Wednesday, May 30, 2012

Spain's ten year moves steadily toward 7 percent , Italy has a failed auction of 5 and 10 year debt ( causing the ten year and cds of Italy to blow wider significantly ) , EU tries to wake up the rally monkey by recycling another dated rumor - this being ESM being used to recap banks , and Japan sees its bond curve invert

http://www.zerohedge.com/news/germany-shoots-down-european-union-envisagings-bureaucrat-utopia
( EU wonks Rehn and Barosso are truly in panic mode this morning...... Meanwhile Germany says Nein to EU nonsense with not so subtle quickness )


Germany Shoots Down European Union "Envisagings" Of Bureaucrat Utopia

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Submitted by Tyler Durden on 05/30/2012 08:41 -0400




And to think it was not even 2 hours ago that a regurgitated and largely impotent news story hit the WSJ (following up on an identical Reuters story yesterday, as ZH noted), sending the EURUSD higher by 50 pips. As we said, expect Germany to come out with a prompt refutation in minutes. The minutes in question were 90. The official denial to Gollum's lie panderings has arrived courtesy of Market News: "Government spokesman Steffen Seibert said at a regular press conference
here that the German rejection of the idea of any direct recapitalisation of banks by the ESM "is well known." Summary: B+ for effort, C for execution, C- for market reaction halflife, and F for content, as usual.

The German government on Wednesday reaffirmed its opposition to allowing European Stability Mechanism, Europe's permanent bailout fund, to directly lend to troubled banks in the Eurozone.
Government spokesman Steffen Seibert said at a regular press conference here that the German rejection of the idea of any direct recapitalisation of banks by the ESM "is well known."
The treaty creating the ESM explicitly states that the fund can only lend to governments in return for promises of reforms. The German government has stressed on numerous occasions that it insists that this passage of the treaty is respected. The treaty has yet to be ratified by most governments including Germany.The European Commission, however, argued in a report released earlier today that having the ESM bailing out troubled banks could help break the unhealthy mutual dependency of the currency bloc's banks and governments. 



"To sever the link between banks and the sovereigns, direct recapitalisation by the ESM might be envisaged," the Commission said in its analysis.
The highly indebted Spanish government currently faces problems in rescuing its troubled banking sector.
German finance minister Wolfgang Schaeuble will meet his Spanish colleague Luis de Guindos in Berlin today, German ministry spokesman Martin Kotthaus said. There will be no press statement after the meeting because the talks will be "informal," he explained.
Seibert said the German government still had confidence in the Spanish government's reform course.

Oh well, time to regurgitate some more faceless rumors. Hey: has anyone heard the one about China bailing out Europe, and doing a massive stimulus?

and.....



http://www.telegraph.co.uk/finance/debt-crisis-live/9298932/Debt-crisis-live.html


13.29 Germany has rejected the EU's plans to use the bailout fund to recapitalise banks.
Government spokesman Steffen Seibert said at a regular press conference that the German rejection of the idea of any direct recapitalisation of banks by the ESM "is well known".



13.00 Finland rejects EU plans, says aid from European bailout fund (ESM) must got through member countries.



and....

http://www.zerohedge.com/news/national-acronym-day-europe


National Acronym Day In Europe

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Submitted by Tyler Durden on 05/30/2012 08:30 -0400




Via Peter Tchir of TF Market Advisors,
So the EC wants the ECB to bypass the EFSFand use the ESM to recap EU banks?  That was the rumor that shifted global stock markets by 1% in a matter of minutes?
It has been awhile see we looked at the EFSF Flowchart or had a detailed look at the EFSF Guidelines but it looks like it is time to dig a bit deeper into what is possible and what is not.
The ESM is not yet up and running.  There was talk that it would be done by June or July of this year, but in typical EU fashion I don’t think much progress has been made towards that promise.  So right now the EU is stuck with EFSF and the potential to set up the ESM.

The EFSF actually has a lot of powers.  I’m not sure exactly why it is such a big deal if the EFSF (or ESM) invests directly in banks or lends money to countries to invest in banks.  In theory the countries could lose on their bank investment but pay back EFSF loans?  That is a possibility but it would seem more and more likely that if the bank rescues fail the sovereign is dead anyways, so the market might be reacting too much to that distinction.
The bigger problem is that the EFSF is not well set up to leverage itself.  The EFSF is technically the entity that could be buying bonds in the secondary market.  It is supposed to have taken over that role from the ECB, yet it hasn’t done that.  Why not?  It is possible that they haven’t figured out a good way to leverage the EFSF and therefore would get minimal bang for the euro by buying bonds in the secondary market without leverage.  The same issues apply to its role in the primary markets.  Yes, the EFSF can intervene in the primary markets, but again, had very convoluted leverage schemes, which would never work.
The problem isn’t so much what the EFSF is allowed to do, it is how constrained it is in terms of leverage and access to funding.  There is almost nothing that can be done about how EFSF is set up at this stage, nor should there be.  That messed up entity should be put out of its misery.

