Greece Poised to Default

By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

Another melee won by the ECB overnight with the LTRO once again pushing sub 3 year sovereign auctions into a “happy place”.

Spain sold 12-month debt with a yield of 2.049% against a previous 4.05% in December along with 18-month paper at 2.399 percent, previously 4.226% Greece sold 1.625 billion euros of 91-day bills in an auction that saw a decline in yield to 4.64% compared with 4.68% at a slightly lower bid to cover.

Belgium was also in the action selling 1.76 bln euro worth of 3 month T-bills cover 2.24 vs 2.13 , yield 0.429% vs 0.264 % an Eur 1.2 bln of 12 mth t-bills cover 2.06 vs 2.21 , yield 1.162% vs 2.167 %. The EFSF was also in on the action with 1.501 bln of new 6 month bills and managed a yield 0.2664%, bid to cover 3.1.

So all good news. To add to the up side the German ZEW jumped from -53.8 in December to -21.6. The ZEW is a survey of German analysts and investors of their market sentiment. The big jump is seen as a direct result of the ECB’s action to stem the economic crisis. Although the result was good, I am not really sure why anyone was ever concerned about Germany. The problem for Europe at this point is not Germany’s weakness but its strength, the survey suggests that issue is going to get worse.

The last information on car registrations presents the growing imbalances of Europe nicely and matches much of what we have seen in the recent PMI data:

The European car market fell by 1.4% to 13.6 million vehicles in 2011, marking the fourth-consecutive annual decline, and the outlook for this year looks bleak as tough austerity measures are expected to eat into demand.

“In 2011, most of the significant markets declined,” the European automobile manufacturers association, or ACEA, said Tuesday in a statement.

The French market dwindled by 2.1%, the U.K.’s fell 4.4%, while new-car registrations in Italy contracted by 10.9% and in Spain by 18% year-to-year, reflecting the region’s economic woes, particularly in Southern Europe.

Still, Germany—Europe’s largest car market—posted an 8.8% increase compared to 2010, backed by a more robust economy and better consumer confidence

It would appear from the across the board yield drops, even in Greece which is rumoured to be on the verge of default, that the LTRO is now creating its own momentum and it is likely we are now also seeing some front-running action. Again this is all good news for sovereign yields as it appears banks are actually running the carry trade through the ECB. We need to wait until the end of February to get an understanding of the true size of that carry trade when the ECB offers the second round of extended maturity LTRO. I suspect we will probably see some more sovereign-bank bond issuance partnerships, as we did last time, in the lead up to next operation.

Although the news is good, it should be noted that it is still very early days:

European sovereigns and banks need to find Euro 1.9 trillion to refinance maturing debt in 2012, equivalent to around Euro 7.5 billion each business day.

Italy requires Euro 113 billion in the first quarter and around Euro 300 billion over the full year, equivalent to around Euro 1.5 billion per business day. Italy, Spain, France, and Germany together will need to issue in excess of Euro 4.5 billion every working day of 2012.

European banks, whose fates are intertwined with the sovereigns, need Euro 500 billion in the first half of 2012 and Euro 275 billion in the second half. They need to raise Euro 230 billion per quarter in 2012 compared to Euro 132 billion per quarter in 2011. Since June 2011, European banks have been only able to raise Euro 17 billion compared to Euro 120 billion for the same period in 2010.

The question also remains what happens after March 1st to keep the ball rolling? A new round of asset purchases perhaps?

Either way, the LTRO does appear to be helping both the sovereigns and the banks to re-capitalise which are both good outcomes. However, as I have stated over the last few weeks, the LTRO will do very little to help the real economies of the periphery for two reasons. Firstly the banks appear to be using the facility to re-capitalise while at the same time they shrink their asset base in order to meet capital requirements, and secondly, in a poor economy the appetite and/or desire for credit is low and the availability of credit-worthy customers is limited.

This is where the focus of the problem is now. I am not sure if it is just rhetoric at this stage but the Euro-elite seemed to have had an epiphany over the last few weeks that the austerity measures aren’t working as they expected. We are now seeing more and more speeches focusing on the need for employment growth such as that from the President of the European Council, Herman Van Rompuy:

In the meantime, we should re-focus on growth and job creation. Growth friendly consolidation and job friendly growth are what we need! Growth should be enhanced by strengthening supply and by stimulating demand. We must urgently put in place an anti-recession strategy, mobilizing means and efforts at the Union level and – most importantly – at Member States level.


We also need to stimulate demand. Restoring confidence in the euro zone will strengthen consumer confidence, which is key to enhancing private consumption. New trade opportunities and new markets are to be exploited to stimulate foreign demand and export. Recent exchange rate developments for the euro will help our competitive position. We need to push our trade and investment opportunities with our strategic partners. I will travel next month to Beijing and Delhi to promote trade and investment with these two countries.

