With Greece announcing yesterday they won’t meet their deficit targets the chances of sovereign default are rising. Unfortunately they have a history of defaulting.
Greece on Edge of Biggest Insolvency 24 Centuries After First City Default
History’s first sovereign default came in the 4th century BC, committedby 10 Greek municipalities. There was one creditor: the temple of Delos, Apollo’s mythical birthplace.
Twenty-four centuries later, Greece is at the edge of the biggest sovereign default and policy makers are worried about global shock waves of an insolvency by a government with 353 billion euros ($483 billion) of debt — five times the size of Argentina’s $95 billion default in 2001.
“There is a monstrously large amount of uncertainty and a massive range of possibilities,” said David Mackie, chief European economist at JPMorgan Chase & Co. in London. “A macroeconomic disaster could be averted but only by aggressive policy action” by central banks and governments, he said.
After two international-bailout deals, three years of recession and budget-cutting votes that almost cost him his job, Greek Prime MinisterGeorge Papandreou says throwing in the towel now would be a “catastrophe.” Potential consequences of a national bankruptcy include the failure of the country’s banking system, an even deeper economic contraction and government collapse.
The fallout may echo the days following the 2008 implosion of Lehman Brothers Holdings Inc. when credit markets froze and the global economy sank into recession, this time with the prospect that the 17-nation euro zone splinters before reaching its teens. The International Monetary Fund, whose annual meetings start in Washington today, reckons the debt crisis has generated as much as 300 billion euros in credit risk for European banks.
Default Risk
Greek two-year yields surged above 70 percent today and credit-insurance prices on Greece indicate the chance of default at more than 90 percent. Investors can expect losses on Greek debt of as much as 100 percent, says Mark Schofield, head of interest-rate strategy at Citigroup Inc. in London.
“People, justifiably, think the crisis is what we’re living now: cuts in wages, pensions and incomes, fewer prospects for the young,” Greek Finance Minister Evangelos Venizelos told reporters yesterday in Athens. “Unfortunately this isn’t the crisis. This is an attempt, a difficult attempt, to protect ourselves and avert a crisis. Because the crisis isArgentina: the complete collapse of the economy, institutions, the social fabric and the productive base of the country.”
Even if Greece receives its next aid payment, due next month, default beckons in December when 5.23 billion euros of bonds mature, saidHarvinder Sian, senior interest rate strategist at Royal Bank of Scotland Group Plc.
‘Too Late’
“It’s too late for Greece,” Howard Davies, a former U.K. central banker and financial regulator, told “Bloomberg Surveillance” with Tom Keeneand Ken Prewitt. “The Greek situation is tumbling out of hand and I suspect Greece will not be able to avoid a substantial default.”
The introduction of the euro and global financial connections mean previous Greek defaults in the 19th and 20th century, most recently in 1932, don’t provide a decent precedent for a failure to satisfy lenders now.
“Contagion will be violent” as the price of the two-year Greek note tumbles below 30 cents per euro, predicts Sian. The European Central Bank would be the first responders through purchases of government debt, he says.
Greek Banks
The country’s banks, of which National Bank of Greece SA (ETE) is the largest, would be the next dominoes. They hold most of the 137 billion euros of Greek government bonds in domestic hands, a third of the total and three times their level of capital and reserves, says JPMorgan Chase. As those bonds are written down and equity wiped out, banks would lose the collateral needed to borrow from the ECB and suffer a rush of withdrawals that likely triggers nationalizations, said Commerzbank AG economist Christoph Balz.
“No banking system in the world would survive such a bank run,” said Frankfurt-based Balz.
A hollowed-out banking sector wouldn’t be the only danger to an economy that the IMF says will contract for a fourth year in 2012. The Washington-based lender said this week that Greece will shrink 5 percent this year and 2 percent next year, reversing a forecast of a return to growth in 2012.
Unemployment is set to rise to 16.5 percent this year, and to 18.5 percent next year, the highest in the European Union after Spain and dry kindling for potential social unrest.
Even after saving 14 billion euros in debt repayments, much depends on what deal Greece could strike with its creditors.
Debt Load
To restore market confidence the debt needs to be pared to below 100 percent of gross domestic product, Stephane Deo, chief European economist at UBS AG, said in a July study that noted national default was “invented” in Greece with the Delos Temple episode. At the time, the IMF was projecting the debt to peak at 172 percent next year.
