Jean de La Fontaine
1. the state of being abused or scornfully criticized
2. reproach or censure
3. a cause of disgrace or ignominy
Collins English Dictionary – Complete and Unabridged
In his 1787 essay, James Madison also wrote:
"Whatever is begun in anger ends in shame."
The Credit Indices Itraxx overview - Source Bloomberg:
Itraxx Crossover 5 year CDS index (50 European High Yield names), reached 647.5 bps on the 16th, closing around 600 bps on Friday. "Lather, rinse, repeat" in true 2011 style - Source Bloomberg:
Spain 5 year Sovereign CDS versus Italy's 5 year sovereign CDS level converging still - source Bloomberg:
The current European bond picture with Italy and Spain 10 year government yields converging as well - source Bloomberg:
The liquidity picture, as per our four charts, ECB Overnight Facility, Euro 3 months Libor OIS spread, Itraxx Financial Senior 5 year index, Euro-USD basis swaps level - source Bloomberg:
But banks that are domiciled in say Italy or Spain will be more likely to undertake a portfolio shift out of reserves and into Italian or Spanish domestic assets than a German bank.
A German bank faced with an excess reserve position might find it more appealing to leave the money at the ECB and receive a 25 bp rate of interest, versus taking on Italian risk or buying German T-bills at a yield of close to zero."
"The second dose of cheap cash from the European Central Bank at the end of this month should spread more broadly across financial markets than the first, sweeping money into non-bank corporate bonds.
This is in part because banks are expected to use the proceeds from the Feb 29 auction to pay down their own debt even further than they have done already. Long-term investors, big holders of bank bonds, will be pushed elsewhere as a result.
Peripheral euro zone government bonds, such as those in Spain and Italy, have been by far the biggest visible beneficiaries of the ECB's offer of nearly half a trillion euros in December. Benchmark Italian borrowing costs have fallen as much as 150 basis points.
But the banks have actually used most of the cheap ECB money to pay off their own debt."
From the same article, and according to a Goldman Sachs note:
Following up on our favorite theme of subordinated bond tenders, it is important we think, to give an update of the results so far of the ongoing exercise and its signification.
According to CreditSights, acceptance rate, while varying significantly, so far for these bonds tenders have been in the region of 50%.
In relation to Spain, which we have been discussing at length in recent conversations, according to Bloomberg:
"Bank crisis looms as Europe’s debt woes deepen" - Charles Dumas, chairman & chief economist at Lombard Street Research:
Hence the convergence in both CDS and bond Yields between Italy and Spain we have been highlighting in recent weeks.
"If true, here are the questions you should ask yourself:
1-Will the new bonds be senior to the old bonds? If so, expect private investors to go on strike and buy much less sovereign bonds as they will be subordinated to the ones owned by Public institutions in the future. Also, some private investors may decide to try their chance in Court and argue against the subordination de facto.
2-If the old bonds are bought back by the issuer at Par against new bonds, expect private investors to ask for the same treatment (pari passu) and go to Court on the basis that holders are not treated “equally”!
Basically, if such a swap is in the pipe, we think there will be collateral damages which will affect drastically the sovereign bond market."
Good bye pari passu!
Pari passu is a Latin phrase that literally means "with an equal step" or "on equal footing." It is sometimes translated as "ranking equally", "hand-in-hand," "with equal force," or "moving together," and by extension, "fairly," "without partiality." In finance, this term refers to two or more loans, bonds, classes of shares having equal rights of payment or level of seniority - source Wikipedia
"ECB Said to Swap Greek Bonds for New Debt to Avoid Loss" - Jeff Black - Bloomberg:
“If this ECB plan goes ahead it may appear that the ECB is receiving preferential treatment, raising questions about whether the ECB is senior to private-sector bondholders, not only in the case of Greek debt, but also regarding the debt of other euro-zone nations that the ECB may be purchasing.” - Chris Walker, foreign-exchange strategist at UBS AG in London.
Is preferential treatment for the ECB not the real "opprobrium" we have been discussing all along, namely definition number 3: a cause of disgrace or ignominy?
"What do you regard as most humane? To spare someone shame."