Credit - The Dunning-Kruger effect

"The truest characters of ignorance are vanity and pride and arrogance." - Samuel Butler, British poet

Watching with interest the impressive volatility in the bond space which has yet to normalize, we thought this week we would use a reference to human psychology in our reference title, given so far our "Central Bankers" mind tricks (call them jedi skills if you want) seems to differ widely, between the Fed and Bank of Japan, between the Bank of England and the Reserve Bank of Australia, and the ECB of course.

For those who have been following us, you know that like any good cognitive behavioral therapist, we tend to watch the process rather than focus solely on the content. 

So why our chosen title you might rightly ask?

"The Dunning–Kruger effect is a cognitive bias in which unskilled individuals suffer from illusory superiority, mistakenly rating their ability much higher than average. This bias is attributed to a metacognitive inability of the unskilled to recognize their mistakes" - source Wikipedia

When one look at how central bankers have been previously apt in preventing formation of asset bubbles or identifying asset bubbles, one can easily be drawn to the Dunning-Kruger effect given that ignorance of standards of performance is behind a great deal of incompetence.

Of course we are not surprised to see the Dunning-Kruger effect at play, given it is a continuation of the "Omnipotence Paradox" of our central bankers or deities:

"In similar fashion, the financial crisis and the consequent burst of the housing bubble which had taken aback the beliefs of some forefront central bankers such as Alan Greenspan; have clearly shown that Central Banks are not omniscient either (omniscient being the capacity to know everything that there is to know).

"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief." - Alan Greenspan -  October 2008." - Macronomics, 18th of November 2012.

In the Dunning-Kruger effect, for a given skill, incompetent people will:
"1.tend to overestimate their own level of skill;
2.fail to recognize genuine skill in others;
3.fail to recognize the extremity of their inadequacy;
4.recognize and acknowledge their own previous lack of skill, if they are exposed to training for that skill." - source Wikipedia

In continuation to our "Omnipotence Paradox" conversation,  we believe this time around that the Dunning-Kruger effect can explain the failures of some economic school of thoughts, namely the Keynesian school of thought and the Monetarist School of thought. We have argued in our conversation "Zemblanity", when looking at the evolution of M2 and the US labor participation rate that both were indicative of the failure of both theories:

"Both theories failed in essence because central banks have not kept an eye on asset bubbles and the growth of credit and do not seem to fully grasp the core concept of "stocks" versus "flows"."

"Credit growth is a stock variable and domestic demand is a flow variable" as indicated by Michael Biggs and Thomas Mayer in voxeu.org entitled - How central banks contributed to the financial crisis.

Obviously one can posit that not only do our central bankers suffer from the Dunning-Kruger effect but they are no doubt victim of the well documented "optimism bias" which we discussed in our "Bayesian Thoughts" conversation:

"Humans, however, exhibit a pervasive and surprising bias: when it comes to predicting what will happen to us tomorrow, next week, or fifty years from now, we overestimate the likelihood of positive events, and underestimate the likelihood of negative events. For example, we underrate our chances of getting divorced, being in a car accident, or suffering from cancer. We also expect to live longer than objective measures would warrant, overestimate our success in the job market, and believe that our children will be especially talented. This phenomenon is known as the optimism bias, and it is one of the most consistent, prevalent, and robust biases documented in psychology and behavioral economics."

Tali Sharot - The optimism bias - Current Biology, Volume 21, issues 23, R941-R945, 6th of December 2011.

We have on numerous occasions discussed shipping as being not only a leading credit indicator (with the collapse in European structured finance) but as well a leading economic growth indicator (on that subject please refer to "The link between consumer spending, housing, credit and shipping"), in our "Bear Case", excess capacity and a weak global economy with a China slowdown will drive rates down even with price increases, pressuring margins - graph source Bloomberg:

"The Drewry Hong Kong-Los Angeles 40-foot container rate benchmark rose 21.8% to $2,236 in the week ended July 3, as a $400 rate increase went into effect. Rates are 11.2% lower yoy, as slack capacity pressures pricing. With four increases in 2013, rates are up 1% ytd. Carriers are expected to implement a $400 peak season surcharge ahead of back-to-school and holiday shopping on containers from Asia to all U.S. destinations, effective Aug. 1." - source Bloomberg.

Not only slack capacity are pressurizing pricing in the shipping space but in general, we have long argued that overcapacity has been plaguing various economic segments such as the car industry with European car sales back at 1993 sales levels (on that subject see our 21st of April "European Clunker" conversation), but with the incoming threat of a China slowdown or even hard landing, metal prices such as Aluminum prices are indicative as well of the great deflationary forces at play and the overcapacity fuelled by "cheap credit" (the Baltic Dry reached 11,783 on May 20, 2008 and is now at 1103) - graph source Bloomberg:

"Aluminum prices, which have fallen for three straight quarters, may be poised for further declines as new production in China and the Middle East increases global output even as Alcoa Inc. trims capacity.
The CHART OF THE DAY shows production has gained 5.1 percent since the end of 2011, helping drive prices down 9.3 percent, according to data from the International Aluminium Institute. Output will reach a record near 50 million metric tons this year, up from 45 million in 2012, Harbor Intelligence forecasts.
“The market is still looking at over-capacity, over-production and an unprecedented overhang of metal,” said Jorge Vazquez, a managing director at Austin, Texas-based Harbor. “There’s a lack of credibility for the producers, and even if these cuts take place, investors expect nothing to change.” Alcoa, Aluminum Corp. of China Ltd. and United Co. Rusal, the world’s largest producer, are among companies trimming capacity amid ample supplies. The price outlook remains “depressed” as some investors are concerned that producers won’t follow through on planned cuts and amid the prospect of new and expanded plants and restarts at some older sites, Vazquez said.
Aluminum for delivery in three months on the London Metal Exchange dropped 12 percent this year to settle at $1,832.50 a ton yesterday. The metal may fall to $1,675 in the next few weeks said Vazquez, who expects supply to exceed demand by 350,000 tons in 2013 for a seventh straight year of surplus." - source Bloomberg.

Of course our "omnipotent" central bankers "fail to recognize the extremity of their inadequacy" in true Dunning-Kruger effect as far as "cheap credit" and "bubbles" implications are concerned. They have even come up with a new marketing campaign as of late "forward guidance" in Europe.

Forward Guidance:
"Forward guidance arms central banks with fresh ammunition even when they have lowered short-term interest rates close to zero. It allows them to influence not just current rates but those stretching into the future through pledges to keep them low. The forward guidance can be for a period of time or it can be linked to specific indicators, such as an unemployment-rate threshold (which is not, however, a trigger) in the case of the Fed." - source The Economist

Fresh ammunition? Yet another demonstration of the Dunning-Kruger effect at play we think. Thank god, our "central bankers" are not in the guide dog training business to lead blind and visually impaired people around obstacles...
"Forward Guidance" might be as effective as using a "Yorkshire Terrier" as a guide dog, instead of the usual Labrador retriever. The "Yorkshire Terrier" could be trained to do the job, but would they really be effective? We wonder and ramble again.

Unemployment-rate threshold? As we have argued in "Goodhart's law":
"Conducing monetary policy based on an unemployment target is, no doubt, an application of the aforementioned Goodhart law. Therefore, when unemployment becomes a target for the Fed, we could argue that it ceases to be a good measure." - Macronomics, 2nd of June 2011

In this week's conversation, we would like to focus our attention to the "Bail-in" effect and the recent clarifications made surrounding financial subordinated debt instruments which have long been a pet subject of ours ("Subordinated debt-Love me tender?") given the "Bail-in" conversations which took place on the 26th of June (BRRD) which we touched last week, will have as well  "ripple" effects in the subordinated credit space but first our market overview.

The US dollar still rising against one of the most impacted asset commodity classes since the beginning of the year namely gold - graph source Bloomberg:

The greenback is still benefiting from the surge in bond volatility which has yet to recede.

The "Daisy Cutter" effect as displayed by the evolution of the Merrill Lynch MOVE  index, which is still showing sign of high volatility in the fixed income space as witness this week and CVIX indices closely followed by the recent rise in the VIX index - graph source Bloomberg:

No wonder interest rate sensitive asset classes such as Investment Grade Credit and High Yield are as well suffering from the increased turbulences as displayed by the price evolution of the most liquid and active ETFs in the credit space namely the LQD (Investment Grade) and HYG (High Yield) ETFs, graph source Bloomberg:

In the HY Fixed Income space HYG (iShares $ High Yield Corporate Bond, Expense Ratio 0.50%) has lost $1.78 billion year to date in terms of net redemption flow.

In terms of weekly allocation trends, bond market outflows have jumped in the week of the 27th of June until the 3rd of July as reported recently by Nomura's Fundflow insight published on the 5th of July:

"Asset allocation trends: Bond market outflows jumped/money market turned to inflows
- Bond market: -USD28.1bn vs -USD8.0bn in the previous week
- Money market: +USD7.7bn vs -USD25.1bn in the previous week
For the week ending 26 June, the bond market reported outflows for the 4th week in a row — the longest streak since August 2011. Despite bond market outflows easing slightly in the week before, the latest outflows jumped more than 3x to USD28.1bn from USD8.0bn in the previous week. In contrast, the money market turned to mild"- source Nomura, Fundflow insight, 5th of July 2013.

