Tag Archives: EFSF

After the Greek Haircut it’s Time to Focus on the ECB

So much is going on in Europe. The number one thing I’m waiting on is the Greek bond haircut but something around 50% seems fairly certain at this point. The euro will rally once there is an agreement but it will be telling to see how much it rises.

Quick recap/analysis of today’s news:

–          EU agrees to 9% bank capital ratio. €106B to be raised, with 75% of it in Greece, Spain, Italy and Portugal. The list of how much banks in each country must raise is here.

There is no way Greek banks can raise €30 billion so that money is coming straight out of the EFSF. I don’t know all the details of European financials but I’m eager to see how they react in stock markets tomorrow. I’ll go from there.

There is also to be a question about whether convertible debt will count toward the ratio but I’m guessing Germany and Spain will lose.

Berlin and Madrid are mounting a last-ditch bid to lower the bar by allowing a broader range of capital to be used as part of the “temporary buffer”. German and Spanish banks in particular will have a lot more work to do to reach the new, 9 per cent core tier one capital ratio if they are not allowed to count some hybrid forms of capital. (link)

–          No concrete news on the EFSF but it sounds like a two-pronged approach. 1) first loss guarantees on new periphery debt 2) Use the EFSF and get investors (China) build a fund that will buy debt on the secondary market.

For instance, Italy will need to issue about €300 billion next year. If the EFSF guarantees the first 20% of losses, that would amount to €60 billion. If Italian funding is still under strain, the second approach will be implemented.

At those rates, the EFSF will be swallowed up fairly quickly. The longer-term risk is that debt markets get addicted to the EFSF backstop and that it will never be removed. On the face of it, it’s an okay plan. The near-term risk is that the details fail to impress.

–          Italy delivered a letter of intent to reform spending and sell €15 billion of assets over the coming three years.

A fist-fight broke out in Italian parliament about pension reform after an opposition leader said coalition partner Bossi’s didn’t favour pension reform because his wife retired on a generous state pension at the age of 39 from her job as a teacher.

I would say stability in Italy is a major question mark right now and Burlesconi is a major liability. The whole thing could come crashing down because of these idiots.

As I mentioned, the Greek haircut news is really the last piece of the puzzle for the immediate term. The market will then immediately shift its focus to the ECB’s Nov. 3 meeting, just one week away.

Although this is the first meeting led by Draghi, I don’t see him hesitating to cut rates.

Regardless of the outcome, the market will make a strong push to price in a dovish scenario over the next three days. I’m not trading this news but I would like to sell a post-Greek-haircut bounce, especially if a spike over 1.40 looks like a short squeeze.


EFSF Guideline Report is No Decisive Solution

The euro jumped 100 pips in a flash on the release of the EFSF guideline report. The move is nonsense and has retraced completely. EUR/USD has fallen as low as 1.3656 which is 120 pips below our trade entry point. Let’s take a closer look at the news.

There is nothing remarkable about the text of the document. It merely gives the EFSF power to purchase bonds in the secondary market, something that was widely expected. It also allows for credit lines to governments for the specific purpose of bank recapitalization but only as a last resort. The rules are effective immediately.

Intervention should be done “on the basis of ECB analysis and following a decision by mutual agreement from member states” and the condition for access requires “continued compliance with appropriate policy reforms” dictated by euro area finance ministers.

This draft may be all that’s accomplished this weekend. The latest reports suggest another round of meetings has been set-up for next week because of disagreements over leveraging the EFSF and the size of the Greek haircut.

“There will be no agreements,” said one senior German official. “This will now happen Wednesday at the earliest.”

The weekend will flop but the stone has been kicked down the road. There is a chance that 1.3650 breaks as headlines disappoint. I’m tempted to book profits if we see a large EUR selloff before the weekend.

Negotiations are divided on the French idea of turning the EFSF into a bank. Germany is adamantly opposed but may be growing isolated. If Sarkozy is able to force the idea forward, it would be the worst-case realistic scenario for EUR shorts.

In other news, Germany cut its growth forecast for next year down to a paltry 1%. It’s hard to imagine any other economies in the region doing any better.


Looking to Buy EUR on ‘Marshall Plan’

The euro surged on news that the European bailout fund will be given the power to buy periphery debt in the secondary market. We think this is a wise move by European leaders. It will chase out shorts in the bond market and spook CDS buyers. We anticipate buying to be unannounced (unlike the Fed’s QE).


The riskier part of the plan, which is a draft “Marshall Plan”, calls for EU investments and growth stimulation in Greece. Banks will be recapitalized with an estimated €25 billion via loans to the Greek government. The EFSF will issue loans at around 3.5% and the duration will be extended from 7.5 years to at least 15.


As the news leaked out, EUR/USD jumped to 1.4315 from 1.4190. Technically, it sparked an outside bullish reversal candle. The move above 1.4309 surpasses the 100-day and the 55-day moving averages.


At the same time, S&P said there is a 50% chance it will downgrade the US to AA in the next three months. They warned that a short-term agreement to boost the debt ceiling without a long-term deficit-cutting plan could cause the downgrade as soon as early August. Under this scenario, they see US long-term yields rising 25-50 bps with GDP growth also cut by 25-50 bps.


They said a failure to reach an agreement would likely shove the US economy back into recession. They think it’s possible the Treasury could delay other payments and push default beyond Aug. 11. The latest possible date they see is Aug. 15, when $62 billion in interest is payable.