While we have largely resumed ignoring the non-newsflow out of Europe, as it has reverted back to one made up on the fly lie after another, or just simple rumor and political talking point innuendo in the most recent attempt to get hedge funds starved for yield (and chasing year end performance) to pursue every and any piece of Italian and Spanish debt (at least the until euphoria ends and the selling on fundamentals resumes) the latest development from the FT bears noting as it has major implications for Europe's make it up as you go along "recovery." According to the FT: "A plan to create a single eurozone banking supervisor is illegal, according to a secret legal opinion for EU finance ministers that deals a further blow to a reform deemed vital to solving the bloc’s debt crisis. A paper from the EU Council’s top legal adviser, obtained by the Financial Times, argues the plan goes “beyond the powers” permitted under law to change governance rules at the European Central Bank." The punchline: "The legal service concludes that without altering EU treaties it would be impossible to give a bank supervision board within the ECB any formal decision-making powers as suggested in the blueprint drawn up by the European Commission."

Keep in mind this has been Germany's position all along, which has absolutely no intention of handing over supervision of Deutsche Bank (whose ongoing bailout this is all about), to the ECB. But more importantly, recall that the ESM as a bank recapitalizing CDO mechanism can only work under an active banking supervision regime, which in turn means that the uber Deus Ex Machina, that of recapping insolvent and locked out banks directly and bypassing the ECB's direct debt purchasing using a third party surrogate instead, will not be possible. This is bad news for Spain, but the country is still celebrating its "Schrodinger" status of a country which is both investment grade and needing an imminent bail out any second now.

and......

http://www.zerohedge.com/news/2012-10-17/once-jollying-markets-faith-hope-and-charity-fails-what-comes-next-primer-europes-ne

Once "Jollying The Markets" With "Faith, Hope And Charity" Fails, What Comes Next: A Primer On Europe's Next Steps

Submitted by Tyler Durden on 10/17/2012 10:06 -0400

Bond

Creditors

European Central Bank

International Monetary Fund

Back in January, Zero Hedge proposed a pair trade, which to date has returned well over 100% on a blended basis, namely the shorting of local law peripheral European bonds, while going long English law (or strong covenant) bonds (a relationship best arbed in Greece, when various foreign-law issues were tendered for at par to avoid a bankruptcy, even as the local law bond population saw a massive cram down a few months later as part of the second Greek "bailout"). In big part, this proposal stemmed from the work of Cleary Gottlieb's Lee Buccheit, who has been the quiet brain behind the real time restructuring of Europe's insolvent states. In fact, one can say that what is happening in Europe was predicted to a large extent in his "How to Restructure Greek Debt" and "Greek Debt; The Endgame Scenarios." Which is why we read his latest white paper: "The Eurozone Debt Crisis - The Options Now", because it presents, in clear, practical terms, just what the flowchart for Europe looks like, unimpeded by the ceaseless chatter and noise of clueless politicians and career bureaucrats who have never heard the term pro forma orfresh start. In brief, Buccheit, unlike all European politicians, is hardly optimistic.

Here is where are are now, according to the Clearly lawyer, and where we are going fast: "The preferred option for the debtor country, and the stage we are currently in with Spain and Italy, is to jolly the markets into an act of faith, hope and charity. Politicians from debtor countries and elsewhere attempt to persuade the markets that the voluntary fiscal adjustment programs adopted by these countries are indeed irreversible and will inevitably restore the countries to a sound financial footing... The markets should have faith in this inevitability and should immediately moderate their interest rate expectations." This phase failed in July when Spain 10 years hit record highs. "If Option One fails and the market cannot be persuaded voluntarily to accept low coupons (and we are surely on the cusp of that failure for Spain at least), the second option involves active official sector intervention in the primary or the secondary markets in order to suppress the yields on a debtor country’s paper and thereby permit continued access to market borrowings at tolerable coupon levels." It is this option that Moody's is betting the ranch on, to explain the simply ridiculous paradox that Schrodinger Spain is somehow both "Investment Grade" and has been on the cusp of a full blown bailout for 2 months now.

To summarize:

"The battle for Option
One as it relates to Spain (jolly the markets into continuing to lend)
is quickly being lost. The battle for Option Two (massage the yields) is
about to begin."

What happens next? According to Buccheit, the real fun is only now starting, and what happened in Greece is prologue, with the biggest losers once again set to be local-bond holders, who will inevitably be once again impaired:

Notwithstanding this revulsion to a debt restructuring, if one becomes unavoidable the process will be facilitated -- as it was in Greece -- by the high percentage of local law instruments in the affected debt stock. Moreover, the concentration of the paper in the hands of local investors, while it may rule out the more savage debt restructuring techniques, should at least give the sovereign a malleable creditor universe. Local institutions are susceptible to forms of governmental persuasion to which foreigners are immune.

It is now time to revisit the subordination divergence trade once again, especially now that the ECB has made entry into its virtually cost, and risk-free.

Thank you Mario.