The current debt suggests to him a reduction in the face value of outstanding securities — or haircut — of about 50 percent, which would pare the burden to around 80 percent of GDP, the same as Germany and France. Citigroup’s Schofield estimates a writedown of 65 percent to 80 percent, potentially rising as high as 100 percent as the economy slows further.
If default is limited to Greece, the fallout may be contained, say Nomura Securities International Inc. strategists including New York-based Jens Nordvig, whose projections allow for an 80 percent haircut. They estimate euro-area banks would lose just over 63 billion euros, with German and French institutions losing 9 billion euros and 16 billion euros respectively. The ECB would face about 75 billion euros in losses on Greek debt it has bought or received as collateral, they say.
‘Large Haircuts’
Such amounts suggest “the losses from Greece-related exposures in isolation look manageable, even in a disorderly default scenario with large haircuts,” though the ECB would probably require fresh capital from euro-area governments, Nordvig and colleagues said in a Sept. 7 report.
A debt exchange that was part of the second Greek bailout approved by European leaders in July would impose losses of as little as 5 percent on bondholders, according to a Sept. 7 report by Barclays Capital analysts.
The risk is that the rot spreads beyond Greece as investors begin dumping the debt of other cash-strapped European nations, said Ted Scott, director of global strategy at F&C Asset Management in London. Portugal and Ireland have already been bailed out, while speculators have also tested Italy and Spain. Italy, the world’s eighth-largest economy, has a debt of almost 1.6 trillion euros, while Spain, the 12th biggest economy, owes 656 billion euros.
‘Grand Solution’
Those possible ripple effects explain why policy makers won’t let Greece default, said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London. He expects them to strike a “grand solution” in which richer euro countries such as Germany support the weak and begin issuing joint bonds.
Policy makers “would only allow a Greek default if they think they can contain the fallout, which is a dangerous presumption,” said Diebel.
If Greece, Ireland, Portugal and Spain all impose haircuts, European banks could lose as much as $543 billion with those in Germany and France suffering the most, according to a May report by strategists at Bank of America Merrill Lynch.
Even those figures don’t tell the full story because they omit indirect exposure via derivatives such as credit-default swaps. Economists at Fathom Financial Consulting in London calculated in June that U.K. and U.S. banks hold such insurance on Greek debt totaling 25 billion euros and 3.7 billion euros respectively. Extend that metric to the whole European periphery and U.S. banks have a 193 billion euro exposure.
‘Even Worse’
Such linkages threaten an “even worse crisis” than the folding of Lehman Brothers, said Scott. “The amount of outstanding debt is more than with Lehman and we don’t know the amount of derivative exposure.”
To support the financial system and stave off an economic slump, Carl Weinberg, founder of High Frequency Economics Ltd. in Valhalla, New York, says governments must create a fund to inject capital into banks as the U.S. did with its $700 billion Troubled Asset Relief Program.
“If banks fail, or if they fear big losses, they will stop lending,” said Weinberg. “As things stand today, a credit crunch will corset euroland and a depression will ensue when Greece fails and takes out euroland’s banking system.”
G-20 Signals
Signaling efforts to contain the crisis, European officials including French Finance Minister Francois Baroin yesterday said they may be willing to use leverage to boost the firepower of their 440 billion-euro bailout fund. Group of 20 finance chiefs said after talks in Washington late yesterday that European authorities are willing to “maximize” the fund’s impact by the time the group next meets Oct. 14-15.
The ECB may also intensify its own attempts to support growth and ease financial market tensions as early as next month, Governing Council members Ewald Nowotny and Luc Coene said. Potential measures include the reintroduction of 12-month loans to banks, while JPMorgan Chase’s Mackie said today he expects the central bank to cut its benchmark interest rate of 1.5 percent next month.
BofA-Merrill Lynch economist Laurence Boone calculates a disorderly Greek default with spillover into Spain and Italy could mean the euro-area contracts 1.3 percent in 2012, using the Lehman Brothers episode as a benchmark.
Waiting for Surplus
Her “high probability” scenario of a Greek restructuring in 2013 when Europe’s permanent crisis resolution mechanism is operational and Greece is closer to having its primary budget in balance suggests growth of 1 percent next year. The “increasingly likely” option of an orderly restructuring at the end of this year would mean expansion of 0.1 percent, she projects.
Hanging over the debate is also whether Greece could default and remain a member of the euro area. Nouriel Roubini, co-founder of Roubini Global Economics LLC in New York, proposes that default — and an end to debt repayments and required austerity measures — be twinned with an exit from the euro –an approach rejected by European and Greek policy makers — to restore competitiveness and debt sustainability.
