Credit - The Magnus Effect

"As long as the world is turning and spinning, we're gonna be dizzy and we're gonna make mistakes." - Mel Brooks

While looking at the disappointing US macro data (ISM and nonfarm payrolls), we reminded ourselves of the Magnus effect, which the commonly observed effect in which a spinning ball curves away from its principal flight path. Our analogy refers somewhat to golf given backspin generates lift by deforming the airflow around the ball, in a similar manner to an airplane wing. This is called the Magnus effect. A ball moving through air experiences two major aerodynamic forces, lift and drag. Modern golf balls called Dimpled balls fly farther than non-dimpled balls due to the combination of these two effects. In relation to our chosen title and the analogy with economy, looking at the performance of the US 10 year treasuries since the beginning of the year is directly countering the thesis that the American economy has truly achieved "escape velocity". When it comes to lift and drag, no doubt to us that the US economy recent economic data is more indicative of "stalling momentum" rather than "escape velocity momentum" when ones look at the recent ISM new orders index (-13.2 points to 51.2, the largest decline since December 1980) as well as pending home sales.

We argued in the past that the growth divergence between US and Europe were due to a difference in credit conditions. In this short post we will look at the reverse in the divergence between US growth and Europe in conjunction with the significant flows out of Emerging Markets Equities seen in recent weeks.

The divergence between US and European PMI indexes is all about credit conditions. This is why the US was ahead of the curve when it comes to economic growth compared to Europe since December 2011. We have discussed this before, the US PMI versus Europe - source Bloomberg:

The Fed’s January Senior Loan Officer Opinion Survey released this week indicated weaker demand in mortgages over the past quarter. A net 28.2% and 45.7% of banks reported weaker demand for prime and non-traditional residential mortgages, the worst data since April 2011 and January 2009 respectively.

Of course when it comes to "Magnus effect" and major aerodynamic forces, some Emerging Markets have suffered the full force of outflows as "tourist" investors have been leaving in drove. For instance EM retail outflows represented -18 billion $ year to date according to JP Morgan's recent EM Fixed Income Flows Weekly:

"EM equity retail outflows persisted with $6.5bn of outflows this week, comparable to last week's $6.4bn in redemptions as the MSCI EM extended YTD losses to -8.4%. Meanwhile, EM woes drive flight-to quality as US bond funds experienced a surge in demand as inflows reached $14.6bn, the largest single weekly inflow in EFPR's history." - source JP Morgan

What is of interest as well have been the outflows from the famous Japanese Double-Deckers which favorite "carry" currency has long been the Brazilian real as indicated as well in JP Morgan's note:

"Japanese funds experienced outflows of $254mn with dedicated local Brazil funds accounting for most of this (-$222mn)." - source JP Morgan

The reason behind the depreciation of the Brazilian Real in 2011 was because of the great unwind of the Japanese "Double-Decker" funds. These funds bundle high-return assets with high-yielding currencies. "Double Deckers" were insignificant at the end of 2008, but the Japanese being veterans of ultralow interest, have recently piled in again. It looks to us that, in similar fashion to what happened in 2011, a similar exit by these Japanese retail funds is adding pressure on the Brazilian currency:

In blue the Brazilian real versus the US dollar, in red the Australian dollar versus the US dollar, as one can see the correlation between the Australian currency and the Brazilian real broke down spectacularly in 2011.

But when it comes to Brazil, not only the Japanese outflows have been putting additional pressure on the currency but the slack in industrial production is as well putting some pressure as indicated by Bloomberg's recent Chart of the Day:

"The biggest monthly plunge in Brazil’s industrial output since December 2008 shows policy makers’ confidence that a weaker real will stimulate manufacturing is proving misguided.

The CHART OF THE DAY tracks Brazil’s industrial production index, the real on a percentage-change basis and exports on a rolling six-month average. Output fell in December by the most in five years even as the exchange rate weakened 34 percent since the manufacturing index reached a record-high in May 2011.

The currency is the biggest decliner against the U.S. dollar in the last three years among 16 major currencies tracked by Bloomberg after the South African rand.

President Dilma Rousseff said on Feb. 3 that a weaker real would help drive exports this year, an affirmation of Finance Minister Guido Mantega’s comments in September that a currency drop would make Brazilian products more competitive and boost manufacturing. Goldman Sachs Group Inc.’s Alberto Ramos said the government’s optimism isn’t warranted, as companies are hampered by rising labor costs and lack of incentives to modernize.

“The bottom line is that we expect the industrial sector to underperform,” said Ramos, Goldman’s New York-based chief Latin American economist. “It is a sector that is still facing significant foreign competition and cost-competitiveness issues, which will handicap performance.”

The country’s main manufactured exports and destination by value last year included passenger cars to Argentina and Mexico and automobile parts to Argentina and the U.S., according to Trade Ministry data. Brazil, which is the world’s largest emerging market behind China, saw its economy contract in the third quarter by the most since 2009 as investments dropped.

Fiat SpA is one manufacturer that has seen financial results hindered by Brazil operations. The carmaker’s 2013 trading profit in Latin America dropped 41 percent largely from price increases in Brazil, Chief Financial Officer Richard Palmer said in a Jan. 29 earnings call." - source Bloomberg.

When it comes to outflows as well, it is worth noticing the significant outflows from equities, putting somewhat a dent to the "Great Rotation" story from bonds to equities as indicated by Bank of America Merrill Lynch's note from the 6th of February entitled "Stampeding Bears":

"The bottom-line: big capitulation out of stocks into US Treasuries…marks end of Jan/Feb correction

The big numbers: largest weekly equity fund outflow since Aug’11 ($28bn); largest equity ETF outflow since Feb’09 ($26bn); largest bond fund inflow since Apr’10 ($15bn)

The caveat: our trading rules not yet flashing “strong buy”… Bull & Bear index now down to 4.2 (hit 1.8 late-June – Chart 1); Global Breadth index now up to 44% (hit 96% late-June – Chart 3) and…

…EM Flow Trading Rule: another $7-8bn outflow next week triggers contrarian buy-signal (last buy-signal on 6/27/13 followed by 14% rally in EEM next 3 months)" 

- source Bank of America Merrill Lynch

As far as equity flows are concerned, the "reverse osmosis" namely the tapering impact on some Emerging Markets have led to the following as detailed in Bank of America Merrill Lynch's note:

"Equity Flows

$6.5bn outflows from EM equity funds (15 straight weeks of outflows = longest outflow streak on record – Table 3)

4-week outflows from EM equities = 2.1% of AUM; another $7-8bn outflows next week would trigger contrarian “buy” signal from our EM Flow Trading Rule (3.0% is threshold)

Huge $24bn outflows from US equity funds (almost all via ETF’s SPY, IVV, IJH – but see above for caveat on Good Harbor)

Business as usual for Europe (32 straight weeks of inflows) and Japan (7 straight weeks of inflows)" - source Bank of America Merrill Lynch

Whereas Fixed Income Flows,such as the ones seen in US Treasuries, shows the asset class hasn't lost its appeal:

"Monster $13.2bn inflows to Govt/Tsy funds (caveat: $10bn inflows likely due to Good Harbor rebalancing from SPY to SHY, IEI & UST)" - source Bank of America Merrill Lynch

When it comes to Emerging Markets woes, not all countries in the Emerging Markets suffer from acute imbalances and as far as the long term trend is concern in true "Angus Maddison" fashion, the future is brighter for many Emerging countries than it look in the near term. Just wait for the "tourists" to exit and value will come back, no doubt to the fore-front.