With the recent surge in both US Treasury yields courtesy of a better than expected Nonfarm payroll number coming at 195 K and in oil prices thanks to increased tensions in Middle-East, we wonder how long equities  in general and the S&P in particular will stay immune from the growing nervousness - graph source Bloomberg:

The latest "Forward guidance" European marketing stunt is no doubt meant to prevent a dramatic repricing in the European government space and avoid the trigger of the much "hyped" OMT. The volatility jitters in the bond space, have led to a surge in European Government Bonds yields in the process as indicated in the below graph with German 10 year yields rising towards the 1.70% level and French yields now around 2.30% - source Bloomberg: - graph source Bloomberg:

Of course our "omnipotent" central bankers in Europe had to come up with another playing trick up their sleeves, given as we indicated in last week's conversation, contagion risk is now bigger than ever and the customer/investor security system is now weaker than ever because the LTROs have encouraged banks to increase even more their holdings of government debt to fund fiscal deficit, making them in the process even more "Too-Big To Fail". Yet another demonstration of the Dunning-Kruger effect.

The issue of course is "convexity", given the debt levels for both the private sector and the public sector are high in most developed countries meaning their economies are now even more sensitive to interest rate risk courtesy of global ZIRP! The more sensitive their economies get, the more solvency risk you have, the greater the risk of a sudden spike of defaults you get in a low yield environment with surging yields.

Back in November 2011, we posited the following in our conversation "Complacency":
"In a low yield environment, defaults tend to spike. Deflation is still the name of the game and it should be your concern credit wise (in relation to upcoming defaults), not inflation."

"Low inflation environments, like the one we’ve had for the past 25 years, tend to be ones where defaults can spike." - Morgan Stanley - "Understanding Credit in a Low Yield World.


Moving on to the subject of the "Bail-in" factor and the financial subordinated credit space, given it has gathered much attention in the bank credit analysts sector as of late with very diverging views on the future for legacy subordinated Tier 1 securities, a subject which warrants some attention.

For instance Morgan Stanley on the 25th of June, in their European Banks note entitled "Get Ready: Regulatory Rating Par Calls Soon" argued the following:
"We have long been cautious on high cash price regulatory and rating par calls (see Reg Par Calls:
Closer, October 12, 2012, and The End of RAC Tier 2, April 2, 2013). The finalisation of CRD IV and S&P’s decision on RAC methodology mean possible calls are weeks away.
About 60 Tier 1 bonds have reg par call language (RPC) in our space, which means that if regulations change and bonds lose their Tier 1 regulatory status, they can be called at par. More than half of these RPC bonds are currently trading above par, leaving scope for significant downside from here.
Deutsche could be the first RPC next month… As we believe it will be able to trigger the reg par call of its €9.5% and €8% retail prefs as soon as CRD IV/CRR is published in the Official Journal of the EU, on June 27, which marks the end of the legislative decision-making process. At current levels, the yield to call in, say, a month is -26% for the €9.5% and -37% for the €8%. Bondholders risk losing up to 8 points in a day if the RPC is exercised.
… affecting all RPC bond pricing negatively, in our view. The language of nearly all other RPC bonds is far less clear than Deutsche’s, and such ambiguity could bring legal challenges many of these issuers (if not all) would not want to risk. However, particularly in today’s kind of market, we believe that many holders will simply take fright and it’s hard to say how much above par any bid might be, following a potential par call by Deutsche." - source Morgan Stanley

We were quite baffled by Morgan Stanley's note given we have been watching liability management exercise for a while in the European banking space and we completely disagree with their take on Tier 1 securities trading way above par that could be rapidly called by their issuers. For us, it doesn't make sense as we indicated in our conversation "The Doubt in the Shadow" on the 23rd of March 2013:
"Banks may have an incentive to buy back non-compliant Basel 2.5 hybrids that do not qualify as regulatory capital under Basel 3. To the extent that such "liability management exercises" can result in debt being repurchased at a discount to par (well below a cash price of 100), banks are able to generate common equity Tier 1 (CET1) gains. On that subject see our October 2011 conversation "Subordinated debt-love me tender?"."

Our views have been comforted by Bank of America Merrill Lynch note entitled "Bail-in: the ripples" from the 1st of July:
"Reg par calls – still a no-no?
The new need to have a bail-in buffer if anything supports the idea that the banks need to hold onto their existing subordinated debt and would be ill-advised to rush to redeem it, even if it optically appears to be expensive. The work we have presented on the need for bail-in buffers only underlines that European banks need to retain and rebuild capital, not redeem it, in our view. Why would a regulator permit the calling of an old Tier 1 bond just because it was ‘expensive’ to the bank? We think the emphasis on retaining capital until the banks are more comfortably positioned will remain for the foreseeable future so our base case remains: No reg par calls." - source Bank of America Merrill Lynch.

Morgan Stanley is putting the cart before the horse and we also agree with the below extract from Bank of America Merrill Lynch note:
"European banks’ need to retain and rebuild capital not redeem it. Why would a regulator permit the calling of an old Tier 1 bond just because it was ‘expensive’ to the bank? They would wish to see such a bond being replaced. If we were regulating the banks, we’d also like to see the banks issued the replacement capital prior to our allowing them to call the old." - source Bank of America Merrill Lynch

On top of that it seems to us Morgan Stanley's is not taking into account earnings boosting technique of FAS 159 which allows banks to book profits when the value of their bonds falls from par, meaning for us, that banks will be encouraged to issue more loss absorbing subordinated debt rather than reduce their buffer to avoid having senior unsecured bondholders or unsecured depositors paying the piper like it happened in the Dutch SNS case in the first instance due to lack of deliverables for the CDS trigger, and in the second case like it happened in Cyprus due to lack of sufficient subordinated and senior unsecured bonds buffers.

So what is the "ripple" effect of the latest "Bail-in" discussions for senior debt and legacy subordinated debt?
"But this brings us to the ripple effect: if banks need to focus on building this buffer, we believe it will prima facie entail potentially some new sub or bail-in bond issuance.
What about retaining the existing subordinated stock though where it is evidently cheaper than issuing new stuff? We are thinking particularly of low-back end Tier 1 bonds but there are also fixed-to-float UT2s and arguably even the dated LT2s too. It makes sense to keep these outstanding forever, arguably, or at least until such a time that the spreads on e.g. bail-in bonds are comparable to those low back-ends (which may, equally, be never of course). 
This is a totally separate discussion to whether the bonds in question are included in regulatory capital. Eventually, very little of the old stock of Tier 1s, Upper Tier 2s and Lower Tier 2s should there be any long-dated enough will ‘count’ as regulatory capital. But there is a role now for all these instruments in the liability buffer above own funds that perhaps they didn’t have before last Thursday. What sense for Credit Agricole to call the €4.13% Tier 1 bond with a back-end of +165bp? Or for BNP to call the US$5.186% bond with a back-end of +168bp? How to justify retiring these bonds which are subordinated and – indeed – loss absorbing – to expose senior bondholders to potential losses? A call of these bonds would look like negligence to us, if it increased the risk that senior bondholders would be bailed-in." - source Bank of America Merrill Lynch

We agree with Bank of America Merrill Lynch's take on the subject. From a regulatory perspective and in relation to increasing capital buffers, previous bond tenders have shown that there is a greater call risk with low back-end bonds (convexity issue) and those trading below par:
"In most cases, that CRD 4 is now European Law. It must be domestic law too. It will take several countries some time to put CRD 4 into their own law. So in most cases, there is no immediate threat of a reg par call because there isn’t even the legal basis yet for one." - source Bank of America Merrill Lynch

What is the risk for senior unsecured bondholders and the implication of having low subordinated bond levels buffers for some European banks?
Here is Bank of America Merrill Lynch take on the subject:
"If banks don’t build up their buffers and appear to have no intention to either, then their senior will widen towards their sub and the sub-senior curve (in cash) will flatten at wider levels, mutatis mutandis, we think. Current CDS contracts may not be a reliable indicator of this of course, since they are locked in their own technical until the new contracts come into being in September" - source Bank of America Merrill Lynch

We could not agree more. Of course current CDS contracts are not yet reliable indicators of this risk until the much anticipated need to revamp CDS contracts in September. For more on the importance of this issue please refer to our conversation "The Week That Changed The CDS World" from the 26th of May.

So all in all, Morgan Stanley as put the horse before the cart, and in the case of financial subordinated bonds has even jumped the gun as indicated by a JP Morgan's note from the 5th of July entitled "Tier 1: Upgrade to Overweight":
"The clarification that legacy Tier I instruments will not be eligible as Tier II capital under transitional arrangements will be an undoubted positive for valuations as this will increase the certainty of call being exercised. Whereas previously our assumption was that the Tier I instruments would be eligible as Tier II capital, making the decision to call such instruments dependent on the relative cost of issuing Tier II capital instruments, the fact that the legacy Tier I instruments will not have any regulatory capital value will imply that it will merely be a question of comparing the post-call spread on the instrument versus the cost of senior funding. Under these circumstances, we assume that the issuers will have much lower incentives to maintain these instruments outstanding and as such, the certainty with regard to call has to increase. This would also be applicable for issuers such as DB which in the past have used economic rationale to justify the calling or not of Tier I instruments." - source JP Morgan

On a final note, we have always lacked conviction in the great rotation story from bonds to equities which has been put forward since the beginning of the year. As displayed in the below graph from Bloomberg, the rotation to stocks from bonds has been indeed less than great, so has been QE to the "real economy" courtesy of the Dunning-Kruger effect:

"Anyone who expects U.S. individual investors to push stocks higher by moving away from bonds may end up disappointed, according to Vadim Zlotnikov, Sanford C. Bernstein & Co.’s chief market strategist.
The CHART OF THE DAY illustrates how Zlotnikov drew his conclusion, presented in a report yesterday. He tracked the value of equities, owned directly or through funds, as a percentage of household financial assets. Stocks were 39 percent of assets at the end of March, according to data that the Federal Reserve compiles quarterly. The figure was the highest since 2007 and surpassed an average of 29.2 percent since 1950, as shown in the chart. “U.S. households’ exposure to equities is already above historical levels,” the New York-based strategist wrote. “With rates likely to rise over the next 12 months, the case for a rotation from bonds into equities may become less compelling.” Average inflation-adjusted returns on U.S. stocks are negative 2.3 percent a year when bond yields increase at an annual rate of more than 1.3 percentage points, he wrote. The calculation is based on performance from 1871 through April of this year.
Betting against stocks with relatively high dividend yields may pay off as rates increase, Zlotnikov wrote. These shares are 20 percent more expensive than their industry peers on average when judged by ratios of price to book value, or the value of assets after subtracting liabilities, the report said." - source Bloomberg

"Real knowledge is to know the extent of one's ignorance." - Confucius

Stay tuned!

