Things are now happening so fast in the context of the ever further worsening debt and economic crisis that the ink has barely dried on an article when it already becomes outdated again.
In Greece, the PASOK government appears to be on the verge of falling on its sword. Yesterday a number of news sources reported that prime minister Papandreou was either A) negotiating to form a government of national unity coalition with the New Democratic Party (Greece's conservatives), B) reshuffling his cabinet, or C) contemplating his resignation. The latest is that after implementing B) – the cabinet reshuffle, there is now D) in train – a call for a vote of confidence in parliament, while riots are raging in Athens. As a result of all this to and fro, Papandreou appears to have lost even more support among his allies.
As Bloomberg reports:
Greek Prime Minister George Papandreou’s decision to reshuffle his Cabinet and demand his allies vote confidence in his government fueled dissent within his Socialist ranks and roiled financial markets.
The yield on Greece’s 2-year bond topped 30 percent for the first time on concerns Papandreou’s grip on power was slipping, threatening passage of a new austerity plan aimed at securing a second aid package and avoiding the euro-region’s first default. The resignation today of two members of Papandreou’s parliamentary group, prompted Socialists lawmakers to demand an emergency meeting with the premier.
The political turmoil came as European Union talks on forging a new bailout to prevent the first euro-area default stalled. The impasse over the aid formula and speculation that a government shakeup would disrupt passage of budget cuts and asset sales sent Greek bonds and the euro plunging. EU’s Economic and Monetary Affairs Commissioner Olli Rehn said in an interview that Greece would receive its next bailout payment.
Papandreou sought to reassert his authority in a televised address last night hours after police used tear gas to break up protests in central Athens and media reported he was in talks to step down in favor of a unity government. He said he would reshuffle his Cabinet and then call a confidence vote in parliament. He has yet to announce the details of the government shakeup.
What would happen if the Greek government stepped down and new elections were called? As far as we know, the government's funds will last for just about another 10 days. Then it is over – there will be no more money, unless the EU/IMF fork over more bailout funds. The government then would no longer be able pay for anything at all – no salaries, none of the bills that are coming due, and certainly not its creditors. It is probably no exaggeration to expect that chaos would result.
As the same Bloomberg report quoted above notes further:
If the no confidence motion fails, the market reaction is just the beginning,” Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London, wrote in a note. “Then Armageddon scenarios come into play, which include default and potentially the whole contagion scenario plays out.”
Greek confidence debates typically take three days with the ballot at midnight, meaning the vote isn’t likely before the evening of June 19.
Greece’s 10-year bonds declined for a ninth day, with the yield rising 22 basis points to 17.9 percent. The cost of protecting Greece against default climbed 129 basis points to a record 1,899 in London, indicating an 81 percent chance that Greece will default, according to prices compiled by CMA.
Meanwhile, the eurocrats continue to bicker over the details of the planned bailout. German rightly insists that private creditors must accept a haircut. France and the ECB are against this – the former because its banks have the biggest exposure to Greek debt of all banks in the euro area, the latter because it fears contagion would immediately serve to sink the other fiscal deadbeats, which could lead to massive troubles for banks across the entire euro area. Naturally, the ECB would itself immediately fall into a negative capital position – i.e. the central bank would become technically insolvent (we say 'technically' because it can of course still print money at will, regardless of whether its capital base is wiped out by losses on the securities it holds).
In reaction to the failure of the eurocracy to come up with a speedy resolution, Moody's has already put several large French banks on credit downgrade review due to their Greek exposure. S&P has meanwhile downgraded the biggest Greek banks to CCC – one notch above default.
Credit ratings agency Moody's says it may downgrade its ratings of France's three largest banks over their exposure to Greece.
Moody's said Wednesday that BNP Paribas and Credit Agricole face a one-notch downgrade, while Societe Generale could see a two-notch decline through their holdings of Greek government bonds or through their local banking subsidiaries.
Earlier this month Moody's downgraded Greece by three notches from a B1 rating to Caa1 with a negative outlook, citing increased risk that the financially stricken country will be unable to handle its debt problems without an eventual restructuring – paying creditors less than the full amount, or later than originally planned.