"There's no limit to how complicated things can get, on account of one thing always leading to another." - E. B. White, American writer

Stay tuned!

Credit - The Regret Theory

"In history as in human life, regret does not bring back a lost moment and a thousand years will not recover something lost in a single hour."  - Stefan Zweig

This year, we have on numerous occasions touched on game theory in our posts (The European iterated prisoner's dilemma, Agree to Disagree) and we also used an analogy relating to project management linked closely to the famous game of chicken, namely the Nash equilibrium concept (Schedule Chicken). We even ventured towards computational analogies in our title selection process (Bankers' algorithm). Given the latest raft of European PMIs, pointing to a continued (albeit much smaller) divergence between the United-States Growth and Europe (Growth divergence between the USA and Europe), reason being the lack of credit provided to the real economy due to:
-inappropriate European Banking Association decision of imposing banks to reach a 9% Core Tier 1 ratio by June 2012 
-unrealistic budget deficit targets (A Deficit Target Too Far), 

We came to the conclusion that we ought to use in our title a reference to the Regret decision theory.

The divergence between US and European PMI indexes - source Bloomberg:

The Regret theory (also called opportunity loss) being defined as the difference between the actual payoff and the payoff that would have been obtained if a different course of action had been chosen by our European politicians. The Regret theory is also a model of choice under uncertainty defined as the difference between the outcome yielded by a given choice (credit crunch, economic recession) and the best outcome (muddle through) that could have been achieved in that state of nature (deflationary forces at play). 

As far as Europe is concerned, one can wonder what would have been the "economic outcome" if a different course of action would have been undertaken. On that matter we wonder why our "European elites" did not use the minimax regret approach being a decision rule used in decision theory, game theory, statistics and philosophy for minimizing the possible loss for a worst case (maximum loss) scenario. One approach is to treat this as a game against nature (deflation in our case) and using a similar mindset as "Murphy's law" ("Anything that can possibly go wrong, does"), taking an approach which minimizes the maximum expected loss, but we ramble again...

And what could possibly go wrong in relation to European growth in 2013? After all, one might posit it is only a game of confidence. Well, looking at consumer confidence in Europe, "Murphy junior" would certainly comment that his father is probably too optimistic when looking at European Consumer Confidence.

European consumer confidence indicators for some European countries - source Bloomberg:

We already looked at the link between consumer confidence and consumption back in our June conversation "Yogurts, European Consumer Confidence and Consumption" where we undertook at an interesting exercise following Yogurt giant Danone profitability warning announcement (affected by Spanish woes), namely plotting Danone share price against consumer confidence - source Bloomberg:

We wrote at the time:
"Yogurts matter as an indicator? One has to wonder...

As austerity bites consumer spending and with Italy and Spain in recession, companies have been forced to lower cost to protect earnings so far. End of May the ECB also indicated that loans to households and companies in the euro zone grew at the slowest pace in two years as the on-going crisis curbed demand for credit."

In relation to European Consumption, Consumer Confidence is key. The latest data relating to car sales in Europe, confirms the deflationary forces at play in Europe with car registrations falling plunging 19.2% in November in France on a monthly basis and 13.8% in the first 11 months of the year and Italian care sales by 20.1% in November (for a lengthy analysis on the subject of the car market in Europe please check - "The European Clunker - European car sales, a clear indicator of deflation").
As far as 2013 is concerned, European car sales are at risk on weaker consumer consumption as indicated by Bloomberg:

"Bears suggest discounting by automakers may not be enough to boost unit sales in Europe. Austerity in Europe is straining disposable incomes, with consumer household expenditure falling for three consecutive quarters. Car sales in Europe fell 4.2% yoy in the first three quarters of 2012 and any sustained recovery will be challenging as economic pressures mount." - source Bloomberg

One could also look at car sales and European Consumer confidence since 2007, the relationship seems pretty clear even though the cash for clunkers program have indeed been highly supportive of car sales whenever consumer confidence needed some government "artificial boost" - source Bloomberg:

Weak economy, low consumer confidence and high unemployment are indeed the deflationary forces at play plaguing European consumption and impacting car sales in the process. 2012 will be the fifth consecutive year of declines in the European car market below 12.8 million units, 20% below pre-crisis levels.

Strong macro drivers such as consumer confidence set the trends for the demand in the auto sector but for consumption levels as well.

France Consumer Confidence and Household Consumption YoY since 2001 - source Bloomberg:

For instance, another indicator of the divergence between Europe and the United States, comes from the auto sector where demand for US light vehicle sales were up 7% year over year in October and 14% year to date, whereas Europe was the only region to decline in 2012, down 4.6% in October and down 6.9% in 10 months. Even China, passenger car sales were up 6.4% in October and nearly 7% year to date. In Europe the European Automobile Manufacturers Association, or ACEA, indicated in November car sales decreased 6.9 percent to 10.7 million cars. The ACEA indicated Europe’s car sales would reach a 17-year low in 2012. It also estimates that as much as 30 percent of production capacity is not used.

We think our European politicians would be wise to look at the minimax regret approach given Intrade is now putting a 30.6% chance of breakup of the Euro by December 31st 2013 as reported by Stephen Rose from Bloomberg on the 3rd of December: 
"Following is a table listing the odds that one country currently using the Euro will change its official currency by the expiration date, based on bets made at Intrade.com."

Europe is still a story of deleveraging and as pointed out by a recent note from Credit Agricole Cheuvreux from the 29th of November entitled "EU, The Road through purgatory", should our European politicians decide to tackle the minimax regret approach, there are indeed four possible recipes: "There are four basic recipes for deleveraging: austerity, inflation, growth, and default. The optimal is growth but Europe as whole cannot export its way out of its challenges and nor does it need to. Europe overall runs a current account surplus; the challenge lies in the balance within the Union. Europe needs further debt restructuring, inflation and a rebound in consumption (domestic growth). Deflation is the key risk here, but Draghi appears to understand this danger and has proved a better lateral thinker than his predecessor." - source Credit Agricole Cheuvreux.