But don't take our word, take that of the man who is orchestrating it all. From The Eurozone Debt Crisis -- The Options Now, by Lee C. Buchheit, Mitu Gulati (full pdf)

How We Got Here

When the crisis first overwhelmed Greece in the spring of 2010, the Hellenic Republic had in excess of €300 billion of debt outstanding, virtually all of it in the hands of private sector creditors. In crafting a bailout package for the country in May 2010, Greece’s official sector supporters faced an obvious choice -- would they lend Greece the money required to repay its maturing debts in full and on time, or would Greece be told to restructure those debts so as to shift the maturing amounts out of the adjustment program period. The official sector chose the former option; a gross bailout in the amount of €110 billion that included a large allocation to pay maturing Greek debts.

The historical precedents pointed in the other direction. During the Latin American debt crisis of the 1980s and early 1990s, the IMF’s prescription for debtor countries was stultifyingly predictable -- raise revenues (tax), reduce expenditures (cut) and stretch out the maturities of existing obligations (restructure). The official sector at that time was asked, but steadfastly refused, either to guarantee the debts of the more than 20 countries that were engulfed in the crisis or to lend those countries the money to repay their existing debts in full and on time. In effect, this policy grabbed the existing private sector lenders by the nose and forced them to extend their loans into a future that held either a return to normal debt servicing or a more severe form of debt restructuring involving a haircut to principal and/or interest. With the benefit of hindsight, of course, we now know that Nicholas Brady, the successor U.S. Treasury Secretary, waited in that misty future with his eponymous Brady Bonds. Creditor haircuts would eventually come at the hands of Mr. Brady, but only eight years after the crisis first started.

Why should the official sector lenders to Greece in the spring of 2010 have chosen such a radically different course, effectively using taxpayer money to repay existing lenders at par? There were three motivations at the time:

Fear of contagion. If holders of Greek bonds were forced to restructure, might not the fear of similar treatment infect the holders of the bonds of Ireland, Portugal, Spain, Italy and perhaps others?
Balance sheet damage. The lenders to Greece in the spring of 2010 were predominately French and German banks. A restructuring of the Greek portfolios of those institutions would inevitably have disagreeable consequences for the balance sheets of those creditors. So bailing out Greece was simply an indirect (and more politically palatable) way of bailing out overexposed financial institutions in northern Europe.
- Reputation of the Euro. A few people (mostly at the senior levels of the European Central Bank) worried that a restructuring of any Eurozone sovereign debt instrument would indelibly tarnish the reputation of the euro itself. This was a fate, they argued, to be avoided at all costs, even if it meant a public sector assumption of Greek liabilities.
So starting in May 2010, Greece began drawing down on its official sector loans, partly to cover its budget deficits, but mostly to repay its bondholders at par. The liabilities thus inexorably began to migrate out of the hands of the folks who had lent the money and taken the commercial risk (the bondholders) and into the hands of Greece’s official (taxpayer funded) sponsors. It was a policy that lasted for 14 months, until the summer of 2011.

It seems belatedly to have dawned on the official sector players that they were gradually displacing their private sector counterparts as the principal lenders to Greece. If a debt restructuring were to become unavoidable, and the word “unavoidable” was by the summer of 2011 distinctly in the air, that restructuring might have to fall on the official sector lenders, with all the predictable political consequences.

Starting in the summer of 2011, the official sector therefore careened from its prior policy of insisting that every creditor of Greece be paid in full to the antipodal extreme of demanding that all remaining private sector bondholders “voluntarily” agree to restructure their claims against the country. By that point, of course, the corpus of Greek bonds remaining in private hands had shrunk to the point that achieving the official sector’s debt relief target required a writeoff of 53.5 percent of the nominal amount of the bondholders’ claims. Greece closed just this transaction in March of this year, erasing approximately €100 billion from its stock of debt in the hands of private sector creditors.
The Diagnosis
The original objective of containing the Eurozone debt crisis has failed. Exactly why it failed depends on your point of view. Some would argue that the measures adopted to ensure containment were inept, inconsistent and insufficient. The more charitably disposed may say that the underlying economic problems of the peripheral countries were so intractable that nothing short of a decision to monetize every debt instrument south of the Rhine could have successfully stopped the rot. Ireland and Portugal were the next to go; Cyprus, Italy and Spain now twitch nervously in the crosshairs.
The options facing the Eurozone at this stage are a function of how the current problem is being diagnosed by the official sector. In a word, the view of the official sector is that we are confronting a temporal problem. Spain and Italy have each embarked on an aggressive program of voluntary fiscal adjustment. All that is needed, the argument goes, is time. Time to let that fiscal adjustment produce its desired effect. Above all, time for the markets to appreciate that the adjustment programs are irreversible and to reward the countries with lower interest rates on their new debt issuances. If we could only fast forward for a few years, this view holds, the entire problem would evaporate like a mist on a chilly hillside in the springtime. The only question is how to bridge this gap -- measured in months or at most a few years -- between the announcement of fiscal adjustment and the market’s willingness to reward that adjustment with lower risk premia.

The Options

There are five, but probably only five, options for dealing with countries like Spain and Italy. These are ranked below in descending order of their attractiveness to the debtor country.

Option One: Jolly the markets
The preferred option for the debtor country, and the stage we are currently in with Spain and Italy, is to jolly the markets into an act of faith, hope and charity. Politicians from debtor countries and elsewhere attempt to persuade the markets that the voluntary (to be contrasted with IMF-prescribed) fiscal adjustment programs adopted by these countries are indeed irreversible and will inevitably restore the countries to a sound financial footing. Accordingly, they argue, the markets should have faith in this inevitability and should immediately moderate their interest rate expectations.

