Saturday, March 27, 2010

HIRE act...

...causing would-be foreign Treasury buyers to opt for swaps.

Wednesday, March 10, 2010

Saturday, March 6, 2010

Argentina debt swap

BUENOS AIRES, March 5 (Reuters) - Argentine sovereign debt prices rose on Friday on growing expectations that the government will launch soon a planned swap of about $20 billion in defaulted bonds, traders said.

Government bonds traded over the counter in Buenos Aires were up 0.9 percent on average in midday trade, led by the dollar-denominated Boden 14 paper ARBODEN14D=RASL, which was trading 1.9 percent higher to an ask price of 29.15.

Argentina's government plans to open a debt swap to mop up bonds leftover from a massive 2002 debt default, allowing it to issue new debt in global credit markets to help ease tight state finances in a preelection year.

"The likelihood that the swap will take place in the next few weeks appears more and more likely," Buenos Aires-based financing group Grupo SBS said in a research note.

Economy Minister Amado Boudou said earlier this week the government would soon wrap up the paperwork needed to launch the operation with the U.S. Securities Exchange Commission, reaffirming his aim to start the swap this month.

Argentine sovereign bonds were slightly outperforming the JPMorgan Emerging Markets Bond Index Plus 11EMJ, with spreads tightening 15 basis points to 749 basis points over U.S. Treasuries prices. Overall emerging-maket spreads narrowed 13 basis points to 272 basis points, according to the indicator. (Reporting by Jorge Otaola; Writing by Helen Popper)

Friday, March 5, 2010

European Commission...

Already firing salvos in the propaganda war by classifying investors as "speculators".

EU weighing up regulation for debt speculators

(AP) – 21 hours ago

BRUSSELS — The European Commission said Wednesday that it will call in market regulators and banks to discuss possible problems with the market for credit default swaps on sovereign debt.

The swaps are a form of insurance against a borrower defaulting on debt — and the market for them has swelled in recent weeks as traders weigh up the risk that Greece might not be able to repay its massive debt.

EU press officer Carmel Dunne said in an e-mailed statement that EU officials were looking at the issue closely and would shortly call a meeting of regulators, supervisors and the industry to discuss it.

"We need to know better who does what, to better understand this market, including interactions with sovereign debt," she said. "We need to decide whether there are inherent problems with the CDS market."

BNP Paribas analyst Hans Redeker said spreads on sovereign bonds and credit default swaps have now collapsed, blaming "hedge funds fearing Europe imposing regulatory measures on CDS spreads."

Thursday, March 4, 2010


Buy sovereign risk in Asia?

March 3 (Bloomberg) -- Franklin Templeton Investments, manager of $187 billion of fixed income assets, is buying South Korean and Malaysian bonds on bets currency gains will boost returns as sovereign risk weighs down developed debt markets.

“Growth will be slow in traditional core fixed income markets, but not necessarily other countries,” said New York- based Rob Waldner, Franklin Templeton’s global bond fund manager. “What we’re looking at is opportunities that avoid those core markets.”

Sovereign bonds from Asian countries where currencies will appreciate as central banks raise interest rates are a buy, Waldner said yesterday in a phone interview from Melbourne, where he was visiting clients. Franklin Templeton is buying notes maturing in two years or less to limit exposure to declines in the prices of debt, he said.

But P&C rejoins...

KUALA LUMPUR: Bankers in the Asia-Pacific region perceive there the banking industry is over-regulated while issues including macroeconomic trends and political interference are among the top three threats to the banking sector over the next 12 to 24 months, according to PricewaterhouseCoopers (PwC).

The issues weighing down bankers are the Basel 2 requirements arising from the financial crisis and close economic ties to the West, according to PwC officials at a media briefing on Thursday, March 4.

The Banking Banana Skins 2010 survey results showed the “relatively volatile” equity markets in the region were susceptible to the movement of funds around the world.

The survey also revealed areas of high concern included commodities, especially in resource-rich countries, the sustainability of the market rally, a high dependence on TECHNOLOGY [] and the risks to the environment.

Areas of less concern for those in the Asia-Pacific region were credit risk, the availability of capital and issues of corporate governance.

Monday, February 22, 2010


...In Asia.

The truth is that the rise in foreign reserves has rested substantially on large commercial borrowings by the government, and the release of the first two installments of a US$ 2.6 billion International Monetary Fund standby loan, which is spread out over two years. The IMF approved the loan last July when the country faced a major foreign exchange crisis and, potentially, a default.

The Sunday newspaper economic columnist warned last weekend: “Most of the (foreign currency) reserves are loans that have to be repaid rather than funds that have been earned through exports. These contingent liabilities have also increased the country’s public debt that is a serious burden on the economy…”

The columnist also noted that another reason for the favourable foreign exchange figures was a rise in remittances sent by workers employed overseas, particularly in the Middle East. He pointed out that while remittances increased 14.2 percent in US dollar terms over the first 11 months of 2009, exports were sharply down in all areas by an overall 14.7 percent. These included a fall of 12.3 percent in agricultural exports, including 10.2 percent for tea, and 15.1 percent for industrial exports.

Textile and garment exports fell by only 5.3 percent, but the sector will be hard hit by the EU’s decision to end its GSP+ trade preferences over war crimes and human rights abuses. Like the US, the EU is using the human rights issue to pressure the Sri Lankan government, and undermine the influence of rivals such as China. But the decision to end GSP+, which will take effect in six months, will have a damaging effect on garment exports and jobs. More than half of the sector’s exports go to Europe.

They doth protest too much...

Germany must not mind the decline of the Euro that much. They can ill-afford another vertical drop in exports to the U.S.

Friday, February 19, 2010

But without the same Liquidity Risk

Budgetary finance problems have completely different implications for sovereign non-currency issuing countries such has Greece. This article is out of paradigm. The UK does not need to "get" pounds from any exogenous source.

Friday, 19 February 2010

Britain's public finances are in a worse position than those of
Greece, according to the latest figures on government borrowing. The
Office for National Statistics said yesterday that January alone saw a
net shortfall of £4.3bn, far worse than City forecasts and in a month
which has always previously shown a healthy surplus. It puts the UK on
track for a deficit of £180bn this year, or 12.8 per cent of GDP,
economists said, shading the Greek figure, hitherto the worst in the
European Union, of 12.7 per cent. In the pre-Budget report the
Chancellor forecast a deficit of £178bn for the current year. Warnings
that the UK could face a Greek-style crisis of confidence have been
building for some weeks, and yesterday saw a sell-off of sterling and
British government securities, or gilts, on the disappointing news.

Jonathan Loynes, chief European economist at Capital Economics
commented: "The figures suggest that this year's budget deficit could
exceed that of Greece and further underline the need for more decisive
action to improve the fiscal position when the economy is strong
enough to withstand it.

"It is clear that a more credible plan to restore the public finances
to health will be required shortly after the general election in order
to keep the markets and rating agencies at bay."

January usually shows a healthy surplus, as tax receipts flow in from
City bonuses and payments made before the final deadline for
self-assessment on 31 January. Last year, for example, revenues
exceeded public spending by over £5bn in the month. This year, tax
receipts across the board were unusually depressed, reflecting the
depth of the recession in the 2008-09 tax year. Depressed earnings in
the financial sector and the general weakness of the economy conspired
to push receipts down by 9 per cent overall compared with last year;
income tax takings slumped by 20 per cent, and corporation gains tax
revenues fell by 6 per cent. VAT payments were up a little, after the
17.5 per cent rate was restored on 1 January. On the other side of the
ledger, public spending is still showing double digit increases: 15
per cent up in January, driven higher by the rise in benefits to the


Feb. 19 (Bloomberg) -- The crisis stalking the euro economy began with a footnote.

