http://www.zerohedge.com/news/2013-06-26/futures-lifted-verbal-cental-banker-exuberance

Futures Lifted By Verbal Central Banker Exuberance

Submitted by Tyler Durden on 06/26/2013 06:37 -0400

Once again it is all about central banks, with early negative sentiment heading into Asian trading - following the disappointing announcement from the PBOC about "ample liquidity" leading to the 6th consecutive drop in the Shanghai Composite while the PenNikkeiStock index tumbled yet again - completely erased and flipped as Mario Draghi spoke, although not to explain his involvement with the latest European derivative window-dressing scandal, but to announce that he is, once again, "ready to act" (supposedly through the OMT, which despite the best hopes to the contrary, still DOES NOT OFFICIALLY EXIST) and that while it is up to government to raise growth potentials, growth would "partly come from accommodative policy." In other words, ignore all BIS warnings, for Europe's unaccountable Goldmanite overlord Mario Draghi continues to promise more morphined Koolaid (read record Goldman bonuses) to any banker that comes knocking.

Sure enough, European stocks are now trading at session highs, and European optimism that the monetary spigot is still quite open has pushed US equity futures to their respective session highs as well.

In other news, formerly-exiled (and pardoned by donor recipient Bill Clinton) Glencore founder Marc Rich has died in Switzerland at age 78.

The crash in the Indian Rupee and the precious metal complex was already noted, even if bond yields are modestly tighter, both across the European periphery as well as the 10 Year which was down to 2.57% at last check. Alas, not so much Indian 2022 bonds, which are now 9 bps wider to 7.77% and surging.

And just to provie that it is indeed, "all about the Central Banks at the moment", this is precisely how DB's Jim Reid begins his daily comment of the day. To wit:

It's all about the Central Banks at the moment - a comment that we'll probably continue to make many times over the next few years. On balance the PBoC is edging out the Fed as the main concern for markets at the moment. Its also providing us with pretty volatile intra-day markets. Indeed, as we went to press with the EMR yesterday, the Shanghai Composite index was trading at a low of - 5.5% before staging an impressive come back to finish the day relatively unchanged (-0.2%) on the back of some somewhat reassuring comments from PBoC officials. The PBoC’s comments mostly downplayed the concerns around liquidity and money market rates saying that liquidity was partly a seasonal factor.

A number of domestic newswires have also run editorials overnight suggesting that liquidity will return to the banking sector after month-end. Looking out to the rest of this week, it’s very likely that we’ll see more headlines from PBoC officials with Shanghai’s annual Lujiazui Forum (a financial conference) starting tomorrow and continuing through until Saturday. This forum is co-sponsored by the PBoC, the local banking, securities and insurance regulators.

As we type this morning, the Shanghai Composite is trading about 0.9% lower with financials down 2.6%. Onshore money market rates remain elevated though newswires are reporting that the PBoC has intervened to inject liquidity through open market operations overnight. Elsewhere in Asia, sentiment is more stable this morning with gains seen on the Hang Seng (+1.0%) and KOSPI (+0.2%). S&P futures are trading about 5pts lower (-0.3%). There have been large moves seen in Asian credit which is getting squeezed tighter amidst the better market sentiment - the IG index is trading around 10bp tighter overnight. The CDS of higher beta EM sovereigns such as Indonesia are around 25bp tighter.

Back to China, whether or not the liquidity picture eases, there is concern building that what's happens so far will impact loan growth over the coming 1-2 months and to real economic growth. In terms of the observable indicators, the one-year yields on local AAA corporate debt has spiked 121bp to 5.15% according to the South China Morning Post citing data from ChinaBond. At the same time, bond sales slumped to RMB158 billion for the month of June, the least in 17 months and down 57% from May. The article says that at least 11 companies have delayed bond sales this week alone and about RMB7 billion of offerings have been postponed. Whether the banking system liquidity issues lead to a longer term slowdown in credit growth, remains to be seen, but constrained banking liquidity appears to have limited the ability of companies to raise funds from the bond market for the time being.

Returning to yesterday’s session, we noted the interesting interplay between USTs, equities and credit. Starting with USTs, 10yr yields reached a low of 2.48% during the European session, but the subsequent release of some upbeat US data helped 10yr yields close at a high of 2.61% at the end of US trading. Interestingly, the S&P500 remained firm throughout the session, even reaching an intraday high of +1.3% (close 0.95%) despite the +13bp move upwards in US rates. Similarly the CDX IG credit index rallied into the close to finish at the day’s tights. This was in contrast to Monday when we saw softness in both equities and credit as yields spiked briefly up to 2.66%.