Credit - Promissory Hope

"The man who promises everything is sure to fulfil nothing, and everyone who promises too much is in danger of using evil means in order to carry out his promises, and is already on the road to perdition." - Carl Jung

"A promissory note is a negotiable instrument, wherein one party (the maker or issuer) makes an unconditional promise in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms." - source Wikipedia 

Promissory notes differ from IOUs in that they contain a specific promise to pay, rather than simply acknowledging that a debt exists.

While looking at the political success of Ireland in obtaining finally some debt-relief, which could be seen as an interesting step for European politicians in helping struggling European countries, we thought our chosen title should be "Promissory Hope" given S&P has just raised Ireland's outlook from negative to stable, in the footsteps of rating agency Fitch's revised outlook on the 14th of November. Our title also reflects that while the ECB agreement brings some relief, it doesn't reduce in no way the stock of debt and the impact on the Irish budget deficit will be limited to 0.6% in 2014 and 2015.

No doubt the liquidation of IBRC (the remnants of former Anglo Irish Bank and Irish Nationwide Building Society has put to rest the burden of 3.1 billion euros of annual repayments for the next 10 years.

But, our chosen title is also directed towards the negative spread reaction in subordinated CDS and Lower Tier 2 cash bonds (used as reference obligation in the CDS space) since the announcement of the SNS nationalization and expropriation. We discussed this touchy subject in our previous conversation "House of pain and House of cards":
"The SNS case this week has had some major significant risks to the "House of pain" in the European banking sector that warrants additional close attention for the remaining subordinated bondholders.
If the recovery rate for SNS LT2 subordinated bonds is zero, the significance for the European subordinated CDS market is not neutral given the assumed recovery rate factored in to calculate the value of the CDS spread is assumed to be 20% for single name subordinated CDS and 40% for senior financial CDS. On top of that, a nationalization, such as SNS case, is not by itself a credit event trigger. Appointing an insolvency official is.
As far as delivery of LT2 underlying subordinated bonds referenced in any CDS contract referencing SNS, you would have to ask the Dutch state for delivery (if the subordinated bonds are not simply cancelled or converted into equity...).
So what's the value of your subordinated single name CDS on SNS? Could it mean single name subordinated CDS are a "House of cards"? We wonder. Oh well..."

Therefore in this conversation, we will focus on the implication for the Credit markets in general and the CDS market in particular.

While subordinated bondholders met their makers in the case of the nationalization process of SNS, at least Senior Unsecured bondholders got some welcome respite as indicated in the below Bloomberg graph on a specific SNS bond:

But given Germany, the Netherlands and Finland are looking at speeding up the European plans as soon as 2015 rather than 2018, to force losses on senior unsecured bondholders of failing European financial institutions, the bail-in push to protect European taxpayers looks to us that, rather that financial unsecured bonds are now more akin to "Promissory Notes" (or hope) rather than plain IOUs.

As indicated by Jim Brunsden and Rebecca Christie in their Bloomberg article from the 4th of February entitled "German Push to Accelerate Bank Bail-Ins Joined by Dutch, Finns":
"Senior bank bondholders so far have mostly avoided losses, while European governments and the International Monetary Fund have committed to 486 billion euros of aid since 2010. Under the EU plans, drawn up by the European Commission, regulators would be given the power to impose losses on holders of senior unsecured debt, as well as derivatives counterparties, once a lender’s capital and subordinated debt are wiped out. Regulators could also force debt to convert into common shares, so shoring up a struggling bank’s equity. 
Once the new rules take effect, national authorities would be expected to exhaust bail-in options before resorting to public money to stabilize the bank. 
 The nations are seeking a date as soon as 2015 because it would provide time to adjust to the measures while not putting individual countries at a competitive disadvantage if they apply bail-in rules ahead of 2018, one of the officials said."

Arguably this is what we have discussing in various conversations and is even more likely to happen sooner rather than later, we think as we posited in"Subordinated debt - Love me tender?" and "Goodwill Hunting Redux"):

"First bond tenders, then we will probably see debt to equity swaps for weaker peripheral banks with no access to term funding, leading to significant losses for subordinate bondholders as well as dilution for shareholders in the process." - Macronomics - 20th of November 2011.

As usual the credit markets are only waking up to the rising risk and acceleration of what pains could be inflicted higher up in the capital structure. On that specific subject, we would have to agree with CreditSights note from the 10th of February entitled "Exploring the Sub-Conscious":
"The market is much more used to the idea of "burden-sharing" in hybrid debt, be it through non-calls, coupon deferrals, discounted tenders or principal write-downs. Even so, most of the latest crop of announcements does not help sentiment across the subordinated asset classes." - source CreditSights.

In similar fashion that the Greek CDS saga, followed up by the ban on naked Sovereign CDS last year questioned the existence of the Sovereign CDS market, the SNS episode is no doubt, raising serious questions on the value of subordinated protection as we argued in our previous credit conversation.

On this specific subject, CITI's note from the 11th of February entitled "What bail-in means for CDS" poses some serious questions:
"CDS protection in question – The consequences for CDS may be at least as far reaching as for bonds. Even if expropriation is deemed to be a trigger event, there is a real risk that no subordinated bonds will be left outstanding to be delivered into the contract. This would render subordinated protection practically worthless in the particular case of SNS (given that senior bonds are trading close to par)." - source CITI

In similar fashion to the sovereign CDS markets, it could no doubt, inflict some serious liquidity constraints to the credit markets as well as much needed reality check as per CITI's note:
"If any bank bondholders had not previously noticed that the rules were being rewritten on them, then the 80-point drop in SNS subordinated debt ought to have served as a wake-up call. Yet to our minds the implications for CDS may be almost as dramatic, and yet ironically may cause the market to rally rather than to sell off. 
Broadly speaking, the problem is that CDS contracts were designed prior to the invention of bail-in. Unless lawmakers are careful, they risk situations in which CDS protection turns out to be worth much less than protection buyers would have hoped and expected, either because it is not triggered at all, or because of problems with a lack of deliverable obligations. This would not only be very damaging for the CDS market; it would have very negative consequences for bank bond liquidity too." - source CITI

The Greek PSI in conjunction to the naked ban on naked Sovereign CDS have indeed somewhat "killed" the trading in the Itraxx Sovereign index SOVX as indicated by CITI:

We have as well to agree with CITI that, increased likelihood of bail-in is probably negative for cash bonds but how negative?

EDHEC-Risk Institute in their January 2012 note entitled "The Link between Eurozone Sovereign Debt and CDS Prices" provides us with some insight on the aforementioned impact:
"To examine the difference between these spread measures, we priced a 5-year bond with a 5% coupon in an environment where the default-free yield curve is assumed flat at 3% and the Libor risk-free curve is also assumed to be flat at 3.5%. We considered two cases - first an expected recovery rate of 40% and second an expected recovery of 0%. We then varied the 5-year survival probability assuming a flat term structure of default rates11 and calculated the implied bond price and spread measures. In all cases we assumed k = 1.

Figure 2 Comparison of the model-implied CDS, bond yield-spread and par asset swap spread measures as a function of 

the full price of a 5-year bond with a 6% coupon. We show this for an expected recovery of 40% (above) and 0% (below).":

"The results are presented in Figure 2. When the expected recovery rate is 40% we find that as the 

bond price falls (and it cannot fall below 40), the CDS spread grows and asymptotically tends to infinity while the yield-spread and asset swap spread tend to different large but finite numbers. However, if we set the expected recovery rate to zero then the yield-spread also tends to infinity and is very close in value to the CDS spread as the bond price falls to zero." - source EDHEC-Risk

Therefore, as we indicated in our previous conversation, if the recovery rate for SNS LT2 subordinated bonds is zero, the significance for the European subordinated CDS market is not neutral to say the least given the assumed recovery rate factored in to calculate the value of the CDS spread is assumed to be 20% for single name subordinated CDS and 40% for senior financial CDS.

What are the implications and "unintended consequences" for the financial credit markets? CITI's note gives some additional insights:
"Likewise, lawmakers may feel that the decline in liquidity in sovereign CDS following the ban on naked shorting may not seem to have had an immediate effect. But here too we would argue that this is mostly because we happen to have been in a rallying market, and that the future consequences may stretch well beyond just CDS itself. If investors become forced sellers following downgrades to junk for Spain and Italy, as we think quite likely, the lack of liquidity in CDS would exacerbate the movement in bonds. While some liquidity remains in single-name sovereign CDS, the effect on the SovX index of the shorting ban has been quite dramatic (see graph above on Itraxx SOVX weekly trading). 