When the European Union predicted in 1997 that Italy’s budget deficit would exceed the threshold to qualify for the single currency, it buried in the fine print the observation that with “additional measures” the Italians could pass.

They did, thanks to a one-time tax and a yen-denominated swap. It was an early example of the balance-sheet fiddling deployed since then by countries eager to share the benefits of a $13-trillion market and lower borrowing costs, yet unwilling to cede control over their budgets, wages and welfare systems.

Now Greece, by setting a standard for fiscal creativity, has exposed the flaws in Europe’s hybrid of monetary union and fiscal indiscipline. The crisis risks extending the euro’s 6 percent slide against the dollar this year, its expansion into eastern Europe and its prospects to challenge the dollar as an international reserve currency.

Greece’s fiscal tragedy “reveals a lot of things that people didn’t want to look at, such as the lack of economic governance of the euro zone,” said Pervenche Beres, a French member of the European Parliament who is sponsoring a resolution calling for tougher financial regulation. “If Greece falls apart, everything would fall apart. Nobody should allow this.”

Harvard University’s Martin Feldstein was among economists who have cautioned since the currency debuted in 1999 that divergent economies couldn’t fit under a single roof. The union was led by a Germany that consented to give up its deutsche mark as long as the rest of Europe embraced the German aversion to debt that took hold after two world wars.

Western Hemisphere OK

Proximity yields some benefits for the North American antipode countries...

NEW YORK, Feb 18 (Reuters) - Investors pushed Latin
American stocks close to one-month highs on Thursday, driven by
gains in Mexico, where new pension fund rules were seen giving
greater flexibility to fund managers to navigate volatility.

Regional currencies were mixed against the U.S. dollar with
the Mexican peso, Brazilian real and Colombian peso making
modest gains even after reports of stronger manufacturing out
of Washington.

MSCI's Latin American stock index rose 1.71 percent
.MILA00000PUS while the broader MSCI emerging market stock
index was off just 0.05 percent .MSCIEF.

Upbeat U.S. economic data -- stronger regional
manufacturing data and rising leading economic indicators --
offset a report from Wal-Mart Stores Inc (WMT.N), the world's
largest retailer, which forecast results for the current
quarter could miss Wall Street estimates. For more see

Credit spreads narrowed more as a function of the drop in
U.S. Treasury prices and their rising yields on the back of the
stronger data rather than any out-sized gains for emerging
market sovereign debt. [ID:nN18186639]

Thursday, February 18, 2010

Follow up on Chinese Ambivalence

A <3% decline has occurred before, and note the following month/quarter/year purchases. That being said, there is much talk of financial weaponization, etc., and of course the Chinese would dearly love to convince U.S. citizens they hold more power than is the case.

The Virus spreads...

...Italy now firmly in the cross-hairs.

ROME—Derivative contracts taken out by Italian municipalities could jeopardize local public finances for decades, even though the global financial crisis has softened the blow in the short term, Italy's Audit Court said Wednesday.

"Certain debt and imbalances are magnified over time, and may wring sacrifices from future generations for 20 or even 30 years," Mario Ristuccia, the chief prosecutor of the administrative court, said in a speech delivered here.

The Greek government's use of derivatives has stoked claims of deception and fraud as Athens used the sophisticated over-the-counter contracts to prod its fiscal accounts into apparent compliance with European Union rules.

Italy itself used a currency swap to help its application to join Europe's monetary union at its inception more than a decade ago.

National governments aren't alone. After a 2002 Italian budget law allowed local administrations to engage in sophisticated finance, local governments entered into around €35 billion ($) worth of derivative contracts. That is equivalent to almost a third of all debt held by Italy's regions, provinces and municipalities. More than 500 municipalities signed derivatives deals.

The contracts were often designed to protect public bond issuers against adverse interest-rate movements, until the central government banned the practice in 2008. But while the derivatives were supposed to hedge balance-sheet risks, they also were used to rake in upfront cash to use for current spending, and at times with a pure "speculative intent," Mr. Ristuccia said.

Diversification or malice?

The beneficial aspect of this is that we can now move on from the "China as largest "creditor" to the U.S." to a more productive conversation regarding global economic recovery.

This article from China daily does have a more aggressive tone than previous PRC propaganda.

China's holdings of US Treasury debt slashed
By Li Jing (China Daily)

China sold $34b in bonds in Dec; Japan becomes biggest foreign holder

China drastically slashed its holdings of United States government debt last December, allowing Japan to retake its place as the largest foreign holder of US Treasury bonds.

China sold more than $34 billion in short- and long-term bonds, leaving its total holdings at $755.4 billion, according to US Treasury data released on Tuesday.

The country sold about $45 billion in US Treasuries in the last five months, Alan Ruskin, chief international strategist for RBS Securities Inc, said in a research note. He said it was a "long enough period to hint strongly at a trend".

Liu Yuhui, an economist with the Chinese Academy of Social Sciences (CASS), said now is a good time to cut holdings of US Treasuries as recent European debt concerns have driven up the US dollar.

"China has chosen the right strategy in slashing its huge holdings of US government debt as the greenback rebounds," said Liu, adding that there is no sign of change to the long-term weakness of the US dollar.

Massive US deficit spending and near-zero interest rates would also further erode the value of US bonds, said Cao Honghui, director of financial market research at CASS.

The White House released a budget plan on Feb 1 that predicted the deficit for this year would total a record $1.56 trillion, surpassing last year's $1.4 trillion, which re-ignited China's concern about its dollar assets.

As one of the US' biggest creditors, China has sought to diversify its portfolio of foreign exchange reserves over the past year as the share of US dollar-dominated assets is too large.

Wednesday, February 17, 2010

Bob McTeer...

...hits the correct answer on the profound difference between sovereign issuers of endogenous currency and those subject to liquidity risk (I disagree with the "borrow from the central bank" part, but that is a trifle)

U.S. debt is a problem, but not a crisis. If worse comes to worse, the Treasury (with the help of Congress) could prevail on the Federal Reserve to buy its debt at prices more favorable than those demanded by foreign creditors. If not sterilized, thus neutralizing the impact of the purchases on the money supply, the Fed would be monetizing the debt and a pickup in inflation would be the likely outcome. Indeed, that is what people mean when they refer to “inflating your way out of debt.”

A developing country that cannot issue debt in its own currency, but must issue it in another currency, say U.S. dollars, must earn the dollars necessary to service and redeem the debt through foreign trade (or perhaps temporarily through foreign borrowing to roll the debt over). It does not have the luxury of borrowing from its own central bank to service and redeem the debt.

Chinese ambivalence toward Treasuries?

A 4.3% decrease in indeed news, but this has happened before on several occasions, only to see a healthy appetite from China the following month.

TOKYO—Japanese financial institutions helped drive the purchasing that made Japan the world's top holder of U.S. Treasuries in December, but the trends that drove its banks and others to buy may not last.

U.S. Treasury estimates Tuesday showed Japan overcame China as the No. 1 foreign holder of U.S. sovereign debt for that month. China's sharp paring of its own holdings from the month before, by $34.2 billion to $755.4 billion, made up a large part of the switch.

Nothing new... Fed Minutes regarding foreign currency operations, something which may receive unwanted attention should congress understand that the Fed forwarded unsecured (dollar) loans to several Central Banks during the crisis.