Yes, our "Generous Gambler" aka Mario Draghi has been clearly a better lateral thinker in preventing a financial meltdown following the acute liquidity crisis of the financial sector in 2011. But as far as our Regret Theory is concerned, we previously indicated that in the case of Europe, causation implied correlation:
"Admittedly, a correlation between two variables does not necessary imply that one causes the other, but when it comes to European woes, not only did the ECB's LTROs amounted to "Money for Nothing" given the lack of transmission to the real economy as we posited in February this year, but looking back at the overzealous deficit targets set up by the European Commission which we discussed in our conversation "A Deficit Target Too Far", we are not surprised to see that the economic causation does indeed implies correlation to current European economic woes unsurprisingly due to poor loan growth."


Looking at the prospect for the younger generation of Europeans and high level of youth unemployment, maybe Murphy junior is correct in assessing his father's law after all:

-source CA-Cheuvreux / Eurostat.
"These unemployment trends are very worrisome and if they are not reversed in the short term they may lead to increased social tensions and structurally higher long-term unemployment, which has negative effects on a country's growth prospects as part of the workforce becomes impaired. Also, youth unemployment leads to emigration, which will have a negative impact on demographics, as will be seen in most European countries in the medium term." - source Credit Agricole Cheuvreux.

Deleveraging leads to lower domestic consumption while tax rates are increasing with a shift from income taxes to consumption taxes:
"As taxes increase, and penalise an already fragile economy, consumption decreases exponentially and corporate investment is postponed, which leads to lower tax intakes. This means that more taxes are levied on the economy to try to cover the shortfall and a vicious circle is perpetuated." - source Credit Agricole Cheuvreux.

Maybe the minimax regret approach is the right approach after all. Oh well...

On a final note and in relation to struggling peripheral countries, Spain has indeed very apt in avoiding "tapping out" for help in this European fight of the Century, given it has so far managed to retain market access with timely sales as indicated by Bloomberg Chart of the Day:

"The CHART OF THE DAY shows Spain, which has auctioned about 82 billion euros ($106.7 billion) of bonds this year, sold the most debt when borrowing costs were at their lowest. That’s allowed it to retain market access and so far avoid a sovereign bailout even as 10-year rates surged to a euro-era record. “Spain has been smart in timing the issuance in the market,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “A loss of market access in July this year could have easily driven Spanish yields to the 8 to 9 percent area.” The nation’s 10-year bond yielded about 5.32 percent on Nov. 30, down from 7.75 percent on July 25. The yield touched 5.20 percent last week, the lowest since March 20. Spain sold the biggest proportion of its debt in January, when the 10-year yield averaged 5.30 percent, and auctioned the lowest amount of bonds in August, when yields ranged from 6.15 percent to 7.44 percent. The Treasury completed its program of medium- and long-term debt sales earlier this month, and has used subsequent auctions to raise funds for 2013." - source Bloomberg

"Uncertainty is the worst of all evils until the moment when reality makes us regret uncertainty."

- Alphonse Karr, French critic

Stay Tuned!

Credit - St Elmo's fire

“But now St. Elmo's fire appeared, which they had so longed for, it settled at the bows of a fore stay, the masts and yards all being gone, and gave them hope of calmer airs.” - Ludovico Ariosto's epic poem Orlando furioso (1516).

"St. Elmo's fire is named after St. Erasmus of Formiae (also called St. Elmo, the Italian name for St. Erasmus), the patron saint of sailors. The phenomenon sometimes appeared on ships at sea during thunderstorms and was regarded by sailors with religious awe for its glowing ball of light, accounting for the name. Because it is a sign of electricity in the air and interferes with compass readings, sailors also regarded it as an omen of bad luck and stormy weather." - source Wikipedia

We decided once more to follow on one of our favorite theme of maritime analogies looking at the recent evolution of events. After all, our recent post of the 8th of May "The Tempest" was a reference to Shakespeare's late masterpiece of 1623. Our title "The Tempest" was also a closely affiliated to our chosen post title Saint Elmo's fire, displaying a more negative association than our opening quote, as evidence of the tempest inflicted by Ariel according to the command of Prospero in Shakespeare's play:

PROSPERO
"Hast thou, spirit, Perform'd to point the tempest that I bade thee?"
ARIEL

"To every article. I boarded the king's ship; now on the beak, Now in the waist, the deck, in every cabin, I flamed amazement: sometime I'ld divide, And burn in many places; on the topmast, The yards and bowsprit, would I flame distinctly, Then meet and join."

As we ramble again in the opening of our post, in our usual habits, one of the earliest references to the St Elmo's fire phenomenon appeared apparently in Alcaeus's Fragment 34a (Ancient Greek lyric poet - 6 BC) about the Dioscuri, or Castor and Pollux. Why are we making a reference to the Dioscuri again you might wonder? Because in our conversation "Leda and the (Greek) Swan and why Europe matters more for Emerging Markets" in reference to the Dioscuri we argued back in early November 2011 the following:

"So now the ECB has a stark choice, similar to the one Pollux was given by Zeus, to save his dying brother Castor by sharing his immortality with his mortal brother (namely European peripheral countries) or spend his time in Olympus (letting Europe fail, one country after another). The ECB is the only institution that can step in and become the lender of last resort, effectively becoming in essence a FED like entity which should be backed by a central treasury (and we discussed this point in our last conversation), or doing nothing and our Greek swan might take us to another path...

We know that Pollux made the right choice and enabling in the process, the two siblings to become the two brightest stars in the constellation (Gemini).

And the Dioscuri "characteristically intervened at the moment of crisis, aiding those who honored or trusted them." - Source Wikipedia."

St. Elmo's Fire is also a 1985 American coming-of-age film directed by Joel Schumacher, a prominent movie of the Brat Pack genre, revolving around a group of friends that have just graduated from Georgetown University and their adjustment to their post-university lives and the responsibilities of encroaching adulthood. Looking at the attitude of our "European Brat Pack", one has to wonder if our European Politicians will ever adjust to their respective responsibilities and embrace somewhat adulthood which would in effect determine whether our Saint Elmo's fire evolves towards a positive outcome in Ludovico Ariosto's fashion, (leading to the rise of the Dioscuri), or to the negative association of Saint Elmo's fire, namely disaster and tragedy. So for Europe, we think it's graduation time but we clearly divagate..."Misery Loves Company" we wrote in October 2011, and in similar fashion many asset classes have recently experienced similar pain due to the ongoing crisis particularly once again in Emerging Markets. In our long conversation, we will look at the broader impact and consequences following our usual credit overview.

The Itraxx CDS indices picture on Friday - source Bloomberg:

Yet another tale of ongoing volatility and a day of two halves. It started on a positive tone with Itraxx Crossover 5 year CDS index (50 European High Yield entities - High Yield credit risk gauge) tightening significantly in the morning before widening in the afternoon on the back of the negative news flow in the afternoon leading the indices to widened slightly further more than Thursday. The SOVx index representing the CDS gauge risk for 15 Western European countries (Cyprus replaced Greece recently 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.