Much of the move up in yields was attributed to some fairly strong US data. This was interesting given that the data collection/survey periods were all prior to June’s FOMC. Consumer confidence for June came in at a cyclical high of 81.4 (vs 75.1 expected) as consumers’ assessments of both future expectations (89.5 vs. 80.6) and present conditions (69.2 vs. 64.8) improved on the month. DB’s Joe Lavornga notes that the cut-off date for the June survey was the 13th, so the preliminary results were collated prior to the momentous FOMC meeting. Durable goods orders for May rose 3.6% (vs 3.0% expected). The Case-shiller home price index for April increased 1.7% (vs 1.2% expected). On a year-on-year basis, the index has risen 12% for its strongest annual gain since March 2006.

Outside of the PBoC, a number of central banks were also active yesterday in supporting sentiment. The ECB’s Coeure said that there "should be no doubts that our exit (from current policy stance) is distant and our monetary policy is and will remain accommodative". Coeure added that the ECB has been speaking with market participants on the potential for negative deposit rates and the central bank stands "technically ready" for this measure. A similar message was also given by Draghi and Liikanen. Draghi said the Euro area still requires loose monetary policy and OMT is needed more than ever, which was somewhat timely given that periphery European bond yields are at or near YTD highs. Outgoing BoE Governor Mervyn King said markets had "jumped the gun" about when central banks were likely to start raising interest rates after the Fed comments.

Turning to the day ahead, we have another round of speakers from the ECB (Asmussen and Mersch) during the European trading day. In the US, Q1 GDP revisions and mortgage applications are the main data releases.

And SocGen's recap:

It has taken statements by three Fed officials, ECB president Draghi and BoE governor King, but at least we saw some degree of normality returning yesterday as volatility eased off in FX and the VIX index dropped a full 3.5pts from Monday's 21.93 high. The PBoC too has been credited for helping to restore stability, even though the funding situation in China remains strained. At yesterday's fixings, 1-month CNY libor was set at 8.418%, nearly 400bp above the rate a month ago.

Stocks ended the session higher on both sides of the Atlantic despite a further back up in US yields after strong data for consumer confidence and new home sales. Seven straight sessions of higher yields have been registered and the tactic of selling rallies will not be abandoned soon as the UST 10y climbs over 2.60%. Mortgage applications data may provide a more sobering picture as mortgage rates surge, but this will not turn the tide and we reckon the advent of debt supply will keep yields and swaps in the ascendency into next week. That should keep the generally USD-bid tone intact, though chinks in the armour have started to appear with oversold currencies trying to cut their losses. Positioning looks interesting in that post-FOMC liquidation of USD longs by speculative accounts did not slow the USD rally. Tactics may well be reversed and give the greenback another tailwind.

The demarche from president Draghi yesterday on the OMT shows the lengths to which the ECB is prepared to go and how the game has effectively changed outside the US since the FOMC roiled bond markets worldwide last week. In the eurozone as well as in the UK, money market futures have sold off dramatically, pushing 2014 rates to levels that imply a tightening in monetary policy next year. The steepening has also seen short-term borrowing costs rise sharply; cue the results yesterday of Spain's 3-month and 9 month bills auctions. With the eurozone economy still limping along, one wonders what the ECB might do if yields keep pushing higher. Verbal intervention will suffice for now, but it could take bold policy steps to stop funding costs from rising even further. With 10y gilts having added 40bp in a week, no wonder BoE governor King in his final testimony yesterday lamented the premature judgement of people thinking a return to normal interest rates is imminent. It is a view incoming governor Carney will undoubtedly share when he takes office in Threadneedle Street on 1 July.

http://www.zerohedge.com/news/2013-06-26/italy-embroiled-latest-derivative-loss-fiasco-through-another-mario-draghi-headed-sc

Italy Embroiled In Latest Derivative Loss Fiasco Through Another Mario Draghi-Headed Scandal

Submitted by Tyler Durden on 06/26/2013 04:57 -0400

It was roughly four years ago when details surrounding such Goldman SPV deals as Titlos first emerged, that it became clear how for over a decade, using deliberately masking transactions such as currency swaps, Greece had managed to fool the Eurozone into believing its economy was doing far better, and its debt load was far lower than it actually was in order to comply with the Maastricht treaty's entrance requirements.

That this happened with the implicit and explicit knowledge of such European and Goldman "luminaries" as Helmut Kohl and Mario Draghi did not help Europe's credibility.