Option Two: Massage the yields

If Option One fails and the market cannot be persuaded voluntarily to accept low coupons (and we are surely on the cusp of that failure for Spain at least), the second option involves active official sector intervention in the primary or the secondary markets in order to suppress the yields on a debtor country’s paper and thereby permit continued access to market borrowings at tolerable coupon levels. This intervention can take one of two forms. An official sector player such as the ECB or ESM could purchase bonds in the primary (ESM) or secondary (ECB or ESM) markets. This added demand should put downward pressure on yields. More on this below. Alternatively, the official sector could offer some form of partial credit support for new issuances by the debtor country -- a partial guarantee, insurance policy or “put” arrangement. This technique bleeds an element of AAA credit risk into each new bond and thus allows it to be sold with a lower coupon.

Admittedly, the track record for official sector intervention to massage yields on sovereign bonds is not good. In the early days of the European debt crisis, the ECB intervened in the secondary markets to buy Greek, Irish and Portuguese bonds. The effort failed in each case to preserve market access for more than a few weeks or months.

If Options One and Two both fail, the country loses market access (as happened in Greece, Ireland and Portugal).

Option Three: Full bailout

If it is unable to refinance maturing amounts through market borrowings at bearable interest rates, the debtor country will prefer a full official sector bailout; that is, a bailout package which includes an amount sufficient to cover projected budget deficits and to repay all maturing obligations during the adjustment program period.2 A full bailout allows the debtor to avoid the opprobrious label “defaulter”. A cynical politician in the debtor country may even conclude that if a debt restructuring becomes necessary down the road, such an operation would be far easier with the liabilities concentrated in the hands of a few official sector lenders rather than thousands of private sector bondholders.

Option Four: Reprofiling

Were the official sector to balk at paying out existing creditors at par (the now widely-recognized error of the first Greek bailout), some form of debt restructuring becomes inevitable. The mildest debt restructuring technique that will accomplish the official sector’s objective of moving maturities out of the program period is known as a debt reprofiling. This technique, used successfully by Uruguay in its restructuring in 2003, has the merit of simplicity. The maturity dates of all items of outstanding debt (except perhaps for short-term Treasury bills) are shifted out by a fixed number of years -- three, five or seven years, for example. In a Uruguay-style reprofiling, no haircut is applied to the principal of the debt and the interest rate applicable to the extension period is the original coupon rate on each of the affected instruments.

A reprofiling offers these advantages:

Local politicians can claim that investors will be paid back every euro they lent together with interest calculated at the original rate. The repayment of principal will merely be delayed a bit.

A reprofiling moves maturities out of the program period and obviates the need for the official sector to fund those maturities; this is its principal charm in the eyes of the official sector.

The net present value loss to investors resulting from a reprofiling is muted. It will depend, of course, on the length of the extension period. In Uruguay’s case (a five year extension), the NPV loss was about 19%.

If the debtor country cannot return effortlessly to normal market borrowing when the period of the extension ends, the ensuing debt restructuring will bite the private sector lenders, not taxpayers.

Option Five: Full (Greek-style) restructuring

The final option is a full restructuring of the debt stock combining both a maturity extension and principal/interest haircuts. This is where Greece wound up in the spring of 2012.

Can Market Access Be Preserved?

The battle for Option One as it relates to Spain (jolly the markets into continuing to lend) is quickly being lost. The battle for Option Two (massage the yields) is about to begin.

On September 6, 2012, the European Central Bank announced its willingness to commence a program -- the Outright Monetary Transactions (OMT) program -- of buying short-term (one to three year) bonds of Eurozone countries in the secondary market, in unlimited amounts3, in order to suppress the yields on those instruments. The objective of the OMT program is to allow afflicted countries to continue to issue paper in the primary market at tolerably low interest rates. OMT purchases of the bonds of a country would be expressly conditioned, however, on that country’s acceptance of a formal, IMF-approved and monitored adjustment program; “voluntary” fiscal adjustment will not be sufficient. The ECB also announced that in the event of a future debt restructuring of bonds acquired in the OMT program, the ECB will accept the same treatment as private creditors. Aggregate OMT purchases will be reported weekly with country-by-country breakdowns published each month. The ECB has said that it expects to publish the market value of its OMT positions.

No one doubts ECB’s financial capacity to run the OMT program. After all, ECB owns the proverbial printing press. It is political rope that may be in shorter supply. If indeed the ECB is forced to open the OMT throttle for Spain and/or Italy, these risks loom:

The market will obviously realize that its own assessment of the appropriate risk/reward calculus (reflected in the coupon the market demands on a new bond) has been skewed by the presence of an official sector deus ex machina5 in the process. Investors will presumably continue to buy those bonds at that officially induced interest rate only if they believe that either (i) they effectively are being given a put of the instruments to the ECB or (ii) in the event of a future restructuring the ECB, as the largest holder of the bonds and now publicly committed to accept pari passu treatment, will use its considerable leverage to ensure that short-dated bonds are exempted from (or treated very leniently in) the restructuring.