Rebounds
After shrinking 10.9 percent in 2002 following its decision to default and devalue, Argentina’s economy grew eight years straight, exceeding 8 percent in every year aside from 2008 and 2009. Russia was growing in double digit just two years after defaulting on $40 billion of local debt in 1998.
In contrast, facing only hard choices, EU officials have taken half-measures in the hope that the situation would somehow turn around, said Rodrigo Olivares-Caminal, senior lecturer in financial law at the University of London.
“What they have done so far is a patchwork approach,” he said. “Now things are much worse. It’s becoming more expensive not only in economic terms but also in social terms for Greek citizens because now there will be redundancies, now there will be more taxes there will be less jobs and things will get worse.”
To contact the reporters on this story: Simon Kennedy in London at skennedy4@bloomberg.net; Maria Petrakis in Athens at mpetrakis@bloomberg.net
When one gets too depressed over falling stock & home prices, ones favorite football team losing, kids misbehaving or spouses nagging. We need to remember that things may not be as bleak as they seem. Here are some material things that prove the trend toward the better: In 1990, the avg American family had 2 tv’s, 2.43 in 2000 and 2.9. in 2010. In ’90 the cell phone was but a dream yet we had 1 in ’00 and 2.3 in ’10. In ’90 we had 1.77 vehicles, 1.89 in ’00 & 1.92 in ’10. Or that most important luxury, air conditioning, 38.9% in ’90, 53.7% in 2000 and 61.4% in 2010. We are better fed; we are healthier and certainly we have more “stuff” than any generation or
civilization in history, and we’ll be better fed, be even healthier and have even more ‘stuff” in the future. The Gartman Letter 9.29.11
Euro Crisis Makes Fed Lender of Only Resort as Banks Chase Dollar Funding
By Craig Torres and Caroline Salas Gage – Sep 28, 2011 10:09 AM ET
The U.S. Federal Reserve building stands in Washington, D.C.. Photographer: Andrew Harrer/Bloomberg
The Federal Reserve, chastised by Congress for lending money to foreign institutions including a Libyan-owned bank, is once again the lender of last resort for banks around the world it knows little about.
Three years after the collapse of Lehman Brothers Holdings Inc., money-market borrowing rates for dollars are rising, leading the Fed and European Central Bank to make the currency available to Europe’s institutions for as many as three months. U.S. prime money-market funds cut their exposure to euro-zone bank deposits and commercial paper, or short-term IOUs, to $214 billion in August from $391 billion at the end of last year, according to JPMorgan Chase & Co. data.
The failure of regulators worldwide to address European banks’ fragile dependence on short-term funding is “putting the Fed in a really awkward position,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington regulatory research firm whose clients include the biggest U.S. banks. The swaps with Europe “are an extremely advantageous political football” for critics of the Fed, she said.
The extended funding comes as the U.S. central bank is already under fire for its unprecedented monetary stimulus. Republican leaders including Representative John Boehner of Ohio and Senator Mitch McConnell of Kentucky wrote Chairman Ben S. Bernanke and the Board of Governors on Sept. 19, asking them to “resist further extraordinary intervention in the U.S. economy.”
Lawmaker Criticism
Representative Ron Paul, a Texas Republican who wants to abolish the Fed, and Senator Bernard Sanders, a Vermont independent, have criticized its loans to foreign institutions.
“The Fed has made good on most of its investments over the years, but increasing its exposure and that of the U.S. government to foreign banks is a moral-hazard problem,” said Edward Royce of California, the third most-senior Republican on the House Financial Services Committee. “We are effectively incentivizing U.S. money-market funds to continue to finance these banks.”
U.S. regulators also are becoming less patient with what are turning out to be dollar-funding runs against foreign banks. Financial institutions are too dependent on short-term money- market investors that tend “to flee at the first signs of distress,” William C. Dudley, president of the Federal Reserve Bank of New York, said Sept. 23 in a Washington speech.
Regulators also lack access to data on foreign institutions operating in the U.S. that would allow them to “make informed judgments about the adequacy of such firms’ capital and liquidity buffers,” he said.
Large Losses
Investors are fleeing because of concern that banks will take large losses if a euro-zone nation such as Greece defaults. Europe’s debt crisis has generated as much as 300 billion euros ($408 billion) in credit risk for the region’s banks, the International Monetary Fund said last week.
Against the euro, the dollar is heading for its biggest monthly advance since November last year as European policy makers fail to contain their region’s sovereign-debt crisis. It was little changed today at $1.3575 at 3:11 p.m. in Tokyo.
