Wow,
Who would have thought nothing concrete, promises for dates in the future, failed math, leveraged debt on debt, a letter about austerity, and voluntary losses could hold a 27 country project together under extreme tension.
Obviously they went to a different math class than the rest of us.
First of all, here is an article laying out the response from the July 21st Agreement. Great picture of them having coffee together.
Click!
Lets zoom in on the SP500 and the reaction after the July 21st agreement.
You'll notice this mornings rally rang the bell on the 200 DMA.
Well, the Jury is out on what happens now.
More general commentary below.
One of the things that I can not understand is how many bondholders are interested in taking a 50% haircut on a bond voluntarily? Sounds like the underground was sent in to ask for the signatures.
Secondly, all of these entities bought insurance to protect them if the bonds are not repaid in full. So not only did they have the expense of the original purhcase of the bonds, they have paid an annual insurance policy to be repaid in full. That was getting more expensive each year. They all agree to wave those losses as well.
Thirdly, It's ok that the bonds bought by the ECB don't have to be discounted 50%. So on $350 Billion in bonds, only $200 Billion have to eat the haircut of 50% voluntarily but the ones who bought later when things were scarier and priced appropriately, don't have to. It's not really a haircut, because they are going to receive long dated bonds deep into the future. But Greece goes bankrupt in the meantime because it can't service existing commitments without more borrowing. If you own AAA rated bonds, you are lined up behind the central bank for getting paid back. You can't decide how much they hold, so if they fill the bank full of bonds up to the level that can be paid back, you get Zero on AAA that was insured. This apears to be where we are headed.
When I played Monopoly, and we kept doing Bizarro deals to keep the game going, eventually the players who were being hurt by the reengineering started a yelling match, or just quit. In Europe, everybody is fine. Europoly with real money. Zeuropoly.
All of the Greek Pension funds ( not to mention other funds) just lost 1/2 their investments in government bonds. As if the people expecting their pension from these funds would be willing to take 50% less pension, voluntarily, when they had insurance to protect them from the loss. Who agrees to underperform the market?
Lastly, if insurance under stress doesn't pay out, when would it? Does that mean the CDS portfolio is only payable after you take 50% haircuts on any Euro sovereign debt? So all of the Eurozone Triple AAA bonds insured are not really insured? Or they might be insured unless everyone is imploding, then it doesn't pay? Wow, that is a precedent!
I could go on, but this is too funny. You'll have to check out the CNBC tweets today for what the EFSF stands for in the minds of their viewers. One of them was '''Eewww, Feels Sorta Flimsy"
Here is a link to sovereign credit default swap prices. The little blurb at the bottom lays out how to understand this. Unfortunately, there are no charts attached. What I like to do, is print the page occassionally and then you can see how it moves. Compare it once a month.
Sovereign Credit Default Swaps Table
Here is the $LIBOR daily. This is the cost of borrowing money between banks. A day isn't enough, but we will find out if the banks feel better next week. If nothing else, this little rally, allows the banks to sell more shares at higher prices for recapitalization.
Still Rising.
As Steve Liesman said, at least they are going down fighting! I might add while enjoying coffee and red carpets! After 13 weeks of emergency meetings, it really is awkward.
This charade must stop. We'll need real valuations to move forward meaningfully. More importantly, they might damage the CDS market to such an extent as to make it meaningless. Why buy the CDS if it doesn't pay out?
Too much commentary here, but I'll keep watching what the credit market does. In the end, that will decide where we go from here.
Here is the Bond Dashboard. I don't like the short term turning lower.
Good Trading,
Greg Schnell, CMT