But our foremost concern should be stimulating employment. We need more, better and new jobs. Today, over 23 million people are unemployed in Europe. The economic slowdown risks increasing this number. Many of them are young. Women are particularly affected. The young are Europe’s future and we need to give them hope and a decent perspective of joining the labour market.

Our focus in the European January summit should be on youth employment and lifelong learning. The recent “youth opportunities” Commission initiative offers perspectives for skills, training and job placements. Also our “green jobs” potential should be fully developed. In parallel, and during the semester, we need to foster strong labour demand. Hiring people should be easier and more attractive. The EU can help Member States in their efforts to reform labour markets, and to overcome the “skills mismatch” in supply and demand, and the “geographic mismatch” by facilitating mobility.

Oh the horrible irony. “Think of the children” indeed. Expect to hear more of this toff over the coming days in the lead up to the next summit. Hopefully we will get something more concrete from there, but obviously given past performances you should not hold your breath.

Also in breaking news, it appears Greece may have a PSI deal at 32%:

Greece is nearing a deal with private creditors that would give them cash and securities with a market value of about 32 cents per euro of government debt, according to Bruce Richards, a hedge-fund manager on the creditors’ committee.

“I’m highly confident the deal will get done,” said Richards, chief executive officer of New York-based Marathon Asset Management LP, in a telephone interview today with Bloomberg Businessweek.

Given that Fitch stated this yesterday:

Parker said that Fitch believed that even a voluntary agreement by private investors to take a haircut on Greek debt would constitute a default.

“We have said for a long time that we don’t think this PSI is the way to go and we would treat it as a default. It clearly is a default, however they try to spin it,” he said.

We await the initial fallout… and wonder what the Portuguese and Irish are thinking right now?

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  1. burnside

    That voluntary agreement by private investors cuts two ways in my view. Given the possibility Fitch and other ratings agencies could (hypothetically) be convinced or pressured to pass on declaring default, thus sparing holders of the debt, the validity of swaps then becomes an open question.

    There are consequences either way.

  2. Fiver

    Well, Greece was going to default at some point in 2012 (or so my little list says), so the sooner the better for all involved. While some gamblers could get caught (mini MF Globals)everyone else has had so much time to prepare that the market reaction will be a fast down/fast rebound, a blip really, to little lasting effect – which is of no use to Greece. It’s going to be a very tough slog no matter what for Greece (and other PIIGS who do not default) for several years absent a coordinated, serious, US-led, global effort to address fundamental problems – I give the odds of that happening a slim and none. The ECB can probably save the others – for a couple years.

    Thought this might be of interest. If it’s already been discussed on NC, sorry for the redundancy. The Conference Board is revising the components of its index of Leading Economic Indicators with a release Jan. 26. As the CB might just as well be a branch of the Fed in terms of its analytical framework, what these new measures show may be critical to assessment/reassessment of the prospects for US expansion/contraction and of future Fed actions. For what it’s worth, I would expect a bias both in the release and its reportage towards further QE, even if this wasn’t an election year, though of course, it is.

      1. Fiver

        Just because, right?

        ECRI has called for US recession by Q2 2012. LEI has not – at least not yet. If you don’t care about whether or not the US is headed back into recession, well, I can’t make you care. Very sorry to have disturbed your causal rationale bliss.

    1. Rick Hull

      > the market reaction will be a fast down/fast rebound, a blip really, to little lasting effect – which is of no use to Greece. It’s going to be a very tough slog no matter what for Greece (and other PIIGS who do not default)

      This strikes me as quite wishful thinking.

      1. Fiver

        I’m anything but some Fairy sprinkling stardust. I believe we are assured a crisis worse than 2008 due to appalling failure of leadership in the US, which set the parameters for trying to cope with this crisis globally. I just do not think the European endgame will occur over Greece, and not this year – muddle, extend and pretend has a couple more years left, as existing laws, regulations, and practice are serially pretzled and breached consuming all the available political energy trying to stave off disaster rather than engaging in the fundamental re-think as to the viability of this globalized race to the bottom.

  3. psychohistorian

    2012 is crying out to start with a country default in January. If we can’t have another war started and stabilized by November then economic crisis and monetary conflicts are needed to get the public focused on how to vote for the acceptable alternative puppets offered to them.

    It will be interesting to see how Greece comes out of this as well as the remaining EU…..make the rest stronger or weaker? More defaults in 2012? How many?

  4. bmeisen

    … and B ofA is going to go down shortly thereafter.

    Yves is a national treasure. But she has been ringing this bell for a long time now and I am inclined to think that she’s wrong on both counts, Greece and BofA. Maybe it’s financial markets orthodoxy myopia: market data overwhelmingly indicate default, ergo there must be default. There is something else going on here – call it political stupidity or call it the primacy of politics over finance. I think Greece won’t default until Merkel and Sarkozy say so, or the colonels storm the parliament and resurect the Drachma, but that will give Merkel and Sarkozy a political excuse to kick them out of the EMU. And given the presidential contenders, BofA is going to be around for at least 5 more years.

