Posts Tagged ‘ Sovereign Debt ’

Europe’s Prisoner’s Dilemma – LTRO Needs to Continue for Years

May 22, 2012
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Europe’s Prisoner’s Dilemma – LTRO Needs to Continue for Years

European leaders have inadvertently created one of the financial world’s largest negative feedback mechanisms. By issuing long-term refinancing operations (LTRO) with cheap ECB funding for terms up to three years and encouraging European banks to take the funding and purchase assets such as sovereign debt, the ECB effectively has encouraged the European financial system to purchase and hold “money good” European sovereign debt. With cheap funding available and the ECB encouraging banks to take the money and invest/lend a situation was created where the natural buyers of sovereign debt were propped up and supported. With many of the bonds in Spain and Italy having maturities in the vicinity of 5-10 years, there is a good chance that the LTRO will need to continue for a number of years until...

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Deja Déjà Vu – A Third Summer of European Crisis

May 18, 2012
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Deja Déjà Vu – A Third Summer of European Crisis

Over the past week, it has become clear that a third annual conflagration throughout Europe is upon us. The crisis has morphed yet again, and like The Hydra, it has come back in a more menacing form. The issue this summer is more profound than the “sovereign debt crisis” which struck last summer. Last summer’s issues were always containable with simple resolve from the ECB. The market forced the issue in sudden manner and eventually a fix came in the form of 3-year long-term refinancing operations (LTRO). Astute observers will notice that today, sovereign debt rates, while higher, have not flared up to the levels they reached last year. European interest rates should not approach summer levels because there is a set playbook that works to contain sovereign rates...

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On Paranormal – A Review of the “New-New Normal”

January 6, 2012
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On Paranormal – A Review of the “New-New Normal”

PARANORMAL: beyond the range of normal experience or scientific explanation, not in accordance with scientific laws. A great friend of mine, and incredibly savvy investor, recently pointed me to Bill Gross’ January 2012 Investment Outlook: “Towards the Paranormal”. He suggested it was an intriguing, provocative, and worthwhile read. After reading the four page monthly I immediately agreed with all of those qualifications even though aspects of the paranormal thesis don’t sit with me. After pondering for a couple of days, here are my observations (Bill Gross, if you are a Crackerjack Finance reader, please feel free to comment at any time). Now would be the time to read the original piece on the PIMCO website to get much more out of today’s thoughts. The financial markets are slowly imploding...

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The Rest of Europe Can’t be German

December 12, 2011
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The Rest of Europe Can’t be German

The EU Summit and ECB meeting which transpired last week are likely to be the final supporting actions by Eurozone officials this year. The tack forward for Europe has been clarified; move ahead with the long and arduous process of fiscal unification, supported by a reactive ECB. The path ensures two outcomes; that there will be flare ups along the way which will negatively impact sovereign debt/currency markets, and that Europe’s economies will continue to slow as the mending process is drawn out. The way forward will be the German way forward, and the rest of Europe will need to accept it in the near term. Germany has the strongest and most robust economy in the Eurozone. German unemployment is low and the euro has already depreciated to levels...

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ECB Cuts Rates 25 Basis Points to 1% – Hawkish Press Conference Q&A Squashes Hopes of Sovereign Debt Purchases in Larger Amounts

December 8, 2011
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ECB Cuts Rates 25 Basis Points to 1% – Hawkish Press Conference Q&A Squashes Hopes of Sovereign Debt Purchases in Larger Amounts

The ECB issued a terse press release detailing an interest rate cut for the main refinancing operations of the Eurosystem (from 1.25% to 1.0%) commencing on December 14th. In addition, the ECB cut rates on the marginal lending facility and deposit facility by 25 basis points. This move was widely expected and had a limited impact on the euro or equity markets. The press conference and Q&A (45 minutes later) with financial reporters was where the real action took place. The only market friendly outcome was the announcement to extend lending to European banks from a one-year to a three-year term. The collateral requirements for these loans are also being loosened. The press conference was predominantly hawkish. When asked about hints earlier in the week that the ECB could...

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Mario Monti Announces Serious Austerity Plan for Italy – 2013 Balanced Budget Target Leads to Sovereign Debt Rally

December 5, 2011
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Mario Monti Announces Serious Austerity Plan for Italy – 2013 Balanced Budget Target Leads to Sovereign Debt Rally

Italian Prime Minister, Mario Monti, announced sweeping austerity measures and reforms, bolstering confidence in Italian sovereign debt markets. Monti’s plan includes tax increases, government spending cuts, pension savings and raising the retirement age. Italy needs to enact these reforms over the next couple of years, and there are some political risks to implementation, but the immediate market response is positive for this round of announcements as opposed to the cynical reactions in the summer and fall. Italian 10-year borrowing costs dropped from 6.68% to 6.10%. While it is dangerous to extrapolate any daily changes in sovereign debt yields due to the vagaries of European markets, this change is driven by a major announcement which would impact actual fundamentals (again if implemented) and the change in yields is simply a...