As for the Pandora's Box that was opened following the disclosure of just how ugly the unvarnished truth in Europe is, following the Greek disclosure, leading to the general realization that the European experiment has failed and it is now only a matter of time before its final unwind, any comment here is unnecessary - this has been widely discussed here and elsewhere over the past several years.

Now it is Italy's turn.

Overnight, the FT reported that "Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the eurozone crisis, according to a confidential report by the Rome Treasury that sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999. A 29-page report by the Treasury, obtained by the Financial Times, details Italy’s debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7bn."

What was the point of these derivative contracts? The same as in Greece: to transform reality and make it mora palatable: "... before and just after Italy entered the euro, Rome was flattering its accounts by taking upfront payments from banks in order to meet the deficit targets set by the EU for joining the first wave of 11 countries that adopted the euro in 1999. Italy had a budget deficit of 7.7 per cent in 1995. By 1998, the crucial year for approval of its euro membership, this had been reduced to 2.7 per cent, by far the largest drop among the Euro 11. In the same period tax receipts increased marginally and government spending as a proportion of GDP fell only slightly."

The chronology of events is presented below:

And while Mario Draghi managed to evade serious inquiry following his role as head of the Bank of Italy at a time when Monte Paschi was engaging in various swap transactions as reported previously, just as he managed to evade scrutiny in his role as a Goldman banker before that, when he was instrumental to aiding and abetting Greece in its economic embellishment efforts (even as Goldman was being paid generously for its "advice") when inJune of 2012 the ECB outright refused to respond to Bloomberg's FOIA request on the central bank's Greek-ECB-Goldman currency swaps, Mario the untouchable, may finally be called to task: after all he was once again instrumental in covering up yet another financial crime this time as director-general of the Italian Treasury!

Only a handful of Italian officials, past and present, are aware of the full picture, according to bankers and government sources. The senior government official who spoke to the Financial Times and the experts consulted said the restructured contracts in the 2012 Treasury report included derivatives taken out when Italy was trying to meet tough financial criteria for the 1999 entry into the euro.

Mario Draghi, now head of the European Central Bank, was director-general of the Italian Treasury at the time, working with Vincenzo La Via, then head of the debt department, and Ms Cannata, then a senior official involved with debt and deficit accounting. Mr La Via left the Treasury in 2000 and returned as its director-general in May 2012 – with the backing of Mr Draghi, according to Italian officials.

An ECB spokesman declined to comment on the bank’s knowledge of Italy’s potential exposure to derivatives losses or on Mr Draghi’s role in approving derivatives contracts in the 1990s before he joined Goldman Sachs International in 2002.

Of course the ECB will decline to comment: doing so would open up the can of worms of just how much alleged criminal activity Europe's central bank may have engaged in for its own benefit, for the benefit of members such as the Bank of Italy, and of course, for the benefit of such "financial advisors" as Goldman Sachs. After all let's not forget that we are now into the fourth year of the Fed's investigation into Goldman's role as facilitator of Greek currency swaps. That's right: we remember, and we are still holding our breath.

To summarize:

Mario Draghi, complicit and aware of the Greek currency swap arrangement, as a member of Goldman Sachs in the mid-2000s.
Mario Draghi, complicit and aware of various Monte Paschi derivative deals, as head of the Bank of Italy.
Mario Draghi, complicit and aware in rejecting Bloomberg's FOIA requests that would have blown all of these scandals wide into the open, as current head of the ECB.
And now, Mario Draghi, complicit and aware of at least one (and likely many) Italian window dressing derivative deals with one or more US investment banks, as Director-General of the Italian Treasury.

Just where does Mario Draghi's rabbit hole of endless scandals finally end?

Still, the ability to push yet another Draghi-centered scandal under the rug may be impossible especially if Italy suffers billions in losses on this latest derivative fiasco:

While the report leaves out crucial details and appears intended not to give a full picture of Italy’s potential losses, experts who examined it told the Financial Times the restructuring allowed the cash-strapped Treasury to stagger payments owed to foreign banks over a longer period but, in some cases, at more disadvantageous terms for Italy.

In April police of the Guardia di Finanza visited the offices of Maria Cannata, head of the Treasury’s debt management agency, asking for more information on the report drafted by the agency, including details of the original derivatives contracts, the senior official said.

The leaking of the 2012 Treasury report, which was also obtained by La Repubblica, the Italian newspaper, is likely to fuel debate over Italy’s exposure to derivatives. It comes at a time when markets have begun to exhibit new nervousness with the cost of borrowing rising sharply recently for eurozone peripheral countries like Italy.