Nonetheless, the markets may mercilessly test the ECB’s willingness to persist in buying unlimited quantities of peripheral sovereign bonds. And every time a prominent politician in Germany or elsewhere, perhaps goaded by an ECB report of an eye-watering mark-to-market loss on OMT-acquired bonds, rails against the OMT program, the shorts will be emboldened. They will constantly be measuring the amount of political rope left in the ECB’s coil. Once the ECB commences buying, it must be prepared to continue doing so until the earlier to occur of a capitulation by the shorts or a general market acceptance that the crisis has abated in the target country.

The OMT program will apparently restrict its buying to the short end of the yield curve (one to three years). Every atom of the political flesh in the debtor country will therefore want to concentrate primary market borrowings in this sweet spot where the yields benefit from official sector intervention. Why borrow for ten years at 9% when one can borrow for two years at 3%? Unless restricted by the terms of the IMF-prescribed adjustment program, however, this tendency to borrow short will very quickly produce an alarming debt profile, one characterized by an Himalayan spike in the early years. The optical impression that such a spike will leave on the retinas of prospective investors may itself become an obstacle to renewed market access.

What happens if austerity fatigue forces the politicians in the debtor country to fall out of the fiscal adjustment bed at a time when the ECB owns a sizeable chunk of OMT-acquired bonds? Experience tells us that public resentment of austerity measures tends to intensify when the aggrieved citizens perceive the author of their misery to be an organization such as the IMF rather than their own elected representatives. The danger here is that the ECB, and more generally the EU, could become a hostage to its own policies. Rather than abruptly suspend further OMT purchases to a non-complying country, with the predictable consequence of an immediate spike in yields and massive mark-to-market losses in the OMT portfolio, the Europeans may feel that they have little choice but to accede to whatever relaxation of the adjustment program is demanded by the debtor country. So much for OMT conditionality.

The lesson? Before agreeing to play a deus ex machina role, an actor is well advised to ensure that the crane will be adequate to get the god all the way to the stage floor.

Assessing the Options

Again, the official diagnosis of this situation is that it is a footrace; can market access at tolerable interest rate levels be preserved long enough for the benignant effect of fiscal austerity programs to become visible to the market? If interest rates rise to an unsustainable level before the adjustment programs have had time to do their good work, the race is lost.

Option One (cajole the markets into an act of faith, hope and charity) appears to be ending; perhaps it never really had much of a chance.

Option Two (massage the yields) is about to begin. The OMT program may work but its fate will turn crucially on three factors that are difficult to handicap. How relentlessly will the markets test the ECB’s resolve to continue buying peripheral bonds in unlimited quantities? Second, how successful will the ECB be in mollifying the unhappiness of its largest shareholder with the very idea of buying bonds in the secondary market for this purpose? Third, will the economic recovery of the affected countries (and their planned return to normal market borrowing) be delayed by forces beyond their control, a further slowdown in global economic growth for example. This could require the deus ex machina to stay on the stage longer than anyone anticipated.

For two reasons, Option Three (full bailout), if it is tried at all, may not last long. First, the memory of the ill-fated May 2010 Greek bailout is still fresh in the minds of the official sector. Will taxpayer money again be used to repay, in full and on time, private sector creditors, particularly when OSI (official sector involvement, a/k/a restructuring of official sector debt) is in the offing? Second, are there sufficient resources in the European bailout mechanisms to repay all of the maturing debt of the countries now in play over even the next 15 months?

Option Five (a Greek-style restructuring) seems unlikely. In Spain and Italy most of the foreign investors have already exited and been replaced by local financial institutions -- banks, insurance companies and pension funds. A massive haircut to the debt stocks of either of these countries will therefore only decapitate the domestic financial systems. The money saved in debt service will have to be used to recapitalize those institutions.

As Sherlock Holmes might have said, exclude the impossible and whatever is left, however improbable, must be true. That logic leaves Option Four, a debt reprofiling designed to shift maturities out of the adjustment program period while inflicting the least possible NPV loss on the debtholders. As the months roll sweetly on, however, a Uruguay-style debt reprofiling becomes less and less attractive.Uruguay had the luxury of extending its bond issues at their original coupon levels because those bonds had been issued at a time when Uruguay was investment grade. So the reprofiling meant an extension of low-coupon debt.

European peripherals were in a similar situation at the start of this crisis; their bonds had been issued during the sunny years when the market failed to register any significant credit distinctions among Eurozone members. The coupons on those bonds, even for Greece, were therefore only marginally higher than equivalent-maturity German bonds.

Once the illusion of uniform creditworthiness within the Eurozone was blasted by the events in Greece in early 2010, the coupons on new issuances of debt by European peripherals increased significantly. A Uruguay-style extension of the entirety of the debt stock of one of these countries today will therefore not be as attractive as it would have been two years ago, and it grows less attractive as each month passes and maturing debt has to be rolled over at interest rates higher than those applicable to the original issuances.

Let’s be clear: a debt restructuring, even a mild one like a reprofiling operation, is a last resort alternative for most members of the official sector. They may eventually come to it, as they eventually came to it in Greece, but only if all other alternatives show themselves to be financially or politically untenable. Even now, the official sector takes every opportunity to describe the Greek restructuring as “unique and exceptional.”

Notwithstanding this revulsion to a debt restructuring, if one becomes unavoidable the process will be facilitated -- as it was in Greece -- by the high percentage of local law instruments in the affected debt stock. Moreover, the concentration of the paper in the hands of local investors, while it may rule out the more savage debt restructuring techniques, should at least give the sovereign a malleable creditor universe. Local institutions are susceptible to forms of governmental persuasion to which foreigners are immune.

and......

