing the ECB…
JC
The thing is
JC
Buiter knows v well that the ECB has a LOT of firepower
JC
tapping seignorage, Eurosystem assets etc.
JC
which is his main point
JC
But also
JM
He’s just baiting them
JM
Here’s the rest of the quote I tried to paste before
JC
The ECB can refuse to take losses on eg. Greek bonds it holds, in a restructuring
JM
Essentially, a central bank can print legal tender and, if necessary, can make up for any losses by borrowing against its future ability to create central bank money, says Buiter. This is not necessarily a highly attractive option, as excessive recourse to central bank money creation would create unwanted inflation. However, even if the central bank only prints enough money to keep inflation at 2%per year from now on, it would be able to survive massive losses on its balance sheet, as large as 3 trillion according to our calculations.
The Citi Economic Research team says the paid-in capital of the ECB (5.4bn) or its subscribed capital (10bn), or even by the capital plus reserves of the Eurosystem (about 81bn), is not a concern because even regarding conventional loss-absorption capacity, the Eurosystem as a whole is well equipped in addition to the 81bn of capital plus reserves, there is more than 300bn worth of loss-absorbing valuation gains on gold reserves on the Eurosystem balance sheet.
Of course, these losses do, ultimately, come out of the pockets of the euro-area taxpayers, who will not receive the dividends or profits from non-inflationary central bank money creation that would otherwise have come their way,” adds Buiter. “Central banks, such as the ECB, are qualitatively different from commercial banks, therefore subjecting them to the same field of tests is irrelevant.
The Citi Economic Research team says the paid-in capital of the ECB (5.4bn) or its subscribed capital (10bn), or even by the capital plus reserves of the Eurosystem (about 81bn), is not a concern because even regarding conventional loss-absorption capacity, the Eurosystem as a whole is well equipped in addition to the 81bn of capital plus reserves, there is more than 300bn worth of loss-absorbing valuation gains on gold reserves on the Eurosystem balance sheet.
Of course, these losses do, ultimately, come out of the pockets of the euro-area taxpayers, who will not receive the dividends or profits from non-inflationary central bank money creation that would otherwise have come their way,” adds Buiter. “Central banks, such as the ECB, are qualitatively different from commercial banks, therefore subjecting them to the same field of tests is irrelevant.
JC
Yep, exactly
JC
Unfortunately, this is not about ‘cannot’ it’s ‘will not’
JM
Not even under Mario?
JC
Mario ‘I respect the Bundesbank tradition’ Draghi
JM
Ah, yes, that Mario.
JC
(As he said in his first presser)
7:53PM
JC
Anyway
JC
In case you were bored with euros
JC
We should do a quick market update
JM
Yes, but I did want to ask about the Italian auction tomorrow
JC
Dow now off 400 points? Am I seeing that correctly?
JC
Oh, the 12-month T-bill auction. Ha.
JM
Not normall an issue but I just read this from RBC
JM
In a litmus test of sorts, Italy will attempt to auction off EUR5bn in 12mo bills on Thursday. The worry, many will decide to exit the name by simply not rolling over current investments despite skyrocketing yields. An in ability to confidently hedge risk in CDS would have contributed to depleting the investor base for EU periphery debt. Monday Italy will attempt to sell EUR3bn 5-year paper. Interestingly this is a reopening of an issue first auctioned just two months ago. Its coupon, 4.75%. Suffice to say the world has changed a lot since then, and the coupon looks a tad stale with yields over 7%. And of course, while yields on Italian paper have jumped, given the presence of the SMP in the wings, we’d be hard pressed to believe that the current market yields are necessarily a true representation of risk.
JC
Yeah, when ‘litmus test’ = getting dipped in a vat of acid
JM
Haha. That last clause is lovely.
JM
Markets
JM
Dow Jones
11,799.83 -370.35 (-3.04%)
11,799.83 -370.35 (-3.04%)
S&P 500
1,232.62 -43.30 (-3.39%)
Nasdaq
2,629.63 -97.86 (-3.59%)
JM
So, a rally!
JC
JM
Bloody CNBC and Bloomberg TV both saying Goldman Italian exposure 2.3bn
JM
Without noting it’s (a) gross, (b) funded, and (c) credit, exposure
JC
What is it net again?
JM
700m, on credit exposure
JM
Acc to GS
JC
cthwaites – Does what it says on the tin
JM
And more
JM
As it no longer has the carphone warerhouse
JM
As a shareholder
JM
Right, the problem
JM
With these emergency markets live
JM
Sessions is when there’s not much else to say
JM
Apart from “European politicians, grrrrrrrr”
JC
‘Correlation, arrgh’
JM
El-Erian
JM
Fortunately
JM
Is never without something to say
JM
In his latest daily comment piece
JM
He makes a few interesting points about BTPs
JM
Secondly, it has become fashionable not only to sell Italian bonds but also to tell the world about it, as loudly as you can.
In the last few days several banks have rushed to announce that they have been actively reducing their holdings of Italian debt – as a means of reducing market concerns about their own well-being. This phenomenon is similar to the 1980s phase of “macho provisioning” that saw banks trying to outdo each other in telling the world that they were fully protected against their past loans to Latin America. The result today is to encourage and push other Italian creditors to also sell, adding to the market pressures. In too many cases, the damage to the demand for Italian bonds is much more than transitory.
In the last few days several banks have rushed to announce that they have been actively reducing their holdings of Italian debt – as a means of reducing market concerns about their own well-being. This phenomenon is similar to the 1980s phase of “macho provisioning” that saw banks trying to outdo each other in telling the world that they were fully protected against their past loans to Latin America. The result today is to encourage and push other Italian creditors to also sell, adding to the market pressures. In too many cases, the damage to the demand for Italian bonds is much more than transitory.