As indicated by Senior Strategist Divyang Shah's recent article in IFR, severing the financial/sovereign link is easier said than done:

"In the US this has been made easy by the post-Lehman concerns over money market funds and temporary government insurance on non-interest bearing checking accounts that has helped to see total insured bank deposits rise to US$7.3tn at the end of June last year compared with US$5.9tn in the second quarter of 2008 (Fitch).

In the eurozone the insurance of deposits took the form of state guarantees which is why what had started out as a banking crisis also turned into a sovereign crisis for some eurozone states starting with Ireland.

The ECB’s Peter Praet today points towards the need to disconnect the banks from sovereign debt, but this is proving a little difficult. The focus on Spain currently and Bankia especially is about a more general concern that the sovereign does not have the resources in order to overhaul the Spanish banks/financials and thus external assistance in the form of ESM/EFSF funds will be required."

The risk of course of deposit flights is indeed a very serious cause for concerns as indicated in the same note by Divyang Shah:

"A Greek exit has simply accelerated concerns over the outlook for financials as investors question the viability of the euro. The FT this morning highlights how funds are dumping euro assets (“Big European funds dump euro assets”) but what matters is the trickle of deposits leaving the periphery.

Data shows that on a y/y basis (March 11–March12) corporates reduced their deposits in Spanish banks by €31bn while retail investors have reduced theirs by €11bn. The point at which this trickle turns into a flood is uncertain but it’s a risk that the eurozone does not want to flirt with especially as sovereign and financial risk is still intertwined."

Deposits flows are indeed key factors in determining the stability of any financial system in peripheral countries as indicated by Bloomberg:

"With an 18 billion euro recapitalization of Greece's banks agreed and access to standard ECB facilities set to reopen, May's 700 million euros of announced deposit withdrawals may reverse. In 2006, household deposits were 45% of total liabilities vs. 32% in March, while deposits from banks were 6% vs. 25%. Retail funding remains key for future stability." - source Bloomberg.

In relation to Banks' "viability" and connection to sovereign risk, we have been sounding the alarm for a while in relation to subordinated bondholders about the very real risk of debt-to-equity swaps occurring in the financial bond space, meaning more pain and losses for both bondholders and shareholders alike. Time has come to warn senior unsecured creditors as well, as reported by Jim Brunsden and Ben Moshinsky in Bloomberg on Friday:

"The European Union will seek to give regulators the power to impose writedowns on senior unsecured creditors at failing banks as part of measures to prevent taxpayers from footing the bill for saving crisis-hit lenders.

The writedown powers would apply to senior unsecured debt and derivatives, while some other claims, including secured debt and deposits that are protected by government guarantee programs, would be shielded from the losses, according to draft plans obtained by Bloomberg News."

The plans are scheduled to be published on the 6th of June. The plans will have to be agreed on by finance ministers from the EU’s 27 member states and members of the European Parliament before they become law and the bail-in powers must be in place across the EU by the start of 2018.

So yes, our long standing assumptions are indeed correct, namely that debt-to-equity swaps are coming, it is part of the "liability" exercise needed to recapitalize ailing banks in Europe:

"As well as writing down claims, national regulators would also have the power to convert them into equity, according to the draft rules." - source Bloomberg.

When it comes to financial institutions in distress, it seems that more and more financial institutions are relying on ELA (Emergency Liquidity Assistance), which according to Bloomberg is increasingly being tapped - Frozen Europe Means ECB Must Resort to ELA for Banks:

"The first rule of ELA is you don’t talk about ELA.

Each ELA loan requires the assent of the ECB’s 23-member Governing Council and carries a penalty interest rate, though the terms are never made public. David Owen, chief European economist at Jefferies estimates that euro-area central banks are currently on the hook for about 150 billion euros ($189 billion) of ELA loans.

The program has been deployed in countries including Germany, Belgium, Ireland and now Greece. An ECB spokesman declined to comment on matters relating to ELA for this article.

The ECB buries information about ELA in its weekly financial statement. While it announced on April 24 that it was harmonizing the disclosure of ELA on the euro system’s balance sheet under “other claims on euro-area credit institutions,” this item contains more than just ELA. It stood at 212.5 billion euros this week, up from 184.7 billion euros three weeks ago.

The ECB has declined to divulge how much of the amount is accounted for by ELA."

When it comes to European Banking woes, which have been as well a regular feature in our conversations, Bankia share were suspended on Friday - source Bloomberg:

Bankia restated its 2011 results - saying it made a 2.98 billion euro loss for 2011 rather than the 309 million euros in profit it announced in February - and asked for the aid from Spain's bank bailout fund, FROB requesting 19 billion euro of financial support. Late Friday, rating agency Standard and Poor's downgraded Bankia, along with four other banks, to "junk" status: Bankinter, Banco Popular Espanol, Banca Civica, Banco Financiero y de Ahorros S.A.

Formed in December 2010 from merger of seven troubled banks, Bankia's most toxic assets were moved into holding company BFA.

Listed on the Madrid stock exchange in July 2011. Chairman Rodrigo Rato resigned earlier in the month before Bankia was "part-nationalized". Two weeks ago, the government intervened and awarded Bankia a 4.47 billion euro loan.

In our conversation "The Raft of the European Medusa", we discussed the ill-fate Bankia IPO which occurred in July 2011. Rodrigo Rato was the former Managing Director of the International Monetary Fund (IMF) from 2004 to 2007 and declared in relation to the July 2011 IPO for Bankia that it “has been considered a reference point for the Spanish banking industry” and was completed “in the middle of a true storm in the markets that imposed the toughest financial conditions of the last decade,” in a speech on July 20 2011.
Individual investors bought about 60 percent of the shares on sale in the IPO we indicated previously.

How can one expect Spain's to restore investor confidence when:

-as we indicated in our conversation "The road to hell is paved with good intentions‏", Spanish Economy Minister expected Bankia to only need 7 billion to 7.5 billion euro to meet provisional rule and declared he did not expect Spain Mortgage defaults to rise much. Total bill amounts now to 23.47 billion euro and counting for Bankia so far...

-the former 9th IMF Managing Director Rodrigo Rato led a very questionable July 2011 Bankia IPO based on "irregular" and "insincere" financial accounts leading to significant losses for already rattled Spanish individual investors.

One has to wonder. We do.

Meanwhile the price action in the European Bond Space has been volatile to say the least.

The current European bond picture, a story of ongoing volatility for Italy and Spain, but with France, joining the fray with a significant drop in yield over two days, dropping more than 20 bps - source Bloomberg:

French OAT 10 year Government Bond Yield receding significantly on the 24th of May - source Bloomberg:

French bonds falling towards their lowest level of 2.50%, experiencing a significant "flight to quality" move which so far Germany had benefited mostly.

The "Flight to quality" picture as indicated by Germany's 10 year Government bond yields (well below 2% yield), with 5 years Germany Sovereign CDS above 100 bps - source Bloomberg:

"Demand at almost record highs for German bunds and the insurance to hedge against default on the securities indicates that investors are increasingly betting on the breakup of Europe’s monetary union.