BREAKING: France on the edge as Credit Agricole sells Emporiki -

…FOR ONE EURO

That’s a loss of €2bn, but cheap at twice the price given the liabilities and derivatives nightmare.

As flashed in Smoke Signals yesterday, France is on the edge. The Slog posted:

‘Emporiki Bank and the unpleasant George Provoloupolos at the Bank of Greece are also implicated here. I sense I must post now (9.15 BST 16.10.12) as there are signs that this new bombshell is about to break cover.’

What happened here was that Provo the Crook played hardball with CreditAg, and they had no choice but to withdraw. One hopes George has good security and burly minders. Perhaps he should be Greece’s chief negotiator with the Troika.

and.....

BREAKING….Samaras coalition partner to vote against Troika’s Greek labour rights attack

Tonto Troka’s 10-year pay-freeze proposal

Samaras coalition government partner and Democratic Left leaderFotis Kouvelis said last night that his party will vote against anyTroika-imposed measures proposing to reduce workers’ rights in Greece.

Speaking to journalists after a meeting with Prime Minister Antonis Samaras and third government partner Venizelos (PASOK) yesterday, Kouvelis asserted:

“We categorically reject the Troika demands. The minimum wage has nothing to do with structural reforms. We will not vote in favor of the austerity in labour rights at the Parliament.”

The Troika wants the complete removal of labour rights in the private
sector. It demands that employees and workers earning the minimum wage
of 586 euro gross per month should stay this level for about 10
years. Rather like the eurocrats in Brussels, one imagines.

Ever the mouth without the trousers, Venizelos added, “The Troika
is playing with fire”, but backed off from anything in the way of action, as such.

The whole negotiation is a farce anyway, as Athens has already been guaranteed further aid along with Spain.

http://www.zerohedge.com/news/2012-10-17/overnight-sentiment-celebrating-spains-non-junk-status

Overnight Sentiment: Celebrating Spain's Non-Junk Status

Submitted by Tyler Durden on 10/17/2012 07:02 -0400

With little official macro news overnight, the market has focused on yesterday's after hours positive surprise which was Moody's confirmation that nothing major is allowed to happen to Europe until after the US election, namely Spain's downgrade to junk. Sure enough, despite expectations to the contrary, and reality screaming, Moody's decided to keep Spain at Baa3, on the verge of junk, with a warning that if there is any hiccup in the country's private market debt access, a multi-notch downgrade would follow. All the headline scanning algos however saw 'Spain is IG' and never looked back. The result is a slide in Spanish bond yields to multi-month lows on the confluence of two absolutely paradoxical events: Moody's saying Spain is fine if it can fund itself, and the ECB saying it is there to rescue the country when the time when it can fund itself runs out. Naturally, under this confluence of events, Spain will be even less likely to request a bailout, which will require an even more forceful shock when the time finally comes for reality to reassert itself, to get Rajoy to smell the morning napalm. Until then however, the musical chairs continues, and in the scramble for yield Spanish bonds are suddenly attractive, at least until they aren't.

To summarize: European stocks are little changed although Spanish shares rise. Spain 10-yr bond yields fall to the lowest level in more than 6 months. S&P futures are now higher on the trading session, driven by correlation engines as the euro is up vs the dollar, despite major disappointments by IBM and Intel. In other news Germany formally shut down the debt redemption fund proposal, ending one more rescue avenue for when the recent baseless euphoria ends, even as Spanish La Vanguardia reports that Germany is pressuring Italy to request European aid alongside Spain so that the government of Prime Minister Mario Monti doesn’t reap the benefit of lower borrowing costs without being tied to tougher economic reforms. Needless to say, Italy is said to resist the proposal: after all in Europe one just wants the upside from being bailed out, as opposed to actually being bailed out...

FX recap via SocGen:

EUR/USD 1.3041-1.3124 overnight range. Big two-day move puts spot above 1.3100 with overnight Spain ratings confirmation supporting positive momentum. Resistance 1.3147, then 1.3172 the Sep 17 high. 1mth RR jump to -0.2725.
USD/JPY 78.62-78.92 overnight range. The six -day rally comes to an end as spot slips back below 78.75, the 100d ma. Japanese cabinet meeting awaited later today to confirm stimulus bill. EUR/JPY resistance 103.86.
GBP/USD 1.6109-1.6138 overnight range. Up with risk appetite overnight, resistance situated at 1.6138. Trailing EUR/USD means that EUR/GBP is squeezing above 0.8100. The MPC minutes and labour market data in focus this morning.
AUD/USD 1.0263-1.0324 overnight range. Back above 1.0300 on Spain news and broad Asian equity market gains overnight. Difficult to be very bullish given dovish RBA stance. Resistance runs at 1.0345, the 200d ma. Focus on stocks.