The potential problem in bank CDS is almost as large. Although net notional outstandings for single-name European bank CDS are only $68bn,7 DTCC data show that traded volumes are some $36bn/month. This compares with gross turnover in €-denominated bank bonds of only €15bn/month (on €600bn of outstandings). CDS plays an extremely important role in terms of index trading and price discovery, and is often actively used as a hedge for bond portfolios by investors because of its greater liquidity. 
These issues over triggers and deliverables could all too easily jeopardise the validity of the CDS market as a hedge. If it were accidentally “killed off”, the consequences for the bond market would be severe. Unlike in sovereigns, where the underlying cash market has normally been more liquid than CDS, in the corporate market liquidity is heavily fragmented. Without the signaling and hedging role of an active CDS market, bond transparency would fall, trading would become more lumpy, and ultimately the cost to bank issuers would increase, as an increased illiquidity premium became factored into spreads. This hardly seems a desirable outcome." - source CITI

On a final note, as far as Europe is concerned, whereas the US was all about the "fiscal cliff" recently, we think investors in Europe should be focusing on the potential "earnings cliff" given we think analysts are somewhat a little bit too optimistic in their expectations. As an illustration Dutch KPN fell 18% recently to its lowest level since September 2001, following a 4 billion euros right issues in conjunction with earnings well below expectations, leading S&P to downgrade the credit to BBB-, one notch above junk - source Bloomberg:

"Everyone's a millionaire where promises are concerned." - Ovid

Stay tuned!

Credit - European Derecho

"Derecho comes from the Spanish word for "straight" (cf. "direct") in contrast with a tornado which is a "twisted" wind. The word was first used in the American Meteorological Journal in 1888 by Gustavus Detlef Hinrichs in a paper describing the phenomenon and based on a significant derecho event that crossed Iowa on 31 July 1877." - source Wikipedia

"A derecho  is a widespread, long-lived, straight-line windstorm that is associated with a fast-moving band of severe thunderstorms. Generally, derechos are convection-induced and take on a bow echo form of squall line, forming in an area of wind divergence in the upper levels of the troposphere, within a region of low-level warm air advection and rich low-level moisture. They travel quickly in the direction of movement of their associated storms, similar to an outflow boundary (gust front), except that the wind is sustained and increases in strength behind the front, generally exceeding hurricane-force. A warm-weather phenomenon, derechos occur mostly in summer, especially during June and July in the Northern Hemisphere, within areas of moderately strong instability and moderately strong vertical wind shear. They may occur at any time of the year and occur as frequently at night as during the daylight hours." - source Wikipedia

Looking at the recent storms which have recently unfortunately hit our American friends, and given the sudden rise in Spanish yields to record levels, touching a euro record high of 7.56%, we thought this time around, our "Derecho" analogy would be appropriate. Although these "Derechos" storms most commonly occur in North America, "Derechos" can occur elsewhere in the world, hence our recurring theme of severe weather patterns (Plain sailing until a White Squall? - 18th of March, The Tempest - 8th of May, St Elmo's fire - 26th of May). After all, "Derechos" in North America form predominantly from May to August and the “Sell in May and go away” has persisted as a profitable market-timing strategy for stock investors. Could it be in similar patterns to "Derechos"? We ramble again:

"The CHART OF THE DAY shows the average percentage-point gaps in stock performance between the six months ended in April and the next six months, as presented in the study. The figures cover MSCI Inc.’s local-currency indexes of 23 developed markets for November 1998 through April 2012.
Every index did better in the November-April period, led by MSCI Ireland, which had a differential of 17.9 points. Fourteen emerging-market indexes were included in the research, and all of them showed the same tendency. “The Sell in May effect occupies a special place among seasonal anomalies,” University of Miami Assistant Professor Sandro C. Andrade and two of his colleagues wrote in the study, posted yesterday on the Social Science Research Network. That’s because it only takes two trades a year to make money, unlike other patterns that require more frequent buying and selling. The research by Andrade, Vidhi Chhaochharia and Michael E. Fuerst followed up on a study published in 2002 by the American Economic Review, an academic journal. The earlier work tracked the disparities in the 37 MSCI indexes from their inception, as early as 1970, through October 1998.
In the earlier period, the gap averaged 8.7 points. The differential climbed to 10.5 points after excluding Argentina and Brazil, which experienced hyperinflation. The overall average in the new study was 9.7 points." - source Bloomberg.

 

 

So in our long credit conversation, given the interesting turn of events of the week, with some very important legal evolution, we think, in the subordinated bond space relating to "Bail-ins" and exit consents challenge (h/t FT Alphaville Joseph Cotterill for pointing this out), we will take a look at implied recovery in bank credit and credit events. This recent interesting legal challenge has indeed significant implication for recovery rates in the subordinated bond space, particularly for Spanish subordinated bondholders (facing the music of haircuts, coercive or not, in true Irish fashion). But first our credit overview.

The Itraxx CDS indices picture, with indices tightening on the back of Mario Draghi's declarations  - source Bloomberg:

The Itraxx Crossover (High Yield CDS risk indicator - 50 European high yield credit entities) tightened by 22bps to 642 bps level. Both the Itraxx Financial Senior 5 year index (25 banks and insurers) as well as the Itraxx Financial Subordinated 5 year index fell significantly in the process, respectively by 12.5 bps and 21 bps. Truth is, during this summer lull, with poor liquidity, market makers are not seeing big sellers of protection (going long credit, being "Risk-On" that is), and are scrambling to bid for protection with no offer available and remain wary of this market movement akin to short covering. We have seen this movie before...

Although French President Francois Hollande and German Chancellor Angela Merkel said Friday their nations are “bound by the deepest duty” to keep the currency bloc intact, following on the commitment made Thursday by ECB President Mario Draghi, we remain deeply concern by the economic situation in the peripheral space with Spain registering a new unemployment record at 24.6% from 24.4% in the prior three months, the most since at least 1976, the year of the democratic transition.

We have indeed reached intervention time given Spanish yields and rising NPLs have as well reached new record highs:

"Spain's ability to fund itself at the shorter end suffered a severe blow as two-year yields breached 6.5% on fears that regional governments beyond Valencia would seek aid, rendering the 18 billion euro bailout fund insufficient. Beyond funding difficulties, bank bad debt will deteriorate faster as debt rollover costs continue to rise." - source Bloomberg.

 

 

While Europe’s success in severing the link between Sovereign Risk and Financial risk remain to be seen as indicated by the difference in spreads between the Itraxx SOVx 5 year CDS index (representing 15 Western Europe sovereign CDS including Cyprus) and the Itraxx Financial Senior 5 year index which remains broadly flat - source Bloomberg:

“We have got to cut the fatal loop between sovereigns and banks, which will otherwise bring the euro-zone project as it exists now down,” Adair Turner, chairman of the U.K. Financial Services Authority, said in a London speech as reported by Bloomberg (wishful thinking). The Commission is working against a "self-imposed" September deadline to carve out plans that would give oversight of banks to the ECB as the first step in a campaign to break a cycle of banks and sovereigns fuelling each other's solvency risk.

Truth is time is running out for Spain, probably the reason why Mario Draghi felt compelled to "buy" some time in order to give sufficient time to the market to calm down before the September deadline:

"The CHART OF THE DAY shows the difference in yield between the two securities narrowed this month before flipping on the 26th of July. The five-year note yield surged to as much as 7.785 percent, the most since the euro was created in 1999, and more than three basis points higher than the 10-year rate, which reached 7.751 percent. The selloff also pushed yields on Spain’s two-year securities to more than 7 percent for the first time since September 1996. The bonds subsequently rebounded and the five year rate dropped below 10-year yields amid speculation Spain’s fiscal predicament will convince the European Central Bank to augment the firepower of the region’s bailout fund." - source Bloomberg.

With Mario Draghi's timely intervention, no wonder Spanish yields receded very significantly by more than 100 bps in our European bond picture while German government yields rose back towards higher levels around 1.40% on the close (1.16% on the 20th) with other European core bonds (France, Netherlands) rising as well in conjunction with German yields - source Bloomberg:

Spain's 10-year yield fell 52 bps this week to 6.74%, the biggest weekly drop since the period ended December 2nd according to Bloomberg.

While Spanish banks have been busy lowering their sovereign holdings for a third straight month:

"Euro zone financial institutions increased sovereign debt holdings by more than 145 billion euros during 1Q, as ECB cash was put to work. Spanish banks, having purchased 78 billion euros of sovereign in the four months to end-March, lowered their exposure for a third month in June. A euro-zone wide, sustainable solution is required to stem the crisis." - source Bloomberg.

Looking at Santander 1H deposit mix, Spanish structural funding issues are very clear for these institutions:

"While Santander's total customer deposits grew 3% yoy to 1H, its time deposits fell 22 billion euros. The key delta was growth of more than 38 billion euros in non-resident "other" deposits. As Spain's troubles continue, a shortening of liability duration and withdrawal of mutual and pension fund support will likely continue across banks, pressuring funding costs further." -  source Bloomberg.