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China Starts Monetary Policy Easing Cycle & Rest of World Provides Additional Liquidity

November 30, 2011
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China Starts Monetary Policy Easing Cycle & Rest of World Provides Additional Liquidity

Overnight, financial market sentiment turned around pretty dramatically. The China A-Share market sold-off by 3.3% and approached the vicinity of recent lows. Fears started to mount that Chinese central bankers were going to be slow to ease monetary policy based on continued inflation concerns. After Asian markets closed, the People’s Bank of China announced that reserve ratios were being cut by 50 basis points, from 21.5% to 21.0%. The move was somewhat of a surprise and has started a turnaround in sentiment in the financial world. The reserve ratio cut is significant because it is the first time reserve ratios have been cut since 2008. China’s central bank has been allowing reserve ratios to generally trend higher since 2006 when the ratio used to be in the high single...

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Greece Will Stay On Board – Merkel and Papandreou Plan a Dinner Date in Berlin

September 27, 2011
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Greece Will Stay On Board – Merkel and Papandreou Plan a Dinner Date in Berlin

Greece will ultimately stay on board. There I’ve said it – and it is really what I think will happen. There were a number of “unity” headlines hitting over night which have led to a continuation of the rally in global risk assets. Emerging Markets which looked sufficiently panic sold to call out yesterday are up 3-6% across the board. Major stock markets in Europe are up 3-4%. At risk of sounding Pollyannaish about the whole episode it appears to me that Greece and the rest of the Eurozone are coming to terms and seeking out a middle ground which avoids the suicide option. My thesis for the past month has been that this looming crisis is avoidable across the Eurozone because it has morphed into a crisis of...

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Why A European Sovereign Debt Crisis Can Be Avoided

September 20, 2011
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Why A European Sovereign Debt Crisis Can Be Avoided

The European sovereign debt crisis has dominated financial news and been the primary driver of markets for the past month. I would argue that we are in an actual crisis in Europe and this is no longer about fears of a crisis. When banks can’t finance independently through the market and when large countries can’t issue debt at reasonable interest rates you are in the throes of a crisis. The outlook regarding how this unfolds is really the dominant driver behind any and all short and medium term investment decisions right now. If one believes that this crisis can’t be contained and it will be a 2008-2009 redux, then it would make no sense to be invested and a lot of sense to be short. If one believes this...

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Chitaly Starts to Mambo Italiano – China in Talks To Buy Italian Sovereign Debt?

September 12, 2011
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Chitaly Starts to Mambo Italiano – China in Talks To Buy Italian Sovereign Debt?

I mentioned this possibility over a month ago on August 5th, in the story “Chitaly – China to Purchase Italian Sovereign Debt?” Headlines just hit that Italy is in talks with China to directly buy Italian bonds according to the FT. This headline caused an immediate lift to depressed markets which is quickly getting faded. I believe this may actually transpire because it accomplishes two aims. Most clearly, it helps Italy fund its sovereign debt, which they had some trouble doing today as evidenced by the 1-YR note auction going for 4.15% this month vs 2.96% last month. Secondarily, China is desperate to maintain the euro, because this is the only other major currency which has the potential to be investible for large quantities of FX reserves. To the extent that China runs a...

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France to be downgraded – it should be – it doesn’t matter

August 10, 2011
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France to be downgraded – it should be – it doesn’t matter

Rumors are swirling that France is about to be downgraded by Standard & Poor’s. We do not believe France should be downgraded, unless every nation that is rated “AAA” changed to “AA” on Standard & Poor’s definition of “AA”. No country should have a higher sovereign credit rating than the US. No other nation has the world’s reserve currency or largest military – therefore they are riskier. If the market sells off on any news related to France, it’s an opportunity to buy. French Government bonds are 3.10%. German Government bonds are 2.11% Italian Government bond are 5.10% (down sharply from last week) Spanish Government bonds are 5.01% (down sharply from last week) What the S&P says about any other countries in the world really doesn’t matter in our view. The entire...

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Market Fears of a Recession in 2012

August 8, 2011
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Market Fears of a Recession in 2012

Well, the market clearly isn’t looking for the light at the end of the tunnel. Italian 10-YR bonds have surged, rallying 80 basis points (from a 6.09% yield on Friday to 5.29% yield today). Spanish 10-YR bonds have also surged, rallying 88 basis points (from a 6.03% yield on Friday to a 5.14% yield today). While we think this was the more important event over the weekend into Monday morning. The market is clearly on edge regarding the unintended consequence of the Standard & Poor’s sovereign debt downgrade. Standard & Poor’s also downgraded both Fannie Mae and Freddie Mac based on dependence on the US Government. A number of insurance companies and municipal bond issues will also be downgraded. If the US sovereign rating is not AAA, than nothing...

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