The ECB’s move to unclog the transmission mechanism, that carries its monetary policy decisions to markets and the wider economy, has been unconventional. The €1,019bn in cheap three-year loans to banks, under its long-term refinancing operations (LTRO), being the most daring.
Naturally, the question on the minds of many is whether the operation has just delayed the inevitable. While the policy goal for the eurozone’s central bank was clear — unclog the transmission mechanism — the fact that this would just buy time for the fiscal and balance sheet readjustments of sovereigns and banks was evident from the beginning. Read more
Yes, “L-troh”. So ubiquitous is the ECB’s three-year liquidity op getting that we’re turning the acronym into a word. Like Nato or Isda. So sue us!
With the second three-year Ltro on Wednesday, the release from the burden of the acronym has come just in time for another bout of guesswork on how ‘big’ it will be, and just what the ECB’s funding will be used for. Read more
Eurozone governments are looking to the European Central Bank and national central banks to help pare back the cost of a second rescue package for Greece which would otherwise amount to €170bn. Figures seen by the FT reveal Greece needs €136bn in fresh bail-out funding from the European Union and International Monetary Fund – in addition to the €34bn left over from Greece’s first bail-out. This is €6bn more than EU leaders agreed in October. Germany, the Netherlands and Finland have insisted on paying no more than €130bn. Eurozone finance ministers, who meet in Brussels on Monday to hammer out a deal to save Greece from default, hope the ECB can contribute by forgoing some of the future profits it would earn on its Greek bondholdings, which it has said it is willing to do. Senior officials said they would also discuss a possible contribution from eurozone national central banks whose bondholdings could be included in a €200bn debt restructuring to be launched alongside the bail-out.
When a sovereign or corporate becomes sufficiently distressed, a flip can happen in the way the credit default swaps are quoted. According to Markit, this is happening with Portugal now, with the CDS moving from being quoted in conventional spread to upfront. This is, in some ways, a worse omen than the credit deterioration itself.
It’s the conventional spread format that’s making headlines at the moment. Trampling previous highs, the CDS has broken into uncharted territory (in the figurative sense only, as here is a chart, courtesy of Markit): Read more
Back in September, the FT reported an interesting estimate by JP Morgan.
Twenty-eight European banks would have faced a total liquidity shortfall of €493bn at the end of 2010, if they had been forced to meet new liquidity requirements (which actually come due in 2015) then and there. Read more
We’re sure there’s a drinking game in here somewhere, given that Wednesday’s headlines about new records for credit default swap indices will be usable many a time over the coming weeks as the sovereign crisis lurches along. And despite any doubts you may be harbouring about this particular market, it is simply refusing to die. CDS on France have shown a particular resilience and were the most actively traded contracts last week.
But first, some of those records that you’ll be reading about on Wednesday
and Thursday and Friday: Read more
Moody’s Investors Service issued a stark warning concerning France’s credit rating in its Weekly Credit Outlook on Monday morning, reports Reuters. The note pointed to the elevated rates being paid on the sovereign’s debt as well as weaker economic growth prospects, stating that both could be a negative for the country’s rating. While neither of these factors will be new to market participants, the resolution of the sovereign crisis is felt to rest in part on France’s ability to maintain its AAA rating. The budget deadlock in the US also hasn’t helped sentiment, with stock markets in Europe all down this morning, the FT reports.
On Thursday there was an auction of Spanish 10-year date, aka mega headline-grabbing European peripheral sovereign benchmark debt. The sovereign found itself paying a euro-era high of 6.975 per cent for the €3.56bn of issuance.
The Spanish treasury had paid 5.433 per cent in an auction of similar securities on October 20th. The bid-to-cover ratio was 1.54 this time versus 1.76 last time, signalling a softening in demand. Read more
As spreads of all colours blow out due to the perpetually unresolved sovereign crisis in Europe, FT Alphaville has been wondering what non-fundamental factors are driving these moves. The bond market is in some places broken and in other places potentially being driven by regulation.
To the extent that the market for credit default swaps influences the bond market, we ponder the technicals of these derivatives that reference it. Here we look at the role played by trades directly between banks and sovereigns. Read more
Bond yields are all over the shop on Wednesday after yesterday’s buyer strike.