Europe’s big hope is to actually launch ESM and launch it with a banking license. If ESM can be launched, and it can get a banking license, then the EU has a powerful tool.  The ESM is allowed to do all the things the EFSF can do – participate in new issues and the secondary market and lend to countries for them to support their banks.  Without a banking license its firepower is limited.  With a banking license it can leverage itself to a very high degree and can tap all the cheap funding already in place and whatever new programs the ECB decides to launch.
So worry less about any “new” powers the ESM might have and worry about 1) the ESM actually getting funded, and 2) the ESM getting a banking license.  Germany was very resistant to the idea of the banking license.  I assume they still are, but they have already given the ESM all the powers it needs, and has endorsed leveraging the capital, so a banking license might not be out of the realm of possibility.
With a banking license, the ECB can do a lot to help the ESM.  The LTRO deals did a lot for the banks.  They really have reduced the pressure on European banks.  In spite of the fact that Bankia is a total mess, we are not reading headline after headline about how BBVA or SocGen or even DB are in trouble.  The banking system is in much better shape than last year because of LTRO.

The market got carried away with the promise of LTRO as a sovereign debt savior.  The market, more than the ECB, created the idea of banks buying lots of sovereign debt.  That was never going to work because the banks that would do it, already had too much exposure to their national sovereign debt.  It created a potential death spiral.  Taking the concept of the “carry” trade and LTRO out of the banking system and into the ESM might have more of an impact.
The market has lots to worry about, whether it is China, Facebook, Banking Regulations, Fiscal Cliff, whether American Idol is rigged, economic data, etc., but we are still very much at the mercy of policy intervention.  Strong signals of new QE for the U.S. seem more likely by the day, and in Europe, there is likely to continue to be a lot of contradictory comments, but  banking license for the ESM seems more plausible than many of the other rumors (like Eurobonds or Greek Exit) and would be a powerful catalyst for a bounce in European equities.
The credit markets and CDS in particular seem tired.  They don’t seem to have the energy to compete with the swings in equities.  So far IG18 has traded in about a 1 bp range in spite of the gaps in equity futures.  Even MAIN, right in the center of it all, has traded between 173 and 175.5.  The high yield market, and HYG and HY18 both had big days yesterday, with cash up as much as 1%.  We will likely see some give back there, but there really is no evidence that retail is giving up on high yield and there isn’t as much leverage in the market as there was in 2011 as hedge funds have been cautious and banks have cut their exposures.

Spanish and Italian bonds are definitely getting crushed today, but with Spanish 10 years above 6.5% and Italian 10 year bonds nearing 6%, the potential for intervention rises.  The secondary market is affecting the primary market, which is driving up the cost of funds, creating more pressure on the budget deficits.  The countries are painfully aware of that, as is the ECB.  One ongoing frustration for the ECB is their inability to translate their short term rate setting of 1% into the sovereign debt market.  They are looking for ways to ensure that policy can impact all sovereigns because without that occurring it makes their job far harder than the Fed’s where treasuries instantly respond to the Fed rate decisions.

and.....

http://hat4uk.wordpress.com/2012/05/30/spanish-bankia-ruse-draghi-bats-the-stinky-ball-back-to-madrid/


SPANISH BANKIA RUSE: Draghi bats the stinky ball back to Madrid

“But eeth oonly leetle beet of thyeet, Mario…”
I’m amazed it’s taken this long to be honest, but Mario Draghi’s ECB yesterday told the chaps at Bankia thanks but no thanks in relation to their planned sh*t-for euros exchange via the ‘recapitalised’ Spanish bank. As I posted earlier this week, he had no choice: otherwise every bank from Arnhem to Zaragossa would’ve been at it.
There is of course the slight problem that what he’s done breaks the ECB Support pledge, but that’s never held the Italian back before. Meanwhile, the much bigger problem is what the Band of Hope and Rajoy do now. To which the answer is probaby eat a lot of words such as “We do not need an EU bailout”.
The markets have reacted quickly, with almost every bourse down: now that the Bankia wheeze has been shot down by the European Central Bank, Spain’s borrowing difficulties must become even more intractable. 10-year Spanish bond yields are up 9 basis points to 6.53%, now something of a Bailout benchmark in the light of Ireland, Portugal and Greece’s fate. Draghi’s ECB immediately bought zillions of euros, as a result of which obvious manipulation the Pound weakened slightly against the currency. I can’t believe that rally will last, and I can’t believe Mario has unlimited amounts of money without starting to print bigtime. This is what Zero Hedge was expecting him to do last night, as what the site now calls‘Eurocalypse’ had Tyler Hurden  chewing the Xanax once more.

