Martin Wolf was fuming about Russia on Wednesday — incensed specifically about its stance towards Ukraine’s attempted debt restructuring. He really doesn’t like the fact that Russia’s refusal to join August’s $18bn deal with private bond holders will block Ukraine’s access to IMF money, promising to collapse the country’s economy.
Along the way, Wolf notes that there’s a solution on the table here, albeit one that Russia is unlikely to accept. It comes from Adam Lerrick of the American Enterprise Institute — a man with some form in coming up with elegant solutions amid sovereign debt crises. (See Iceland, Greece and also Argentina.)
Here’s Lerrick’s detail on Ukraine, along with a table for Putin and pals… Read more
About that meeting of eurozone finance ministers, ECB and IMF officials that collapsed in the early hours of this morning (at least, until Monday) for ‘further technical work’…
First: looks like our bold call was correct. Um, yay?
Second, Reuters says it has the document prepared for the meeting and circulated among the ministers. Read more
Central counterparty clearing and settlement was always intended to make the financial system safer.
If you use a CCP, the idea goes, you’re far more robustly protected against counterparty default. The counterparty default risk has been absorbed by the much larger central entity. (The CCP can weather the default risk because its exposure is spread across numerous members.) Read more
Update — apologies for a rather disorganised (and long) post… but we’ve finally gained information from all seven eurozone central banks who’ll accept additional credit claims under the ECB’s new rules…
Lend to an Italian small business for five years, take the loan to the Bank of Italy for ECB three-year funding… get this kind of haircut: Read more
ICMA’s European Repo Council has taken a look at the role of haircutting repo collateral in the current crisis on Wednesday. It’s decided that, overall, (and especially in Europe) there is little reason to believe the practice of discounting repo assets’ market value has had much of an impact.
This is mainly for two reasons, writes the reports author Richard Comotto. First, there is a lot of misunderstanding in the market as to how haircuts and margins actually work. Second, the practice in Europe is very different to that in the United States. Read more
Another interesting snippet from the BIS quarterly review regarding the role played in the recent funding crisis by the deteriorating operational capacity of broker dealers:
Traditionally, these have not been collateralised. Short-dated CDS premia increased sharply for US and European dealers in September and November (Graph 6, left-hand panel). The November increase came after the failure of MF Global highlighted the importance of sovereign risks. As their own funding conditions deteriorated, securities dealers tightened terms on securities financing and reduced their market-making activities. A Federal Reserve survey of 20 large securities dealers, published in October, already showed that financing asset-backed securities, corporate bonds and equities had recently become more expensive and required more collateral (Graph 6, centre panel). Read more
News that Basel III is reconsidering the use of government bonds as eligible capital to be held in banks’ so-called liquidity buffers, couldn’t have come quicker.
The world, for want of another phrase, is running out of collateral. Especially in Europe. Read more
Collateral management and secured lending are the big post-crisis themes in financial markets.
But what happens when a strategy that’s designed to protect the system backfires? Not because you don’t hold enough collateral to cover the counterparty risk, but — as it happens — because you’ve given too much of it away as haircut. If your counterparty suddenly turns out to be more fragile than you anticipated, you could find yourself with the equivalent of an unsecured exposure. Read more
Updated: Full statement (PDF)
Papandreou is now speaking. Here’s the live video feed. Read more
Asian stocks rose for the fourth consecutive session on hopes for a solution to Europe’s debt crisis, while Chinese banks surged after a unit of the country’s sovereign wealth fund increased its stake in the lenders, the FT reports. The MSCI Asia Pacific index advanced 1.1 per cent with Hong Kong’s Hang Seng index up 3.6 per cent and China’s Shanghai Composite index 2.1 per cent higher. Earlier, the renminbi staged its biggest one-day jump in six years. Overall sentiment was boosted by pledges made by German and French leaders over the weekend to recapitalise Europe’s banks. They plan to unveil a comprehensive package of measures to tackle the eurozone debt crisis by the end of this month. Meanwhile talk grew of bigger haircuts for Greek bondholders. The Telegraph says unnamed officials told the newspaper it is “more likely than not” that investors will suffer bigger losses on Greek debt than the 21 per cent haircut agreed in July, with the exact level to be determined by the Troika.
Asian shares and commodities fell on Thursday, Reuters reports, on growing worries that Europe’s intractable debt problems will plunge the world into a second global financial crisis. Copper fell 3 per cent, gold slipped toward $1,600 an ounce to stand more than $300 below its record high earlier this month, and commodities-related stocks such as global miner Rio Tinto were dumped on worries that demand will weaken as the international economy slows. The current focus of concern is a vote on the EFSF enhancements in Germany on Thursday morning, which is expected to receive poor support from members of chancellor Angela Merkel’s centre-right coalition. Late on Wednesday a backlash from Greece’s private sector creditors to talk of bigger haircuts, covered in the FT, sparked more fears for the future of the monetary union and helped stall a rally that had begun earlier in the week.