1. The Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New York, for
the System Open Market Account, to the extent necessary
to carry out the Committee’s foreign currency directive
and express authorizations by the Committee
pursuant thereto, and in conformity with such procedural
instructions as the Committee may issue from
time to time:
A. To purchase and sell the following foreign currencies
in the form of cable transfers through spot or
forward transactions on the open market at home
and abroad, including transactions with the U.S.
Treasury, with the U.S. Exchange Stabilization Fund
established by section 10 of the Gold Reserve Act of
1934, with foreign monetary authorities, with the
Bank for International Settlements, and with other
international financial institutions:

Sovereign debt rating criteria

There are some doctrinal problems associated with the stance of the large rating agencies. For example, below are S&P's guidelines, with my comments in italics.

For sovereign governments, the key determinants of credit quality are political and economic risk. Economic risk addresses a government's ability to repay obligations on time. Political risk addresses the sovereign's willingness to repay, a qualitative factor that distinguishes sovereigns from most other issuers. Political risk encompasses the stability and legitimacy of political institutions. At the regional and local government level, the analysis includes the supportiveness and predictability of the public sector system and the matching of revenue to service responsibilities.

Economic risk is thus misguided for currency issuing countries. This includes Japan, the U.S., and the U.K. Matching revenue to service responsibilities is somewhat of a misnomer as well, considering these countries do not need to "raise" revenue in order to spend their own currency.

The foundation of government creditworthiness is the economic base. The economic structure, demographics, wealth, and economic growth prospects play a key role in credit analysis.

Again, growth prospects delineated within a sovereign country's own currency is a different thing when commodity convertability is an issue. And, of course, all of these issues are notoriously difficult to predict with reasonable accuracy.

Budgetary performance is a central component of financial analysis. Special attention is paid to revenue forecasting, expenditure control, long-term capital planning, debt management, and contingency plans. The debt burden relative to the economic and population base, as well as the government's debt structure and funding sources are considered.

With sovereign currency issuing countries, debt structure and funding sources have little bearing on credit worthiness, instead, Taxation and Government Spending function as aggregate demand dampeners and enhancers, respectively.

Off-balance sheet obligations are recognized. Quantitative elements are captured in a number of ratios that can be compared to those of peers.

Very well. But care must be given when analyzing sovereign currency issuers; their "debt" functions as something other than a drag on economic activity and future creditworthiness. I need not remind the reader here that "off balance sheet" poses its own problems with detection, valuation, and predicting future inflows and outflows of currency.

For sovereigns, financial analysis includes fiscal and monetary flexibility. The financial sector may be viewed as a significant contingent liability for a sovereign government. External liquidity is also analyzed.

Interesting. This appears to be aimed at Europe, U.K., and the U.S. External liquidity is not a factor for sovereign currency issuing countries.

Similar to the rating process in the private sector, analytical judgment, rather than a formulaic approach, is employed to weigh the individual RAMP categories and reach a rating decision.

OK, just as long as private sector corollaries do not bleed into analysis concerning non-convertible sovereign currency issuers.

Tuesday, February 16, 2010

Slow demand for Treasuries?

This is a rate of change vs. level problem, and year/year figures are conspicuously absent.

WASHINGTON (MarketWatch) -- Net foreign purchases of U.S. long-term securities grew at a slower pace in December, while China lost the spot of top foreign holder of U.S. debt, the Treasury Department said Tuesday.

Total foreign holdings of equities, notes and bonds increased a net $63.3 billion in December. This is down from $126.4 billion in the previous month.

Analysts said foreign appetite for Treasurys remained healthy. Foreigners also increased their purchases of equities. Demand for corporate debt remained weak.

Kauri bonds...

...issuing bonds in a currency backed by an economy with GDP of 130 Billion.(by way of comparison, California alone is 1.3 Trillion and Kentucky is 146 Billion). Interesting.

17 (Bloomberg) -- New Zealand dollar-denominated note sales by foreign issuers in the country are surging due to European sovereign debt concerns and favorable currency swap discounts, Australia & New Zealand Banking Group Ltd. said.

The Asian Development Bank’s first ever sale of so-called kauri bonds and deals from borrowers including the World Bank and the European Investment Bank boosted total sales since Dec. 31 of the securities to NZ$875 million ($615 million), from none at this time last year, according to data compiled by Bloomberg.

“Both investors and issuers are willing to cast their nets wider as confidence in core markets like Europe suffers,” said Dean Spicer, head of domestic capital markets for ANZ in Wellington, who has helped manage all this year’s kauri bond sales. “There’s been an increased interest in Kiwi dollar assets from offshore investors in particular.”

Meanwhile, In Argentina...

Full article here. South America in play now.

Ocean Guardian

(Jeremy Cresswell)

Argentina has said that it is taking control over all shipping between its coast and the Falkand Islands, effectively awarding itself the power to blockade the disputed territory.

According to a decree issued by President Kirchner, all ships sailing through the waters claimed by Argentina must hold a permit. The measure looks set to deepen a row over conflicting claims to oil beds lying inside the Falklands’ territorial waters.

Argentina still claims sovereignty over the islands it calls “Las Malvinas”, nearly three decades after the end of the Falklands conflict in which more than a thousand people died.

Tensions over the islands remained buried until the discovery of potentially rich energy reserves in the Falklands’ seabed. Argentina protested to Britain this month over plans to begin offshore drilling near the islands.

Taxation in the UK

Not the best way to stimulate aggregate demand. The UK must realize its national accounts will look terrible in the next couple of years, but one of the themes of this blog is that a SOVEREIGN ISSUER OF ITS OWN CURRENCY has incredible latitude in adjusting aggregate demand by fiscal and taxation policy, and need not fear from liquidity risk as it does not have to "get" currency from any exogenous source.

A rise in VAT is looming whichever party wins the general election, as Labour and the Conservatives draw up plans to balance Britain’s books.

Alistair Darling and George Osborne, the Shadow Chancellor, are both considering raising VAT to as high as 20 per cent — the European average — from the current rate of 17.5 per cent, The Times has learnt.

Doing so would raise an extra £13 billion a year at a time when financial markets are searching for signs that whoever takes power is serious about tackling Britain’s £178 billion deficit.

Though Labour and the Tories have denied having any current plans to increase VAT, neither will rule it out and The Times understands a rise in the tax is being considered by both parties


German Investor Confidence. Liquidity risk abounds here.

FRANKFURT — German investor confidence slipped for the fifth month in a row in February amid dim prospects for the nation's retail, consumer goods, steel and chemical sectors, a closely watched survey showed Tuesday.

The confidence index of the ZEW Institute showed investors' outlook for the next six months dropped to 45.1 points from 47.2 points in January. The survey is viewed by many as an accurate barometer for the economic outlook in Germany, Europe's biggest economy.

ZEW, or the Center for European Economic Research, based in Mannheim, said that despite the decline, the index remains well above the historical average of 27.1 points.

The index hit a 3 1/2-year high of 57.7 points in September.

The ZEW said it expects the economy to recover slowly from the current crisis within the next six months, but that prospects for the retail, consumer goods and auto sectors remain poor. Participants also voiced pessimism about the steel and chemical sectors in Europe's biggest economy, the ZEW said.

Demand in Emerging Markets...

...for oil based on the premise that import demand among the G20 will remain healthy.

Speaking at International Petroleum Week in London, Christof Ruehl, chief economist at BP, predicted a long-term recovery in global oil demand next year, fuelled by the industrialisation of China and India.

Ruehl also predicted that the oil price will remain flat in the short term and the oil market will see a synchronisation with the economic recovery in the medium term.

According to Ruehl, demand will switch from the Organisation for Economic Co-operation and Development (OECD) countries to the non-OECD countries over the next year. "The industrialisation of these emerging countries, such as China and India, will incentivise long-term demand growth," he said.