    1. Yves Smith Post author

      You are misreprenting my position. The cross post is talking about a default as defined for CDS. I have said from the get go that Greece would have to do a very deep restructuring or default. That was hardly an unusual position and that is how this is playing out.

      Re BofA, I said the litigation losses would do them in. That will take a while. Expect an asbestos type solution.

  5. jake chase

    I don’t know what the LTRO is, but those who are betting on default don’t understand that finance is just electrons and verbal slight of hand. You think Greece is going to bring down globalization? Better lay off that disgusting wine!

    1. craazyman

      I think ur right jake. I’m sitting here losing out on the rally waiting for the big crash but I just get the feeling it isn’t coming — even though Mish Shedlock and John Hussman have persuaded me that my instincts are wrong.

      I could feel the 2008 crash coming like vomit crawling up your throat. There’s no mistaking what’s about to happen. But now. I don’t feel anything except static on a bright blank screen.

      LTRO means “Let’s Try Repo-ing Ourselves!” that’s My exclamation point. it’s not in the original, which contains only the 4 letters. I think they may get lucky and make it actually work somehow. Defying all the skeptics, further enriching the banksters, while saving innocent women and children from certain death. I guess that’s 2 out of 3 if youre keeping score. That probly works, politically speaking, long enough for everyone to forget all about it.

      1. Jim

        “I could feel the 2008 crash coming”

        Maybe you did, but very few others shared your sentiment. I recall Don Luskin on CNBC in early September 2008 arguing for a higher S&P, and everyone agreeing.

        In fact, given where the market was in early September 2008 and where it was a few months later, the data clearly indicate that VERY FEW saw an economic implosion coming.

      2. ScottS

        I think your metaphor is perfect, Craazyman. We’ve been nauseated since 2008, hovering over the toilet knowing what is about to come. Then there’s that moment where the nausea disappears suddenly and you, for a brief second, are certain that everything will be okay. Then you immediately empty your stomach contents in spectacular fashion.

      3. Yves Smith Post author

        This time the officialdom isn’t just using propaganda, they are also sending out lots of noise on psychic frequencies, my New Agey buddies tell me. So you can’t pick it up that way this time around. Bummer.

  6. Ignacio

    The cars registration data have a piece of good news on it despite being negative: it suggests that some rebalancing is occuring in the Eurozone. It could be worse if in Germany car sales diminish as in the rest of the eurozone.

  7. Lafayette


    Yes, it takes a Frenchman to defy the CRAs (Credit Rating Agencies).

    J-L Borloo, an ex-member this present French administration, has decided to quixotically undertake a court case against the CRAs in France – namely S&P – for their part in fraudulently giving triple-A ratings to subprime debt.

    In France, Civil Responsibility laws cover such fraud and, if the result of expert analysis in the matter so conclude, the rating agencies found guilty would face not only fines but damages.

    A shame that’s not happening in the US … n’est-ce pas?

    1. Francois T

      In the US, what is considered by any other civilized country as a financial crime is legal. It means the laws are on the books, but the cops aren’t on the (Wall) Street.

      Any question?

      1. Lafayette

        Pas de question. On se comprend.

        Une loi, sans la volonté de l’appliquer de la part des autorités, reste muette …

  8. Susan the other

    Goldman and Greece get off the hook. Maybe French Banks too? The banks get off the hook and everyone who bought insurance on their investments will get zip. I hope we are seeing the final resolution of what Greenspin euphemized as irrational exuberance. Too many uneasy investors were irrationally exuberant about hedging with credit default swaps? Will the gamblers lose money on the secondary CDS market? (Then there would be a little justice.) It is too confusing for me to follow. So maybe the rating agencies are claiming they don’t buy the volunteerism so that France can’t sue them. Ha.

    1. ScottS

      Time to take out a CDS^2. A default swap default swap — for when Greece defaults, but the CDS doesn’t trigger.

      1. esop

        Yes, as Johnny Thunders would say,
        Bootleg the bootleggers”.

        Or as Tim Duy would say,
        “Years of current account deficits seeking to maintain export growth”.

        False profits are cheap until others see their secured transactions busting loose.

  9. PhilS

    Pardon me. I meant to say a zero rate of interest.
    The USA is being entrusted to keep the world economy flowing!
    International Commerce must continue for Mankind’s survival.
    Commodities will always flow osmotically(my mnemonic) Oil will be the gold standard for 25 more years. Then Renewable Energy will start to kick in. As the oil supply drops off; the fracking and the deep water oil wells will kick in.for another 10 years or so,by which time the 7 Billion of us will have figured out a way to do without OIL I hope.The commodities of the earth flow from areas of wealth to areas of dearth and back again. Hopefully with ever better equanimity!

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