Hungary has been long been our pet subject (Hungarian Borscht, Hungarian Dances) in relation to the study of systemic risk diagnosis (Modicum of relief):
"The reason behind our choice is that it appears to us as very good case study for systemic risk diagnosis from a macroeconomic point view (after all our blog is called Macronomics)."
We argued at the time:
"A liquidity crisis happens when banks cannot access funding (LTRO helped a lot in preventing a collapse). A solvency crisis can still happen when the loans banks have made turn sour, which implies more capital injections to avoid default (hence the flurry of subordinated bond tenders we have seen). Rising non-performing loans is a cause for concern as well as rising loan-to-deposit ratios. "
It was not really a surprise therefore to see Hungary Yields dropping below Spain for the first time this week:

"Hungary’s borrowing costs dropped below Spain’s for the first time as the European Union’s most
indebted eastern member held talks on an international bailout and Spain’s regions requested aid. The CHART OF THE DAY shows investors this week demanded lower yields to hold Hungary’s debt than Spain’s after Hungary began talks for an International Monetary Fund credit line and Spain’s Valencia region sought financial assistance. Hungary’s 10-year bond yields were at 7.39 percent on July 23, compared with 7.49 percent for similar-maturity Spanish debt. “The primary reason why Hungarian bonds have been doing well is because anticipation has been building up that the country is moving toward an IMF program,” Arko Sen, a strategist at Bank of America Corp. in London, said in a phone interview yesterday. Hungarian yields were as high as 10.8 percent after Prime Minister Viktor Orban’s government passed legislation the IMF and the EU said threatened the central bank’s independence in December, obstructing talks on aid. Hungarian yields were as much as 539 basis points above Spain’s in January." - source Bloomberg.

Looking at Mario Draghi's speech we could not resist to reminding ourselves our previous December 11th post "The Generous Gambler" where we quoted the wonderful poem by French poet Baudelaire which inspired Verbal Kint in The Usual Suspects:

"The greatest trick the devil ever pulled was to convince the world he didn't exist"

Roger "Verbal" Kint- The Usual Suspects

"My dear brothers, never forget, when you hear the progress of enlightenment vaunted, that the devil's best trick is to persuade you that he doesn't exist!" - Charles Baudelaire, French poet, "Le Joueur généreux," pub. February 7, 1864

"If it hadn't been for the fear of humiliating myself before such a grand assembly, I would willingly have fallen at the feet of this generous gambler, to thank him for his unheard of munificence. But little by little, after I left him, incurable mistrust returned to my breast. I no longer dared to believe in such prodigious good fortune, and, as I went to bed, saying my prayers out of the remnants of imbecilic habit, I said, half-asleep: "My God! Lord, my God! Please make the devil keep his word!"

Charles Baudelaire, French poet, "Le Joueur généreux," pub. February 7, 1864

People are trading on hope: "Please make Mario Draghi keep his word", we could posit in similar fashion to what we commented in our September 2011 conversation "The curious case of the disappearance of the risk-free interest rate and impact on Modern Portfolio Theory and more!"

"So far the devil's best trick has been to persuade us that risk-free interest rates did exist. It ain't working anymore and that is a big cause of concern." - Macronomics.

We could not resist but we chuckled when we read the following comment from a credit desk:
"Equities = Hope, Credit = Reality, unfortunately, Reality follows Hope until the Hope dies, then Reality settles in."

As a reminder from our "Generous Gambler" conversation this is what Arnaud Marès, from Morgan Stanley in his publication of the 31st of August 2011 -Sovereign Subjects had to say:

"Does it matter that sovereign debt is risk-free? It very much does. If sovereign debt is no longer a safe haven, then the ability of governments to implement counter-cyclical policies is impaired. Fiscal policy is becoming at best neutral, at worst pro-cyclical. At a time when growth is rapidly slowing, the economic cost may be high.
Weakening the quality of government credit means weakening the fiscal backstop from which banks benefit. This risks resulting in an accelerated de-leveraging of bank balance sheets, with equally costly economic consequences."

This is exactly what has happened so far with the ill-fated EBA June 2012 request of asking European banks to reach a Core Tier 1 ratio which precipitated the deleveraging as well as the withdrawal of credit, bond tenders and other liability management exercises, hitting hard in the process the real economy in European countries. This withdrawal of credit has also been confirmed by the latest results from British bank Barclays as indicated by Bloomberg:
"The exodus from debt-ridden peripheral Europe continues, with Barclays detailing reduced sovereign exposure of 22% and 5% lower retail lending in 1H. Plagued by liquidity shortages, EU Banks have also rushed to reduce local funding mismatches: Barclays took additional Spanish deposits since 2011 year-end, while taking 8.2 billion euros from the ECB's LTRO in Spain and Portugal." - source Bloomberg.

As we pointed in a "Tale of Two Central banks", we would like to repeat Martin Sibileau's view we indicated back in October when discussing circularity issues:

"What would be a solution for the EU? We have repeatedly said it: Either full fiscal union or monetization of the sovereign debts. Anything in between is an intellectual exercise of dubious utility."

We would like to take the opportunity of debunking further the "efficient market theory" (if there are any believers left out there...) in relation to Draghi's intervention. We agree with a recent note from French broker Aurel, namely that this "theory" has taken yet another blow. The markets did not react to Mario Draghi's declarations  made in an interview last Saturday in French newspaper Le Monde but "only" reacted strongly on Thursday when similar declarations were displayed in bold red on Bloomberg: « Believe me, it will be enough ».
Oh well...

In relation to our recent theme of "Yield Famine",  Unibail has sold this week EUR750m of bonds at 2.25% maturing on 1st August 2018 (6 years). The issue was 4 times oversubscribed with the order book reaching over EUR 3bn in less than 1.5 hours...We saw similar action this week on numerous new high quality issues coming to the market.
The rush for yield and strong appetite for credit is cause for concern and caution particularly in the High Yield space where risk is lurking.
"unintended consequences" of this low yield environment will have to corporate balance sheets, to some extent, it tends to explain, why defaults tend to spike in a low rate deflationary environment such as today", we argued last week.

High Yield is indeed becoming very expensive as indicated by Lisa Abramovicz in her Bloomberg article - BofA Cools on Junk Priciest to Stocks Since ’93:
"Junk bonds are losing their sheen after becoming about the most expensive relative to stocks in at least two decades, prompting firms from Bank of America Corp. to Loomis Sayles & Co. to warn that gains on the debt may wane. Junk bonds are returning less than the highest-rated corporate notes for the fourth straight week, the longest stretch since the period ended Nov. 27, Bloomberg data show".

Time to reduce duration and favor short term High Yield if you are "starving" for yield and can stomach the volatility risk we think.

Moving on to the very important subject of the legal evolution in the subordinated bond space relating to "Bail-ins" and exit consents challenge,  this recent interesting legal challenge has indeed significant implication for recovery rates in the subordinated bond space, particularly for Spanish subordinated bondholders.
 As indicated on the FT Alphaville comment section, Claudio Borghi Aquilini made some very valid comments:
"This is an extremely important ruling. Basically it (rightfully) denies the very concept of forced burden sharing at the basis of the eurodebt disaster. Either you let the bank fail or if you decide to save it you may not kill bondholders (albeit subordinated) ad random. Reducing the burden for taxpayers might seem a good reason to do silly things but debt is based on rules, if you create doubts and "special situations" no wonder if funding costs skyrocket (and if a judge tells you that you can not play with contracts). "

We could not agree more. Debt is based on rules. The capital structure is there for a reason when it comes to bank debt and the difference between junior debt from senior debt as well as the recovery values and credit events triggering CDS contracts relating to the capital structure. Looking at the recent discussions relating to "Bail-in" proposals (a subject we discussed in "Something Wicked This Way Comes"),  Morgan Stanly in their Credit Strategy review from the 27th of July entitled - Implied Recovery in Bank Credit, argued the following:
"One hears every possible argument in the debate over whether senior bank debt in Europe should bear losses. There is the moral (better that bondholders pay for bank rescues than ordinary taxpayers). The practical (senior bonds are a small slice of the capital structure, burning them saves relatively little money). The game theory (country that imposes losses saves money, everywhere else suffers). The theoretical (if the institution’s insolvent, of course its lenders should bear loss). The psychological (debt haircuts will scar funding markets for years to come). The list goes on. We believe that the costs of haircutting senior bank debt in Europe vastly outweigh its rewards."
On that matter, we "Agree to Disagree" with Morgan Stanley, given that, as we posited in "Long hope - Short faith, Hungary and Bank Recapitalization", the study realised by Stanford University Anat R. Admati (Why Bank Equity is Not Expensive) shows that banks have fought bitterly against increasing equity buffers which is the cheapest and easiest way to recapitalize banks. Why? because allowing high payouts to shareholders, namely bank employees in many cases, allows financial institutions to raise their leverage: "Focus on ROE is also a reason bankers find hybrid securities, such as debt that converts to equity under some conditions, more attractive than equity." - Anat R. Admati.

The latest legal spat as reported by FT Alphaville (link above) involving credit asset manager Assénagon and Anglo Irish, is a relative important matter given the latest European Bail-in resolution and, because, as indicated by Morgan Stanley in their research piece:
"Fixing the recovery of subordinated debt and taking the spreads on senior and sub debt observed in the market, it becomes possible to solve for a recovery rate on senior."

"The eight banks in the top of the table provide observations of actual loss severity. Why do we focus on CDS? Our approach provides a simple way to solve for implied recovery, but only if the probability of default between two instruments is similar. This isn’t strictly the case with bank bonds, as the restructuring of Lower Tier 2 bonds in the Irish banks bound holders to a large loss, but left senior debt unscathed. CDS, in contrast, triggers at the entity level, meaning that senior and sub CDS are much more likely to take loss at the same time" - source Morgan Stanley.