The London Interbank Offered Rate at which banks say they can borrow for three months in dollars rose for a 14th day today to 0.36856 from 0.36522 percent yesterday, according to data from the British Bankers’ Association.
ECB Coordination
The ECB said Sept. 15 it will coordinate with the Fed and other central banks to provide three-month dollar loans to banks to ensure they have enough of the currency through the end of the year. The Fed bears no foreign-exchange or credit risk on the swap lines because the Frankfurt-based ECB is its counterparty.
There were $575 million in outstanding swaps with foreign central banks as of Sept. 21, Fed data show. The ECB loaned a similar amount of cash to two euro-area banks earlier this month in seven-day transactions. The first of three ECB three-month dollar-loan offers starts Oct. 12.
The Fed facility provides a critical “ceiling” on funding squeezes that allows investors to avoid panic and distinguish between healthy and troubled banks, said Jerome Schneider, head of the short-term strategies and money-markets desk at Pacific Investment Management Co. in Newport Beach, California.
“What you don’t want to have is liquidity risk become intertwined with solvency risk,” Schneider said. The swap lines are “the foundation right now to provide a backstop.”
Biggest Borrowers
After the criticism earlier this year of lending to overseas institutions — including Arab Banking Corp., part- owned by the Central Bank of Libya, after Lehman collapsed in 2008 — New York Fed researchers said U.S. branches of foreign banks were among the biggest borrowers from the discount window because they lack deposit bases. The window is the Fed’s oldest backstop-lending tool.
In an April 13 post on the New York bank’s research blog, the researchers said these institutions have relied more heavily on so-called wholesale funding for dollars, including the money markets and foreign-exchange swaps. Supporting these banks helped maintain foreign investment in the U.S., they said.
The Fed “does need to be concerned about how a liquidity run on the European banks will impact us — our financial markets, our financial institutions, the economy as a whole,” said Republican Representative Kevin Brady of Texas, the vice chairman of Congress’s Joint Economic Committee. The Fed needs to define its safety-net policies and use the extension of its credit as a lever to persuade European regulators to work on funding stability, he added. He will call on Bernanke to address these concerns at an Oct. 4 hearing, he said.
Policy Gap
“The Fed’s lack of a lender-of-last-resort policy really does create tremendous market uncertainty” and provides an incentive for institutions “to run to the politicians,” Brady said. “It does create moral hazard, no doubt about it.”
Euro-zone banks and other institutions were more than $350 billion in debt to the Fed’s emergency-lending facilities at one point during the 2008-2009 financial crisis, according to datacompiled by Bloomberg News. The analysis was based on Fed documents released earlier this year after court orders upheld Freedom of Information Act requests by Bloomberg LP, the parent company of Bloomberg News, and News Corp.’s Fox News Network LLC. Fed lending to these entities totaled more than $100 billion on an average day.
Dexia SA (DEXB), based in Brussels and Paris, was the biggest euro-area borrower, with as much as $58.5 billion of Fed loans on Dec. 31, 2008. BNP Paribas (BNP) SA in Paris borrowed as much as $29.3 billion on April 18, 2008. The largest U.S. borrower, New York-based Morgan Stanley (MS), took $107.3 billion of loans on Sept. 29, 2008.
Unstable Funding
Banks that rely on unstable short-term funding risk having to return to official sources for money until liquidity and capital are bolstered, said Viral Acharya, a New York University Stern School of Business professor and author of books on financial stability.
“All the national regulators have to agree that their banks need to raise capital,” he said. “The regulators are not sufficiently united. No one country is taking the leadership to realize the problem is getting out of hand.”
The Basel Committee on Banking Supervision, a group of regulators and central bankers from 27 nations including the U.S., has agreed on liquidity guidelines; the first round is slated to be phased in by 2015.
While the Fed is legally required to lend to banking entities in its districts, it “does have a choice” regarding how it will extend the swap lines, said William Poole, former president of the Federal Reserve Bank of St. Louis.
“European governments have substantial dollar holdings of U.S. Treasury securities, so why not sell some of their dollar securities to support their own banks?”
To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Caroline Salas Gage in New York at csalas1@bloomberg.net
Retailers are starting the holidays even earlier this year
By Bruce Horovitz, USA TODAY Updated 9/12/2011 10:35 AM
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Santa’s becoming a September fixture.
By Amanda Schwab, AP
Dancers gathered in Times Square to perform a choreographed routine to promote The Radio City Christmas Spectacular’s annual Christmas show on August 11.
