Wednesday, 10 August 2011

Markets update: European Debt Crisis - EFSF and The Sum of All Fears

“ "Why, you may take the most gallant sailor, the most intrepid airman or the most audacious soldier, put them at a table together - what do you get? The sum of their fears." „

—Winston Churchill

"Worth noting the FT has reported that Merkel faces a revolt among her own coalition in Berlin over the EU/IIF deal agreed at the 21st July summit.

Some members of the CDU have apparently called for an emergency party conference to debate the government's euro zone strategy including the expanded powers of EFSF.

Belgium's Finance Minister said he aims to have the parliament's finance commission meet on the 5th September to present the text of the amended EU bailout agreement in part because Greece will need funding again in mid-September.

Back from his holidays, Dutch Finance Minister wrote in a letter to lawmakers that the EFSF is "no panacea" to solve the mounting troubles in the euro zone and "any significant increase of the EFSF can...have consequences on the creditworthiness of guarantor nations".

The launch of EFSF 2.0 is clearly a top priority when politicians return from summer holidays and continues to be a space that will probably bring us more volatility along the way."
(Source : Deutsche Bank)

Slithering to the wrong kind of union - Otmar Issing

A must read. Otmar Issing argues that Euro Bonds are the only way to alleviate funding issues of the failing peripherals and relieve the pressure which is still building up.

Markets udpate:

Equities - from BFTD to STFB...
CAC40 intraday move, another epic day:

DAX intraday move, I feel dizzy...

Rumours of issues with Societe Generale, stock getting slaughtered:

FX - Swiss National Bank - EUR/CHF a real issue for tourism when a Big Mac menu cost 17 USD in Zurich...

Credit - Same story as yesterday, except a tad wider...
Itraxx Sub Financial 5 year index breaking a new record.

Gold, well you know the score...

Risk indicators - still in the red and on DEFCON 1

OIS-Libor - Liquidity getting poor in the Euro area.

German 10 year Government bond aka DA BUND - can you spell Lufthansa flight to quality?

EFSF and The Sum of All Fears:
The European credit crisis is worsening. The Euro lost 1.3% today to 1.4188, while Gold hit 1800. The Euro Stoxx 600 crashed to a two year low and Paris based Societe Generale closed down 15%, after an intraday low of -22%.
The US 10 year bond reached a low of 2.13% after touching a record low of 2.03%. The US is turning like Japan and star analyst Meredith Withney even mentioned "zombie banks", a term I have already used in this blog in relation to Irish banks.
What the FOMC told us is that Ben Bernanke is well aware of the economic situation and has indicated to the market that the FED is going to stay accomodative for a while which according to me, means that long bond yields are going to fall much further:
UST 30 year yields:

France is next on the line and their were some nasty rumours of downgrade on France today leading to massive sell-off in French financial stocks today.
France is indeed in the crosshairs of the bonds vigilantes and the EFSF is definitely in jeopardy unless a very fast solution is find. France's five year Sovereign CDS reached 172 bps today. France's AAA rating has been affirmed by all three rating agencies, Moody's, S&P and Fitch. The market is very nervous and if France CDS is under attack it is not a good sign.
Not only France was under attack but French banks 5 year Credit Default Swaps were as well targeted.
Not only did Societe General stock tanked, its 5 year senior CDS reached 300 bps according to CDS data provider CMA.
Here is a run sent by a dealer regarding French banks CDS:
ACAFP being Credit Agricole, for your information.

Credit markets liquidity is drying up very fast, meaning new issues are being delayed and bank funding is under increasing pressure.

So what is happening now? Are we getting to the end game as mentioned previously in this blog?

As a reminder, this is what you have in a deflationary environment:
The "Beggar-thy-neighbor" policy induced by both the UK to some extent and by the FED is pushing us towards debt defaults for countries. For instance this policy is now crushing Swiss and Japanese exports and has taken a severe toll on European exports.
The fight between the Keynesian FED and the Austrian ECB is reaching fever pitch. Given the size of the bonds purchases needed to support Italy and Spain, the ECB doesn't have enough ammunition and a sizeable balance sheet to sterilise as it did previously its purchases of Portuguese, Irish and Greek bonds.
If the ECB start "printing", then the consequences will be a meteoric rise in the price of Gold, and we are, dear readers, getting very close to that point of no return for the ECB, unless Euro Bonds are set up, fiscal union reached, but given political uncertainties within the German CDU and Angela Merkel, the outlook is grim, given the very high fear of extending the size of the whale CDO, namely the EFSF. This is indeed The Sum of All Fears.

While I thought, I have been quite pessimistic recently in my outlook, so far, about the situation, Martin Sibileau in his latest post is even more scarier:

A View from the Trenches, August 9th, 2011: "The beginning of the end"

"The dam is broken and there is really no way to hold the fury back. The forces that will be unleashed here will surpass what anyone of us can imagine and the end game is a world’s reserve currency backed by gold. Within a fractionary reserve system? Unfortunately we think so, but backed by gold!"

This article is a must read as, I believe can explain what is at stake if European politicians cannot reach an agreement relating to Euro Bonds and a EFSF increase very fast.

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