In terms of market observations, Morgan Stanley also indicates:
"Although senior bank bondholders have generally been protected in Europe, it has been more common for sellers of senior CDS to face losses when contracts are triggered by restructurings. Recoveries in such events have been generally high, at around 50%.
The range of pricing, however, has been enormous – senior CDS on Bradford and Bingley recovered at 95c, CDS on Landsbanki recovered at 1c – especially with regards to the ratio of loss (or the implied ratio of loss).
Across current banks in Greece, Portugal and Spain, pricing also remains highly disperse." - source Morgan Stanley.

"What’s notable? For most banks, implied senior recovery is surprisingly ‘average’ relative to the last seven years, despite all the recent rhetoric. The range of implied recovery is also very narrow (35% to 57%), in direct contrast with the large variation in senior recovery under stress seen in previous table, although we acknowledge that the banks above are for the most part higher-quality than the names in that data-set.
Per our framework, the UK banks (e.g., Lloyds, RBS, Barclays) as well as Commerzbank enjoy the highest implied senior recoveries (i.e., sub debt trades the widest to senior). This is somewhat odd, given that both the UK and Germany have resolution regimes in place whereby subordinated and
senior bondholders could potentially take losses. One explanation could be that investors feel more comfortable in UK and‘core’ European bank senior debt, yet more cautious on subordinated debt, given the resolution regimes. We’re generally happy to lean against this, and would note that the wide senior/sub differential is consistent with our generic preference for UK LT2 and certain Commerzbank subordinated debt structures.
In contrast, Spain and Italy have among the lowest implied recovery rates. Consistent with what we note on UK and German banks, we suspect that this relates to the high degree of sovereign stress which has pushed out senior spreads to very wide levels. Equally, the potential risks of some form of burden-sharing spreading up the capital structure to even include senior debt are also a source of concern for investors, even if a low-risk tail event, in our view." - source Morgan Stanley - 27th of July 2012.

Using Santander as a proxy in determining "Implied Recovery and Default Rates:

For SANTAN, subordinated CDS spreads are ~1.5x senior, implying 1.5x higher loss severity for the same probability of default. Fixing the potential loss on Lower Tier 2 at 90% (10% recovery), this gives an implied loss on senior debt of 59% (90%/1.5x), for an implied recovery of 41% (1-59%).
Similar to the story in the broader index, implied recovery is only marginally lower than its historical average, while spreads now suggest a near-record probability of default over five years (32%). Stress on the Spanish sovereign has led to an increase in the risk of default, but not a decline in perceived recovery." source Morgan Stanley, 27th of July.

Forced burden sharing and coercive action in similar fashion to the Anglo Irish situation, would indeed, lead lower perceived recovery for Spanish  banks bonds, hence the importance of this legal ruling relating to Anglo Irish.
Morgan Stanley in their note Senior and Sub Financials - Credit Derivatives Insights on the 27th of July point to the following:
"What are the historical examples of senior and sub CDS triggers in Europe?
We now have a few precedents for bank CDS triggers in Europe (see table below): The Icelandic banks, Bradford & Bingley (UK) and now Irish banks are the financials credit events for CDS in Europe in the last five years. The above can be sorted into three groups: i) banks that were not backstopped and allowed to default (Icelandics); ii) banks that had an extremely credible backstop (Bradford& Bingley) and a well-supported senior; and iii) banks that were perceived to have a backstop for seniors but not fully robust (Irish banks)."

"We think the Anglo Irish example is good template for how bank restructurings could evolve from a CDS perspective and how auctions could work. Anglo Irish Bank announced a tender offer following equity injections, offering to exchange all the three existing LT2 bond issues into new 1yr government guaranteed senior FRNs (Euribor +375bp) equivalent to 20c of existing face value. In addition to the exchange offer, the Bank convened meetings to approve the inclusion of a right to redeem all (but not some only) of the existing notes at practically zero to encourage acceptance. This series of events triggered a restructuring credit event for Anglo Irish CDS. The requirements in determining a restructuring credit event were fairly straightforward to establish in the case of Anglo Irish: a loss of principal for a multiple holder obligation, made binding on all holders and which resulted directly from deterioration in credit quality.
While all thee LT2 bonds were restructured ultimately, the timeline was in a staggered fashion in order to avoid a lack of LT2 deliverables if all were restructured in one go. Thus, the auction was conducted in an accelerated timeframe, after the first bond was restructured and triggered CDS, but before the other bonds was restructured." - source Morgan Stanley.

The recent legal ruling for Anglo Irish versus Assénagon (rightfully) denies the very concept of forced burden sharing which has been used in the determination of the recovery during the restructuring credit event for the CDS auction process and the results, a process which will inevitably occur for weaker Spanish and Italian institutions at some point:

"While the recoveries for the senior CDS of different buckets were largely in line with each other, sub CDS had very different recoveries for the 2.5yr bucket (74.5) vs. for the other two buckets (around 18). In practice the recovery for different buckets of senior CDS could also vary considerably, as the dollar prices of a 2.5yr bond could be very different from a 7.5yr bond in a restructuring scenario." - source Morgan Stanley.

As indicated by FT Alphaville in their post,  IFR reports that IBRC, the successor to Anglo Irish, is considering an appeal. The awarding of any damages is yet to come. A truly interesting legal development in the banking space.

On a final note, a weakening of the Euro is likely to be reflected in HSBC, Santander, BBVA 2nd Quarter results as shown by Deutsche Bank's recent profit warning:

"As Deutsche Bank's profit warning demonstrated, the ongoing weakness of the euro can negatively affect results where there is a  mismatch between costs and revenue, or material parts of the business earn and report in different currencies. Euro zone revenue contributions are likely to shrink at HSBC, which has significant euro operations and reports in dollars." - source Bloomberg.
Given Deutsche Bank AG recently announced it would reduce risk to meet a 2013 capital-ratio goal after second quarter profit missed analysts' estimates on expenses tied to a weaker euro (net income fell to 700 million euros), reduced risk will lead to reduced liquidity and inventories provided to the market place. Yet another story of de-risking, deleveraging. No wonder traders are leaving the banking industry for Hedge Funds in this process.

"The greatest trick European politicians ever pulled was to convince the world default risk didn't exist" Martin T - Macronomics.

"Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies."  - Groucho Marx

Stay tuned!

Credit - Agree to Disagree

"Politics is the art of postponing decisions until they are no longer relevant."
Henri Queuille

Looking at the growing spat between Germany and France in relation to the on-going European saga, we thought this time around we would use the term "Agree to Disagree", given that the term "agree to disagree" or "agreeing to disagree" is referring to the resolution of a conflict (usually a debate or quarrel) whereby all parties tolerate but do not accept the opposing positions:

"It generally occurs when all sides recognise that further conflict would be unnecessary, ineffective or otherwise undesirable. They may also remain on amicable terms while continuing to disagree about the unresolved issues." - source Wikipedia.

While our European politicians continue to be irrational/irresponsible in their behavior, and "agree" to continue to "disagree" for now; as indicated by Wikipedia, investors can as well follow a similar path:

"Economist Frank J. Fabozzi argues that it is not rational for investors to agree to disagree; they must work toward consensus, even if they have different information. For financial investments, Fabozzi posits that an investor's overconfidence in his abilities (irrationality) can lead to "agreeing to disagree"—the investor thinks he is smarter than others."

When looking at the growing divergence between US stocks and US Bond yields, and softening US economic data, one can wonder our long US investors can "agree" to "disagree" - source Bloomberg:

"Any multiyear rally in U.S. stocks may depend on a signal that the bond market has yet to send, according to Michael Hartnett, Bank of America Corp.’s chief global equity strategist.
Bond yields have to reach “an inflection point” before shares can move into what’s known as a secular bull market if history is any guide, Hartnett wrote in a June 12 report.
The CHART OF THE DAY compares the Dow Jones Industrial Average and the yield on 10-year Treasury notes since 1900, as Hartnett did in his report. The yield figures were compiled by Yale University Professor Robert J. Shiller and obtained from his website.
Hartnett highlighted three inflection points in the past century, as shown in the chart. They foreshadowed stock-market booms during the 1920s, after World War II, and throughout most
of the 1980s and 1990s.
A comparable surge in share prices is unlikely, he wrote, “until Treasury yields rise in response to stronger growth and a healthier global economy.” The 10-year yield fell to a record 1.4387 percent this month.
Even so, lower yields are giving investors more incentive to shift into stocks from bonds, the New York-based strategist wrote. He estimated that it will take a 0.6 percent yield for the 10-year’s return in the next 12 months to match stocks’ 20th-century average of 10.5 percent a year." - source David Wilson, Bloomberg, 15th of June 2012.

"Mind the Gap" we indicated on the 8th of May in relation to the European space. European investors had agreed to disagree, we thought at the time, for too long, and now it looks like the gap has been closing. - Top Graph Eurostoxx 50 (SX5E), Itraxx Financial Senior 5 year CDS index, German Bund (10 year Government bond, GDBR10), bottom graph Eurostoxx 6 month Implied volatility. - source Bloomberg:

So, as we go through a credit overview, this time around we will focus our attention on the future of Europe, given that our European politicians, in true "Henri Queuille fashion" are once again playing the "can kicking game". Unfortunately for them, with Spanish yields at 7%, crumbling Spanish Cajas and Greek elections on top of weak economic data, it is decision time.