In an economy in which consumers will do almost anything to save a buck and retailers will do almost anything to make a buck, it’s common for stores to roll out holiday goods this month.
Christmas merchandise has been at Costco stores since Sept. 1 and will begin showing up on some Home Depot shelves Sept. 19. Kmart and Sears will begin selling Christmas trimmings Sept. 25. And Walmart and J.C. Penney will start selling Christmas merchandise before month’s end.
“Retailers are putting out a little bit of holiday stuff earlier each year,” says Mike Gatti of the National Retail Federation’s marketing division. “They know a substantial number of consumers will pick out Christmas tree ornaments even as they’re picking out Halloween pumpkins.”
STORY: Wal-Mart brings back layaway for holiday shoppers
STORY: Lady Gaga takes over Christmas window at Barneys
STORY: Stores cut holiday hiring
More than 37% of shoppers — and 42% of women — plan to do some holiday shopping by Halloween, reports an NRF consumer survey. Retailers are happy to oblige as they chase the estimated $450 billion of holiday spending.
That’s why some retailers:
•Began Christmas already. JoAnn Fabric has had holiday fabrics on its shelves since July, and A.C. Moore has had them since August.
•Start in September. “Historically, we are in seasons early and out early,” says Richard Galanti, Costco’s chief financial officer.
After rolling out Christmas merchandise in mid-October the past few years, this year Walmart will start in late September, spokeswoman Tara Raddohl says.
Customers want early holiday merchandise to space out holiday purchases, Home Depot spokeswoman Jen King says.
•Kick off Christmas in October. Everything from outdoor holiday inflatables to Christmas lights will hit shelves at Lowe’s stores Oct. 1, spokeswoman Colleen Maiura says.
Nordstrom is bucking the trend. “It’s been our long-standing tradition to not decorate our stores for the holidays until after Thanksgiving,” spokeswoman Pamela Lopez says. “We believe in celebrating one holiday at a time.”
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Yesterdays closing level of the Standard & Poors 500 stock index of 1129 also occurred on April 22, 1998. A time in which we were just learning about a woman named Monica Lewinski!
From today’s Cashin’s Comments..
Things turned a bit more philosophic at last night’s convocation of the Friends of Fermentation. It was not a plenary session but rather a more intimate group – about the size of a sub-committee. And, as often happens at watering holes, folks drifted in and out, going to a meeting or coming from one.
The core of the group was a trio of card-carrying members – a hedge fund veteran, an institutional floor broker and yours truly.
After running through the day’s events and action, the topic drifted, naturally, to the stunning leadership vacuum, both here and in Europe. Another bowl of peanuts was ordered and the conversation began to drift toward the possibility of the Fed doing a reprise of Operation Twist from the 1960’s. We began to focus on the Fed’s lengthening maturities when another shift took place.
For two decades, we have heard that “we” are saddling our children and grandchildren with a mountain of debt that would burden them potentially for their entire lives.
Study groups (e.g. Simpson/Bolles) tell us that there is no quick fix to these deficits and that they may take decades to rein in.
The group wondered aloud why the Treasury and the Congress were not being more opportunistic. Rates are at historical lows. Why aren’t we issuing 50 year or even 100 year treasuries? At these exceptional rates, that would allow us time enough and room enough to put the debt in order – a chance to structure the debt hodgepodge in an almost logical manner. It would give us a chance to hand off to our children something far less burdensome.
More ice cubes were marinated and the brain trust (ex me) concluded that the primary deterrent probably was that going to a 50 or 100 year might raise interest costs somewhat. That would yield, quickly, to political finger-pointing.
So, here it was again – politics. I don’t want to be accused of “busting the budget” by auctioning something that yields
several basis points more. “The kids? The hell with the kids! They ain’t voting in this election.”
Say, Sean, ya got any pretzels back there?
Source: UBS
Have you noticed how the “blame” seems to have shifted from the Bankers and Wall St. to the Politicians?
Our very good friend and fellow trading veteran, Dennis Gartman, came across an enlightening analogy from the blog “Things That Make You Go Hmmmmm.” Here’s the bit: If the US government was a family, they would be making $58,000 a year; they spend $75,000 a year and are $327,000 in credit card debt. They are currently proposing BIG spending cuts to reduce their spending to $72,000 a year. These are the actual proportions of the federal budget and debt reduces to a level that we can understand. Kind of puts the debt debate in a rather different perspective.
Cashin’s Comments 8.15.11