The CHART OF THE DAY shows 10-year German bund yields at all-time lows and the cost to insure the benchmark European debt close to record highs. Yields on the securities fell as low as 1.35 percent today as investors seek a refuge while European leaders seek to keep Greece within the euro and the currency bloc’s debt crisis from worsening.

“The signals are counterintuitive, but the market is pricing in an increasing probability of a euro zone breakup,” said Jürgen Odenius, chief economist at Prudential Financial Inc.’s Prudential Fixed Income unit in Newark, New Jersey. “And betting that even though the German balance sheet will take a big hit, that their new currency, which doesn’t yet exist, would

appreciate tremendously.” Credit-default swaps on 10-year German debt rose to 126.09 on Friday, according to data compiled by Bloomberg." - source Bloomberg

This graph has indeed been a regular feature in our conversations for obvious reasons...

Another interesting graph we have been tracking with much interest displays the ongoing relationship between Oil Prices, the Standard and Poor's index and the US 10 year Treasury yield since QE2 has been announced - source Bloomberg:

We do expect the SPX index to fall further in conjunction with Oil prices. We saw that "Misery loves company" back in 2011. In similar fashion, many various asset classes are experiencing significant correlation on the downside, following a similar pattern.

Oil prices are poised to fall further because drilling-rig use and stockpiles are at their highest levels in decades, according to Michael Shaoul, Oscar Gruss & Son Inc.’s chief executive officer as reported by Bloomberg:

"The CHART OF THE DAY compares weekly data on the number of oil rigs, as compiled by Baker Hughes Inc., with the Department of Energy’s weekly figures on crude inventories. Last week’s rig count of 1,382 was the highest in 30 years, Shaoul wrote yesterday in an e-mailed note. The number increased 45 percent from a year ago. Oil stockpiles totaled 382.5 million barrels, the most since mid-1990.
“Even though demand has remained steady, it has been overwhelmed by supply,” the New York-based analyst wrote. “The clear risk is that this will be resolved by sharply lower prices in the coming months.” Oil has tumbled 14 percent on the New York Mercantile Exchange this month. The loss exceeds an 11 percent decline in Brent crude, another benchmark, and would amount to the biggest monthly loss in two years." - source Bloomberg.

Commodities, like in 2011, experienced as well some significant retracement with Cash silver losing as much as 1.3 percent to $27.9275 an ounce and to around $28.30. The metal is 1.5 percent lower this week for a fifth weekly drop, the longest losing streak since July 2011. Raw materials slid to a five-month low this week and more than $4.3 trillion was erased from the value of global equities this month on concern that Greece will exit the euro as the region’s debt crisis deepens according to Bloomberg.

Emerging-markets stocks as well, have seen the longest string of weekly losses since 1994 according to Bloomberg:

"The MSCI Emerging Markets Index sank 0.4 percent to 898.57 at 12:42 p.m. in Hong Kong. The gauge has fallen 0.9 percent this week, poised for a 10th weekly decline, on concern that Europe’s debt crisis and China’s economic slowdown will curb demand for riskier assets."

So yes, "Misery" does indeed, love company, and in 2012 like it did in 2011:
"Emerging-market equity funds posted outflows of $1.5 billion in the week ended May 23, Markus Rosgen, Hong Kong-based analyst at Citigroup Inc. said in a report today. Overseas investors sold $5 billion of emerging-market stocks in Asia, the biggest weekly outflow this year, according to the report." source Bloomberg.

"Emerging-market dollar bonds may start to match declines for developing-nation stocks as the
Greek debt crisis further weakens the risk appetite of investors, according to Mizuho Securities Co.
The CHART OF THE DAY shows JPMorgan Chase & Co.’s Emerging Market Bond Index has dropped 2.4 percent this month, while the MSCI Emerging Markets Index of stocks plunged 12 percent. During a sell-off that started Sept. 8, the indexes fell in tandem, with dollar debt declining 5.5 percent in two weeks. The lower panel shows emerging-market credit-default swaps have being gaining since March, mirroring a rise in the cost to insure against losses leading up to early September."  - source Bloomberg.
Dollar-denominated fixed-income securities from emerging-market nations have returned 4.2 percent so far in 2012.

"Emerging-market bond funds attracted $633 million in the week to May 16, taking inflows this year above $20 billion, according to U.S. research company EPFR Global. Some $15 billion of that was invested in dollar notes. About $2.3 billion was pulled from equity funds, the second week of withdrawals, paring inflows this year to $20.5 billion, EPFR said." - source Bloomberg
We've seen this movie before...

In relation to European economic data, it is hard to find any comforting news with euro-area unemployment rate climbing to 11 percent in April, the highest in data compiled by Bloomberg back to 1990, and worrisome PMI numbers coming clearly on the weak side.

The divergence between US and European PMI indexes - source Bloomberg:

Widest level reached since 2008, 9.80 between both PMI indexes.

On a final note, our good cross asset friend indicated to us an interesting correlation between the Japan Nikkei index and Japan's sovereign 5 year CDS since the beginning of March. The index has been falling whereas at the same time, Japan's sovereign CDS is rising. The bottom graph indicates so far a fairly muted volatility for the Nikkei index:

If Europe is moving towards a Japanese decade, there might be at least some solace for Spanish Golf players given that according to Bloomberg there has been a high correlation between Golf Membership fees and Tokyo land prices - source Bloomberg:

"The CHART OF THE DAY compares an index of commercial land prices in the Tokyo metropolitan area, compiled by the Japan Real Estate Institute, with the average membership price among Japan’s three most-expensive golf clubs. The average joining fees at Koganei Country Club, Tokyo Yomiuri Country Club and Yomiuri Golf Club this year have fallen about 40 percent compared to the full-year average in 2011, according to prices compiled by Nikkei Golf Corp., a Tokyo-based broker for membership trades.
Tokyo’s office vacancy rates increased to a record high of 9.23 percent in April from 9 percent a month earlier, pushing rents to a record low, according to Miki Shoji Co., a closely held office brokerage company. The vacancy rate was also 9.23 percent in January. The commercial property index peaked in early 1991, about a year after average prices for the country clubs reached a record high of 288 million yen ($3.62 million), the data show. Golf-membership prices soared in Japan during the 1980s bubble economy, then slumped as the country suffered through series of recessions the past two decades. At least 800 golf clubs went bankrupt since 1991, according to Meiji Golf, a Tokyo-based broker. Some of the most expensive clubs in Japan don’t allow memberships for women or foreigners."

"Markets can be as treacherous as the sea". - Macronomics

Stay tuned!

Growth divergence between US and Europe? It's the credit conditions stupid...

“The European Central Bank has a different task from that of the US Fed or the Bank of England”
Chancellor Angela Merkel.

