Greece to be Saved by Conference Call

The markets keep chasing Greek bond yields and CDS prices to ever more absurd heights. At the time of writing the Greek one year government note yield was at 143%, while CDS on Greek debt have shot up to a new all time high of 5,620 basis points, up yet another 800 basis points in a single day on Tuesday. This indicates a 98% default probability, based on the standard assumption of a 40% recovery rate, which as it were is rather a heroic assumption in this case. Sean Egan thinks the default will at best result in recoveries of 10%. Note in this context that lower recovery rates imply also a lower default probability (e.g. at a 38% recovery rate, the default probability sinks to 95%, as explained here).

Later in the day, a rumor surfaced that Merkel, Sarkozy and Papandreou were going to 'hold a conference call' today in order to discuss how the bleeding might be stopped. The rumor has in the meantime turned into a near certainty, as the WSJ reports:

„Greek Prime Minister George Papandreou is scheduled to hold a conference call Wednesday with German Chancellor Angela Merkel and French President Nicolas Sarkozy, Greek officials and the French Presidency confirmed Tuesday.

Greek officials also said the call will focus on developments relating to the Greek reform program and the bailout package, and will be held at around 1500 GMT or 1600 GMT with no statement planned afterward.

Fears over a Greek sovereign default rocked European financial markets Monday, rattling the euro, government bond prices and the region's equity markets. French banks, which are seen as heavily exposed to Greek debt, suffered steep share price declines.  Those fears were touched off by weekend comments from a German lawmaker and German media reports raising the possibility of a Greek default in the near future.

At the same time, Greece's government is scrambling to cut public spending and step up its lagging reform drive amid ultimatums from other euro-zone governments that further rescue money will be withheld if Athens doesn't deliver.  This month, talks between Greece and officials from the European Commission, the International Monetary Fund and the European Central Bank – the so-called troika that assesses the country's eligibility for fresh aid – were suspended in a dispute over whether Greece would need to take further measures.

Without the aid, Greece says it will run out of cash by the middle of October.“

Obviously this didn't impress the markets much, given where Greek debt now trades.

It was also reported by Reuters yesterday that 'International alarm over Europe's debt crisis grows', with treasury secretary Geithner boarding a Europe-bound plane in order to add his two cents to the proceedings.  Of course, nothing that he, or anyone else does or says can alter the fact that Greece is bankrupt and will remain so. Evidently though worries about Italy aren't going away just yet either.

“In a measure of the alarm in Washington, Treasury Secretary Timothy Geithner will take the unprecedented step of attending a meeting of EU finance ministers in Poland on Friday. It will be his second trip to Europe in a week after he met his main EU counterparts at a G7 meeting last weekend.

Obama said that while Greece is the immediate concern, an even bigger problem is what may happen should markets keep attacking the larger economies of Spain and Italy.”

On the other hand, it appears now that equity markets have decided they have declined far enough for the time being.


The Trouble With French Banks

On Tuesday, European markets at first continued their plunge, but then BNP Paribas published a rebuttal of a report that had appeared in the WSJ in which an anonymous source from the bank was quoted alleging that 'BNP can no longer borrow any dollars'. When BNP published its press release, the stock turned around from steep earlier losses to close in positive territory. It was quite a move, from a low of €23 to a close at €28.



BNP Paribas turns around from a steep sell-off on Tuesday – click for higher resolution.



The WSJ report didn't sound completely unbelievable, as we know for a fact that someone has problems with dollar funding in Europe. If it's not BNP, then it must be other banks. We simply know this for a fact for two reasons: 1. euro basis swaps have dived deeply into negative territory and 2. dollars from European sources have begun to pile up in the US.  It does by the way not matter who actually owns these dollars. They are certainly dollar liabilities of euro-land banks, i.e., they represent funding that was previously in Europe and now is no longer there. Some snips of the WSJ article are certainly worth quoting (note, BNP only denied it has no access to dollar funding – and sure enough, in extremis it can always ask the ECB for dollars, since the swap lines with the Fed continue to exist).

“'We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore," a bank executive for BNP Paribas, who declines to be named, told me last week. "Since we don't have access to dollars anymore, we're creating a market in euros. This is a first. . . . We hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore."  [this is what has prompted BNP's denial, ed.]


BNP, Société Générale and Crédit Agricole together hold nearly $57 billion in Greek sovereign and private debt, versus $34 billion held by the largest German banks and $14 billion at British banks. French banks also held more than €140 billion in total Spanish debt and almost €400 billion in Italian debt as of December, according to the latest figures from the Bank for International Settlements. If either of these latter two governments were to default, their banking systems could collapse and take the French system with them.

BNP, Société Générale and Credit Agricole all say that their finances are in order and the market worries are unfounded. But it's difficult for the BNP executive to hide his concern.

"Look at the French banks' debt holdings versus those of U.S. banks," he continues. "The total debt of the three big U.S. banks (Bank of America, JP Morgan and Citigroup) is $5.86 trillion, or 39% of GDP, while the debts of BNP, Crédit Agricole and Société Générale come to €4.7 trillion, or 250% of French GDP."


(emphasis added)

That sounds to us like these banks are simply 'too big to bail'. No wonder Mr. Sarkozy is eager to hold a conference call with Mrs. Merkel and Mr. Papandreou. Meanwhile, equities continued to surge in Europe in Wednesday's trading, which we take as a hint that stock markets are for the moment focusing on the other side of the Greek default coin, which is: more monetary pumping is on its way.



Germany's DAX as a proxy for euro-land stock markets – a bounce has begun in spite of the continuing woes of Greece – click for higher resolution.