The markets were also disappointed that Beijing didn’t pile in with any money after all. Well, you read it here first: The Slog never expected them to. Why put dead money into a scam fund when in six months time you’ll be able to buy every port in the Med for a dime? Anyway, the Spanish Government, Madrid sources claim, will have to inject another €100 billion into its banks because (as we’ve all known for months) Bankia’s problem is merely the uber-cloud peak of an Everest of porkies.  Although Bankia is Spain’s second biggest bank by deposits and fourth biggest by loans, it now has nowhere else to go….and the Rajoy Government simply doesn’t have a hundred billion lying around looking for a usage occasion.
One can’t help wondering how much longer it’ll be before Berlin makes its euromove. I am on the case – but as yet, getting nowhere.

and....
http://www.zerohedge.com/news/ecbs-refusal-play-ball-means-spain-has-foot-%E2%82%AC350-billion-bailout-bill


ECB's Refusal To Play Ball Means Spain Has To Foot A €350 Billion Bailout Bill Alone

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Submitted by Tyler Durden on 05/30/2012 07:27 -0400




Moving away from baseless (or is that faceless?) European bailout rumors, and moving into cold hard math territory, we hear from JPM's David Mackie that "If a Spanish EU/IMF bailout package covered the government’s gross funding needs through the end of 2014, and included €75bn for bank recapitalisation, then it would amount to around €350bn." This may be a problem since as pointed out on Tuesday, the Spanish Fund for Orderly Bank Restructuring (FROB) is down to... €5.3 billion.
From JPM: Spain starts climbing the steps of the liquidity hospital
The ECB’s rejection of the Spanish government’s plan to recapitalise Bankia – by injecting government bonds directly into the bank which would then be used as collateral in ECB financing operations – puts Spain on the steps of the region’s fiscally based liquidity hospital (EFSF/ESM). It looks increasingly likely that it will be knocking on the door soon asking to be admitted.

Crisis management is all about burden sharing: who bears the cost of prior mistakes. Spain looks to have gotten to the point where it cannot bear the burden alone. The Spanish government recognises the need for burden sharing, but it does not want the kind of burden sharing that was made available to Greece, Ireland and Portugal. The Spanish government wants the ECB to directly purchase its sovereign debt and for the EFSF/ESM to directly recapitalise its banks.

As far as a genuine shift in credit risk is concerned, there is no real difference between ECB sovereign bond purchases and EFSF/ESM loans to the sovereign. From the Spanish government’s point of view the former is more attractive because there is no loss of sovereignty: SMP bond purchases do not come with conditionality. But, who recapitalises the banks is a huge issue. Given the likelihood that there are still a lot of losses that have not yet been recognised, a capital injection into the Spanish banks directly from the EFSF/ESM would be a boon for Spanish taxpayers. Future losses would be absorbed by the area wide taxpayer.But, the sort of burden sharing that the Spanish government wants is not on offer. It could be argued that the government is delaying asking for EFSF/ESM help in the hope that the rest of the region will change its stance. Certainly a Greek exit would likely catalyse the kinds of changes that the Spanish government wants. But, it is not clear that Greece will exit anytime soon. Spain probably doesn’t have the luxury of waiting.



Before Spain asks for admission into the liquidity hospital we may see the SMP reactivated. But, given that the Spanish situation looks increasingly like a solvency crisis – the government is not solvent enough to recapitalise insolvent banks – the ECB is unlikely to view the SMP as an appropriate long term response to this problem. More likely, SMP purchases would simply be used to limit market turbulence while a traditional bailout package was negotiated.


If a Spanish EU/IMF bailout package covered the government’s gross funding needs through the end of 2014, and included €75bn for bank recapitalisation,then it would amount to around €350bn. A traditional package would keep the burden of adjustment squarely on the shoulders of the Spanish taxpayer. Spain could be accommodated in the liquidity hospital as currently designed, but a Spanish admission would force the region to think hard about both the size of the fiscally based liquidity hospital and its funding. It would push the region closer to a hybrid liquidity hospital, where governments provide capital and the ECB provides funding.


and the pain in Spain has moved over to Italy as well.....