What else is on the outlook:

We were warned by Germany late yesterday not to ‘over-interpret' the statement with regard to making a credit line available to Spain, but speculation (and hope) of progress in the margin of the EU Council summit tomorrow is of such nature that smallest hint of negotiations advancing can be infectious for the broader market. Better macro data (US NAHB homebuilding at a six year high, capacity use up) and more bullish investor optimism explain the resilience in risk assets that now has the Eurostoxx targeting the September high (256.9) on the dawn of the latest EU leader gathering. The move in EUR/USD risk reversals compared to a year ago is staggering (see chart vs US/EU macro surprise index) and underlines how the backdrop has improved and EUR angst has receded in particular since the summer. The conciliatory tone of German officials with respect to Spain and Greece in particular demonstrates how, in the short-term at least, the thought of (more) flexible lending terms but without mentioning the words ‘debt mutualisation' is making confidence stick. The question is whether this time the EUR can hold on to its gains or we revert to type where post Summit blues last year set the scene for a big 12 figure drop in EUR/USD between late October and mid December.

No EU first-tier data or events are scheduled today except for the German 2y auction. In the UK we get the latest MPC minutes and labour market data. The minutes of the October meeting will be key to finalise expectations for the November meeting and whether further QE is possible. A drop in annual CPI to 2.2% in September suggests more asset purchases could be on the way though we will reserve our final judgement until after the first release of Q3 GDP next week.

A more comprehensive summary via Deutsche Bank:

S&P 500 Futures (-0.09%) turned negative after the debate which was predictable but something that might be a little short-sighted. Bernanke and QE are more likely to survive with Obama than with Romney. Nevertheless, major Asian bourses are still higher across the board though with the Hang Seng (+0.96%), ASX200 (+0.87%) and the Nikkei (+1.41%) all higher. The EURUSD cross jumped 0.5% following the Moody’s press release, adding to yesterday’s 0.8% gain, now trading just under the 1.31 mark. In the credit space, Asian and Australian IG indices are trading 4bp and 7bp tighter respectively overnight, with cash bond spreads generally marked 5-10bp tighter.

This all followed another positive day for markets yesterday. The Dow and the S&P 500 added +0.95% and 1.03% on the day to close just 0.4% and 0.7% below their post QE3 highs.

The market saw broad based gains across most sectors but the strength was mostly concentrated in cyclicals. Better US earnings certainly helped. Indeed the market was encouraged by pre-market earnings beats from Goldman Sachs, State Street and Johnson & Johnson yesterday. Coca-Cola finished the day lower (-0.6%) after falling short of the market’s top line estimates. Indeed revenue beats are a lot lower than earnings beats so far in the current reporting season. Of the companies reported to date the beat:miss ratio is around 52%:48% for revenues versus 84%:16% for EPS. Intel and IBM both reported better earnings after the close but the latter fell short on revenue estimates. Elsewhere Apple rose +2.4% yesterday after it issued invitations to an October 23rd event which prompted chatter that it will unveil a mini-version of its iPad. I must somehow try to resist.

US data was overall a bit more mixed. Industrial production was up 0.4%mom (vs +0.2% expected), an improvement on the prior month’s print which was revised down two-tenths to - 1.4%. September CPI came in higher than expected 0.6% (vs 0.5%) because of a 4.5% increase in energy prices, much of which was due to higher gasoline prices (+7.0%). The core CPI was reported at 0.1% which kept the year-over-year rate unchanged at +2.0%. Meanwhile,the October NAHB housing market index was up by a point in the month to 41. This brings the series to the highest level since June 2006(42) as US housing data continues to improve.

The Stoxx 600, IBEX and FTSEMIB rose +1.32%, +3.41% and +2.53% respectively after German coalition members Michael Meister and Norbert Barthle from Merkel’s Christian Democrats, indicated that Germany was open to Spain applying for a precautionary credit line (PCCL) from the ESM. However, Barthle later played down the comments saying that they were "over-interpreted" by markets, and that he was only making a general point about a PCCL being one of a number of options available (Reuters). Indeed, the Dow Jones reported overnight that Rajoy had phoned Merkel to assure her “not to believe everything you hear” about Spain requesting a credit line.

These comments came after the FT report yesterday suggesting that Spain was preparing to request EU support in the form of a PCCL that would trigger the ECB’s OMT programme but would not need to be funded by the ESM. DB's Gilles Moec noted that although what the FT describes is accurate, crucially it does not discuss the details of the MoU’s conditionality which is key for the success of EU support. Conditionality will have to be flexible enough - in particular on the deficit targets - to be credible and keep the market ready to believe that the outcome of the quarterly conditionality reviews will allow the ECB to continue to intervene, but at the same time tough enough to address doubts about writing a “blank cheque”. Spanish 10yr bond yields finished about 9bps off the intraday lows to finish the day virtually unchanged at 5.81% although the front end outperformed (2yr yields were -7bps on the day) probably reflecting a greater probability of ECB intervention in shorter-dated bonds.

Looking at the day ahead, the key data points in the US are housing starts and building permits with the market expecting 775k (which would be the highest since late 2008) and 810k respectively. BofNY, BofA and PepsiCo are among the companies reporting in the US morning, while Amex and eBay report later. It will be relatively quiet on the datafront in the Eurozone.