More Calls for Intervention

In this context we would note that well-known BoE dove Adam Posen has just delivered an impassioned 'we need to do more' speech, an exhortation aimed at his fellow central bankers to crank up the printing presses pronto, instead of giving in to 'policy paralysis' (he references Heli-Ben's similar admonishments in the direction of the BoJ back in 1998 and 2003). We may take a closer look at the speech's details in an upcoming post, but suffice it to say for now that it's yet another ode to central planning as opposed to 'doing nothing', which not surprisingly, is judged to be 'bad' by Posen. 

Posen's speech is entitled 'How To Do More' (print more money of course, what else? It's the only trick these pranksters have) and readers interested in reading the jeremiad in its entirety can download it here (pdf). Given that UK CPI has once again exceeded expectations, Posen's assertion that the 'BoE can print more without causing more inflation' is wrong even by its own narrow and quite misguided definition of 'inflation'.

In a rather bizarre recent development, the IMF has lately taken to publishing papers on a number of well-known truisms. The latest such effort deals with credit growth and asset bubbles. Gee, the IMF says, you know what? When credit growth goes off the charts and asset prices rise sharply, it may actually be a sign that a bubble is underway. We've got to monitor that! According to the IMF survey publication:

“Rapid credit growth, increased asset prices, greater reliance on banks’ foreign borrowing, and an appreciating currency are signs a country could be headed for a financial crisis, according the IMF’s latest analysis.”

You don't say! And further:

“Credit growth is the result of either a good shock to the economy, such as increased productivity, or a bad shock, such as real estate bubbles that led to the most recent global crisis. Other indicators need to accompany credit growth for policymakers to distinguish between the two types of shocks.

The same indicators also work across different exchange rate regimes, which means a wide range of countries are able to use the indicators to help spot a potential crisis. The IMF tested a variety of models across a large sample of countries, including advanced and emerging economies.

“We first try to better understand, through a model that accounts for the interaction between the financial sector and the economy, which indicators and what types of shocks give rise to systemic risk; then we use these insights to find indicators to help us predict when risks are building up,” said Laura Kodres, chief of global stability analysis in the IMF’s Monetary and Capital Markets Department, in a press conference to launch the study.”

Good and bad shocks! And now we have more 'models' telling us which are which – what a relief! Of course every bubble that has burst over the past few decades has been identified as such by people employing correct economic theory or even merely employing a certain modicum of common sense. No complicated mathematical models were needed for that. All you needed was a more or less functioning brain and a few charts.

Now, we will be the first to admit that credit growth as such is not indicative of anything nasty – provided that credit is backed by real savings and employed productively. But the IMF's latest collection of truisms strikes us as yet another example of the fact that faith in the efficacy of central economic planning remains as cemented in the minds of policymakers and economists as ever. In effect, this is a call to 'plan the economy better'. It is therefore a complete waste of time and effort.

The IMF does not even mention the root cause of the boom-bust cycle. This is not surprising, as the IMF does not allow its member nations to use anything but unanchored fiat money. Its statutes expressly forbid issuing a gold backed currency. This is designed to ensure the supremacy of the US dollar as the world's 'reserve currency' as well as guaranteeing the continuity of the current interventionist economic architecture. It inter alia also ensures the job security of those working at central economic planning agencies such as the IMF. 

However, it won't matter what governments decide to 'monitor' and what 'models' they use to do so. As long as the central bank-led fractionally reserved banking system keeps creating fiduciary media (money from thin air), the boom-bust cycle and the associated capital malinvestment and overconsumption will continue to bedevil economies. If policymakers begin to monitor and influence one thing, the bubbles will simply move on to some other, unmonitored area. The way to ensure smooth economic development is not by introducing even more central economic planning than we already have. The only way to ensure that is by returning to sound money, instituting a free banking system based on traditional legal principles (with sight deposits fully reserved and a strict differentiation between deposit banking and loan banking), the consequent abolition of the central economic planning agencies that are today instrumental in helping to create the boom-bust cycle (chiefly, central banks) and the removal of as many of the regulatory obstacles that are currently hampering the market economy as is possible. The State must shrink back to its essential functions, which certainly do not include interference with the economy.


Euro Area Credit Market Charts

Below you find our usual collection of charts of CDS spreads, bond yields,  euro basis swaps and a few other charts. Prices in basis points, both prices and price scales color-coded where applicable. As noted above, the giant moves in CDS on Greek government debt continue, but others look like they may be ripe for a pause.



5 year CDS on Portugal, Italy, Greece and Spain – the historic move in Greek CDS continues – at 5,622 basis points this spread has now reached a level never before seen in CDS on the debt of a sovereign issuer – click for higher resolution.



5 year CDS on Ireland, France, Belgium and Japan – click for higher resolution.



5 year CDS on Bulgaria, Croatia, Hungary and Austria – click for higher resolution.



5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – some of these may have reached a short term peak, but it is too early to tell for sure – click for higher resolution.



5 year CDS on Romania, Poland, Slovakia and Estonia – click for higher resolution.



5 year CDS on Saudi Arabia, Bahrain, Morocco and Turkey – still surging – click for higher resolution.



10 year government bond yields of Ireland, Greece, Portugal and Spain – new highs for Greek yields, and all are surging again. Note the big move in Spanish and Portuguese yields lately – click for higher resolution.



10 year government bond yields of Italy and Austria, UK gilts and the Greek 2 year note. The Greek two year note was up another 600 basis points from the day before. The rise in Italy's yields is once again beginning to look worrisome, but there has been a little bit of selling in the 'safe havens' – click for higher resolution.



Three month, one year and five year euro basis swaps –  a small relief bounce – click for higher resolution.



Inflation adjusted yields continue to decline – click for higher resolution.



5 year CDS on the 'Big Four' Australian banks – a small pullback – click for higher resolution.




Charts by: Bloomberg,



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