sovereign debt

New European Bail Out Announced - Greek Debt Gets a HairCut

We have another Eurozone bail out. The Euro Summit has released a 15 page statement (pdf) overviewing the agreement. The plan was ratified by all 17 Member States of the euro area.

First, there is a haircut on Greek debt, which while pretending to be voluntary, the volunteer or else threat behind it would allow a complete Greek default, where bond holders would get nothing and banks would probably be ruined.

We invite Greece, private investors and all parties concerned to develop a voluntary bond exchange with a nominal discount of 50% on notional Greek debt held by private investors. The Euro zone Member States would contribute to the PSI package up to 30 bn euro.

The plan is to reduce Greek debt to 120% of GDP by 2020 and is about €100 billion reduction with yet another €100 billion in additional aid.


Reactions to the S&P Downgrade of USA Sovereign Debt

china flagChina is having a field day blasting the United States over S&P's downgrade:

The White House on Saturday challenged the ruling by Standard & Poor's to downgrade U.S. long- term credit rating form top rank of AAA to AA+, citing the agency' s decision relied on faulty math and in haste.

Disappointingly, instead of reflecting on themselves and sitting down to fix problems in a cooperated way, the Democrats and Republicans in Washington are questioning the creditability of the downgrade ruling and blaming each other for the ever-first shame of slipping out top credit rating club.

The alarm has rung. It is time for the naughty boys in Washington to stop chicken games before they cause more damages. It is time for the policy-makers in Washington to settle down, to show some sense of responsibility and fix their fiscal problems.

While Government Fiddles as America Burns, Traders Place Their Billion Bets

While our Congress slashes our social safety net and spews economic fiction on how deficits somehow matter when it comes to our jobs crisis (they do not at this point), traders are placing bets the United States is downgraded and even goes into default.

The bet that shook up the world today was a $1 billion dollar futures trade.

Someone dropped a bomb on the bond market Thursday – a $1 billion Armageddon trade betting the United States will lose its AAA credit rating.

In one moment, an invisible trader placed a single trade that moved the most liquid debt market in the world.

The massive trade wasn’t placed in bonds themselves; it was placed in the futures market.

The trade was for block trades of 5,370 10-year Treasury futures executed at 124-03 and 3,100 Treasury bond futures executed at 125-01.

The value of the trade was about $850 million dollars. In simple terms, if that was a direct bond buy, no one would be talking about it.

However, with the use of futures, you have to have margin capacity behind the trade. That means with a single push of a button someone was willing to commit more than $1 billion of real capital to this trade with expectations of a 10-to-1 return ratio.

You only do this if you see an edge.
This means someone is confident that the United States is either going to default or is going to lose its AAA rating. That someone is willing to bet the proverbial farm that U.S. interest rates will be going up.

Moody's Downgrade Threat

All hail the almighty credit rating agency. Yesterday Moody's threatened to downgrade the United States:

Moody's Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations. On June 2, Moody's had announced that a rating review would be likely in mid July unless there was meaningful progress in negotiations to raise the debt limit.

In conjunction with this action, Moody's has placed on review for possible downgrade the Aaa ratings of financial institutions directly linked to the US government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks. We have also placed on review for possible downgrade securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the US government or the affected financial institutions.

The Wall Street Journal points out:

For the dollar, this would spell disaster.

The triple-A rating on U.S. government bonds is one of the main reasons why many investors, including other major central banks, hold these dollar assets.

Take this top-level rating away and many will be forced to sell. The diversification flows into other major currencies, which have been a major source of dollar weakness in recent years, will only accelerate.

It Would Hurt the Banks....

The latest request to restructure Greece's debt has been denied. with a quote from the ECB that should be classic:

A Greek debt restructuring is not the appropriate way forward -- it would create a catastrophe” because it would damage the banking system, ECB Executive Board member Juergen Stark said today in Lagonissi.

Look at this quote on their demand to privatize:

“Privatization makes a real difference,” said Poul Thomsen, head of the IMF’s Greek mission, which is in the process of reviewing the country’s progress on the bailout conditions. “If targets can be met, it will make a change to debt sustainability.”

Oh really? And that is why the US deficit is so small today, or other nations who privatized?

Seems The Greece Prime Minster, George Papandreou, is all for denying Greece any debt restructuring as well.

Greece must avoid debt restructuring and push on with budget cuts and privatisations to overcome its debt crisis, the country's Prime Minister George Papandreou and senior ECB officials said on Saturday.

Papandreou also said:

Henceforth, the European Union will escort Greece's privatisation programme as if we were conducting it ourselves

Dear Portugal, You Get a Bail Out and a Recession

Portugal is getting an IMF, EU, ECB crafted bail out of €78 billion where the austerity terms will throw them into recession.

