More Meetings Are In The Works


In what could by now be termed a European tradition, the summit inflation seen last year seems set to continue. In 2011 the people involved in the attempt to curb the euro area's still evolving debt crisis lurched from one emergency summit to the next, providing an unexpected boon to euro-land's catering industry.

The next meeting is scheduled between Angela Merkel and Nicolas Sarkozy, these two unlikely captains of the euro ship, on January 9. It will be about discussing 'rules' – namely the rules that will, so it is said, help to 'enforce budget discipline in the euro area'. Needless to say, this hardly addresses the not inconsiderable problem that a number of countries in the currency union  have seen their competitiveness eroded during the boom, remain mired in depression and continue to depend on a public sector vendor financing scheme via the famed 'TARGET2' balances between euro-system central banks.

Moreover, whenever a eurocrat invokes budgetary 'rules' a not unimportant question immediately suggests itself: if the old rules didn't work, why should the new ones?

It remains inconceivable that the new framework will be better in this regard than the existing one. Any surrendering of fiscal sovereignty by member states of the euro area will be conditional only, contingent on future developments. 'Papier ist geduldig' as the German saying goes (literally, 'a piece of paper is patient') – which is to say, the value of the signatures on any forthcoming pact consists mainly in the possibility that they may help with pretending that a new era of fiscal discipline has dawned. The pressures of political and economic reality are bound to intrude on any such agreement in short order.

But fear not: as CNBC reports, once the January 9 meeting is concluded, more opportunities to meet over bowls of shrimp will immediately follow – surely something will emerge from those. Even if it is only (insert term of your choice for things that emerge after the process of digestion):


„Finance ministers from the EU's 27 members will meet on January 23 before their leaders hold a summit a week later. They will be under intense pressure to find a definitive solution to the crisis which threatens the very survival of the single currency, 10 years after it came into circulation.“


Well, they have been under 'intense pressure' to come up with something for quite some time now. It hasn't really led anywhere, except in directions that must be regarded as highly dubious. If the 'centralizers' and 'harmonizers' succeed in pushing through their demands, it will be akin to a death sentence for economic freedom in the euro area.

Yet one more meeting is in store shortly:


„Italy's Prime Minister Mario Monti, who is still battling to shore up confidence in the Italian economy, will also meet the French and German leaders this month as well as British Prime Minister David Cameron.

All European Union leaders except Cameron agreed at an emergency summit on December 9 to draft a new treaty that would implement tougher rules on budget discipline, including automatic sanctions for deficit offenders.“


Phew! We already feared they had forgotten about Italy and Mario Monti. Alas, even more meetings are already assured, since it has been noted with respect to the new treaty that its 'finalization' won't be easy:


„However a new treaty could take some time to finalize.“


Catering firms in Brussels will be happy to hear it.

Financial markets may however be somewhat less enamored by the prospect, given the record of past eurocrat meetings of producing fresh worries and uncertainties and waves of selling of 'risk assets' in their wake.


Deceptive Calm as a Massive Wave of Debt Rollovers Awaits

At the moment, the sense of immediate crisis has seemingly passed, but that may merely signify that we are in the eye of the hurricane. When CDS spreads and bond yields blew out to their extremes late last year, we opined that the 'parabolic' character of the move called for a pause in the crisis, a period during which the markets would exhale, so to speak, and have a little time to reassess the situation in light of new developments emerging late last year.

The most important of these developments was the one that is surprisingly still widely regarded as ineffectual, namely the ECB's massive intervention via lowering of interest rates, 36 month LTRO's and the alteration of collateral eligibility rules.

There continues to be an intense debate over what this inflationary push will actually achieve. As we pointed out last week, an important problem is that the more collateral the banks encumber (see the chart on 'collateral damage' in last week's missive) – whether with private sector funding sources or the ECB – the less incentive there is for anyone to buy their unsecured debt. The reason is that unsecured lenders will have fewer and fewer assets they can tap in the event of a default – since they are all subordinated to the central bank and other liquidity providers.

Note here that the MF Global affair has proved beyond a shadow of doubt that margin collateral can not be clawed back by unsecured creditors and that even the allegedly segregated accounts of customers can disappear and be forever out of reach of their presumed owners if they have been used as collateral to fund an insolvent firm's proprietary speculations.

It is obvious that these facts mitigate strongly against the so-called 'carry trade', this is to say the idea that banks will lever the  liquidity provided by the ECB anew by buying high yielding Italian and Spanish government debt.

And yet, even if we disregard for a moment that there probably exist sub rosa  agreements between banks and their sovereigns regarding a quid pro quo, especially in view of the circular arrangements by which governments 'guarantee' bonds issued by commercial banks so that they can be pawned with the ECB in the first place (this is especially relevant for Italy), then we must at the very least acknowledge that the massive LTRO funding means that banks won't necessarily have to compete for scarce unsecured funds with sovereign debt issuers in the first quarter of this year.