He also outlined how he expected to see a raft of consolidation in the oil refinery sector, with older refineries being phased out and newer, modern facilities protected. "The golden age of refineries only lasted a few years and is now coming to an end. With spare capacity having grown, demand has taken a sharp turn to the negative," he added

Monday, February 15, 2010

China close to revaluation?

This (depending on the % appreciation) would be a seismic event for global markets, effectively repricing the dollar, all commodities, etc.

By Simon Kennedy
Feb. 15 (Bloomberg) -- Goldman Sachs Group Inc. Chief Economist Jim
O’Neill said China may be poised to let its currency strengthen as
much as 5 percent to slow the world’s fastest growing major economy.
“I have a strong opinion that they’re close to moving the exchange
rate,” O’Neill said in a telephone interview from London after China’s
central bank told lenders on Feb. 12 to set aside larger reserves.
“Something’s brewing. It could happen anytime.”
Chinese policy makers are seeking to restrain credit growth after
their economy grew the fastest since 2007 in the fourth quarter. Banks
extended 19 percent of this year’s 7.5 trillion yuan ($1.1 trillion)
lending target in January as property prices climbed the most in 21

Sunday, February 14, 2010

Returning to the scene...

...of the Country that began the current Sovereign Debt Crisis ("SDC")

Feb. 14 (Bloomberg) -- Dubai stocks retreated the most in almost three weeks as Zawya Dow Jones said Dubai World, the state-owned holding company seeking to restructure $22 billion of debt, may offer creditors 60 cents on the dollar after seven years. Kuwaiti’s benchmark index surged the most in six months.

Emaar Properties PJSC, the builder of the world’s tallest skyscraper, dropped the most this month. Dubai Islamic Bank, the United Arab Emirates’ largest bank complying with Islamic banking rules, fell the most in two months. Dubai’s DFM General Index lost 3.5 percent, the most since Jan. 26, to 1,617.51. Abu Dhabi’s benchmark index declined 0.6 percent.

“The sizable haircut and the length of the deferral” as reported “is a disappointment,” said Julian Bruce, director of equity sales at EFG-Hermes Holding SAE, the biggest publicly traded Arab investment bank.

Friday, February 12, 2010

Shifting blame...

to those who either cannot defend themselves politically or who are too dispersed for organized action.

The Gnomes of Switzerland, The Vultures of Germany, etc. Popular scapegoats, but the world is a better place for their relentless discipline. Would the countries in question rather have their profligacy and licentiousness continue unrestrained until a much larger problem arises?

Greek and Spanish politicians complain that their countries and
possibly the whole euro zone have come under speculative attack by
shadowy forces, leading to the rush to develop a euro-zone bailout

The credit-default-swap market, already targeted for its alleged role
in fomenting the financial crisis, has come under suspicion. But it
isn't that straightforward.

True, the sovereign CDS market is playing a role: In the month to Feb.
5, the number of contracts outstanding on the Markit iTraxx SovX
Western Europe index of 15 sovereigns doubled, according to Depository
Trust & Clearing. Moves in Greek credit-default swaps seemed to lead
developments in the underlying bond market, even though there are only
$80 billion of gross contracts on Greece, versus about $385 billion of
Greek debt.

There have been disconnects, with real investor demand seemingly at
odds with the picture painted by credit-default swaps. Portugal this
week sold a highly successful €3 billion ($4.1 billion) bond while its
CDS curve was inverted, which would normally suggest intense stress.

But the real pressure may be as much due to hedging as speculators.
Any speculative positions were probably taken a good time ago, when
the cost of buying insurance against a Greek or Portuguese default was
much cheaper. The real shift higher in costs is likely to have come as
traditional investors with exposure to Greek or other southern
European assets—including stocks and corporate debt, as well as
government bonds—became concerned about possible contagion and
spillover effects due to the crisis in Greek public finances.

They will have been using the CDS market to hedge exposure. Bank
risk-management desks also will have been forced to buy protection as
liquidity in the underlying bonds declined and their price dropped,
adding to the pressure.

There have been sovereign crises for as long as there have been
sovereigns. Investors always will find a way of betting against
governments. The CDS market has made credit risk more easily
observable, and in the case of the euro zone, is a way of
circumventing the protection the euro offers to weaker members.

If the euro zone is forced to rescue Greece, then calls for regulation
of CDS markets may become louder. Some investors already are
considering, carefully, how they make use of CDS even for hedging
purposes on this basis. But the leap in sovereign CDS costs is a
symptom, not the cause, of Greece's problems.

The agitated Dragon...

Raising rates, clashing with the U.S. over the Lama (central to their view of sovereignty is a unique view of human rights, or lack thereof). "Human Rights" are largely a Western construct and the continued expansion of this set of rights is something the Chinese authorities view as encroachment upon their rights as sovereign. Its a different set of rules and the Chinese do not wish to play that game.

Feb. 12 (Bloomberg) -- China ordered banks to set aside more deposits as reserves for the second time in a month to cool the fastest-growing economy after loan growth accelerated and property prices surged.

The reserve requirement will increase 50 basis points, or 0.5 percentage point, effective Feb. 25, the People’s Bank of China said on its Web site today. The current level is 16 percent for big banks and 14 percent for smaller ones.

Thursday, February 11, 2010

Hit the trifecta...

...and slap a tariff on all Chinese imports.

First Taiwan, now the Lama.

Feb. 11 (Bloomberg) -- President Barack Obama will meet with the Dalai Lama on Feb. 18 in the White House’s Map Room, presidential press secretary Robert Gibbs said.

Obama’s plan to meet with the Tibetan spiritual leader has prompted criticism from Chinese government officials at a time when friction between the U.S. and China has been on the rise.

“The Dalai Lama is an internationally respected religious leader and a spokesman for Tibetan rights,” Gibbs said.

Earlier this month, Zhu Weiqun, a Communist Party official who manages Tibet affairs, told reporters in Beijing that a meeting between the Obama and the Dalai Lama would “seriously undermine the political foundation of Sino-U.S. relations” and “threaten trust and cooperation.”

Tension between the world’s No. 1 and No. 3 economies has risen recently over censorship of Google Inc., climate change and arms sales to Taiwan. Additional strains may hamper global efforts to contain the Iranian and North Korean nuclear programs and make China less willing to cooperate on financial matters, such as mitigating the effects of the global credit crisis.

Markets not pleased.

More guilt by association in the cards for the peripheral members of the EU. This measure was more of a band-aid over a bullet wound.

Still, if a more definitive agreement can be hammered out, they may be able to buy more time prior to reckoning day.

Democratic Republic of the Congo

Frontier market with current account deficit of 15% GDP gets another package from the IMF.

It will be interesting to see what kind of assistance the IMF provides Greece and other Eurozone players.

Vietnam as Remora...

Full article here. The east asian countries have served as canaries in the figurative coal mines before...

Vietnam as Asia's first domino
By Shawn W Crispin

BANGKOK - While global markets fret about European sovereign debts, could Vietnam be Asia's first over-stimulated economic domino? With a wobbly currency, fast and loose bank lending and an absence of local confidence in the government's economic management, Vietnam stands out as the region's prime candidate for a sudden market re-evaluation of the financial impact of recently ramped and frequently misallocated fiscal spending.

On the back of massive government pump-priming, Vietnam last year outperformed several of its regional peers with 5.5% gross domestic product (GDP) growth. To counteract the global economic downturn, the government pledged economic stimulus packages amounting to a whopping 8% of GDP. Although less

than half of that amount has actually been disbursed, on-budget spending and off-budget state bank lending propelled the economy through the global crisis.

With emerging signs of global recovery, the communist party-led government has signaled its intention to rein in the stimulus and return the economy to export-oriented growth. But a lack of policy coordination across state agencies and enterprises has further eroded local confidence in the government's ability to control future inflation and to a significant degree has undermined central efforts to contain pressures on the currency and an overheating property market.