Given many pundits have been noticing the growing growth divergence between the US economy and  the European economy as indicated by their respective PMI indexes, we thought it was time to provide further explanations. On the 4th of December 2011, in our conversation "A Tale of Two Central Banks", we explained why the difference approaches followed by the two Central Banks, the FED and the ECB would lead to different growth outcome: "This week analogy with Charles Dickens' masterpiece, relates to the different stance currently being taken in Europe in relation to what the ECB's role should be in the ongoing Europe sovereign debt crisis. Given recent macroeconomic set of data, for both the US and Europe, indeed we can say we have a Tale of Two Central banks."

In recent conversations as well we have been highlighting the growth differential between the US and Europe ("Shipping is a leading deflationary indicator"):

"We have long argued that the difference between the FED and the ECB would indeed lead to different growth outcomes between the US and Europe (US economy will grow 2.2% this year versus a 0.4% contraction in the euro area, according to the median economist estimates compiled by Bloomberg):

"Whereas the FED dealt with the stock (mortgages), the ECB via the alkaloid LTRO is dealing with the flows, facilitating bank funding and somewhat slowing the deleveraging process but in no way altering the credit profile of the financial institutions benefiting from it! While it is clearly reducing the risk of banks insolvency in the near term, it is not alleviating the risk of a credit crunch, as indicated in the latest ECB's latest lending survey which we discussed in our last conversation -The LTRO Alkaloid - 12th of February 2012."

In our March "Shipping" conversation we indicated as well:
"LTRO 1 and LTRO 2 will not enable Europe to escape a slower growth, credit crunch and a recession. Maersk is in fact shifting its business away from Europe as indicated by Christian Wienberg in Bloomberg in his article - Maersk Bets Against European Recovery as Recession Kills Trade:

“We think there will be negative growth in Europe this year and that is affecting our view of Asia-Europe trade,” Trond O. Westlie, chief financial officer of A.P. Moeller-Maersk A/S, the owner of Maersk Line, said yesterday in an interview in Copenhagen. “The solution that Europe is trying to take is different from the solution that the U.S. is taking. We believe that general growth will be higher in the U.S.”

We argued last year (It's the liquidity stupid...and why it matters again...August 2011) that:
"Lack of funding means that bank will have no choice but to shrink their loan books. If it happens, you will have another credit crunch in weaker European economies, meaning a huge drag on their economic recovery and therefore major challenges for our already struggling politicians."

The divergence between US and European PMI indexes - source Bloomberg:

Widest level reached since 2008, 8.90 between both PMI indexes.

The divergence between VIX and its European equivalent V2X - Source Bloomberg:

The highest point reached by VIX in 2011 was 48 whereas V2X was 51. VIX is around 17.20,  and V2X at 28, highlighting as well the rising disconnect between US and Europe in relation to risk perception.

It is all about Stocks versus Flows:
"We mentioned the problem of stocks and flows and the difference between the ECB and the Fed in our conversation "The European issue of circularity", given that while the Fed has been financing "stocks" (mortgages), while the ECB is financing "flows" (deficits). We do not know when European deficits will end, until a clear reduction of the deficits is seen, therefore the ECB liabilities will have to depreciate."

As our friends at Rcube Global Macro Research indicated, for tracking credit availability, you need to use the central banks’ credit surveys. As a reminder, for the Eurozone, the % of banks tightening their lending standards spiked to 35% in Q4:
"Since early February, one of the catalysts behind our bearish view has been based on the tightening of lending standards across the world, and more particularly in Europe.
Over the last month, apart from the BoE credit survey, data has indicated that the risk of a credit crunch has somehow receded."

- Source Rcube Global Macro Research.

"It is interesting to highlight not only that the actual net lending standards eased substantially, but that banks are also expecting net tightening to be close to zero next quarter." - source Rcube Global Macro Research:

"The main factor behind the improvement is the very substantial improvement in funding conditions." - source Rcube Global Macro Research:

But as our good friends Rcube put it in relation to Europe:

"However, we have to keep in mind that the survey was conducted near market tops (between the 23rd of March and the 5th of April). Since then, Spanish spreads have continued to widen, putting the size of the current ESM/EFSF firewall under question."

Hence the importance of tracking the ECB lending surveys. As Bloomberg indicates on the 2nd of May, the ECB Loan survey recovery is key positive for EU Growth Prospects:

"The correlation between euro zone expected corporate loan demand and GDP evolution has been strong since 2003. Should the survey continue to prove a useful leading indicator, its rebound in 1Q could prove to be a turning point for GDP. Euro zone GDP is currently forecast to shrink 0.4% in 2012 and grow 1% in 2013, according to Bloomberg consensus." - source Bloomberg.

Eurozone Corporate Loans and Mortgages Outstanding (Eur bn) versus Change in Expected Demand for Corporate Loans and Mortgages - source Bloomberg:

"ECB lending surveys on expected demand for corporate and mortgage loans in the coming three months have rebounded in 1Q, as the ECB's measures deferred liquidity concerns and markets recovered. Euro zone corporate loans have fallen 175 billion euros since January 2009 highs, and a reversal of current trends is vital for GDP growth to take root." - source Bloomberg

But unfortunately as Spain is concerned, Corporate lending has been cut by 19 billion euro:

"Since the first ECB three-year facility, Spanish monetary financial institutions increased gross central bank borrowings by 210 billion euros while cutting corporate loan supply by 19 billion. With renewed focus on growth strategies as well as austerity, Spain will need its banks to lend while it delivers on 37 billion of austerity measures." - source Bloomberg.

The European Banking Association requirement of reaching a Core Tier 1 Capital of 9% by June 2012, has been for some countries akin to shooting oneself in the foot, as it has been for Portugal - source Bloomberg:

"Portuguese banks may have to squeeze lending further to meet commitments the country made to creditors in its 78 billion-euro ($103 billion) aid program, undermining efforts to fuel growth through loans to businesses.

The CHART OF THE DAY shows that a slowdown in savings growth may make it harder for banks to reduce the ratio of loans to deposits to 120 percent as pledged in the bailout. Deposits rose 0.4 percent in January, the same as the previous month and a fraction of the 1.4 percent pace in November. That’s putting pressure on banks to trim the ratio by curbing new lending." - source Bloomberg.

Moving on to the US, the recently released Quarterly Senior Loan Officer Survey shows that the US credit channel has eased further - source Rcube Global Macro Research:

"While non-price terms (lending standards) eased somehow, price terms eased more substantially. The % of banks that are increasing their spreads of loan rates over their cost of funds has reached the second lowest level since the 1990s. Demand has also peaked up and is now as high as in 2004/2005." - source Rcube Global Macro Research.

On another note CreditSights in their review of the April Loan Officers Survey indicated the following:
"As was the case in January and October 2011, the April survey included questions about lending to European banks and "euro-exposed" firms. Banks reported tightening standards (but to a lesser degree than in January) and domestic respondents reported increased demand owing to reduced competition from European banks."