JM
Third, a series of technical changes are disrupting the Italian bond market, adding to its instability. They range from Tuesday night’s increase in margin requirements imposed by a major clearing house, to the decrease in availability of hedging instruments in the derivative markets.
Third, a series of technical changes are disrupting the Italian bond market, adding to its instability. They range from Tuesday night’s increase in margin requirements imposed by a major clearing house, to the decrease in availability of hedging instruments in the derivative markets.
JC
Macho provisoning, that’s a throwback
JC
Ironically, US banks actually had to sit on losses for years while building up provisions on eg. Mexican debt in 1980s
JM
I wanna be, a macho man
JC
And this was when Volcker was at the Fed
JM
And they also massively underestimated their exposure
JC
Knocking heads together on making sure no one went for the exit at once
JC
Could not do in that in eurozone today, no way
JC
17 govts
JM
There are so many coordination failures we need someone to coordinate them
JC
That’s Olli Rehns job
JC
Anyway, Pimco…
JC
PIMCO is the only U.S. investor in the top 10 list of holders of Italian sovereign debt, based on publicly available filings. With a $4.8 billion exposure, it owns almost half of all U.S. institutional investors’ total holdings.
JC
That’s via Reuters.
JM
El-Erian wouldn’t be trying to hustle, would he?
JC
JC
Max – no one
JM
That’s the problem
JC
Max – think of all the institutional constraints – VaR limits, risk managers, etc.
JM
Jefferies down 9.65%, MS down 8.3%, GS down 7.3%
JM
@JimP — watch Bloomberg TV
JM
PANIC OVER
JM
DJA down less than 3%
JM
Meaningless index saves the day
JC
Er… where’s the S&P then?
JM
@twoplustwenty — it was, i saw it
JM
S&P 500 1,233.58 -42.34 (-3.32%)
JC
JM
JM
Uh-oh
CG
Oh bugger. “Have I missed the battle?” “You have missed the war.”
JC
I mean really, not to go all Price Is News
JC
But Copper -3.40%
IK
Did you say copper?
JC
Izzi, yes!
JM
EUR:USD – 1.67%
JM
(Hi Cardiff)
JM
Breaking
JM
***BBG: FRENCH OFFICIAL DENIES REPORT EU DISCUSSING SMALLER EURO**
IK
Sorry I got stuck looking through archives trying to out people who called this completely wrong (including, ahem, commenters who were mean)
JC
(Surprised that the failure of Greek Technocrat X-Factor is surprising anyone)
JC
Where’s the German official denial!
JC
They were the ones going on about pruning
JM
Already CNBC and Bloomberg TV have stopped
JM
Saying it was alleged CDU officials
JM
And are just going straight for
JM
“Merkel”
JM
This is how problems start
JM
Obviously all blogs’ fault
JM
Right
JM
I think we should pack up
IK
Right – i found it!
JM
DJA at a mere -2.92%
IK
The first post that really covered the eurozone issue
JM
Ah, no coffee for another ten minutes…
IK
and it was based on Buiter’s article
IK
And I am really enjoying reading the comments
JC
Yes, I also enjoy going old eurozone coverage.
JM
Ok.
JC
We’ve gone from ‘you fools, the ECB will never print’
JC
To…
JM
Are you going to share any?
JC
‘You fools, the ECB will print, the euro will be fine’
IK
It’s amazing
IK
I remember the fallout from the original posts we did daring to suggest that countries like Spain and Italy might have an issue
JM
Actually
JM
There may be another solution
JC
Ah well. Water under the bridge of the euro. Oh dear, the bridge collapsed.
JM
“A cunning plan”
JM
From Alan Beattie
JM
From Alan Beattie
JM
One intriguing idea floating around Washington: if the ECB can’t bring itself to bail out Italy direct (sovereign credit risk, no expertise in setting lending conditions) it could in theory, according to Article 23 of its protocol, lend vast amounts to the IMF.
The Fund would then lend them on to Italy, taking on the credit risk and enforcing conditions – both of which are what it is there for.
This would require the ECB’s red lines on financing bailouts to crumble, and might cause the odd raised eyebrow, if not explosion of disbelief, among the IMF’s more assertive emerging market shareholders. But what if it is that, or another Great Depression?
One intriguing idea floating around Washington: if the ECB can’t bring itself to bail out Italy direct (sovereign credit risk, no expertise in setting lending conditions) it could in theory, according to Article 23 of its protocol, lend vast amounts to the IMF.
The Fund would then lend them on to Italy, taking on the credit risk and enforcing conditions – both of which are what it is there for.
This would require the ECB’s red lines on financing bailouts to crumble, and might cause the odd raised eyebrow, if not explosion of disbelief, among the IMF’s more assertive emerging market shareholders. But what if it is that, or another Great Depression?
JC
Interesting!
JC
The thing is though
JC
When the IMF goes in by itself
JC
traditionally, and if it’s a big problem
JC
They might decide to do PSI and loans concurrently
IK
Smoke and mirrors via the IMF
JC
Not always (Brazil, S Korea big IMF bailouts) but in the case of Italy and given the failure of trying to do no PSI in Greece…
JC
But I’m speculating on a speculation. And nitpicking.
JC
One to watch, I think.
JM
If it didn’t require more IMF contributions
JC
On that note – I have to run
JM
Then that’s one less counter-argument
JM
As you say, one to watch
JM
I’m off too
IK
me too
IK
Bye everyone
JM
Sorry about the tech issues
JM
Here and earlier on the site
JM
Neil and Bryce will be back tomorrow
JM
11am London time
JM
Bye!