Fast and Furious

The Greeks

The Ides of October are not to be undone in 2011.

The Greeks either have more money than previously admitted or less leverage with the IMF than thought with the IMF indicating that the Greeks should make do until November until the next $11 billion rolls in.

Private banks are unwilling to mark Greek bonds to market, trading at 41 cents on a the dollar, with the French insisting that the value is 79 cents on the dollar a number conjured by wishful reflection on what bank balance sheets can bear without collapse rather than selling 41’s.

Contemplate the plight of the 11 million Greeks of which 4.9 million appear to be employed. The government borrowed 81,000 euros per worker with no clear idea of what to do with the money except borrow more for precisely the same reason.

The government plan is for 30,000 of the employed, most over 60, to be offered retirement without pension so lenders can vacation in Cannes and the next $11 billion from the IMF can be recycled.

To wit the Greek government needs to borrow $5 billion a month to meet payroll (annual tax revenue of $100 billion against expenditure of $150 billion), principal and interest payments average another $6 billion a month, ergo the magical $11 billion.

The repayment schedule is not linear. The December 2011 principal and interest due is closer to $12 billion while in March 2012 the number runs to $17 billion.

It is not the next $11 billion that matters; it is whether the ECB can manage the next $100 billion plus Spain and Italy whose principal and interest payments in the next ten months exceed $400 billion.

Back to the French for a moment.

The French accounting fiction that the price of an asset in the market can be doubled for balance sheet purposes should be enough to downgrade the country to Zimbabwean ratings.

Morgan Stanley has the great good fortune of having the largest exposure to French Banks in an amount equal to 60% of its market capitalization and a bomb crater in its capital.

Insurance on Morgan Stanley’s debt is elevating but not as quickly as that in Dexia, 8.42% from 1.62%, a quintuple before leverage juice, a municipal finance specialist circling the drain.

The French and the Belgians have subsumed, nationalized, Dexia with valuations that can only be imagined in Chocolate and Bordeaux.

The concern is not Dexia’s dalliance but the implication of the exponential increase in value of CDS (credit default swap) contracts.

For every insured (buyer) there is a seller (masochist) that must either hedge the risk of default in proper quantities of selling short the targets stocks and bonds, properly pious prayer, or some combination thereof.

Greek bond holders are left with prayer because the bonds do not trade, the insurance is too expensive, and the exposure to great.

It appears that thirty four US federally insured banks have written $7.4 trillion in credit insurance with and without collateral not solely in Europe, though this should provide scant comfort because in the derivatives universe French banks may insure default on US municipal bonds with Morgan Stanley intermediating and, literally, being left holding the bag if buyer and seller collapse.

It is an educated guess that Morgan Stanley has sold more than its share of default insurance in many multiples of its market capitalization and book value.

An innocent question is which other financial suspects are similarly situated.

	greece		tx rev	tx spend	deficit	funding
	principal	interest
Sep-11	2,000	13	8,333	12,500	4,167	6,180
Oct-11	3,625	1,170	8,333	12,500	4,167	8,962
Nov-11	3,300	90	8,333	12,500	4,167	7,557
Dec-11	11,722	125	8,333	12,500	4,167	16,014
Jan-12	1,641	350	8,333	12,500	4,167	6,158
Feb-12	813	206	8,333	12,500	4,167	5,186
Mar-12	15,735	1,562	8,333	12,500	4,167	21,464
Apr-12	0	465	8,333	12,500	4,167	4,632
May-12	8,450	1,496	8,333	12,500	4,167	14,113
Jun-12	553	436	8,333	12,500	4,167	5,156
sum	47,839	5,913	83,333	125,000	41,667	95,419

Jaques Costeau

The austerity of 200,000 Greeks with no income or property at the hands of their government as condition for the IMF and ESFS to release tranches of money in October so the government can promptly make payment of interest to banks without any left in the till for November is modest in comparison to mortgage events brewing in the US.

Of the 55 million residential mortgages outstanding in the US (plus or minus) over 10 million are on properties for which the mortgage exceeds the value of the property, or, in less flattering terms, the mortgage is underwater.

The State of California accounts for 2 of the 10 million mortgages with an unemployment rate exceeding 12%, officially. California, other states, and the federal government seek $20 billion in damages from banks for lending abuses that include short cuts in the foreclosure process since 2008.

California walked away from the talks yesterday because the banks request for a "broad release of claims" was unacceptable. What could that release request be and is it coincident to the retaining of criminal counsel by the Goldman CEO last month?

California Quits States’ Talks With Banks on Mortgages - NYTimes.com

Comfort

It is undeniable that Kingfisher beer is an exemplary social lubricant.

The beer, and the promoter, have lubricated the elevated thinking of financial institutions in India that have converted $500 million of $1.5 billion Kingfisher airline debt into equity at 62 a share (current price 25), extended maturity, reduced interest, and agreed to a moratorium on payments.

The promoter and UB Holdings have provided guarantees of $3 billion for which they receive $10 million each a year in fees.

