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.