Overnight Sentiment: Now, It's Italy's Turn (As Spain Continues To Break All Records)

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Submitted by Tyler Durden on 05/30/2012 06:57 -0400




... Which is not to say that the other usual suspects are fine, they aren't: Spain's 10 year just hit a record 6.72%, a spike of nearly 30 bps on the day, and just shy of the apocalyptic 7.00%, at which point everyone will quietly move to the bomb shelter (and JPM is not helping things, saying the total Spanish bank bailout may hit €350 billion even as the Spanish bailout fund has just €4 billion left in it...), even as the 2 Year rises above 5% for the first time since December 2011 on some rapid curve inversion moves. No: today the market simply had one of those epiphanies where it sat in front of a map, and finally remembered that last year as part of the continental contagion spread that forced the November 30 coordinated global central bank intervention, Italy was at the forefront. Sure enough, 2011 is once again becoming 2012. Today's catalyst was an Italian sale of €5.73 billion in 5 and 10 year bonds, less than the maximum €6.25, where €3.391 billion of the 5 Year was sold at a 5.66% yield, compared to 4.86% on April 27, and the BTC of 1.35 vs 1.34. But the optical killer was the €2.341 billion in 10 Years which priced above 6% for the first time in a long while, coming at 6.03% compared to 5.84% in April, and a dropping BTC of 1.40 compared to 1.48 before. The result is a blow out in the entire Italian curve, with the 10 Year point widening by 28 bps, and sending Italian CDS wider by 21 bps to 543 bps. In other words: welcome to the party Italy. You have been missed.
Some perspectives on the first of many ugly Italian bond auctions:
MICHAEL LEISTER, RATE STRATEGIST, DZ BANK, FRANKFURT
"Those figures are really unconvincing. The 10-year benchmark has been issued (at a price) below secondary levels and the bid/cover for the new bond doesn't look too strong. All these on the back of quite a concession into the auction.
"The auction doesn't provide any arguments to become bullish on peripherals again. We're seeing Italy being taken hostage by the Spanish concerns. The market does not discriminate anymore, it is either 'risk on' or 'risk off', you either buy periphery as a whole or you sell it.
"The market isn't happy with this auction."
PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE, LONDON
"The market appears disappointed by the Italian auctions, in that the 10-year came above 6 percent in yield and the new 5-year gave up a lot of yield in the grey market ahead of the auction. The deterioration of peripheral markets appears to be accelerating, which is mainly a function of stress stemming from Spain's banking sector and the Greek exit risks (i.e. market contagion effect), highlighting that the peripheral markets are in dysfunctional territory, raising the risk that peripheral sovereigns lose market access without intervention from policymakers."
MARC OSTWALD, STRATEGIST, MONUMENT SECURITIES, LONDON
"The levels at which the yields were struck were actually higher than the levels on the bid side in the secondary markets. The market had built in a big concession for it and the actual bidding... the prices which they had to strike at the sale had to have an even bigger concession and that's not good."
"With all the noises going on around at the moment, it's really rather unsurprising."
ALESSANDRO GIANSANTI, RATE STRATEGIST, ING, AMSTERDAM
"There was a huge concession before the auction and even despite that both bonds came out with a weak price, below the market. The "risk off" we have seen in markets is affecting especially Spain, but also Italy. Yields and spreads are back to January levels and the indications are the market is going back to the danger zone."
* * *
Other news did not help: European confidence plunged to 90.6 vs. estimates of 91.9, and down from 92.9. European M3 dropped to just 2.5% from 3.1%, while private loans grew just 0.3% vs 0.6% in March, which RBC's James Ashley called "unequivocally a disappointing report in all key areas", and which for all Austrian theory of money folks out there means just one thing: more printing is coming.

and the EU tries to toss a hail mary pass to someone , anyone Bueller ,Bueller.........

http://www.zerohedge.com/news/eu-says-it-willing-envisage-direct-esm-bank-recapitalizations


European Commission Says It Is Willing To Envisage Direct ESM Bank Recapitalizations



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Submitted by Tyler Durden on 05/30/2012 07:13 -0400






Update: sure enough "EU says accommodative ECB has little scope for more stimulus"
In a headline that is far less than meets the eye, we read the following:
  • EU WILLING TO `ENVISAGE' DIRECT ESM BANK RECAPITALIZATIONS
  • EURO ZONE SHOULD MOVE TOWARDS BANKING UNION
As a reminder, this is the EU... not the ECB... and not Germany. The same EU which has for a while now been pushing for Germany to foot the bill. The same EU which without Germany's funding agreement, is a faceless zombie. Recall yesterday's Reuters story that made the rounds: EU proposes cross-border bank rescues. and which as Reuters admitted is "likely to upset some members, particularly Germany." Same here. As expected the record number of EUR shorts send the currency into the sky, but we expect it to come right back down once it is understood that Germany has yet to say anything on this plan.

