Finally someone dares to go ahead and say what is on everyone’s mind, namely that proclaiming a 60% “haircut” as voluntary is about the dumbest thing to ever come out of ISDA. As is well known, the ECB and the entire Eurozone are terrified of what may happen should Greek CDS be activated, and “contagion waterfall” ensue. The fear is not so much on what happens with Greece, where daily CDS variation margin has long since been satisfied so the only catalyst from a cash flow market perspective would be a formality. Where it won’t be a formality, however, is for the ECB which has been avoiding reality, and which will have to remark its entire array of Greek bonds from par to 40 cents on the dollar, which as Alex Gloy indicated earlier, will render the central bank immediately insolvent all else equal.
Thank you Germany – Ambrose Evans-Pritchard
The unpleasant truth is that the EFSF leverage proposals are idiotic, the worst sort of financial engineering, legerdemain, and trickery.
As countless economists have pointed out, it concentrates risk. Germany’s €211bn commitment to the fund is not technically breached but the risk of suffering large and perhaps total loss is vastly increased. Creditor states switch from protected senior status on Greek, Portuguese, or Italian debt to the bottom rung on new slabs of sub-prime structured credit. The bluff might well be called.
The consequence will be to bring forward the downgrade of France and other states. It will accelerate contagion to the core, not stop it.
EU Forges Greek Bond Deal – WSJ.com
French President Nicolas Sarkozy said after the marathon negotiating session that the leaders had reached agreement with private banks on a “voluntary” 50% reduction of Greece’s debt in the hands of private investors.
He also said they had agreed to expand the firepower of the European Financial Stability Facility, the euro zone’s bailout vehicle, four- or five-fold—suggesting it could provide guarantees for €800 billion to €1.3 trillion of bonds issued by countries such as Spain and Italy.
The leaders also agreed on a plan that would boost the capital buffers of the stragglers among the Continent’s 70 biggest banks by €106 billion—though they didn’t say where the money would come from.
Euro-Zone Talks Hit Roadblocks – WSJ.com
BRUSSELS—Deep divisions between euro-zone governments and private banks over how much to cut Greece’s private debts threatened to undermine efforts by European leaders to agree to a broad package at a Brussels summit Wednesday night aimed at stemming the Continent’s intensifying debt crisis.
….Governments, led by Germany, have been seeking a real cut in the value of Greek government bonds held by private investors of as much as 60%. The banks, led in negotiations by Charles Dallara of the Institute of International Finance, a Washington-based international bank lobby group, offered a new proposal Tuesday night that officials said had fallen far short of that.
German Lawmakers Set to Back EFSF – WSJ.com
Ms. Merkel, speaking in Germany’s lower house of parliament ahead of a vote on the European Financial Stability Facility, said Germany can’t prosper without Europe.
“We must solve the current crisis and correct mistakes from the past,” Ms. Merkel said, adding that she wants to push for sustainable decisions to be made at a summit of European Union government leaders later Wednesday in Brussels where leaders are expected to announce a package of measures to contain the sovereign-debt crisis.
A broad majority in the house is virtually certain to support a resolution backing a package of options to boost the firepower of the €440 billion ($611.91 billion) fund to more than €1 trillion without increasing contributing countries’ guarantees for the fund. All major parties approved the resolution in their parliamentary groups on Tuesday, making the resolution’s passing highly likely.
Richard Koo: Cutting government deficits too early will prolong GFC
Richard Koo explains how cutting government deficits too early in Japan prolonged the de-leveraging cycle by almost 10 years.
INET interview with Richard Koo, Chief Economist of Nomura Research
Richard Koo: The effect of de-leveraging after a banking crisis
This video from 2010 is particularly important. Richard Koo explains how the private sector paying off debt leads to a rapid contraction in national income.
INET interview with Richard Koo, Chief Economist at Nomura Research
Asia monthly charts
Monthly charts help fit the current market action into a long-term perspective. The Nikkei 225 index broke support at 9000 and is likely to test the 2009 low of 7000*. 63-Day Twiggs Momentum respecting the zero line (from below) confirms the primary down-trend.
* Target calculation: 9000 – ( 11000 – 9000 ) = 7000
The Seoul Composite found (primary) support at 1650/1700, followed by a reaction to 1900. Declining 13-week Twiggs Money Flow warns of selling pressure. Respect of resistance at 1900 is likely, which would indicate another test of primary support.
* Target calculation: 1700 – ( 1900 – 1700 ) = 1500
The Shanghai Composite index is testing support at 2400. Failure would confirm the strong primary down-trend signaled by declining 63-day Twiggs Momentum.
* Target calculation: 2500 – ( 3500 – 2500 ) = 1500
The Hang Seng index is retracing to test resistance at 20000. Declining 13-week Twiggs Money Flow warns of selling pressure. Respect of resistance, would indicate another test of 16000.
* Target calculation: 16 – ( 20 – 16 ) = 12
India’s SENSEX is headed for a test of resistance at 17500/18000 after a small bullish divergence on 13-week Twiggs Money Flow indicated buying pressure. Respect of 18000 would warn of another test of 16000.
* Target calculation: 16 – ( 18 – 16 ) = 14
Singapore’s Straits Times Index is in a similar position. Respect of resistance at 2900 would signal another test of 2500. Failure of support would confirm the strong primary down-trend signaled by declining 63-day Twiggs Momentum.
* Target calculation: 2500 – ( 2900 – 2500 ) = 2100
ASX weekly chart
Just a reminder that the ASX is still in a bear market. Bullish divergence on 13-week Twiggs Money Flow indicates buying pressure on the All Ords and the index is testing the descending trendline. Breakout above 4400 would signal that a bottom has formed, while reversal below 4200 would warn of another test of primary support at 3900.
The ASX 200 weekly chart shows a similar picture, but 63-day Twiggs Momentum deep below zero warns that it may be some time before this bear (market) goes back into hibernation.
* Target calculation: 5600 – ( 6600 – 5600 ) = 5100
CPI now moves balance of probabilities for next rate cut from December to November – Westpac
In the August Statement on Monetary Policy the Bank [RBA], relying on two recent prints of 0.9%qtr for underlying inflation, forecast that annual core inflation would print 3.25% in both 2011 and 2012. We are now confronted with the reality that annual core inflation for the year to September 2011 has printed 2.47% with a reasonable estimate that given the slowdown in the economy the fourth quarter will print around 0.5%qtr. That will allow the Bank to lower its inflation forecast for 2011 to 2½%yr with a similar outcome likely in 2012.
Given the Governor’s recent statement that an improving inflation environment allowed scope to ease policy it now seems almost certain that Westpac’s forecast which was made on July 15 — that we could expect a rate cut by the end of 2011 — will prove to be correct.
In fact given the Bank’s previous record of moving rates every November for the last five years and given that the case for a rate cut is indisputable the balance of probabilities has now moved to a November cut from our original call of December.
via Westpac Economics – first impressions