Henri Queuille was the epitome for "professional politician": he served three times as Prime Minister and was 21 times minister in a French government under the IIIrd and IVth French Republic. He was the symbol of the inefficiency and the failure of the French IVth Republic, but we ramble again (do we really?). Time for our credit overview touching again on our pet subject of "subordinated bond holders" ("Peripheral Banks, Kneecap Recap"), Spanish bondholders are starting to experience similar pain than Irish and Portuguese subordinated bond holders. "Liability" exercises are already leading to some interesting debt-to-equity swaps.

The current European bond picture with the recent rise in Spanish and Italian yields - source Bloomberg:

While Spanish bonds breached 7% on Thursday, Spanish bonds eased 6 bps on Friday to close at 6.90% while Italian yields receded to around 6%, falling 15 bps. Some of the intra-day relief in Italian and Spanish debt was due to short covering.

Indeed Spanish bond yields have reached "intervention" level for the ECB, with Prime Minister Rajoy pleading for additional support, although the SMP (Securities Market Programme) has been on hold since March, after reaching 219.5 billion euros - source Bloomberg:

"The CHART OF THE DAY shows Spain’s 10-year yields climbed to the highest rate since the start of the euro yesterday, reaching 6.998 percent, on the brink of the 7 percent threshold that helped trigger bailouts for Greece, Ireland and Portugal. Yields are rising even as Spain requested as much as 100 billion euros ($126 billion) in aid for its banks on June 9." - source Bloomberg

As far as Credit Markets were concerned on Friday, it was short covering time, as a European credit market maker put it:

"Market caught between fears over the Greek elections and prospect of a new QE on both sides of the pond. Generally speaking spreads closed somewhat better today in low beta probably fueled by tightening swap spreads. Flow was balanced and trading remains very technical."

The Credit Indices Itraxx overview - Source Bloomberg:

Indeed, short covering it is, in both government bonds market and credit markets as investors and traders alike do not want to be short risk with the looming Greek elections. No surprise to see Itraxx Crossover 5 year index ((High Yield risk gauge, 50 European entities) receding therefore by  more than 20 bps towards the close. Same applies to Itraxx Financial Senior 5 year index and Itraxx Financial Subordinated 5 year index, receding as well in similar pattern. The Iraxx Europe index, (which comprises 125 high-grade borrowers, 25 of which are banks and insurers), was at 175 bps, five basis point tighter from Thursday's close.

What remains concerning, as we argued in our conversation "St Elmo's fire" on the 26th of May, is that the SOVx index representing the CDS risk gauge risk for 15 Western European countries (Cyprus replaced Greece in March in the index) remains at elevated levels and so does the Itraxx Financial Senior Index, a further indication of the existing correlation between financial and sovereign risk:

In fact the rising spread between Financial risk and Sovereign risk to 38 bps is indicative of the growing solvency fears of some sovereigns which received additional pressure this week with both Cyprus and Moody's seeing their sovereign rating downgrade, with both countries requesting support for their ailing financial system.

-Moody’s downgraded Spain 3 notches from A3 to Baa3 on the 13th of June, and placed Spain on review for further downgrade, following Spain’s announcement that it may seek up to 100 billion euros from the EFSF/ESM to recapitalise its banking system (twice Moody’s previous base case estimate and in-line with its adverse scenario).  FROB was also downgraded from A3 to Baa3 accordingly.  Moody’s is further concerned about Spain’s limited access to markets and its dependence on domestic banks, who in turn rely on the ECB, to support new issues.  Moody’s added it would conclude its review within three months as it awaits clarity on the size/terms of the recap, additional estimates from Wyman/Berger, further euro-area initiatives on a fiscal or banking union, and the impact of the recap package to restore market confidence.

-Moody’s downgraded Cyprus as well by two notches from Ba1 to Ba3, on review for further downgrade, due to a material increase in the likelihood of a Greek exit and its impact on the level of support needed by Cypriot banks.  Moody’s  previously estimated Cypriot banks would need support in the range of 5-10% of GDP but now expects it could be materially higher, with Cyprus Popular Bank alone probably accounting for 10% of GDP.

As we indicated in our conversation "The Spread Also Rises" on the 24th of March following the credit indices rebalancing:
"Replacing Greece by Cyprus is the SOVx series 7 index might not be enough to preserve the 15 member's number status. On the 13th of March, Moody's rating agency joined its peer Standard and Poor's in slashing Cyprus to junk status on heightened concerns over its banking sector’s exposure to Greece. Only Fitch rating agency has maintained its rating for Cyprus one notch above junk."

On the back of Spain's downgrade, Moody's downgraded 12 Spanish Sub-Sovereigns, 2 Gov-Related Entities on Friday.

In relation  to our Flight to quality" picture, Germany's 10 year Government bond yields have been recently rising towards 1.50% and the 5 year CDS spread for Germany has remained firmly above 100 bps in the process. In the recently quoted 24th of March conversation "The Spread Also Rises" we also wondered if the rise in German 5 year CDS was an ominous signs of upcoming stress in the markets, which in retrospect was a good sign - graph below, source Bloomberg

While some "agree to disagree", we, on the other hand "agree to agree" with Nomura in relation to their lower forecasts relating to 10 year German yields. In their 14th of June note they added:

"We are bullish Bunds and in recent months have had a series of lower forecasts for 10yr yields - 1.50%, then 1.25% and currently 1.0%. In all cases, we referred to our forecasts as interim, which reflected our view that as the eurozone crisis nears its denouement, yields could fall far below 1.0% as Bunds came to be traded less as yield instruments and more as collateral instruments with a sizable embedded FX option.

 Such bullishness can be somewhat uncomfortable when the asset you recommend experiences a pronounced sell-off. 10 year Bund yields have risen from 1.127% on 1 June to 1.49% currently! Does this sell-off represent the pricing in of new information or does it provide an opportunity for investors who missed the Bund move to establish fresh longs? We think the latter. Two factors have driven the Bund move, and we do not expect either to persist:

1) Bund “Risk” has been reduced ahead of Greek elections. This could increase the market impact of a “bad” election result, while we fear that even a market-positive election outcome would entail an uncertain period while a coalition was formed. More importantly, the Greek election matters less than it did even a fortnight ago. Then, many investors viewed Greece as a catalyst for the latest market down-leg. But in our view Greece was always a symptom of a European policy mix that is undermining growth, fiscal stability and bank solvency. These broader trends have already led to Spain’s need to request bail-out funds and fuel the growing risk that the country loses market access. A positive Greek election will not assuage these risks.

2) Fears of a fiscal union. Hopes have increased that we will see a European Redemption Fund (ERF) or European Banking Union. However, we do not expect meaningful progress towards fiscal union in a timeframe relevant to the current crisis. Of the various Eurobond proposals, the only one which we believe could generate any period of optimism would be the ERF, but even then only until the market analysed the proposal in detail and concluded – as we do – that it is not a solution and may increase the scale of the crisis. Meanwhile, progress in creating a European TARP would be positive but of limited use unless it was combined with talk of turning the ESM into a bank to allow it to fund the recapitalisation via the ECB. (It is difficult to see another source of sufficient funding for the ESM.)

There is also the risk that the escalation of the crisis means that a truly proportional policy response may be more than can be delivered. After all, the response needs to restart rather than just maintain investment flows from core to non-core countries. While we still expect the ECB to initiate QE in Q3, this may now need to combine with an ECB funded TARP. Even then, we assume that the crisis needs to escalate far further before the ECB/ Germany agree to such options. Given these risks, 10yr Bunds around 1.50% seem attractive."

No wonder in the current European context, there is such a difference between the Spanish and German sovereign yield curve  with a much more flatter German curve - source Bloomberg:

Moving on to the core subject of the future for Europe as we are reaching the end for this extended game of "can kicking", we have been wondering what could make us "agree to agree" rather than continue to "disagree" in relation to our European saga. We think Exane BNP Paribas did a good work in summarizing what is needed to review our negative stance, in their recent note "Crunch time is still not with us" from the 14th of June:

"What policies would we regard as sufficiently radical to upgrade?

Any solution to the Euro area debt crisis is going to have to involve one of three unpalatable policies: a) large scale default, b) mutualisation or c) monetisation.

At present, mutualisation appears to be the most likely solution, with the European Redemption Fund (ERF) under discussion in the German parliament; however aggressive monetary action by the ECB remains a possibility."

In relation to the ongoing issue of circularity, which we discussed in our conversation "Eastern Promises", it means that correlation between Sovereign risk and Financial risk is different between countries since January 2010 - Spain versus Germany:

"Spain 5 year Sovereign CDS versus Santander 5 year Senior CDS, correlation is at 0.92. In Germany, the second graph, since January 2010, Germany's Sovereign 5 year CDS correlation with Deutsche Bank Senior 5 year CDS has only been 0.76.

From the above, one can clearly conclude that the more stress you get on a country's sovereign debt, the higher the correlation with the financial sector."

Exane BNP Paribas in their note added in relation to the 100 billion euros plan for the Spanish banking sector added:

"We do not believe that the Spanish programme will materially alter perceptions of that part of the tail risk which related to the danger of a break-up of the Euro. Furthermore, although, as noted above, the benefits from clearing up the financing issues are considerable, and the difference between the market and official interest rates represents a benefit to Spain, all that has really been done here is to move a liability from the banking sector to the sovereign, in the process potentially introducing a layer of subordination to private sector sovereign creditors. Since it is the sovereign credit which is the driver at present (most major bank CDS have tightened markedly relative to their domestic sovereigns), increasing the sovereign indebtedness in order to recapitalise marginal banks does not necessarily benefit that part of the banking sector which is not directly being assisted."