The yield on the sovereign’s 10-year bonds can’t seem to stop flirting with 7 per cent no matter how
inappropriate unsustainable it is. It’s not even a 20-year old model yield, for goodness sake! Read more
Eurozone bond markets suffered a mass sell-off on Tuesday as investor fears spread beyond Italy and Spain to triple A-rated France, Austria, Finland and the Netherlands, reports the FT. The premium that France and Austria pay over Germany to borrow rose to euro-era records of 192 basis points and 184bp respectively, levels investors say are no longer consistent with top credit ratings. FT Alphaville asks what role regulations might play and whether Basel 2.5, that comes into force at the end of this year, may be exacerbating the move. Credit derivatives also suggested stress, writes the FT. The cost to insure eurozone debt against default soared to record highs for most of the leading economies amid growing fears over the single currency. The jump in credit default swap prices on Tuesday came as the extra cost to swap euros for dollars jumped to highs last seen in December 2008 when many markets had seized up in the wake of the collapse of Lehman Brothers.
When you look at Eurozone bond spreads on a historical basis… you have to wonder:
It’s not every day the second-biggest name in the CDS market goes from a healthy shape to a distressed one.
But Wednesday was that day, thanks to Italy. Read more
Greece’s political crisis deepened on Wednesday after a deal to give the premiership to the speaker of parliament fell through at the last moment, reports the FT. Philippos Petsalnikos, speaker of parliament and a former justice minister, was poised to become premier, having emerged as a compromise candidate after fierce infighting inside the PanHellenic Socialist Movement over the candidacy of Lucas Papademos, a former ECB vice-president. But George Papandreou, the departing Socialist prime minister, reportedly reintroduced Mr Papademos’s candidacy, along with that of Evangelos Venizelos, the finance minister. On Thursday morning, a third meeting with the presidency began in order to resolve the leadership crisis. According to Bloomberg, Greek paper To Vima reported that Greece’s two biggest political parties had agreed on Filippos Petsalnikos, the parliamentary speaker, but the source of the information wasn’t given.
Silvio Berlusconi looks posed to pass over the rains to a caretaker government lead by Mario Monty, a former European commissioner, rather than continuing to push for early elections, reports the FT. After an announcement by LCH Clearnet SA on Wednesday morning that margins on Italian bonds would be increased, yields on Italy’s 10-year bonds reached record highs as did the spread over German Bunds. On Thursday morning, yields had fallen, but not to a level viewed as sustainable by many economists. Italy’s Senate, meanwhile, is rushing to pass reforms that will see asset sales and an increase in the retirement age in order to rein in public debt, reports Bloomberg. The budget measures had originally been touted at a summit on October 26th as a result of pressure from other eurozone countries, notably France and Germany.
Remember a month or so ago when we told you there was evidence that CDS spreads may influence bond yields?
“Influence” is a strong word. It was more about which one leads the other. In our previous post, we gave an overview of a study which presented evidence suggesting that when spreads reach distressed levels, the degree to which the CDS spreads lead bond yields increases. Read more
Euro basket-case trade for sale! Contains more correlation and wrong-way risk than you can shake a stick at.
Be the first on your block to have one! Read more
It’s the data you’ve all been waiting for. It’s from DTCC and it covers sovereign CDS. Has the market shrunk, given that whatever is going on in Greece hasn’t yet met the definition of a credit event?
Erm, turns out it hasn’t. Here’s the data on what the total outstanding contracts are as of Friday: Read more
Markit Eurozone Manufacturing PMIs released on Wednesday have shown just how bad a start the fourth quarter has gotten off to. As the massive repricing (or rather, pricing-in) of political risk continues apace in financial markets, businesses are spluttering.
The headline index number of the eurozone came in at 47.1, which is below the flash estimate of 47.3, marking the third month in which business conditions have deteriorated. Read more
Remember the good old debt shenanigans? Where soon-to-be eurozone countries did everything they could to bring their debt figures down?