There can be little doubt that this will lower the pressure on sovereign bond markets somewhat. That will really be necessary, as worldwide, $ 7.6 trillion in sovereign debt are set to mature in the course of 2012 among the G7 and the 'BRIC' nations alone – excluding interest. Including interest, the amount rises to over $ 8 trillion. Note here that of this total, $ 3 trillion must be rolled over by Japan and $ 2.8 trillion by the US. In that sense there are probably a few people who are secretly hoping that the crisis in euro-land keeps steering investors' funds elsewhere.

According to Bloomberg:


„Investors may demand higher compensation to lend to countries that struggle to finance increasing debt burdens as the global economy slows, surveys show. The International Monetary Fund cut its forecast for growth this year to 4 percent from a prior estimate of 4.5 percent as Europe’s debt crisis spreads, the U.S. struggles to reduce a budget deficit exceeding $1 trillion and China’s property market cools.

“The weight of supply may be a concern,” Stuart Thomson, a money manager in Glasgow at Ignis Asset Management Ltd., which oversees $121 billion, said in a Dec. 28 telephone interview.“


(emphasis added)

Mr. Thomson displays a certain knack for understatement.


Three Card Monte, Greek Version

Demonstrating the absurd circularity of the Three Card Monte our modern-day monetary system represents (with debt serving as the theoretical 'backing' of a currency of which unlimited amounts can be created from thin air), the Greek government has just bought € 1 billion in preferred  shares issued by the National Bank of Greece –  so that the bank can survive the coming write-off of Greek government debt.

You simply couldn't make this up.


NBG said that a sale of preference shares to the government brought in one billion euros ($1.3 billion) as part of wider efforts to bolster the banking system so it can help drive the recession-hit economy.

The move should increase NBG's Core Tier 1 capital ratio — a key measure of how much money it holds in reserve as a proportion of assets — to more than 11 percent from 9.5 percent at end-December.

In December, NBG said it would raise the money from the state support fund set up in 2008 at the height of the global financial crisis and which closed at the end of the year.

NBG last month said it lost 1.346 billion euros in the first nine months of the year after factoring in a write-down of its Greek government bond holdings, part of a second rescue package for the debt-stricken country.”



Shares of National Bank of Greece (NBG) at the NYSE, post-split  – i.e., if you compare this chart to our previously posted charts of NBG, note that it really trades at 19.5 cents in pre-split terms, not $1.95. The reverse split was necessary to continue to fulfill listing requirements – click for better resolution.



Meanwhile, the Greek debt restructuring talks (the allegedly 'voluntary' reduction in the claims of private sector bondholders by 50% or more) continue to drag on with no end in sight yet. If this debt exchange can not be effected in time, a hard default will become inevitable.

Mind, we happen to believe that Greece should actually allow a hard default to occur unless the public sector lenders also agree to a 'haircut'. Nowhere is the problem of suddenly subordinating unsecured debtors more vividly demonstrated as in the case of Greece. The decision of the eurocracy to create two distinct species of creditors with vastly different rights – the 'troika' of IMF, EU and ECB on the one hand, and private sector lenders to Greece on the other hand –  has contributed greatly to the intensification of the sovereign debt crisis in 2011.

After all, given that the eurocrats have broken every single promise they have made w.r.t. Greece since 2010, their latest promise that the Greek case will definitely remain a 'one off' is no longer believed by anyone calling more than two brain cells his own. This has thoroughly sabotaged the chances of other stricken sovereign debtors to return to the markets for their financing needs.

Allegedly, 'progress has been made' in recent days in the debt exchange talks, but one Spanish hedge fund walked out of the talks a week earlier and so far all reports of 'progress' have turned out to have been hot air. In related news, it has been rumored that 'Germany is studying the imposition of an even bigger haircut on private sector lenders'.


Germany's government declined to comment on a report that it may push for creditors to accept bigger losses on Greek debt than previously agreed upon, saying only that talks on lowering Greece's debt level may end soon.

Germany is studying a proposal to write down 75 percent of Greek government bonds held by private creditors as part of a planned debt swap to ensure greater debt sustainability, Greek news website reported today, without citing anyone.”


(emphasis added)

Since the 'troika' will not accept any haircuts on its Greek credit claims, it is obvious that the private sector haircut will do next to nothing to alleviate Greece's debt problem. Hence the constant pushing for even bigger concessions. It evidently hasn't dawned on the eurocrats yet that market participants don't like being played for fools by politicians. They seem not to have realized that with every broken promise they are worsening the situation of the remaining sovereign euro-land debtors. 

Meanwhile, the Greeks have finally realized that time is running out. As a government spokesman admitted, unless Greece can fulfill the conditions attached to the second bailout, it will likely default and subsequently drop out of  the euro area.


The bailout agreement needs to be signed otherwise we will be out of the markets, out of the euro," Pantelis Kapsis told Skai TV. "The situation will be much worse."

EU, IMF and ECB inspectors are expected in Athens mid-January to flesh out the new bailout plan agreed in principle by EU leaders in October.

Greece needs to push ahead with a series of unpopular reforms to pensions, privatisations and the labour market in the next couple of weeks otherwise talks with the "troika" of EU, IMF and ECB inspectors could run into trouble.