And here is more on the story, which is nothing but a rerun of yesterday's Reuters report, this time from the WSJ:

The 17 countries that use the euro should consider setting up a "banking union" that allows them to share the burden of bank failures, the European Union's executive arm said Wednesday in a report on the currency union's crisis-fighting efforts.

To further stop expensive bank bailouts from pulling down governments' own finances, allowing the euro zone's new rescue fund to directly boost the capital of banks "might be envisaged," the European Commission said.

At the moment, any financial aid to prop up struggling banks would have to be requested by the firms' own government, pushing up its debt and deficit burden. The fear is that even if the government gets the required bank aid from the bailout fund, it would damage its efforts to raise money from the bond markets to finance the rest of its operations.

The Commission's suggestion for a banking union comes as vulnerable euro countries like Italy and Spain have seen borrowing costs jump in recent weeks while the euro's value has slumped. Spain's troubles, in particular, have been compounded by the weakness of banks suffering the effects of a property-market meltdown.



Investors have also shied away from the currency union's weaker members amid concerns that Greece may have to leave the euro and spark further turmoil in the bloc's financial sector.

The Commission publishes on Wednesday specific recommendations for all 27 EU countries as well as the euro zone as a whole. Many economists have called on the Commission to give countries more time to cut their budget deficits to avoid pushing them further into recession.

In its own staff report, which was released ahead of the recommendations, the Commission paints a dark picture of the euro zone's economy—even in relatively strong countries.

"Even member states that had been regarded as financially sound became affected and the crisis became systemwide in the second half of 2011," it said. "This reveals the strength of spillovers in the euro area…and is a call against complacency for those seemingly unaffected."

And much more recycled "news" in the article itself.

http://www.zerohedge.com/news/japanese-bond-curve-inverts-3y-cash-now-king


Japanese Bond Curve Inverts For First Time Ever As 3Y Cash Is Now King



Tyler Durden's picture
Submitted by Tyler Durden on 05/30/2012 00:29 -0400






For the first time ever, 3 year Japanese government bond (JGB) yields are trading below 1 year JGB yields as the world's inexorable desire to repatriate, delever, and seek safety while reaching for as much term yield as is still 'safe' come home to roost. With Swiss rates already grossly negative and German rates rapidly converging, the world's (d)evolution (since evolution conjures a rebirth into something better) is shifting investors out the yield curve as ZIRP is here to stay forever, wherever you look in so-called developed economies (who can print their own money). In the last 4-5 weeks, 3Y Japanese bond yields have dropped 6bps to around 10bps (pretty much the same as every other maturity inside of 3Y) as the entire yield curve gradually flattens pushing out investor's perception of 'cash' to longer- and longer-maturities. The inversion (i.e. 3 year rates below 1 year) is also interesting given its maturity coincides with thematurity of Europe's LTROs as perhaps some round-about funding mechanism to avoid EUR-USD basis swap detection is forcing money into the Japanese bond market. Of course the lower and lower rates are forced by this unintended consequence of Central Bank signaling, the further out investors will creep, accepting more and more duration, which given its generally monetized by the Central Bank ensures rates cannot rise since the jump in the cost of funds would destroy Japan's QE-driven economy. Be careful what you wish for US equity investors, as the Keynesian Endpoint is upon us (and perhaps, just perhaps that is why Central Banks of the world are checking to the Fed, the ECB is playing hardball, and the Fed remains on hold unless apocalypse occurs - which by the way is not an 8% retracement of a 30% straight line rally).
3Y JGBs trade below 1Y JGBs - leaving the short-end inverted...

and the whole curve has flattened significantly in the last few weeks...
but this is not unusual for the front-end of the German Bund curve in recent years as rotation from the USD (in 2008/9) and from periphery to core (Q3 2011 and now) drove the curve inverted as investors crept out a long a short-end that offered some yield and term safety...


and interestingly this is occurring as EUR-USD basis swaps (short-term USD funding at a premium for European entities) jerks to crisis levels again...







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