So when it comes to the divergence between US and Europe, well as the title goes, it's the credit conditions....

"Demand has also peaked up and is now as high as in 2004/2005." - source Rcube Global Macro Research.

US Private Sector Credit Growth and Fed Funds - Rcube Global Macro Research:

And my Rcube friends to conclude their recent note on US Private Sector Growth:

"Looking now at how the information impacts our credit and volatility models, we believe the survey is another indication that both equities and credit spreads should re-test their March levels. Our US high yield model shows a large deviation from fair value, with our fair value currently at 425bp vs. 600bp on the ML US Master II index."

So from a credit point of view, we agree with our Rcube friends, US HY is behind the Fitted Value:

"Our credit availability indicator, which is an average of price and non price factors, is behind the FV drop." - Rcube Global Macro Research

"We avoided a major credit crunch" - Mario Draghi - 9th of February 2012. Press conference after the bank's monetary policy.

He added at the time:
"We are indeed concerned by the slowing down of credit."
He also said that the central bank's "primary interest is in lending to the real economy. "That's where we see most of the credit tightening."
He noted 3 categories where lending had tightened:
Corporate, housing and consumption. "In some countries you've got credit tightening in all these three categories"
About LTRO 1 impact:
"The impact of the first LTRO is still unfolding".
 
Stay tuned!

Markets - Credit - The Charge of the Light Euro Brigade

Lord Cardigan: [returning from the charge] "Has anybody seen my regiment?"
The Charge of the Light Brigade - 1968 movie inspired from the real historical events.

Staying on the theme of military blunders, we thought this time around we would venture towards the infamous Charge of the Light Brigade, a charge of the British cavalry led by Lord Cardigan against Russian forces during the Battle of Balaclava on 25 October 1854 in the Crimean War. The charge was the result of a miscommunication in such a way that the brigade attempted a much more difficult objective than intended by the overall commander Lord Raglan.  The charge was aimed at the wrong target leading to the near annihilation of the Light Brigade. Previously we discussed in our conversation "A Deficit Target Too Far" how overly ambitious were the budget deficits targets set up by European leaders.

Looking at the lackluster European PMI figures recently released, we thought this title would therefore be more than an appropriate analogy. While the historical charge produced no decisive gains and resulted in very high casualties, the austerity measures imposed to the peripheral countries are pushing them towards a deflationary spiral, with high economic casualties in the process and rising unemployment.

The divergence between US and European PMI indexes has been increasing to the widest difference since 2008 - source Bloomberg:

This divergence can as well be seen in the perception of credit risk for Investment Grade. There is a growing divergence between the CDX IG 5 year CDS index and the European Itraxx Main Europe CDS 5 year index (125 Investment Grade entities), reaching a spread difference of 48 bps and steadily rising towards the highest point reached of 64 bps in September 2011:

This difference in investment grade credit is as well significant between core European countries and Peripheral countries, reflecting the correlation with Sovereign risk.

As indicated by Jonathan Tyce from Bloomberg:

"Pressure to deliver on austerity measures increased as the Eurogroup and IMF boosted war chests. While the euro zone budget deficit fell to 4.1% (from 6.2%) in 2011 as austerity measures took hold, gearing is rising, with debt-to-GDP two points higher at 87.2%. Should sovereign fears overwhelm, gearing concerns may outweigh the benefits of austerity."

Austerity measures announced - "The Charge of the Light Euro Brigade"- source Bloomberg:

When it comes to Spanish bad debts at 18 years high, it is still tracking unemployment - Source Bloomberg:

"Spanish banking system bad debt reached an eighteen-year high in February with doubtful loans now exceeding 140 billion euros. ECB data show total capital and reserves of Spanish monetary financial institutions at 380 billion euros in February, 100 billion higher yoy. As bad debt rises, concerns will increase that a larger capital cushion will be required." - source Bloomberg.

CreditSights in their recent Euro Financial Movers report from the 22nd of April indicated the following in relation to Spanish Banks:

"Spanish banks are increasingly coming under the microscope. NPLs are rising, sovereign risk indicators are deteriorating again, and CaixaBank's 1Q12 results were hit hard by real estate provisions.
One way or another, Spain was the driver of news in the European banking sector last week as concerns over the country's finances intensified. New data from the Bank of Spain on doubtful loans statistics showed that non performing loans for the banking system rose to 9.2% in February, more than doubling on a yearly basis, another indicator of how fragile the system is. Meanwhile, latest statistics showed that Spanish banks increased their holdings of Spanish government bonds by €41 bln between the end of November 2011 and the end of January 2012, on the back of the 3-year LTRO. This increase in government bonds holdings by domestic banks in both Spain and Italy coincided with a dramatic decline in the foreign holdings of those two countries' government bonds. BBVA (-2%) had gross sovereign exposure to Spain of €56.5 bln at end-2011, of which around half was direct exposure to local authorities and half was in sovereign bonds. However, despite the latest ECB data, the bank tells us there is unlikely to be a huge change in this figure when it reports its 1Q12 results on 25 April (see below). In its FY11 conference call, Santander (-2%) disclosed that it had a net sovereign exposure to Spain of around €25-€30 bln, later confirmed to be towards the lower end of this range."

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

The pain in Spain - Spain 5 year Sovereign CDS versus Italy's 5 year sovereign CDS falling to 35 bps above Italy, with both countries widening in synch for now - source Bloomberg:

In another recent note, CreditSights made the following key points relating to the ongoing recycling process of ECB reserves in Italy and Spain:

"-The ECB’s provisions of liquidity to Italian and Spanish banks has partly been used by those banks to increase their holdings of domestic government bonds

-Spanish and Italian banks have increased their holdings by 41 billion euro and 19 billion euro between the end of November and the end of January following the first three year LTRO. That increase in holdings by domestic banks has coincided with a dramatic decline in foreign holdings of those two countries’ government bonds. The result is an increase in concentration of government bond holdings within those two countries banks.

-The repayment of a government bond sees the holders receiving deposits with their domestic central bank as a payment; i.e central bank reserve. Given that Italian and Spanish banks have so far proved willing to buy government bonds with any excess reserves, then if they are increasingly the holder of those bonds then they may continue to be willing to recycle any reserves they receive back into government bonds.

-That means that funding the interest-expense component of the budget deficit and refinancing any maturities may have been made easier as a result of an increasing proportion of government bonds now being held by domestic banks.

-And given that Italy’s budget deficit is entirely the product of needing to fund the government interest expense, that concentration of risk may favour Italy versus Spain which has a substantial primary budget deficit to fund."
We agree with CreditSights, namely that from a pure budget deficit point of view, Italy appears to us in a more favorable situation than Spain, validating therefore our more negative stance on the latter.