Elsewhere Monti is scheduled to meet the Cypriot President in Rome this afternoon. Portugal will sell some bills today while Germany will auction EU5bn in two-year notes. Finally, Merkel will be hosting the Swedish Prime Minister for talks on the EU and the topic of last nights remarkable 4-4 draw between the nations will surely be discussed, especially as Germany were 4-0 up! However at least they got a game, unlike England. Strange times!

http://www.telegraph.co.uk/finance/debt-crisis-live/9613847/Debt-crisis-live.html

18.05 Yannis Stournaras, the country's finance minister, said that he expected differences on labour reforms to be ironed out in the coming days. He told the Financial Times:

We are in full agreement on almost all the issues [...] What remains is to reach a compromise on labour reforms and civil servants, then finalise measures to reform products and services markets in order to bring down prices.

17.32 More progress in Greece, although not enough to present concrete terms at tomorrow's EU summit.

The European Commission has just issued this statement on the country's progress on identifying budget cuts:

The authorities and staff teams agreed on most of the core measures needed to restore the momentum of reform and pave the way for the completion of the review. Discussions on remaining issues will continue from respective headquarters and through technical representatives in the field with a view to reaching full staff level agreement over the coming days. Furthermore, financing issues will be discussed between the official lenders and Greece.

16.27 Greece's prime minister has been speaking on the sidelines of a meeting in Bucharest. There, he said that Greece was close to reaching a deal with its international lenders to unlock aid:

I'm confident we're doing everything we have to do in order to get it [a deal] and get it soon, so that we can move towards a recovery.

16.24 Last week, Spain's Red Cross launched its first ever campaign to raise donations to help the growing number of poverty-stricken Spaniards needing food handouts as the nation's economic crisis deepens.

Now, the Catholic charity Caritas has said it is aiding more Italians than ever as the economu remains mired in recession. AP reports that the charity's annual report revealed that nearly half the people seeking its help in the poorer south are Italians. That compares with 30pc of Italians seeking regular help in the country overall - already up from 23pc three years ago.

The report added that greater numbers of housewives and pensioners are coming forward seeking help.

16.01 Greece and Spain are in "depression, not recession", according to Nobel prize-winning economist Joseph Stiglitz (pictured, below). He toldAFP:

Spain and Greece are in depression, not recession. That impact was brought about by austerity. [...] Austerity is bringing Europe down and diminishes chances of making things work.

On the IMF's growth forecasts for the eurozone, he added:

I'm more pessimistic than they are (about growth)... I see significant risk of continuing turmoil.

15.20 Spain does not need a full bail-out, merely a "precautionary" credit line, according to Finland's PM.

Jyrki Katainen praised Spain's efforts, and said:

If Spain decides to ask for some sort of bail-out then Europe should be ready to act and I’m sure they will not need a full program like Ireland or Portugal and instead they might need some sort of a precautionary program, [...] The main focus now should be that Spain remains in the market and gets funding.

13.18 And if all hell broke loose and Spain and Italy were forced out?

...the situation would totally run out of control if the Euro crisis were to reach the point where Italy would have to secede from the Eurozone, too: Germany would be giving up 1.7 trillion euros and would have to write off 455 billion euros. In this scenario economic losses in Germany with more than 21,000 euros per capita would be even higher than in the exiting countries: Greece would lose 15,000 euros per capita, Portugal and Italy nearly 17,000 euros and Spain 20,500 euros. Another effect would be a dramatic increase of unemployment: only in Germany the number of unemployed rise for more than a million by the year 2015.

This scenario would eventually lead to severe international recession and global economic crisis. By 2020, growth losses in the countries under review would reach a total of 17.2 trillion euros. In absolute terms, France would suffer from the highest losses at this point (2.9 trillion euros), followed by the USA (2.8 trillion euros), China (1.9 trillion euros) and Germany (1.7 trillion euros).

13.15 Add Portugal to the equation and you get this:

In the event of an additional EU secession of Portugal, for example, this would mean a loss of 225 billion euros for Germany by 2020 and necessary debt write-offs amounting to 99 billion euros. Globally accumulated losses in growth would add up to 2.4 trillion euros at this point, of which the USA would have to bear 365 and China 275 billion euros respectively. With this scenario, per capita losses in income in Germany would total 2,790 euros over eight years.

13.08 A Greek exit from the eurozone "bears the risk of kindling a wildfire throughout Europe" and could cost the global economy up to €17.2 trillion if Portugal, Spain and Italy were also forced to leave, according to a respected German think tank.

Bertelsmann Stiftung said that a Greek exit on its own:

...would imply national insolvency, a massive devaluation of the new Greek currency, unemployment, sharply declining domestic demand and many other problems. All these domestic effects would have a direct impact on its trading partners. In Greece alone, the ensuing losses of growth would amount to 164 billion euros or 14,300 euros per capita by the year 2020. The 42 top national economies in the world would have to absorb total losses amounting to 674 billion euros in total.

11.59 Germany has slashed its 2013 growth forecast because of the continuing debt crisis and "economic weakening in developing countries".

Philipp Roesler, economy minister, said that Germany would only grow by 1pc next year, compared with the 1.6pc that it had previously forecast. However, growth this year is now expected to be 0.8pc - marginally better than an earlier forecast of 0.7pc. He told reporters:

The good news is that the German economy is holding up and still on a growth path, despite all the global economic turbulence.

But with the European sovereign debt crisis and the economic weakening in developing countries in Asia and Latin America, Germany is in stormy economic waters.

We're therefore expecting a lessening of economic momentum in the winter half-year. But there can be no talk of a collapse in growth.