Every so often you’d read a story about a clever bit of financial engineering like an off-market swap that looked like debt, smelled like debt, and seemingly wasn’t reported to European statistical agency Eurostat as debt. Even though it should have been. Read more
Eurozone leaders struggled on Tuesday to reach agreement on a much-anticipated deal to reverse their spiralling debt crisis amid mounting signals a definitive agreement would not be reached on Wednesday night, the FT reports. Unnamed officials briefed on deliberations said talks between European government negotiators and representatives of Greek bondholders remained inconclusive, putting at risk one of the three key pillars of a deal: a final resolution on Greece’s second bail-out. Despite this, German Chancellor Angela Merkel has gone to Berlin this morning to seek approval for a planned increase in the rescue funds capacity, reports Bloomberg. Meanwhile, Italy’s prime minister was fighting on Tuesday night to stave off a collapse of his centre-right coalition government over European Union demands for more concrete economic reform measures in time for Wednesday’s highly anticipated summit of eurozone leaders, the FT reports. Pension reform was reported to be back on the agenda for the country, according to the WSJ.
Leading European banks say they would rather sell assets than raise expensive new capital to meet compulsory demands from the European Union for higher capital ratios, threatening a further contraction of credit to the enfeebled eurozone economy, says the FT. This radical approach, led by French banks BNP Paribas and Société Générale, would be copied by lenders across Italy, Spain and Germany, bankers said. However, the banks’ “shrinkage” strategy is likely to prove controversial with politicians and regulators if it led to bankers lending less money to customers, jeopardising the eurozone’s fragile recovery, analysts warned. Also on Wednesday EC president José Manuel Barroso gave a broad outline of a compulsory recapitalisation for Europe’s leading banks, requiring “a temporarily higher capital ratio”, with restrictions on dividends and banker bonus payments in the interim. He stopped short of specifying the target ratio, which had earlier been reported by the FT as likely to be higher than expected at core tier 1 capital of 9 per cent, citing people close to the process. Speaking at a conference in Berlin on Thursday, Deutsche Bank CEO Josef Ackermann said that he doubts that capital boosts will succeed in containing the sovereign crisis, reports Bloomberg.
Look into our eyes. Not around the eyes. Deep, deep, deep into our eyes. You feel you’re getting sleepy. You feel safe and complete. You do not want to hold the franc any longer. You think the franc is rubbish. The franc will yield you a negative interest rate. You’re going to sell the franc. When you wake up you will sell the franc against the euro and continue upon your way. You will not want the Swiss franc any longer. When you hear the SNB say intervention, you will have no memory of this instruction — SNB.
Via Reuters on Wednesday:
Deutsche Bank’s fixed income research team don’t see any need to beat around the bush.
We’re in the early stages of the Global Sovereign Crisis. End of. Read more
It’s panic stations in the eurozone again on Tuesday.
But this time a new theme is emerging when it comes to potential resolution. Read more
Greece has agreed additional spending cuts after international lenders found that the €28bn ($40bn) austerity package agreed last month was no longer sufficient and demanded Athens close a €5.5bn “black hole” in the plan before it is approved by legislators next week, the FT reports. George Papandreou, Greek prime minister, has already struggled to gain support for the plan, which the European Union and International Monetary Fund have insisted is a prerequisite for a €12bn aid payment, which Athens must receive by mid-July or it will default on its sovereign debt. But a technical team sent to Athens this week by the so-called troika – EU, IMF and European Central Bank – identified a financing gap of €5.5bn in the four-year programme of fiscal and structural reforms, according to a Greek official.
Greece’s embattled government won a vote of confidence in parliament early on Wednesday, clearing a significant obstacle to a fresh €120bn bail-out by international lenders, the FT reports. The confidence motion in George Papandreou’s reshuffled team passed by 155 votes to 143, with all of his Socialist party deputies voting for the government. “If we are afraid, if we throw away this opportunity, then history will judge us very harshly,” Mr Papandreou said in a final appeal for support before the vote. The prime minister’s government must now rapidly pass two more tests – enacting a €28bn austerity plan and the laws needed to implement it – to win a new bail-out to avert the eurozone’s first sovereign default and possible global economic disaster. The euro, which had made gains before the vote, fell back slightly in early morning Asia trading.
It’s natural that a sovereign or a bank which is having trouble getting its debt away in the market, might target retail domestic investors.
Indeed, through the issue of small government bond denominations or indirectly via high-yielding deposit wars, the Spanish retail investor has been a critical focus point for recent funding initiatives. Read more
Just in case you were wondering…