It’s no coincidence that with the shift to central clearing looming on the horizon, the Bank of England’s director for financial stability is talking about this subject.
Haircuts, that is. Read more
Warning! — long post. But with investors still grappling with the terms of the Greek debt restructuring, it’s worth reading on…
Avid readers will remember Option 4 of the proposed Greece financing offer. Read more
The cost of trading US Treasury futures was set to rise on Monday as the CME Group adopted defensive measures given the impasse in Washington over raising the Federal debt ceiling, the FT reports. CME said it had raised margin requirements on US government debt futures and its other products linked to US Treasuries after a “normal review of market volatility to ensure adequate collateral coverage”. The cost of trading 10-year Treasury futures for hedging purposes will rise to $1,300 from $1,100, but will be below the $2,200 that was implemented in October 2008 amid the financial crisis. US long dated Treasury yields rose on Monday as Washington failed to reach accord over the debt ceiling. Reuters reports the CME also said it would from Thursday raise the haircuts applied to Treasury futures collateral, meaning traders and investors will have to post more Treasuries to back their futures and options holdings. It is the first such change to collateral discounts since December 2007.
Greek prime minister George Papandreou said the eurozone and International Monetary Fund must quickly approve a second bailout for his country to avoid its economic reform plans collapsing. Reuters says Mr Papandreou told FT Deutschland, ”If we don’t get a decision soon supporting the second Greek programme so that the country can begin its far-reaching reforms, the programme itself could be held up.” The prime minister said he was open to proposals being discussed in the eurozone about potentially using the European Financial Stability Facility for Greece to buy back its debt. Meanwhile the FT reports the IMF on Wednesday warned that the Greek sovereign debt burden risked spiralling out of control and that it would be “appropriate” for private bondholders to share in any restructuring.
€35bn worth of Portguese-government guaranteed bank bonds is probably heading straight for the European Central Bank’s repo facilities.
But don’t expect that to do much for Portugal’s banking system. Read more
We’ve been here before.
Now that talk of Greek debt restructuring has once again reared its head we’re starting to get those ‘who holds Greek bonds’ notes (again) . And here’s a nice one from Citi’s Greek banking team. Read more
In case you forgot that other crisis…
The European Banking Authority has just published parameters for the upcoming European bank stress tests. A first glance has them about as meek as expected. Read more
The thing you want from a bank stress test is for the ‘stress’ to be much tougher than anything that could really happen in reality. A good kitchen-sinking, in other words.
By that standard, European stress-testing is in the toilet. Read more
Amagerbanken is a small bank in Denmark — but its failure could end up having big consequences for investors in bank debt. It might end up being a relatively rare instance of a bank’s senior unsecured investors (and depositors) taking a hit.
Here’s Ivan Zubo and Olivia Frieser at BNP Paribas with the background: Read more
Here’s one that slipped by us on Friday.
The Bank of England quietly changed some of its collateral requirements for UK banks. It wasn’t anything huge — all the assets that are currently eligible for things like the BoE’s open market operations and discount window will remain so — but there are a few changes to the haircuts required by the central bank. Read more
A chart to end a week full of talk of haircuts for senior bank bondholders. The below is from Citi’s Hans Lorenzen — showing senior unsecured financial issuance suffering:
What’s left if we’re not going to get a full-blooded expansion of the eurozone’s sovereign bailout fund?
Um, not a lot, it looks to us. A ragbag of rejigged credit enhancements; lower loan rates; possibly a small programme of buying up distressed sovereign debt markets. Other than that, we’re stumped — although, thinking about it, perhaps this bond-buying idea does have legs. Read more
Here’s an interesting eurozone related bond trade for you.
While Irish debt may be looking unappealing due to the haircuts being applied, there is one possible Irish bond market that could still prove attractive: Irish covered bonds. Read more
Here’s the action in European financial CDS as the market waits for the European Commission to release a consultation paper outlining its plans to haircut senior bank (not sovereign) bondholders. According to Ambrose Evans-Pritchard of the Telegraph this will happen today, Thursday, which means we’re seeing this:
Markit iTraxx Senior Financials 186.5bp (+7)
Markit iTraxx Subordinated Financials 350bp (+10) Read more
Last week’s US Treasury sell-off; deficit despair or recovery-related optimism?
What about a not-so-secret stimulus encouraged by Fed chairman Ben Bernanke? Read more
The Wall Street Journal has a great, interactive, illustration of the Federal Reserve’s Primary Dealer Credit Facility — based on Wednesday’s central bank data dump.
Presented without comment (except for that title), the below from Morgan Stanley:
Consider that senior debt sacred cow heading for the abattoir.
On Friday the Irish Times reported that officials’ sights had switched from sub-debt investors in Ireland’s banks — to senior ones. From the paper: Read more