Portugal's main opposition party met European and IMF officials on Wednesday and said they would consider whether to back a 78-billion-euro bailout after a source said the terms would propel the economy into two years of recession.

Why would the opposing party say that? The IMF is requiring Portugal to enact draconian cuts to the deficit, 9.1% to 5.9% of GDP in 2011 and less than a 3% GDP to debt ratio by 2013. The Guardian:

Health and education spending will be cut by €745m, civil service pay and pensions will be frozen, and people on state pensions above €1,500 a month will have them reduced.

Civil service staffing is to be squeezed by 1% a year in central government, while regional administrations and town halls will be told to shed 2% of their employees annually.

Banks will get €12 billion of the bail out. Earlier Banco Português de Negócios was nationalized, so the bail out requires Portugal to sell it at a greatly reduced price. In fact there is no minimum price specified.

Portugal is expected to reduce public spending by 3.4% of its GDP this year and raise an extra 1.7% of GDP by raising taxes on cars, tobacco and electricity and getting rid of income and corporation tax loopholes.

Europe Probing Goldman Sachs on Sovereign Credit Default Swaps

YES! Bloomberg is reporting 16 banks, including Goldman Sachs are being probed by the EU for anti-trust for manipulation of the the financial derivative, credit default swaps, market.

Goldman Sachs Group Inc., JPMorgan Chase & Co. and 14 other investment banks face European Union antitrust probes into credit-default swaps for companies and sovereign debt.

The EU is investigating whether 16 banks, including Citigroup Inc. and Deutsche Bank AG, colluded by giving market information to Markit Group Ltd., a data provider majority-owned by Wall Street’s largest banks. It will also examine if nine of the firms struck unfair deals with Intercontinental Exchange Inc.’s European derivatives clearinghouse, shutting out rivals.

“Lack of transparency in markets can lead to abusive behavior and facilitate violations of competition rules,” Joaquin Almunia, the EU’s competition commissioner, said in an e-mailed statement. “I hope our investigation will contribute to a better functioning of financial markets.”

Global regulators have sought to toughen regulation of the $583 trillion credit-default swaps market, saying the trades helped fuel the financial crisis. The EU’s probes add to separate investigations in the U.K. and U.S. into whether banks colluded to manipulate the London interbank offered rate.

Credit default swaps allow anyone, not directly involved in the underlying asset, to place bets on whether that underlying security, asset will default or not. Credit default swaps are used for speculation. In the case of sovereign debt, that causes the cost of financing that debt to increase, dramatically.

Credit Rating Agency Scolds the United States on Sovereign Debt

All Hail the credit rating agencies. Standards & Poor's just gave the good ole' USA a negative credit rating outlook, with a scolding on what we should do as a nation:

Standard & Poor’s put the U.S. government on notice that it risks losing its AAA credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt.

“If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns,” New York-based S&P said today in a report that maintained its top rating on U.S. long-term debt while lowering the outlook to “negative” for the first time.

S&P is giving the U.S. a 33% chance of losing it's AAA credit rating.

This is how the game is played to force a nation into austerity. The agenda is to destroy what is left of the working people and middle classes by dismantling what is left of social safety nets, under the claim of too much debt. In other words, it seems S&P is in on the game to make sure Americans have no Medicare, Medicaid and Social Security.

Indeed, it seems Republicans are jumping on this like flies on .....well, you know. All to destroy what is left of America's social safety nets.

Shock of all shocks, Obama's chief economics guy, Austan Goolsbee, is calling cash on S&P and implying this is political:

Greece Downgraded. EU Looks to Ban Sovereign Credit Default Swap Speculation

Greece has been downgraded by Moody's:

Moody's slashed Greece's credit rating by three notches on Monday due to an increased default risk, raising the specter that the distressed euro zone sovereign may have to restructure its debt, perhaps before 2013.

The move increased pressure on euro zone leaders to ease repayment terms on bailout loans to Athens, just as Germany and its allies seem to have turned their backs on more radical steps to help it reduce its debt through bond purchases or buy-backs.

Moody's Investors Service downgraded Greek debt to B1 from Ba1 -- lower than Egypt -- and said it may cut further, drawing an indignant protest from the Greek Finance Ministry.

This downgrade caused Greece's Credit Default Swaps to hit a record high:

  • Five-Year CDS On Greece Hit 1035BPs Intraday, Above Record Close of 1032BPs
  • Cost Of One-Year CDS On Greece Rises 6.1% - Markit
  • $476 Mln New CDS Traded On Greece In Week Ended Feb. 25 - DTCC

The cost to insure EUR10 million of Greek bonds for five years spiked 5.3%, or $52,000 a year,

Meanwhile the EU just did something completely practical, they just voted to ban CDS speculation:

The European Parliament voted Monday to stop investors from buying insurance for government debt if they don't own the underlying bond, as it seeks to fight financial speculation.