Simmering down...

CDS markets calming down as the EU area makes a somewhat cryptic announcement regarding assistance to Greece.

Entity Name 5 Yr Mid Change (%)

Portugal 177.57 -6.83
Greece 333.95 -6.26
Ireland 145.47 -5.39
Spain 132.30 -4.72
Italy 123.78 -3.91

EU Statement

This does not rise to the level of specificity the markets were hoping for, and is more PR than substantive action. It appears to be a palliative action designed to simmer things down. Even odds it works.

Statement by the Heads of State or Government of the European Union
All euro area members must conduct sound national policies in line with the agreed rules. They have a shared responsibility for the economic and financial stability in the area. In this context, we fully support the efforts of the Greek government and their commitment to do whatever is necessary, including adopting additional measures to ensure that the ambitious targets set in the stability programme for 2010 and the following years are met. We call on the Greek government to implement all these measures in a rigorous and determined manner to effectively reduce the budgetary deficit by 4% in 2010. We invite the Ecofin Council to adopt at its meeting of the 16th of February the recommendations to Greece based on the Commission's proposal and the additional measures Greece has announced. The Commission will closely monitor the implementation of the recommendations in liaison with the ECB and will propose necessary additional measures, drawing on the expertise of the IMF. A first assessment will be done in March. Euro area Member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole. The Greek government has not requested any financial support.

Wednesday, February 10, 2010

No ratings actions then?

Interesting commentary from Moody's ostensibly in defense of their current ratings. Tomorrow should be a very, very interesting day.

London, 10 February 2010 -- Among the three governments -- Spain (Aaa), Portugal (Aa2) and Greece (A2) -- whose public finances are currently the focus of much market speculation, only Greece faces material challenges, says Moody's Investors Service in a new Special Comment entitled "Spain, Portugal & Greece: Contagion or Confusion?"

In the report, Moody's reiterates the need for risk differentiation among the three southern European countries. "Spain, Portugal and Greece may share the same currency, but they do not display the same credit profile," says Kristin Lindow, Senior Vice President in Moody's Sovereign Risk Group.

Moreover, Moody's new report says that concerns about the ability of the three countries to roll over their existing debt and finance their ongoing budget deficits have so far not been substantiated by hard evidence. However, Moody's acknowledges that market spreads in Spain, Portugal and Greece now suggest much larger credit risk differentiation than is indicated by their ratings. In response to these differences in perception, Moody's new report offers an assessment of the immediate liquidity risks that it believes are actually faced by the southern European sovereigns and provides the fundamental analysis underpinning its differentiated rating opinions.

The rating agency also believes that fears that the borrowings of these countries may be quantity- rather than price-constrained are exaggerated. "The attention on monthly financing needs magnifies market anxiety but under-estimates governments' financing flexibility," says Pierre Cailleteau, Managing Director of Moody's Sovereign Risk Group. Moody's believes that governments have all options at their disposal, ranging from banks providing temporary assistance with the help of the respective central bank, to funding from European Monetary Union member states or institutions -- and, in extremis, assistance from the International Monetary Fund.

Moody's considers Spain's Aaa rating to be well anchored. (A separate issuer comment was also released today describing Moody's views on Spain's medium-term fiscal consolidation strategy, entitled "Spain's Stability Programme Demonstrates Renewed Fiscal Restraint.") Meanwhile, Portugal's rating is subject to some moderate downward pressure as illustrated by the negative outlook. According to the rating agency, these situations are not directly comparable to that of Greece.

Greek Debt Swaps

Full article can be found here.

Now, though, it looks like the Greek figure jugglers have been even more brazen than was previously thought. "Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future," one insider recalled, adding that Mediterranean countries had snapped up such products.

Greece's debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date.

Fictional Exchange Rates

Such transactions are part of normal government refinancing. Europe's governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn't show up in the Greek debt statistics. Eurostat's reporting rules don't comprehensively record transactions involving financial derivatives. "The Maastricht rules can be circumvented quite legally through swaps," says a German derivatives dealer.

The Euro zone.

I have written about the prospects for the Eurozone on a philophical basis here, but this blog is devoted to more quotidian and practical issues.

Tomorrow, France and Germany will likely announce rescue measures for Greece and perhaps set procedures for rescuing other countries in the EU.

Spreads narrow, but should widen (by that I mean the risk premium will increase from previous "normal" levels) as the market realizes this sets a dangerous moral hazard risk in addition to not solving total debt to GDP ratios for the EU as a whole.


The Mercantilist race to the bottom continues...

By JAMES HOOKWAY in Hanoi and ALEX FRANGOS in Hong Kong

Vietnam's decision to devalue its currency raises tensions across Asia as the region's export-driven economies jostle for an edge amid a slow recovery in orders from the U.S. and Europe.

Vietnam shaved 5% off the value of its currency, the dong, on Wednesday, its third devaluation since June 2008. It also increased interest rates by one percentage point, to 8%. The moves were driven primarily by domestic concerns, including a need to combat speculative pressure that has weighed on Vietnam's economy for more than a year.

Monday, February 8, 2010


Not as a risk per se, but when capital is being removed from Western European banks, you have to wonder what entity(ies) are making the runs on the bank. The Oligarchs have to be wondering how solvent their western partners really are at a time when even the mighty Bund is suffering from CDS spread widening.

Capital from energy rich countries has historically been much more volatile, as those countries are inevitably run in a more autocratic manner (for whatever reason; the curse of oil, geography, etc.) and are thus much less stable than Western-style democracies.

Yellen of the S.F. Fed provides some clarity on U.S. policy...

toward China. The full report can be found here. This definitely apes the comments from the Senate Finance committee who were very concerned about Chinese currency manipulation.

Overall, we encountered concerns about U.S. monetary policy, and considerable interest in understanding the Federal Reserve’s exit strategy for removing monetary stimulus. Because both the Chinese and Hong Kong economies are further along in their recovery phases than the U.S. economy, current U.S. monetary policy is likely to be excessively stimulatory for them. However, as both Hong Kong and the mainland are currently pegging to the dollar, they are both to some extent stuck with the
policy the Federal Reserve has chosen to promote recovery. Moreover, officials in both places are concerned about the prospects of dollar depreciation because they are large net holders of dollar denominated assets.

In China’s case, increased exchange rate flexibility could mitigate growing inflationary concerns, and also act toward easing global imbalances and encouraging the development of the household sector, a shift the Chinese government now officially says it wants. The crisis has vividly demonstrated to the
Chinese one of the downsides of pursuing an export-oriented growth strategy, namely increased vulnerability to adverse foreign shocks. The global crisis may therefore have enhanced the political will for an expedited transition to a more balanced Chinese economy.

Janet L. Yellen is president and chief executive officer of the Federal Reserve Bank of San Francisco.

Early Indications...

Greek markets down significantly and China floating the trial balloon of increased reserve requirements and future rate hikes.

The Euro area cedes bailout responsibility to the IMF? That is somewhat shocking, as the IMF is dominated by US policy.

Feb. 8 (Bloomberg) — Former European Central Bank Chief Economist Otmar Issing said the International Monetary Fund may be better suited to rescuing Greece than the European Union, the New York Times said, citing an interview.

“I don’t think that the EU can impose the kind of sanctions that would be needed, and it would make Brussels too unpopular,” the newspaper cited Issing as saying in an article published Feb. 6. “A better way is for Greece to approach the IMF. It is the only institution that can impose strict enough conditions.”

Meanwhile, Australia removes bank guarantees.