A cynic would claim that the promoter is assured $20 million off the top of $1.2 billion in revenue on which the airline loses $250 million a year, close to $1 million a day. The fee is a suitable substitute for a dividend that may never come assured by a guarantee without value.

But the beer is good


Kingfisher got Mallya's guarantee for Rs 6,176 cr in 2010-11 - Hindustan Times

Seriously

Annual deficit of over $1 trillion. Sale proceeds of $22 billion over ten years. This is a plan?


Washington Considers Sale of Spare Properties to Raise Revenue - NYTimes.com

Petard

The assumption behind the commercial pantomime in Europe is that there is a crisis, a term that brings to mind bread lines in the US during the Great Depression or wheelbarrows of depreciating Reichsmarks after World Ward I.

The European crisis quantified is not one of consumer duress, though the proposed solution requires it, it is one of banking capital or the lack of it.

Banks unable to collect interest on loans (assets) must admit the loans are non performing and set aside reserves out of capital. Alarmingly bank managements are also required to engage in heightened commercial consideration by estimating the probability of recovering a percentage of the principal on which the the interest has vanished.

Managements are challenged enough to price and make loans which carry the implicit belief that the borrower is good for the principal. That optimism is undiminished in estimating, say, that there is one hundred percent likelihood that eighty percent of the principal of a loan secured by the entertaining collateral of a sovereign Greek guarantee, an example, will be recovered.

Credit markets are helpful here. Notwithstanding the headline passage of the Germans adding more to an insignificant bail out till credit markets assess that the Greeks have defaulted and the likelihood of future recovery is 33 cents on the dollar.

Inquiry beyond a Greek property tax imposed on homeowners that will not pay the tax as a condition to the release of IMF funding and German underwriting of prior banking folly is not required.

The Finns to their credit have requested collateral, preferably cash, because they have little appetite for the same Greek bonds that appeal to the IMF and ESFS (euro bailiout fund).

The flow of funds will be IMF loans and ESFS purchases of Greek bonds to be recyled in interest and principal payments to banks for previous borrowing. The new loans come with the condition that the Greeks agree to pay citizens less benefits, reduce employment, and impose new taxes on citizens who are incapable of paying the old ones.

In the end banking capital is preserved for the next quarter

Then?


http://www.nytimes.com/2011/09/30/business/global/even-if-europe-averts-crisis-growth-may-lag-for-years.html?pagewanted=2&_r=1&hp

Man Overboard

The price of risk as measured by the SP 500 in a long term view looks lower. Much lower

Interestingly in the last two weeks gold and commodity prices have declined substantially. Commodities in liquidation of speculation that economic growth will be closer to gravity than infinity

Gold because presumably EU central banks are selling to raise the chips to contribute to the ESFS pot.

Similarly US 10 year and 30 year treasury yields increased sharply in two days implying a selling of US treasuries by the EU for the same reason.

Man overboard




Michael G. Eckert (10 Per Page) - Public ChartList - Free Charts - StockCharts.com: - Sent using Google Toolbar

Wallowing

The EU is thinking and that is trouble

The private market, banks, lent money to Greece, Italy and other less than austere bedfellows for returns that were multiples of lending to austere Germans. In chasing higher yields bank credit analysis, questionable in the best of times, was left in the elevator.

That the less than austere are unable to squeeze enough revenue out of their citizenry for interest much less principal payments surprised only the regulators to whom banks have turned, the EU and IMF, for salvation and the Catholic Church for confession. Though the Church has reprimanded the Italians not for financial profligacy but the unsavory redress of the sins of lust and greed in public.

The EU rainy day piggy bank, ESFS, will be underfunded by three fourths even if all 17 member states agree to add to the till which would require the ESFS to do precisely what the banks did, borrow against the corpus to repay banks that borrowed to lend to the less than austere and lusty.

In the orderly power point world the EU has been instructed to complete the procedural exercise of approval before global governments convene on 3 November.

The convention will contemplate imposing financial penalty on errant government finances in the future if the metrics of debt to GDP and fiscal deficit to GDP are not abided.

In the meantime the citizenry will object, strenuously, to the new austerity and the EU may well be left to reconsider the considered plan.

Short equities, long dollars

Really

The IMF has $680 billion set aside for assistance to middle to high income countries. Really. Subtract the Greek pledge and the number reduces by half. The US claims the reserves are sufficient for IMF's real mission which is helping those developing or undeveloped countries that can't help themselves or whose leaders are helping themselves to the public till.

The Chinese claim that the US is mistaken because the US view requires a doubling of quotas, margin call, by member countries to meet the old mission, new mission, and serial defaults expected in lesser tiers of European harmony. The quota increase requires the assent of the 114 member parliaments, of which 40 have been obtained, which provides Republicans in the US marvellous political fodder against.

An aside, presume that US and European GDP growth declines by 3% then the Chinese would be required to increase spending by 18% to pick up the slack and, presumably, the Chinese are politely telling the IMF to take a long walk of a short pier.