11.16 Portugal has got another debt auction away this morning. The country sold €770m of 12-month debt at average yields of 2.101pc. This is much lower than the 3.505pc it paid at a previous auction in July.

The country also sold six-month debt at average rates of 1.839pc, up from 1.7pc in September, while three-month borrowing costs fell to 1.366pc (v. 2.168pc) in the first debt sale after the country made a tentative comeback to the bond market this month.

11.05 Asked what was the biggest threat to the European Union, Mr Hollande replied:

not being loved. Only being seen at best as an austere cash dispenser or at worse as a reform school.

11.03 You can also read excerpts from the interview in the Guardian.Mr Hollande insisted that France was:

...the bridge between northern Europe and southern Europe. I refuse any division. If Europe has been reunified, it's not for it to then fall into egotism or 'each for one's own'. Our duty is to set common rules around the principles of responsibility and solidarity. As a French person, it's for me to ensure Europeans are conscious of belonging to the same group.

10.52 In a wide-ranging interview, Mr Hollande also dismissed suggestion of a rift with Germany over closer ties and a banking union.

Although he told the French daily that some countries talked a lot about political union but were often "more reluctant to take urgent decisions", he denied that this comment was directed at Europe's largest economy.

He added that decisions made by the European Council had restored calm to the markets. He said:

Nobody today thinks that the euro will disappear or that the area will explode. But the prospect of its integrity is not enough. Now we must get out of the economic crisis.

10.36 Phew! Back to Europe, where the crisis is nearly over, according toFrancois Hollande.

The French president told Le Monde and five other European newspapers that the 17-nation bloc was "close, very close" to exiting the crisis, thanks to the decisions made at June's EU summit.

Mr Hollande said that he wanted issues surrounding Greece's future in the euro, bail-out requests from other countries and the implementation of a banking union to be "resolved by the end of the year" (ha!). Mr Hollande added:

We can then initiate [...] the deepening of our relationship. This will be the largest project in early 2013.

10.12 Back to the unemployment figures, where the rise in the number of Britons in work was driven by part time jobs.

There were 88,000 full time jobs created in the three months to August, compared with 125,000 part time jobs.

09.51 The committee voted unanimously in October to keep interest rates at a record low of 0.5pc and leave QE at £375bn. The current round of money printing will be completed before the bank's November meeting.

09.45 Meanwhile, policymakers at the Bank of England are split over whether to keep the printing presses on once its current round of asset purchases end. Minutes from the Monetary Policy Committee's October meeting highlighted "differences of view between members":

There were some differences of view between members about the outlook and the likelihood that further easing in policy would be required. But there was agreement that there was little to be gained at this meeting in changing the current programme of asset purchases. The Committee would have the opportunity to gauge the impact of past and prospective policy actions at home and abroad over the next month, in the context of preparing its forecasts for the November Inflation Report.

09.38 The number of people aged between 16 and 64 in work now stands at 29.6m. This is the highest since records began in 1971.

09.32 The number of Britons out of work fell by 50,000 in the three months to August, as official data showed that more people are now in work than ever before.

The number of people without a job now stands at 2.528 million,according to the Office for National Statistics. The fall in unemployment means that the jobless rate is now 7.9pc, down from 8.1pc in the three months to July.

09.21 Meanwhile, Germany has stated its exorbitant price for keeping Greece in the euro and agreeing to mass bond purchases by the European Central Bank: a fiscal overlord.

Ambrose Evans-Pritchard writes that Germany wants an EU “currency commissioner” with sweeping powers to strike down national budgets; a “large step towards fiscal union”; and yet another EU treaty. Here's more from Ambrose:

Finance minister Wolfgang Schaeuble dropped his bombshell in talks with German journalists on a flight from Asia, and apparently had the blessing of Angela Merkel, the chancellor. “When I put forward such proposals, you can take it as a given that the chancellor agrees,” he said.

Officials in Brussels reacted with horror. “If that is the demand, they are not going to get it. Nobody in the Council wants a new treaty right now,” said one EU diplomat.

“We’ve got the fiscal compact and quite enough fiscal discipline. Not even the Dutch want a commissioner telling them how to tax and spend,” he said.

08.46 Spain dodged a bullet on Tuesday night when Moody's held the country's debt rating unchanged at Baa3, one step above "junk" grade. However, the ratings agency assigned Madrid a "negative outlook," maintaining a threat to downgrade the country if conditions deteriorate.

Moody's cited the European Central Bank's willingness to buy Spanish government bonds to stabilise its borrowing rate as well as the government's commitment to implementing fiscal and structural reforms necessary to improve its finances.

Catharsis Ours

Wednesday, October 17, 2012

Overnight sentiment - and a review of financial news and data for October 17th

http://www.zerohedge.com/news/2012-10-17/eurozone-bank-supervisor-plan-found-be-illegal

Eurozone Bank Supervisor Plan Found To be "Illegal"

and......

Once "Jollying The Markets" With "Faith, Hope And Charity" Fails, What Comes Next: A Primer On Europe's Next Steps

BREAKING: France on the edge as Credit Agricole sells Emporiki -

…FOR ONE EURO

BREAKING….Samaras coalition partner to vote against Troika’s Greek labour rights attack

Overnight Sentiment: Celebrating Spain's Non-Junk Status

No comments:

Post a Comment