Needless to say the last thing the scandal-prone country, whose most popular politician was just sentenced to 7 years in jail for underage sex, is yet another disclosure that its financial system has been lying, and is about to suffer billions in cash outflow for legacy liabilities. Liabilities, whose total damage may be in the tens of billions:

The report does not specify the potential losses Italy faces on the restructured contracts. But three independent experts consulted by the FT calculated the losses based on market prices on June 20 and concluded the Treasury was facing a potential loss at that moment of about €8bn, a surprisingly high figure based on a notional value of €31.7bn.

Italy does not disclose its total potential exposure to its derivatives trades. The experts contacted by the FT, who declined to be named, noted that the report revealed just a six-month snapshot on a limited number of restructured contracts.

And with derivatives being zero sum (unless there is a counterparty failure in the collateral chain in which case everyone loses), Italy's loss was someone else's gain. In this case Morgan Stanley (among others):

Early last year Italy was prompted to reveal by regulatory filings made by Morgan Stanley that it had paid the US investment bank €2.57bn after the bank exercised a break clause on derivatives contracts involving interest rate swaps and swap options agreed with Italy in 1994.

An official report presented to parliament in March 2012 found that Morgan Stanley was the only counterparty to have such a break clause with Italy and disclosed, for the first time, that the Treasury held derivatives contracts to hedge some €160bn of debt, almost 10 per cent of state bonds in circulation.

The Bloomberg News agency calculated at the time, based on regulatory filings, that Italy had lost more than $31bn on its derivatives at then market values.

In the past, the orders to push back investigations into such illegal, shady dealings most certainly came not only from the very top Italian power echelons, but from the ECB, and ultimately, banks like Goldman. The question is: will Italy's state auditors, the Corte dei Conti, finally stand up for the people and expose the corruption, and the people behind the billions in soon to be revealed losses:

Releasing its own report in February on the state accounts for 2012, Salvatore Nottola, prosecutor-general of the Corte dei Conti, noted that “the damage done to the state’s income constituted by the negative outcomes of derivatives contracts is particularly critical and delicate”.

The Corte dei Conti declined to comment on the report and the finance police did not respond to inquiries. A finance ministry spokesman confirmed the existence of the report but declined to comment on its contents and possible losses, citing commercial confidentiality. He would not comment on requests made by the police to Ms Cannata.

Gustavo Piga, an Italian economics professor, caused a storm in 2001 when he obtained one such derivatives contract taken out in 1996 and accused EU countries of “window-dressing” their accounts. Mr Piga did not identify the country nor the bank involved but they have since been named in the media as Italy and JPMorgan.

“Derivatives are a very useful instrument,” Mr Piga wrote. “They just become bad if they’re used to window-dress accounts,” he said, accusing the unnamed country of disregarding standard derivatives contracts in order to delay until a later date its debt interest payments.

And speaking of openness, transparency, and the lack thereof, none of the above is news. At least not to the one person most instrumental for ushering in the failed European monetary experiment: Germany's Helmut Kohl.

Last year Der Spiegel, a German magazine, obtained official documents which it said demonstrated that in 1998 Helmut Kohl, then chancellor, decided for political reasons to ignore warnings from his experts that Italy was believed to be “dressing” up its accounts and would not meet the Maastricht treaty criteria for entry, including a budget deficit less than 3 per cent. Italian officials, including former finance minister Giulio Tremonti, have said the EU was aware and approved of Italy’s use of derivatives in the build-up to euro entry.

Not surprising considering in his own words, "he acted like a dictator to bring in the euro." And considering that Europeans have gladly ceded all their rights and powers to live in a dictatorial pipe-dream for the past decade, and which has since exploded into the worst depressionary nightmare the "developed" world has ever known, perhaps all those 20%, 30% and more unemployed should look in the mirror when deciding whom to blame for their plight.

But don't worry - the Goldmans, the Mario Draghis, the Cannatas, and the Berlusconis of the world are doing perfectly well, thank you, even as Greek and Spanish youth unemployment is now in the 60% range. Which is roughly just as one would expect of every neo-feudal, dictatorial regime.

Catharsis Ours

Wednesday, June 26, 2013

Market gyros around jawboning of Central Bankers once again - this time ECB Head Draghi ....Though Mr Draghi has his own scandal brewing in Italy , which of course he won't address....

Futures Lifted By Verbal Central Banker Exuberance

Italy Embroiled In Latest Derivative Loss Fiasco Through Another Mario Draghi-Headed Scandal

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