Sunday, February 7, 2010

Sovereign risk

The familiar refrain of capital flowing to where risks are best understood.

“Sovereign risk has taken center stage and the beat of the drum is starting to get louder and louder,” said Larry Milstein, managing director in New York of government and agency debt trading at RW Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The safe-haven bid has come back into play, and investors are looking for safety.”

The yield on the two-year note dropped five basis points, or 0.05 percentage point, to 0.76 percent, from 0.81 percent on Jan. 29, according to BGCantor Market Data. It touched 0.72 percent, the lowest level since Dec. 9. The price of the 0.875 percent security maturing in January 2012 rose 3/32, or 94 cents per $1,000 face amount, to 100 7/32.

The 10-year note yield fell two basis points to 3.57 percent and touched 3.53 percent, the lowest since Dec. 21. The difference between 2- and 10-year yields was 2.80 percentage points. It touched a record high of 2.90 on Jan. 11.

U.S. 30-year bonds fell for the week, pushing yields up three basis points to 4.52 percent.

Saturday, February 6, 2010


Unfortunately, China perceives any unilateral flexibility as a
sign of weakness. This is not the way to proceed with them, as they
have repeatedly demonstrated that any encroachment upon their
sovereignity will be rebuffed. Of course, this if for good reason...they understand that much of the power the western world
posesses is becuase they set the "rules" of the international game.

    Feb. 6 (Bloomberg) -- Major economies with
inflexibleexchange rates must consider allowing them
to strengthen to helpnarrow international trade
imbalances, according to a reportprepared for a
meeting of finance chiefs from the Group ofSeven.
    “Countries with inflexible nominal exchange rates
mustpermit greater flexibility in real exchange rates
either throughhigher inflation or a nominal appreciation
of their currency,”the document, drawn up by Canada’s
finance ministry and obtainedby Bloomberg News, said.    G-7 finance ministers and central bankers are meeting inIqaluit, Canada, today.    The document doesn’t mention which countries are viewed ashaving inflexible
China has attracted international criticism this year
fromforeign governments for controlling the value of
its yuan sinceJuly 2008 after it strengthened 21
percent against the dollarover the previous three years. 

Friday, February 5, 2010

Hopefully this weekend's meeting of the G8... more fruitful.

LISBON, Portugal — Portuguese opposition parties defeated a government
austerity plan on Friday, passing their own bill that lets the
country's regions rack up even more debt. The move raised new
questions about European nations' ability to control their swollen
budget deficits.
The vote was also likely to rattle the world's financial markets,
which are already concerned that the financial troubles gripping
Greece may spread to other vulnerable eurozone countries such as
Portugal and Spain.

Portugal's minority Socialist government had fiercely opposed the
opposition bill, because it contradicts earlier promises to sharply
cut spending. Yet the bill passed 127 to 87, reflecting serious
resistance to the proposed austerity measures.

The government's defeat came after senior officials spent hours in
closed-door meetings trying to hammer out a compromise. The government
says the opposition bill punches a 400 million euro ($550 million)
hole in its budget over the next four years. Asia...

Interesting moves while most of the world is distracted
by Europe...HK CDS widen by 26%.

Thursday, February 4, 2010


The ECB is getting a lesson in predation from the vultures/gnomes.

By Ambrose Evans-Pritchard
Published: 7:29PM GMT 04 Feb 2010

Julian Callow from Barclays Capital said the EU may to need to invoke
emergency treaty powers under Article 122 to halt the contagion,
issuing an EU guarantee for Greek debt. “If not contained, this could
result in a `Lehman-style’ tsunami spreading across much of the EU.”

Credit default swaps (CDS) measuring bankruptcy risk on Portuguese
debt surged 28 basis points on Thursday to a record 222 on reports
that Jose Socrates was about to resign as prime minister after failing
to secure enough votes in parliament to carry out austerity measures.

Asia: why so quiet?

Thailand, Singapore, South Korea, Vietnam, Malaysia.

All strangely silent during this period...even with Australia's surprise no-action on rates.

Lithuania issues dollar denominated bond

Foreign currency denominated bonds are sometimes problematic for Emerging Markets as they must "get" dollars in order to pay coupon and principal.

LONDON (Standard & Poor's) Feb. 4, 2010--Standard & Poor's Ratings Services
said today that it expects to rate the proposed global U.S. dollar bond to be
issued later today by the Republic of Lithuania (BBB/Stable/A-3). The rating
would likely track the sovereign rating.

The sovereign ratings on Lithuania reflect clear commitment across all
political parties to support and implement budgetary and structural policies
which anchor the currency board regime and enhance the economy's flexible
labor and goods markets. An "internal devaluation" is currently taking place,
as unit labor costs have declined sharply since the end of 2008, improving
competitiveness in the tradeables sectors. While the resulting unemployment
and deflation of nominal income are weighing on tax collection, the process
should ultimately result in a stabilization of national income as net exports
stimulate growth.

Contagion still on the bottom rungs of the ladder...

...but climbing fast.

Name MidSpread
Greece 412.25 (was 376 on 2/2)

The UK, contrary to most pundit opinion, should be relatively well insulated by these events given their control over both monetary AND fiscal policy. They have control over rates, bond, issuance, and to some degree currency price levels.

Only a matter of time before this ailment that has affected the extremities travels to the heart of the EU.

And U.S. assets continue to be the default "port in a storm" for the ROW.

The monetary policy...

...of low interest rates does not appear to having the desired effects. One of the problems with monetary policy today relative to previous crisis situations is the revolution of finance that has sliced up and securitized cash flows from an enormous spectrum of assets.

This supply is of course balanced by a global demand for assets denominated (at least in this present era) in U.S. dollars. The persistent Current Account deficit (and therefore Capital Account surplus) attest to this.

Now, lower interest rates do not help the purchasers of financial instruments, and the effects on aggregate demand due to low interest rates has not been examined in great detail.

Wednesday, February 3, 2010


...and contrast.

The sovereign ratings of countries deemed to be experiencing difficulty. These are from S&P as of 1/26.

Liquidity risk

This illustrates one of the central problems with EU members (and one mentioned before on this blog): Liquidity risk. This does not happen with countries who control their own fiat currency. AEP is a notorious "Euroskeptic" but the danger is there.

By Ambrose Evans-Pritchard
Published: 8:24PM GMT 03 Feb 2010

Greece rattled by 'hidden debt' controversy. Truck drivers stuck as
tractors block a highway crossing at Promahonas on the Greek-Bulgarian border.

Greece's labour federation immediately called a general strike for
February 24, dashing hopes that Europe's provisional backing for Greek crisis policies would restore investor confidence.

Joaquin Almunia, the EU economics commissioner, said tough measures
were "extremely urgent" to prevent a further flight from Greek debt.
"The huge imbalances from which the Greek economy is suffering are not sustainable in the long run. The fact of the matter is that markets are putting on pressure. This pressure cannot be ignored."

Greece is the word that should strike fear into all those who love the euro Mr Almunia said concerns have spread beyond Greece to other
eurozone countries where public finances are spinning out of control, chiefly Spain and Portugal. "In these countries we have seen a constant loss of competitiveness ever since they joined the eurozone. The external financing needs are quite big," he said.

Meanwhile, in Iberia...

LONDON (Dow Jones)--The cost of insuring Portuguese sovereign debt against default using credit derivatives reached a record high Wednesday, after the country sold fewer treasury bills than expected at an auction.

Portugal's five-year sovereign credit default swap spreads rose to 197 basis points Wednesday afternoon from 165 basis points Wednesday morning, according to data provider CMA DataVision.

That represents a EUR32,000 increase in the annual cost of insuring a notional amount of EUR10 million of Portuguese government bonds against default.