For a moment consider not helping those that should not need the help, let the Greeks default and private lenders accept the consequence of the lending decision, double quotas, and direct the aid toward, say, Sub Saharan Africa instead of recycling interest payments to preserve worthless collateral on balance sheets of developed countries banks.

Eminent Domain

Eminent Domain

Chinese local governments seize land from peasants at harvest rates, rezone the land and dispose of it fifteen times higher to developers to developers.

The proceeds from the sale, those that make it into official coffers, are applied to repay the $1.7 trillion in state government borrowing because the States are unable to levy a property tax. Financial probity of the States and solvency of the country is at the mercy of demand for property.

Property demand is funded by banks and speculators flush with Chinese current account surpluses. One estimate is that China manufactures 70% of global sex toys accounting for annual cash flow in excess of $500 million. Presumably demand for toys will grow inversely to economic activity. Declining global GDP should lead to higher demand for less expensive but essential pastimes.

Interesting news that manufacturing activity unrelated to sex toys is declining with the Chinese purchasing manager’s index below 50, a leading indicator that removing 200,000 Greeks from government payroll, 10 million of the 55 million in US mortgages underwater, and other fiscal restraint reduces demand for everything.

The US Treasury Secretary thinks the ECB should guarantee sovereign bonds of EU countries without regard for modest regulation that prevents “monetizing” debt of constituents. The ECB will presumably suggest the Fed offer to guarantee the ECB guarantee which will be met with the passing of wind in a closed room. The margin call has come for shifting $2.5 trillion in assets to the Fed balance sheet on the prayer that US housing prices and employment would increase.

European debt comes in various disguise when household, non financial, and government debt as a percentage of GDP are summed.

The Irish (374%), Portuguese (328%), Belgians (315%) make the Greeks (264%) and Italians (233%) models of financial discipline. Dutch households (127%) of GDP have borrowed what the Dutch Government has not (27.5%). And the Finns are to be envied with a government net surplus of 56% of GDP. For the record the US (233%) is suggesting the Germans (188%) belly up to the bar.

Long dollar and short equities until the sovereign defaulters are permitted to be hoist by their own petard.

http://www.nytimes.com/2011/09/24/business/global/chinas-economic-engine-shows-signs-of-slowing.html?pagewanted=1&_r=1&ref=business

Viva Cuba

Greece and Italy will only qualify for new money from the EU and IMF if the governments reduce employment by over 200,000 combined. Presumably these will be living civil servants. The popular unrest will be measured in bottles of ouzo.

The US president plans to save $3.1 trillion by walking swiftly out of two wars ($1.1 trillion), increasing tax rates for earners in excess of $1 million, closing loopholes for income between $200,000 and $1 million ($1.5 trillion), and reducing entitlement spending for the balance. A strategy to insure the ire of all constituents and a new low in economic thought.

The Fed bereft of new monetary ammunition intends to make do with what it has in operation Twister, rolling $20 billion a month in maturing treasury notes into long term bonds at a rate that will insure the Fed holding 70% of the long term inventory.

Enlightened minds perched on economic bar stools believe that Twister will add .4% to US GDP (or the equivalent of 6% growth in India) and add 350,000 jobs. Sober patrons think that the only addition to GDP will be roughly $100 million in fees to the Street for executing the roll which will promptly be spent at Harrys.

The Chinese are loafing through this intellectual wreckage collecting mineral rights and offering a few billion here and there to insure demand for Chinese food in recipient countries outpaces McDonalds but more importantly to camouflage the $1.7 trillion lending bubble in its provinces.

Denial, economic contraction, and unemployment tend not to increase asset prices that are the collateral for bank and government balance sheets to engage in continued folly.

To wit the seers at OPEC have opined that anticipate demand for its wares are less than expected fearing prices closer to $50 than $150.

Sip Havana Club at sun down in the only civilized bastion left in the western hemisphere

Viva Cuba

An indescribable act of financial minutiae

To wit

Treasury Secretary Geithner who presided over the downgrade of the full faith and credit of the US Government lectured India on its archaic financial architecture inadequate to fund the infrastructure development requirement of the country (which the inimical vice chair of the planning commission estimates to be $1 trillion plus or minus)

The suggestion was to expand permissible holdings of GOI and infra bonds by foreign investors, and, quite naturally, the influence that accrues to holders of sovereign debt

This thought should have been discarded into the nearest bin.

Sadly the inspired financial minds of the country plunged into the shallow end of the empty pool head first concluding that FII's may invest $25 billion in bonds of 5 year maturity with a three year lock in to solve a trillion dollar thirty year problem. This plan was met with a dinner tip of $100 million in investment.

Not to be deterred the mandarins submit that the lock in period for $3 billion of the $25 should be reduced to one year.

Frankly the only sensible solution is to outsource the government debt management function to the Chinese under the condition that all infrastructure investment is financed and the taps to Tibetan water remain open, much more efficient than dealing with US, European, and Japanese investors that have been reduced to intermediaries of Chinese capital.


Govt eases FII investment rules in infra - The Times of Indiat