Opinion polls show voters want the government to do all it takes to stay in the euro even if they disagree with austerity reforms, and top officials have warned in the past days that a return to the drachma would be hell.


(emphasis added)

Greece's citizens are somewhat confused at this stage: they understandably do not want to return to the 'hell of the drachma', but when it comes to 'doing what it takes', they are not very happy with what this involves.

Be that as it may – the markets continue to reflect the belief that a hard default is inevitable.  Once such a hard default occurs, Greece will likely ditch the euro involuntarily, as it will only be able to finance its deficits with the help of the printing press. The alternative – namely to spend only as much as the government takes in in revenue – is not considered a palatable alternative by any political party in the modern regulatory democracies of the West. That would only come later in Greece's case, once the 'new drachma' has been destroyed in a hyper-inflationary conflagration.


Hungarian Rhapsody

The mercurial prime minister of Hungary, Victor Orban, continues on his populist path of destroying Hungary's economy piecemeal. As a friend from Hungary pointed out to us, while they are populist, Orban's policies have by no means made him popular. However, as his FIDESZ party enjoys a 68% parliamentary majority, it has been able to alter Hungary's constitution without the opposition's assent (the constitution was predictably not improved by this meddling – a number of democratic checks and balances introduced after the overthrow of communism have been removed), it has been able to 'transfer' (read: steal) private pension fund assets into the government's hands and has been able to revoke the property rights of creditors regarding foreign currency denominated mortgage loans. Whether the most recent agreements struck with lenders can be relied upon remains widely doubted.

The resulting climate of legal uncertainty is slowly but surely driving Hungary's economy to the wall. The latest twist in the saga is that Orban – in his understandable desire to not come under supervision by the IMF – is emasculating Hungary's central bank by essentially revoking its independence. This will eventually allow him to get his mitts on the central bank's foreign exchange reserves.

As Bloomberg reports:


“Hungary’s chances of obtaining a bailout receded after lawmakers approved new central bank regulations that prompted the International Monetary Fund and the European Union to break off talks this month.

Parliament in Budapest stripped central bank President Andras Simor of his right to name deputies, expanded the rate- setting Monetary Council and created a position for a third vice president. A separate law approved earlier today makes it possible to demote the central bank president if the institution is combined with the financial regulator.

Hungary received its second sovereign credit downgrade to junk in a month when Standard and Poor’s followed Moody’s Investors Service in taking the country out of its investment grade category on Dec. 21. The forint has fallen 15 percent against the euro since June 30, making it the world’s worst- performing currency in the period.”

“The approval of the central bank law shows the government isn’t serious about obtaining an IMF loan,” Gabor Orban, who helps manage $2.5 billion at Aegon Fund Management in Budapest, said in a phone interview. “The government is floating the possibility of an IMF deal but in reality it’s playing for time, hoping the global economy will improve and make a bailout unnecessary.”


In our opinion it is more than just 'playing for time', which won't work anyway. The new central bank law has likely far more sinister implications.

The confidence of lenders has been thoroughly shaken as it were:


Hungary raised less than half the planned amount at a debt auction yesterday as borrowing costs surged to the highest in more than a year and the state rejected all bids for three-year notes. The 2022 bond’s yield was at 9.7 percent.

European Commission President Jose Barroso plans to be “constructive and avoid any escalation of the situation” after the passage of the central bank law, commission spokesman Joe Hennon said by telephone in Brussels today. “We will be assessing the legal scope of the new laws,” Hennon said today in Brussels. “We have reiterated our concerns to the Hungarian authorities in the past few days.” Earlier, Barroso sent a letter to Prime Minister Viktor Orban outlining the commission’s views, Hennon said.

The new central bank regulations “seriously harm” the country’s national interests, allow for political intervention in monetary policy and threaten economic stability, the Magyar Nemzeti Bank said today. The laws have led to the “indefinite postponement” of talks on a financial aid package, the central bank said in a statement posted on its website.

While a possible Hungarian agreement with the IMF and the EU on an assistance package would boost confidence, the Cabinet can do without it, Orban told MR1 radio in an interview today. “If we have an IMF safety net, then we face the coming period with greater self-confidence and greater security,” Orban said. “If we don’t reach an agreement, we’ll still stand on our own feet.”


Yes, perhaps they can 'stand on their own feet', but how exactly? Below you can see the current situation in Hungarian government bonds. The crisis is rapidly escalating (we also refer you to CDS spreads on Hungary, which will be posted later along with our euro area chart update – not surprisingly, those are exploding as well).



Hungary's 10 year government bond yield – rocketing to a new high above 10% in Tuesday's trading – click for better resolution.



Hungary's 2 year note yield ended at over 8% on Tuesday – click for better resolution.



The Forint against the US dollar, weekly. A decisive breakout seems imminent – click for better resolution.



It appears to us that Orban altogether overestimates his ability to poke a stick into the Western financial and bureaucratic establishment's collective eye.



A long term chart of the forint against the euro shows that even against the euro the Hungarian currency is now crumbling to new lows – click for better resolution.





Charts by: Bloomberg


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