Tuesday, March 13, 2012


Has the war ended Mr. Remarque?  One might ask but the answer is not really.  Oh yeah,  they killed Greece which was thought to be the cause of all the hostilities but that just leaves us with The Portugese as the next up followed by...oh, who knows...or cares for that matter.  The CDS's were triggered and the sun came up the next morning and while the Euros are still chatting among themselves about the size of the bail-out package and are engaged in a bit of a pissing contest with the IMF as to who contributes what and for how long, things will get done in the end.

BUt there are still the war clouds on the horizon.  There are elections all over Euroland in the next few months and everything that exists today might well be topsy-turvy come June.  On top of that, before the sighs had ended over the Greek debacle Spain announced that as an act of sovereinity it's budget deficit target just agreed in Brussels a month ago was to be raised to over 5% in 2013.  So much for being hacked off at David Cameron and Perfidious Albion:  here's tyranny and revolution in the Euro Zone!  What to do?  The answer is there isn't a hell of a lot we can do.  So much for the fiscal agreement...poof in a month's time.  This will not be the last act of defiance in the next few months.

And what of the Greek deal itself?  What does it mean? Not just for Greece but for the foreseeable future sovereign financing for the less credit worth states of Europe will be sourced from official sources or not at all.  Once again, history repeats itself.  Prior to the 1980ies, sovereign financing for not only emerging markets but for many other markets came from banks.  With the restructurings, bank lending dried up and only official sources and finally, after about 15 years, fixed income investors took up the slack, but the banks never returned.  Today the fixed income investors will diasppear for all but the high tier investment grade borrowers.  Sovereigns will turn to their indigenous banks to support debt issuance which means that we will continuing to experience a lack of funding support across borders for the banking system and as a result less lending to support economic growth.

Fixed income lenders, unless they are totally mad will insist that except for certain jurisdictions, indentures will be subject not to local law but to established legal systems where ex post facto is not a favorite Latin phrase. Agreements written under local law will price differently and trade differently causing a rise in the cost of borrowing across the board.  Hopefully, there will be a reassessment of risk perameters and less reliance on a hedge strategy and particularly a strategy based on the purchase of instruments such as CDS's and if these are used they must, as all other insurance policies, be purchased only by those who own the underlying asset.  You might want to ask yourself that if you were an owner of a ship would you want insurance on that ship sold to a guy that owns a submarine?  In the end despite the arguments in favor, I fail to see the difference.  I again bring you back to AIG in 2008.
Rather that guaranteeing the financial world as we know it, what would have been the result if the Fed had merely put out a bid for the instruments covered by AIG CDS's?  "99.50,  boys, either side."  The result would have been a hell of a lot different.

This stream of conscience probably will not result in any concrete action on the part of the Euromarkets because the Greeks will be in default in 6 months time being totally unable to fulfill their financial obligations under any lending agreement to be finalized by the Troika.  At that point the incredible expanding ECB will have to make another decision.  But, until then it's going to be a quiet spring...except for the elections.


Late this afternoon, the Fed made public the results of the latest "stress test" on American banks.  Citibank failed.  Don't know the details but we'll be on this tomorow with thoughts, reactions and possible consequences.  Full disclosure:  I own C.  Believe me the size the holding will not influence my views.

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