The "Flight to quality" picture as indicated by Germany's 10 year Government bond yields (well below 2% yield) is still pointing towards the lowest level reached in 2011- source Bloomberg:

We previously saw a spike in Germany's sovereign CDS back on the 29th of November 2011 ("The Eye of The storm"), prior to the German "failed" auction which lead to a significant widening of the German Bund yield above 2.30%, when Germany's sovereign 5 year CDS went above the 100 bps level.

Moving back to the "Charge of the Light Euro Brigade" towards austerity, as recession and the debt crisis worsen, according to Citigroup and as reported by Bloomberg article from Lorenzo Totaro from the 19th of April, peripheral countries face additional downgrades, in this deflationary spiral:
"Spain and Italy will be downgraded by Moody’s Investors Service and Standard and Poor’s this year as the recession and debt crisis worsen, economists and strategists at Citigroup Inc. said.
Their credit ratings, along with those of Ireland and Portugal, will be lowered at least one level over the next two to three quarters, Citigroup said in a report published late yesterday. “Deficits will overshoot official forecasts in all the peripheral Economic Monetary Union countries this year and in 2013,” according to the report.
“Spain will need to enter some form of a Troika program” this year, Citigroup economists including London-based Juergen Michels wrote, referring to the aid package for Greece monitored by the European Union, the European Central Bank and the International Monetary Fund. Prime Minister Mariano Rajoy has repeatedly said that Spain won’t need a bailout."
Indeed, as we argued recently in our conversation "A Deficit Target Too Far", similar to Operation Market Garden of September 1944 as per our rambling, the targets are undoubtedly overly ambitious.

In relation to potential rating dowgrades, both Italy and Spain were put on negative watch on February 13, when Moody's downgraded six European countries (Italy from A3 to A2 and Spain to A3 from A1). Moody's move closely followed Standard and Poor's ratings cut for 9 European countries.

From the same article, Citigroup is expecting the following in relation to ratings action:
"By year-end, Italy may be downgraded one level to BBB by S and P and to Baa1 by Moody’s, as the economy probably shrinks more than the government’s forecasted contraction of 1.2 percent for 2012, the Citigroup analysts said. “The falling public support for Monti in opinion polls suggests that the government will have increasing difficulties in going ahead with the implementation of structural reforms,” according to the report. Over the next two to three years, “we expect Italy’s rating by S and P to go down by two notches in total and to settle at BBB- and its Moody’s rating to go down by three notches to settle at Baa3.”

While Lord Cardigan's nearly annihilated Light Brigade (following their fateful charge of Russian artillery guns) were rescued by the French light cavalry, the Chasseurs d'Afrique (they cleared the Fedyukhin Heights to ensure the Light Brigade would not be hit by fire from that flank and later provided cover for the remaining elements), despite the headlines of a USD 430 billion additional funding for the IMF, as Nomura put it in their  recent report (EM to the rescue? Not quite yet), the additional resources available upfront will likely be smaller meaning no meaningful cavalry to rescue our Light Euro Brigade:

"However, of the USD434.3bn committed we think only some USD95.3bn is what one might call ‘real’ and new contributions from non-eurozone countries that are available up front. They include Japan (which is recommitting USD50bn that was already available to the IMF, but was due to be returned, and an additional, new USD10bn). USD200bn is then ‘recycled’ eurozone commitments that cannot be made available to the EFSF or ESM, but which member states are happy to commit to the IMF. This brings the total new funds available to USD295.3bn.

Some Asian countries have promised money (such as Indonesia, Malaysia and Thailand), but they are consulting locally and the amount may only total around USD20bn between them. The Czech Republic has also committed USD2.0bn, but is awaiting a guarantee agreement between its central bank and the government for any potential losses.

On top of this is an additional USD72.0bn from the BRICS. However, this money is dependent on progress on quota reform at the June G20 meeting. There has been no indication of the different contributions between the countries for this amount. As such, as with previous meetings of the BRICS or G20, up-front commitment is still unclear. Similarly, USD15.0bn from the UK that will be subject to IMF quota reforms is being ratified."

And Nomura to conclude their note:
"So, overall the view six months ago that EMs could save the day has hardly come to fruition yet, with difficult progression on quotas required and very few committing money up front. Other developed countries remain dominant in size and number.
In our view, EMs will want to ensure that the IMF retains its original mandate of helping sovereign countries with balance of payments problems by pushing for meaningful reforms through conditionality. There is already much concern in the IMF about the distraction of the eurozone from the plight of many EMs globally. The recent World Economic Outlook and its fiscal and financial cousins highlighted the issues for many of the EMs (in particular deleveraging) so the risks are well known. EMs also remain divided overall on global monetary system reforms and on pushing a joint front on IFIs as demonstrated by the leadership ‘contest’ for the new World Bank President. Unlike with the IMF leadership succession, there was a very credible candidate available for the World Bank in Ngozi Okonjo-Iweala, yet the BRICS failed to join together to support her. Perhaps on IMF funding issues it is easier for the current stance by EMs as the US has not already contributed. That may mean that any progress in EMs providing backstop facilities to the eurozone will remain slow at best, and fail to materialise at worst."
Oh dear...

On a final note, in relation to the results from the first round of the presidential election in France, we were not surprise by the score of Marine Le Pen's National Front. It was not a Black Swan. It was indeed well expected. Economic crisis lead to rise in populism throughout history.
France’s Lead in Asylum Seekers Boosts Le Pen: Chart of the Day - source Bloomberg:

"The CHART OF THE DAY shows that under President Nicolas Sarkozy, France received 6.1 applicants for every $1 of gross domestic product per capita. The U.S. placed second with 5.9, followed by Germany at 4.4, Turkey at 4.1 and the U.K. at 4, according to data from the Office of the United Nations High Commissioner for Refugees." - source Bloomberg

In July 2010 in our conversation - "I promise to pay the bearer on demand...- Panics and Populism", we argued the following:
"Populism movements are deeply correlated to Panics and Depression throughout human history.
The emergence of the Tea Party movement in the US in 2009 is reminiscent of the rise of the Greenback Party, which was active between 1874 and 1884, following the US civil war. The Greenback Party was born because of the Great Depression of 1873."
We would add that the same process of rise in populist movements and extremism happened in Europe in the 1930s.

We also argued:
"The over expansion of credit and loosening of credit standards seem to always led us to economic crisis.
The panic of 1873 was followed by a similar panic in 1893 in the US.
Similar to 1873, the crisis was caused by railroad overbuilding and unsound railroad financing which led to a series of bank failures. Compounding market overbuilding and a railroad bubble was a run on the gold supply and a policy of using both gold and silver metals as a peg for the US Dollar value. Until the Great Depression, the Panic of '93 was the worst depression the United States had ever experienced.
The market overbuilding and the real estate bubble led to the financial crisis of 2007 which started with subprime."

"Those who cannot remember the past are condemned to repeat it."
George Santayana (16 December 1863 – 26 September 1952)

Stay Tuned!