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.
Iron ore crash – macrobusiness.com.au
Spot iron ore prices have shed 19 percent so far this month in a sell-off largely fueled by slower construction steel demand in China, the world’s biggest buyer of imported iron ore at around 400 million tonnes a year.
In Europe, a more important market for Vale than Rio, steel markets have taken a knock given uncertainty surrounding the region’s debt crisis.
Growth of Europe’s steel production will slow in 2012 along with activity in the steel-using sectors, Eurofer, the European steel producers association, has forecast.
via Iron ore crash – macrobusiness.com.au | macrobusiness.com.au.
S&P 500 and Europe encounter resistance
The S&P 500 pulled back from resistance at 1250 and is headed for a test of short-term support at 1200. Failure would test primary support at 1100, while breakout above 1250 would signal an advance to 1400*. Rising 21-day Twiggs Money Flow continues to indicate secondary buying pressure.
* Target calculation: 1250 + ( 1250 – 1100 ) = 1400
Dow Jones Europe index also ran into resistance at 250, bearish divergence on 21-day Twiggs Money Flow warning of short-term selling pressure. Reversal below 230 would test primary support at 205/210, while breakout above 250 would signal an advance to 290*.
* Target calculation: 250 + ( 250 – 210 ) = 290
Euro Crisis Plan in Doubt
The 17 eurozone countries have not reached final agreement on the details of two key elements of the plan — reducing Greece’s massive debts and boosting the firepower of the bailout fund, two European officials said. They spoke on condition of anonymity because the talks were confidential.
Because of that, the 10 EU countries that do not use they euro won’t sign off on a plan to force banks across the continent to raise billion of euros in capital and insisted the meeting of finance ministers be called off, the officials said.
One of the officials said that the eurozone was also still waiting for Italy to take concrete action to control its debts and kick start growth.
“It’s a real mess once again,” the other official said.
Europe approaches zero hour
As I mentioned in an earlier post, there is bound to be a relief rally when EU leaders announce details of their rescue package — followed by a pull-back when traders figure out the costs. The danger is that Germany and France do an “Ireland” and rescue the banks but put themselves at risk. Both have public debt to GDP ratios close to 80 percent and it would not take much to push them into the danger zone. A down-grade would raise their cost of funding and place their own budgets under pressure. If they are down-graded then the kids are home alone — there will be no adults left in the room.
The FTSE 100 displays a decent bullish divergence on 13-week Twiggs Money Flow, warning of strong buying pressure. Breakout above 5600 would offer a target of 6000*, but expect retracement to test the new support level. Respect would confirm the advance.
* Target calculation: 5500 + ( 5500 – 5000 ) = 6000
Germany’s DAX is headed for 6500, but a weaker recovery on Twiggs Money Flow suggests this is a bear market rally. Respect of 6500 would indicate another test of 5000.
The French CAC-40 index displays secondary buying pressure. Respect of 3700 would signal another test of primary support at 2800.
Madrid rallied to test resistance at 900. Again buying pressure on 13-week Twiggs Money Flow appears secondary. Respect of 900 would signal a decline to the 2009 low of 700. Breakout, however, would signal a rally to test the descending trendline.
Italy’s MIB index is testing the descending trendline near 16500. Respect would test the 2009 low at 12500. Breakout would offer a target of 19000*.
* Target calculation: 16 + ( 16 – 13 ) = 19
Euro Zone – ‘Miserable’ Euro PMI Heightens Recession Risk: Economists – CNBC
The euro zone’s manufacturing PMI fell to 47.3 in October, its lowest level since July 2009, with German manufacturing falling for the first time in two years because of a combination of drops in output and new orders and backlogs of work.
The fall in euro zone PMI “reflected steep declines in both the manufacturing and services indices, suggesting that the deterioration in growth prospects reflects developments both at home and abroad,” Ben May, European economist at Capital Economist, wrote in a market note.
via Euro Zone – ‘Miserable’ Euro PMI Heightens Recession Risk: Economists – CNBC.