We have long argued that subordination would lead to insubordination, leading to a buyers strike in the European bond markets which is exactly what has happened courtesy of European politicians meddling.

So what could be the possible solutions for the Eurocrisis? These are the possible outcomes according to Exane BNP Paribas:

"In our opinion, unless one of these major bottlenecks is tackled with a plausible solution, any policy initiative, whether actually implemented or merely suggested, is either a non-solution or simply an exercise in buying time. A number of potential solutions are currently circulating in the policy community, along with a distressingly high number of non-solutions." - source Exane BNP Paribas.

In order to "agree to agree" with Exane BNP Paribas, we think the possible solution for the Eurocrisis goes through mutualisation, default and Official sector involvement:

"Finally, there is the option of default (in a general sense of the word "default", taken to include bail-ins, quasi-voluntary debt tenders, negotiated writedowns and similar operations as well as formal defaults within the meaning of CDS contracts). Sufficiently large debt reduction by official sector creditors is simply another means of mutualisation; more chaotic than Eurobonds, less transparent, setting fewer precedents and in nearly every way less satisfactory, but achieving largely the same goal. As long as the eventual defaults, when they happen, involve a majority of official sector creditors (and/or local banks with similarly few international creditors), the potential for contagion to the wider financial markets could be limited." - source Exane BNP Paribas.

Make no mistake, at some point, as our good credit friend put it, losses will have to be taken.

In relation to the recent European political talks relating to Banking Union, "The road to hell is paved with good intentions", we agree with Exane BNP Paribas that it is a "non-solution":
"Europe needs a short term solution before it can consider a long-term one, and the current nature of the short term problem facing Europe is not necessarily one that is addressed by a banking union."

Indeed, looking at the continuous deposits outflows from Greece, European politicians, while continuously agreeing to disagreeing, are once again utterly and completely behind the curve:

"The problem is that the "failure mode" for Euro exit is most likely to be triggered by a banking system collapse in a peripheral economy such as Greece. And the main stress on the Greek deposit base is not coming from bank-specific concerns related to the credit-worthiness of individual banks, or even related to the ability of individual sovereigns to back up their deposit guarantee schemes in the event of systemic bank failure. Put simply, depositors are worried about getting their savings back in drachma rather than in euros. For this reason, the only guarantee scheme that could persuade them to keep money in the local banking system would be a guarantee of the EUR value of their deposits, which would be payable even in the event of euro exit." - source Exane BNP Paribas.

If our European politicians had studied carefully what had happened in Argentina before their default in 2002, they would not be pressing for a "Banking Union" but should rather be more concerned about a deposit guarantee scheme if they are "really serious" about keeping Greece in the Euro. Back in March we argued the following in our conversation "Modicum of Relief":
"A liquidity crisis happens when banks cannot access funding (LTRO helped a lot in preventing a collapse). A solvency crisis can still happen when the loans banks have made turn sour, which implies more capital injections to avoid default (hence the flurry of subordinated bond tenders we have seen). Rising non-performing loans is a cause for concern as well as rising loan-to-deposit ratios."

In relation to the similarity of Greece in relation to the Argentina crisis of 2001 leading to its 2002 default, we related to a CreditSights article written at the time of the crisis (CreditSights, 31st of July 2001 paper "Defining the Default Path") :
"the most puzzling aspect of the crisis so far is the relative complacency of the public. This is starting to be tested. The term structure of deposits doesn't bode particularly well, especially as the government has tried to force the banks out longer on the curve than is ideal given deposit withdrawals. We estimate that almost 2/3 of deposits are eligible to be withdrawn in the next 30-60 days and we would be surprised if those deposits that extend in the system were put in time deposits. In addition to the obvious potential of a run on the banks, the lack of liquidity in the system has forced the central banks to provide unprecedented level of repos to the system and also relax reserve requirements. The problem is that this is very unclear whether that additional liquidity is funding anything but capital flight at this point."

As far as Spain is concerned, deposits flights have not yet materially happened:

"There was little evidence from aggregate data that the Spanish banking sector was under any particular funding pressure; aggregate domestic deposit balances have declined by 1.3% since the start of the year, which is broadly in line with loan contraction and is therefore likely to reflect overall deleveraging rather than capital flight. Although there were press rumours of a deposit run on Bankia on 11 May (El Mundo), these were not followed up and the official denials appear to have been largely correct in asserting that the deposit flows were seasonal. The large TARGET2 negative balance of the Bank of Spain in the Eurosystem accounts seems to indicate mainly that the liquidity provided in the ECB's monetary operations over the last year has facilitated an orderly withdrawal from Spain by foreign portfolio investors." - source Exane BNP Paribas.

Following on our pet subject of bond tenders, and pain for bondholders as well as shareholders, we have long been expecting such a pain to materialise:
"First bond tenders, then we will probably see debt to equity swaps for weaker peripheral banks with no access to term funding, leading to significant losses for subordinate bondholders as well as dilution for shareholders in the process." - Macronomics - 20th of November 2011.

Banco Sabadell on the 14th of June offered to buy back 1.6 billion euros worth of preferred shares and subordinated debt issued by CAM, a former savings bank  which was acquired by Sabadell in 2011. Sabadell offered to buy back 1.3 billion euros of preference shares issued by CAM and 321 million euros worth of subordinated debt which will be re-invested by investors in newly issued Sabadell shares. Most of these "preferred" shares had been issued to retail clients...

"We believe additional debt to equity swaps will have to happen for weaker peripheral banks, similar to what we witnessed with Banco Espirito Santo in October 2011, as well as for German bank Commerzbank ("Schedule Chicken" - 25th of February 2012)." - Macronomics - Peripheral Banks, Kneecap Recap.

Spain has yet to apply the full extent of the Irish recipe which we discussed "The road to hell is paved with good intentions":"Given the recent outrage by individuals investors relating to the performance of Bankia's share price following its IPO in 2011, it will be interesting to watch the subordinated bond space when looking at the difference in ownership between Ireland and Spain. One has to wonder if Spanish retail investors will be inflicted additional pain..."
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Looking at the recent Sabadell "liability" exercise, it looks like Spanish retail investors are bound to be inflicted additional pain. As indicated by Bloomberg in a recent article - "Irish Tell Spain to Imagine the Worst and Burn Bank Bondholders":
"In all, subordinated bondholders suffered about 15 billion euros of losses in Ireland, helped by the direct or threatened use of the new laws, due to expire this year.
Spain may be reluctant to impose losses on holders of junior debt. Bankia Group is among Spanish lenders that sold 22.4 billion euros of preferred stock to individual investors through retail branches, according to data compiled by CNMV, the financial markets supervisor.
Because of capital structure rules, these investors should be wiped out before losses are imposed on junior debt holders, a move Spanish Prime Minister Mariano Rajoy’s government may shy away from unless he introduces laws to protect them."

Unless our European politicians rapidly introduce European laws guaranteeing depositors money ("insurance for depositors against the risk of euro exit" is qualitatively different from "deposit insurance"), capital flight might start in Spain as it has already in Greece.
"It should also be noted that for the ECB to guarantee the Euro deposit base against redenomination risk is not necessarily as radical a policy as it might seem; really, all it amounts to is a guarantee that the Euro will function as a currency union. This can be seen through a thought experiment." - Exane BNP Paribas

CreditSights in their article relating to Argentina clearly indicated the dangers of deposit outflows. While complacency is prevailing so far in relation to Spanish deposits, it cannot be taken for granted, as shown by the situation in Argentina which quickly spiraled out of control and led to its default in 2002:
"the most puzzling aspect of the crisis so far is the relative complacency of the public. This is starting to be tested." - CreditSights, 31st of July 2001 paper "Defining the Default Path".

Clearly while our European politicians are continuing to "Agree to Disagree" the clock is ticking on the Doomsday European device. As Exane BNP Paribas put it, our European politicians need to come fast with the defusal kit:
"How to defuse a nuclear bomb:
Managing such a crisis would require the ECB to carry out policies which differ by orders of magnitude from anything it has attempted so far. As we noted in an earlier section, a deposit insurance scheme cannot guarantee the entire deposit base against redenomination risk; this is another example of the general principle that a basically fiscal entity cannot do the work of a monetary authority. Furthermore, in a case of a run motivated by fears of euro exit, the guarantee required could not realistically be restricted to the insured deposit base. Even for Greece, the total deposits (domestic NFCs and households) total EUR160bn; for Spain the liability would be EUR714bn and for Italy EUR1trn. Clearly, the only body that could credibly backstop a guarantee to pay depositors the Euro value of their euro-denominated deposits would be the ECB."

On a final note, as indicated by Bloomberg Italy could rapidly come back in the spotlight, should European politicians fail to stabilise Spanish woes: "Italian corporate and household bad debt, totaling a combined 107.6 billion euros, is more than 65% higher yoy while remaining stable ytd. Spain's reported bad debts total 148 billion and have risen 6% in 2012, driven by construction and real estate. Italian corporate and consumer bad debt will likely rise should contagion fears spread."

"Even as Spain requested up to 100 billion euros to bail out its banks, yields on Italian and Spanish sovereigns rose 20 bps to 30 bps. Respective sovereign CDS have also tracked each other closely, although Italian banks outperformed Spanish peers since mid-2011, as Spain's real estate troubles worsened. This may reverse if contagion fears spread." - source Bloomberg

"Politics is not the art of solving problems, but to silence those who ask. "
Henri Queuille

"There is no problem urgent enough in politics that an absence of decision cannot resolve."
Henri Queuille

Stay tuned!