The Portuguese Treasury and Government Debt Agency said it sold EUR300 million worth of 12-month treasury bills at Wednesday's auction, lower than the indicative offer of EUR500 million.

Bend but don't break

Entity Name 5 Yr Mid Change (%) Change (bps) CPD (%)
Greece 372.29 -3.87 -14.99 26.83

Unfortunately, the rally will be held up somewhat by the threatened Labor Union strike on Feb 24.

From the FT:

Published: February 2 2010 15:28 | Last updated: February 2 2010 20:50

Greece has won European support for its plan to pull back from the brink of financial disaster after its prime minister unveiled moves to boost tax revenue and cut public spending.

The European Commission said on Tuesday it would endorse Athens’ plan to bring back under control the public sector deficit, which last year reached almost 13 per cent of gross domestic product.

But the European Union’s executive arm warned that Greece had not escaped from its fiscal problems. José Manuel Barroso, Commission president, said Greece’s proposal was “feasible but subject to risks”.

The finance ministry is due to unveil detailed measures on incomes policy and a new tax system aimed at increasing revenues by about 10 per cent a year, next week.

Tuesday, February 2, 2010

CDS sovereign rates

Entity Name Mid Spread CPD (%)
Venezuela 1004.34 50.07
Argentina 997.81 48.62
Pakistan 892.71 46.06
Ukraine 889.79 42.42
Iceland 672.93 36.02
Iraq 477.70 34.56
Dubai/Emirate of 497.60 29.24
Latvia, Republic of 479.63 27.81
Greece 376.63 27.23
California/State of 309.60 23.98


Leads the list of probable defaulters. Today's appropriation actions in the finance and media sectors are not helping matters.

Entity Name Mid Spread CPD (%)
Venezuela 1004.34 50.07

And, right on schedule, an ombudsmen/accountability commission in Greece has "found" more debt. CDS spreads there increasing quickly.

Monday, February 1, 2010

Holders of U.S. Treasuries...

...enjoy a security premium. Quantifying that security premium is somewhat problematic (and an errand that I will accomplish at a later date). However, foreign holders of U.S. treasuries should be heartened by the latest Quadrennial Defense Report. Its contents reaffirms the U.S.A.'s capability and willingness to deploy security services where world markets are jeopardized.

Some relevant language from the report:

America’s leadership in this world requires a whole-of-government approach that integrates all elements of national power. Agile and flexible U.S. military forces with superior capabilities across a broad spectrum of potential operations are a vital component of this broad tool set, helping to advance our nation’s interests and support common goals. The United States remains the only nation able to project and sustain large-scale combat operations over extended distances.
This unique position generates an obligation to be responsible stewards of the power and influence that history, determination, and circumstance have provided.


The United States remains committed to exercising mutual respect and leadership within the architecture of a just and effective international system. America’s enemies fear its ability to build consensus against tyranny. Pursuing and underwriting a strong international order is an undertaking that benefits all nations, none more than the United States. This principle will guide the Department’s interactions with the international community, and it frames our approach to defending the American people and promoting their interests.
America’s interests and role in the world require Armed Forces with unmatched capabilities and a willingness on the part of the nation to employ them in defense of our national interests and the common good. The United States remains the only nation able to project and sustain large-scale operations over extended distances. This unique position generates an obligation to be responsible stewards of the power and influence that history, determination, and circumstance have provided.

Expediency Measures...

...are gaining steam across the globe.

Wether it be in Greece, South Africa (see article below), or amongst the G8, the proliferation of policies designed to circumvent legal safeguards in the name of expediency (typically citing the GFC as the "unprecedented" event that causes such drastic action) is troubling.

At the very least, it increases geo-political risk and makes the rules of the international game that much more difficult to forecast.

JOHANNESBURG (Reuters) - Top officials in South Africa's ruling ANC are pushing for the state to take over ownership of the country's central bank, one of the few in the world to still be owned by private shareholders, newspapers reported on Sunday.

The Sunday Times and Sunday Independent said ANC Secretary-General Gwede Mantashe had presented a document to the party's top decision-making committee questioning why the bank was still owned by the private sector.

He had argued that the party should not shy away from looking at the state's role in the banking industry as a whole.

"Why have we been reluctant to even open the discussion on the role of the state in the banking industry," the newspapers reported him as saying in the document that was supported by some executive committee members.

"Including discussing the fact that the South African Reserve Bank is one of less than five central banks in private hands in the world."

The Reserve Bank is owned by shareholders, who are entitled to appoint half of the board of directors. Shareholdings are limited and liquidity tight.

Thursday, January 28, 2010

Accelerating towards the cliff

Greece is quickly forcing an end-game. I am sure the Davos will have to serve as in impromptu crisis mitigation site for many members of the EU (PIGS).

Meanwhile, the Gilts are getting a bad rap from S&P. I disagree somewhat on the same grounds of my objections on the Japan negative outlook; the UK faces no liquidity risk that beguiles the EU area.

Wednesday, January 27, 2010

Japan downgraded

Standard and Poors, like Moody's is still of the opinion that the gold standard still applies to currencies, taxation policy, and sovereign debt. I disagree.

SINGAPORE (Standard & Poor's) Jan. 26, 2010--Standard & Poor's Ratings
Services today revised to negative from stable its outlook on the 'AA'
long-term rating on Japan. At the same time, we affirmed our 'AA' long-term
and 'A-1+' short-term local and foreign currency sovereign credit ratings on

The outlook change reflects our view that the Japanese government's
diminishing economic policy flexibility may lead to a downgrade unless
measures can be taken to stem fiscal and deflationary pressures. At a
forecasted 100% of GDP at fiscal yearend March 31, 2010, Japan's net general
government debt burden is among the highest for rated sovereigns. Moreover,
the policies of the new Democratic Party of Japan (DPJ) government point to a
slower pace of fiscal consolidation than we had previously expected. Combined
with other social policies that are not likely to raise medium-term trend
growth and with persistent deflationary pressures, we forecast that Japan's
net general government debt to GDP will peak at 115% of GDP over the next
several years.


Greece 10yr up

FOMC report coming out later as well the auction of 42 Billion in 5 year notes.

That sloshing sound you hear is the sound of capital flying across the pond...

Tuesday, January 26, 2010


Sticks and carrots. The U.S. is yet the engine of consumer spending for the world, and it names its own terms of trade regarding access to its markets.

Instability at the strike of a pen. What other country can provide economic stability coupled with the greatest (defense) security agreement the world has ever seen?

Jan. 26 (Bloomberg) -- President Barack Obama had his only trade request last year shot down by lawmakers. He may be lucky to get any through Congress this year as well.

Obama appealed last March for duty-free status on exports from Afghanistan and Pakistan in an effort to boost employment and counter the lure of terrorist groups. After fellow Democrats criticized labor rights in the two countries, the Senate removed the provision from a funding bill.

“Could we have a higher priority than to get this done?” Brenda Jacobs, a lawyer at Sidley Austin LLP in Washington representing apparel importers, said in an interview. “It’s a harbinger of how tough it’s going to be on trade.”

With last year’s defeat in mind, it’s unlikely Obama will take on Democratic allies and fight for still-pending trade agreements with South Korea and Colombia, Jacobs said. At stake are deals that companies such as Caterpillar Inc. and International Business Machines Corp. say are key to boosting U.S. exports and jobs.

“It’s clear that trade is not a priority,” William Lane, Peoria, Illinois-based Caterpillar’s Washington lobbyist, said in an interview. “There is no way to sugarcoat it: The business community is disappointed.”

Monday, January 25, 2010

...and yet demand is strong.


Interesting. It would seem some calls were placed over the weekend to several of the larger European players that "gently encouraged" solidarity over this issuance.