Meanwhile, ratings agency Standard and Poor’s (S&P) lowered its long-term counterparty credit ratings on four Greek lenders to "CCC" from "B."
The agency said that the financial profiles of National, EFG Eurobank, Alpha and Piraeus “are exposed to significantly heightened risks as a result of deterioration in Greece's creditworthiness and Greek depositors' perceptions of a possible government debt restructuring.”
S&P added that “the negative outlook reflects the possibility that the banks could be downgraded again if we believe the banks are likely to default on their obligations as defined by our criteria."
The ECB meanwhile noted that this is precisely the core problem posed by the Greek bailout/default saga. The euro area banking system may fall prey to contagion and cascading cross-defaults. As Bloomberg notes in this context:
The European Central Bank said the threat of the Greek debt crisis spilling over into the banking sector is the biggest risk to the region’s financial stability.
“Greece could have a contagion effect,” ECB Vice President Vitor Constancio said at a briefing in Frankfurt today, when presenting the bank’s semi-annual Financial Stability Review. “That’s the reason why we are against any sort of default with haircuts and any form of private-sector event that could lead to a credit event or a rating event.”
The euro area’s sovereign-debt woes have worsened as investors increased bets that Greece will not be able to pay its debts, sparking the region’s first sovereign default. The risk that euro-area banks holding Greek government bonds will be saddled with losses has jumped, after Standard & Poor’s slapped Greece with the world’s lowest credit rating on June 13.
"The euro area faces a very challenging situation that comes mostly from the interconnection of the sovereign debt crisis and the situation of the banking sector,’’ the ECB said in the review. “In light of the potentially very dangerous implications of sovereign-debt restructuring for the debtor country, including its banking system, a determined and unwavering focus on improving fundamentals” is required.
It seems we need that determined and unwavering focus on improving fundamentals to kick in over the next 24 hours or so.
While all of this is playing out, the markets are constantly hit with even more bad news: US economic data continue to dramatically weaken and undercut consensus expectations with every new release. Yesterday, it was the Empire State survey's turn (which plunged deeply into negative territory, way below the overoptimistic mainstream expectations) and a CPI reading that exceeded consensus quite a bit as well, implying that the Fed's hands are tied.
Concurrently, it became known that the collapse of Spain's housing bubble has once again accelerated. As the WSJ reports:
The decline in Spanish house prices accelerated again in the first quarter after the government eliminated generalized tax incentives for home purchases, data from Spain's National Statistics Institute showed Wednesday.
In a statement, the institute said first-quarter housing prices fell at a 3.5% quarterly rate and a 4.1% annual rate. That was the fastest rate of annual decline since the fourth quarter of 2009.
The data mirrored the trend shown by data published by Spain's Public Works Ministry in April. The ministry said first-quarter house prices fell by a 2.5% quarterly rate and by a 4.6% annual rate.
And those are the figures released by the National Statistics Institute that apparently gets most of its numbers from a real estate appraisal oligopoly that is firmly controlled by Spain's banks and thus publishes data that are prettifying the real extent of the price declines quite a bit. Independent appraisers have for a long time noted that the reality is far more grim.
Note in this context that the share prices of Spain's banks have come under severe pressure again lately, while Spain's 10-year government bond yield has actually just broken out to new high ground. It is not a decisive breakout yet, but we believe if it becomes one, then we can begin thinking about preparing the funerary rites for the European single currency experiment. It will then likely soon be all over but the shouting.
This happened after a Spanish bond auction today ended up "poorly received":
Spanish 10-year government bond yields hit 11-year highs on Thursday and other peripheral bonds suffered after tepid demand at a Spanish debt auction added to concerns that Greece's debt crisis is spilling over.
Fears that policymakers are struggling to find a solution to avoid a default for debt-laden Athens combined with worries over the stability of the Greek government to push investors into safe-haven core debt. That supported a French bond sale but did little to help a 2.8 billion euro auction of 10- and 15-year Spanish paper.
"We've already seen a decent concession going into the (Spanish) auction so they had to concede quite a substantial amount to investors in order to get them to buy," said WestLB rate strategist Michael Leister. "As we saw in Greece and the other countries, you can fund yourself and get liquidity but the crucial issue at some point in time becomes the price. Here it seems Spain is clearly heading in the wrong direction.
[Click all to enlarge]
Spain's 10-year government bond yield ends the session at 5.75% – a new 11 year high.
Naturally, yields on Irish and Portuguese debt also continued rising today.
To top things off, the Irish minister of finance Michael Noonan has decided that this would be a good point in time for him to also jump on the haircut bandwagon. He reportedly announced that senior bondholders in Anglo Irish bank can no longer hope to be spared. A laudable idea in principle, but he could have been a bit more circumspect about the timing. According to RTE News:
Mr Noonan said the Government will seek to impose losses on some senior bondholders in Anglo Irish Bank. He said that around €3.5 billion in senior unsecured, unguaranteed bonds issued by Anglo Irish Bank and Irish Nationwide Building Society should have losses imposed on them.
Mr Noonan said he had discussed this with the IMF, who supported the strategy.
The Finance Minister said these banks are no longer normal entities and are more like warehouses for bad debts. In that context, he would be going to our European partners to propose significant cuts in the money to be paid to the bondholders.
Noonan is of course perfectly correct both with his assessment of Anglo Irish Bank and his demand that bondholders must be prepared to face the consequences of their unwise investment decisions. But, as we said at the outset: when it rains, it pours – and this fits right in.
Market Turmoil
Not surprisingly, all of this has set already weak financial markets on the edge – in the case US stocks, literally on the edge of a decisive technical breakdown.
The SPX – it's so oversold it should normally bounce – and this makes a failure to bounce extremely dangerous. A market that breaks important support when it is already oversold often crashes.
Funny enough, someone appeared to be trying to buy the dip in Greek stocks yesterday. The Athens General Index produced an inverted hammer candle amid a few bullish-looking technical divergences with momentum oscillators that have recently developed.
Maybe Greek stocks are trying to find a low here? Of course, if the Greek banks end up without ECB funding and get rated "D," then this attempt to find a low will probably be quickly aborted again.
Below we show the CDS charts as of yesterday's close – note that as of today, CDS spreads on Greek debt are yet another 120 basis points higher, which these charts do not yet reflect. As to the Markit SovX index of CDS on 19 Western European sovereigns – we have always maintained that this was a very bullish chart, and it has now indeed moved to a new high.
CDS (prices in basis points, color coded)
Five-year CDS spreads on Portugal, Italy, Greece and Spain. There is now a panicky blow-off move in train in Greek and Portuguese CDS spreads.
Five-year CDS spreads on Ireland, France, Belgium and Japan – Ireland hitting yet another new high, closing at 770 basis points.
Five-year CDS spreads on Austria, Hungary, Romania and Bulgaria. These remain fairly tame for now, but are of course also bouncing a bit amid the growing turmoil engulfing Greece.
The Markit SovX Index of CDS on 19 Western European sovereigns- - a new all-time high for this measure. It was always a beauty of a bullish chart, and our steadfast and often repeated call for new highs has now been vindicated.
Conclusion
Will the can be kicked down the road one more time? It is certainly possible, but it looks now more and more as though we have indeed arrived at a critical juncture in the European debt crisis saga. Ultimately it is a crisis of the entire monetary system. It is after all the existence of a pure, completely unanchored fiat money system that has allowed the build-up of this huge mountain of private and public sector debt that appears ultimately unpayable.
Given the current deadlock in negotiations over Greece among the eurocrats, it may well be that things will finally get completely out of control. If so, the euro experiment may well end sooner than we thought possible, at least in its current form. As one disillusioned negotiator has put it according to a BBC report:
EU commissioners have a "profound sense of foreboding" about Greece and the future of the euro zone, a leaked account of a meeting has suggested.
The account, seen by BBC News, said this was in reaction to the "damning failure" of eurozone ministers to agree a new bail-out for Greece last night. It was written by an official who attended Wednesday's gathering of commissioners in Brussels.
The author warned that the markets would now "smell blood."
This "profound sense of foreboding" seems well justified.
Charts by Bloomberg.