Friday, January 22, 2010

Hellenic austerity measures deemed insufficient...

Credit spreads between Greek and German debt continue to widen out. Again, the liquidity risk inherent in EU debt vs. UK or US debt is not priced properly.

I have mentioned in other places that the EU model is fundamentally unstable, and with the periphery (both literally and figuratively) cracking, the experiment will likely fail.

During times of economic stress, local interests prevail. Its simple human behavior: in times of scarcity, luxuries (world peace, environmentalism, etc.) are abandoned and necessities that are not in plain sight are ignored.

Thursday, January 21, 2010

UK vs. Euro

I have seen several reports that indicate the Euro area sovereign risk situation is more benign than what faces the US and UK. I disagree.

The current spreads between the UK and the Euro area do not accurately reflect the EU countries liquidity risk.

The UK, conversely, does not suffer from this risk as it is a sovereign currency issuer. The UK does not need to "get" pounds in order to "fund" deficit spending in order to stimulate aggregate demand and therefore employment.

As for the U.S., it happens to possess the world's reserve currency in addition to benefiting from the aforesaid sovereign currency issuer status.

Wednesday, January 20, 2010

Hellenic austerity measures deemed sufficient...

London, 19 January 2010 -- Moody's Investors Service today said that the Greek government's Stability and Growth Programme (SGP), which was submitted to the European Commission last week, is consistent with Moody's current A2 rating for Greece's government bonds. However, given the lack of certainty surrounding the Greek government's ability to implement the programme, Moody's negative outlook remains unchanged.


The rating agency notes that the SGP addresses the three most important threats to Greece's long-term creditworthiness that Moody's had previously identified: chronically weak fiscal institutions, the slow erosion in competitiveness and accelerating demographic pressures.

Friday, January 15, 2010


A somewhat disingenuous comparison.

Jan. 15 (Bloomberg) -- Greece’s deficit crisis is
triggering a surge in the cost of insuring sovereign debt from
default on concern there could be a repeat of the turmoil that
followed the collapse of Lehman Brothers Holdings Inc.
“If the market goes much more aggressively against Greece,
surely it’s only a matter of time before that happens to other
countries,” said Gary Jenkins, head of credit strategy at
Evolution Securities Ltd. in London. “The major concern is not
that Greece is the next Argentina, but could potentially be the
next Lehman.”
When Lehman was allowed to fail in September 2008 after
investors withdrew credit lines, the U.S. government had to step
in to prevent a systemic collapse as lending between Wall Street
banks froze. European Central Bank President Jean-Claude Trichet
said yesterday Greece won’t win any special treatment from
European officials as it seeks to reduce the shortfall from 12.7
percent of output in 2009 to less than 3 percent in 2012.
The cost of insuring against losses on sovereign debt
surged to a record high in Europe this week. The Markit iTraxx
SovX Western Europe Index of credit-default swaps on 15
countries from Greece to Germany rose 0.5 basis point to a
record 77.5, according to CMA DataVision prices at 1 p.m. in

Thursday, January 14, 2010

Negative Event Clustering

The incentive to falsify official statistics are clearly very strong in weaker political jurisdictions. and governments would be loathe to "open up their books" to independent auditors in a similar fashion to large U.S. and European companies.

The spreads question apparently contains an element of trust: investors can be more comfortable with company representations rather than the country in which they are domiciled.

More conclusions already examined by Minsky.

By Tony Barber in Brussels

Published: January 12 2010 13:59 | Last updated: January 12 2010 17:23

Greece was condemned by the European Commission on Tuesday for falsifying data about its public finances and allowing political pressures to obstruct the collection of accurate statistics.

In a damning report ­published as the eurozone grapples with its worst financial crisis since the euro’s launch in 1999, the Commission said figures from Greece’s were so unreliable that its budget deficit and public debt might be even higher than government had claimed last October.

At that time Greece estimated its 2009 deficit would be 12.5 per cent of gross domestic product, far above 3.7 per cent predicted in April. It revised its 2008 deficit up to 7.7 per cent from 5 per cent.

The data shocked and angered Greece’s 15 eurozone partners and prompted swift downgrades of Greek debt as well as an increase in the premium demanded by financial markets to buy Greek bonds

Wednesday, January 13, 2010

U.S. Bond auctions

The threats of Moody's to remove the AAA rating for U.S. government debt continues to fall on deaf ears.

The last two bond auctions have been met with very strong demand. Todays settlement of 1BP more than offer price confirms this.

Sovereign/Corp spreads widening...

...see FT article below.

We should see these spreads narrowing quickly. An arbitrage play that assigns less risk for citizens than the country they inhabit cannot last. This misprices the ability of EU corporate giants to relocate capital and personell to other jurisdictions.

Note as well that the combined risk of default by all the EU countries is at issue. If these EU countries "defaulted", one would think the 125 companies would experience balance sheet pressures on a tectonic scale as well.

By David Oakley in London
Published: January 12 2010 19:47 Last updated: January 12 2010 19:47
The cost of insuring against the risk of debt default by European nations is now higher than for top investment-grade companies for the first time, as mounting government debt prompts fears over the health of many leading economies.
It now costs investors more to protect themselves against the combined risk of default of 15 developed European nations, including Germany, France and the UK, than it does for the collective risk of Europe’s top 125 investment-grade companies, according to indices compiled by data provider Markit.
Markit’s iTraxx Europe index of 125 companies is trading at 63 basis points, or a cost of $63,000 to insure $10m of debt over five years. This compares with 71.5bp, or $71,500, for Markit’s SovX index of 15 European industrialised nations.
Fears over sovereign risk have risen sharply in the past few months as investors have become increasingly alarmed over rising budget deficits and record levels of government bond issuance needed to pay off public debt.
By contrast, hopes of a recovery have helped support corporate credit markets. Since September, the SovX index has jumped 20bp, while the iTraxx Europe index has narrowed 30bp.
Bankers are even warning that big economies, such as the US and the UK, could lose their top-notch triple A status because of the deterioration in public finances.
Russell Jones, head of fixed income and currency strategy research at RBC Capital Markets, said: “The US and the UK could be downgraded because of their debt levels.
“Countries, such as Greece, are in a worse position, whereas many corporates look in relatively good shape.”
The cost to insure Greece, which saw its stocks and bond markets tumble on Tuesday after the European Commission said there were severe irregularities in its statistical data, has risen 140bp since September, to 263bp. This is six times more than leading companies such as Unilever, BP and Deutsche Post.
Before the financial crisis, the cost to insure sovereigns was lower than corporates. In August 2007, Greek CDS traded at 11bp, while Unilever, BP and Deutsche Post all traded around 20bp.
Bankers caution that liquidity in the sovereign CDS markets is still low, meaning that just a handful of buy orders can move prices sharply. Liquidity in the corporate CDS market is much higher.
However, even in the highly liquid sovereign bond markets, the debt of governments, such as Greece, is cheaper than many corporates.
Greek five year bond yields, which have an inverse relationship with prices, are 4.75 per cent compared with Deutsche Post’s five year bonds at 3.174 per cent, BP at 3.178 per cent and Unilever at 3.312 per cent


This blog will be dedicated to the analysis of sovereign capital markets. Since a great deal of factors contribute to international price movements and capital flows, a holistic approach will be emphasized.

When appropriate, philosophical discussions ("what defines a sovereign state or jurisdiction") will also be included.

The world we live in is fascinating, the flows of power, wealth, growth, conflict, and compromise form the skene of our lives and the theatre we observe. However, this blog will focus more on the behind the scenes preparations of the actors, and, to the extent possible, the mind of the playwrite.