Banks run eurozone crisis scenarios as S&P cuts Greece to junk – With markets anticipating a Greek debt restructuring, bank traders and risk managers are preparing for a wider crisis that could drag in northern European countries, tip the euro into a tailspin or even threaten the eurozone’s integrity. Banks are shorting the euro, along with German and French government bonds, as a hedge against an escalation of the Greek debt crisis. Their fear is that a Greek restructuring is inevitable and will scare investors away from other vulnerable members of the eurozone. One obvious consequence would be a weakening of the single currency, but banks have entertained a variety of other, wilder scenarios as they seek to immunise their books against a possible Europe-wide crisis.
Random Thoughts on the irony of Minarchism – Just how limited should "limited government" be? If you believe certain right wing commentators both on the internet and in the real world, "the state’s only legitimate function is the protection of individuals from aggression, theft, breach of contract and fraud.". This quote comes from the introduction to the Wikipedia article on Minarchism, which is probably a better and more descriptive title than "limited government". Modern day minarchists – virtually all of them from the United States of America – believe that the state’s power should be limited to national defence (ie the armed forces), law enforcement (ie the police) and the legal infrastructure to ensure that violations of criminal and civil law are punished (ie courts and prisons).
Roubini Says Rising Sovereign Debt Leads to Inflation, Defaults (Bloomberg) — Nouriel Roubini, the New York University professor who forecast the U.S. recession more than a year before it began, said sovereign debt from the U.S. to Japan and Greece will lead to higher inflation or government defaults. Almost $1 trillion of worldwide equity value was erased April 27 on concern that debt will spur defaults and derail the global economy, data compiled by Bloomberg show. German Chancellor Angela Merkel and the International Monetary Fund pledged to step up efforts to overcome the Greek fiscal crisis, after bonds and stocks fell across Europe in the past week. “The bond vigilantes are walking out on Greece, Spain, Portugal, the U.K. and Iceland,” Roubini, 52, said yesterday during a panel discussion on financial markets at the Milken Institute Global Conference in Beverly Hills, California. “Unfortunately in the U.S., the bond-market vigilantes are not walking out.”
Milken: Nouriel Roubini and Mike Milken on What’s Next – video – There was some good stuff in the lunch discussion between Nouriel Roubini and Mike Milken at the Milken conference today. Note: It’s long, and some segments are less interesting than others. Then again, there is the bit where Mike suggests the solution to the U.S’s deficits & entitlements problem is in obesity — the biological kind.
FT Alphaville » Who’s exposed to Greece? (II) Want further detail on which countries stand to lose the most from a Greek default? Then look no further than the following research report from Barclays Capital.The bank’s analysts breakdown exposure (including domestic exposure) to Greek bonds according to country and type of institution:
FT Alphaville » Who’s exposed to Greece? (III) We’re closing in on the specific banks who are most exposed to potential haircuts on Greek debt — notwithstanding reports of an enlarged aid package for Athens. Fortis, Dexia and SocGen seem to have the highest exposure relative to their tNAV, with 64%, 35% and 14%, respectively. The three Spanish banks (SAN, BBVA and POP), have declared zero exposure. Lloyds and Unicredit have also said their exposure is “marginal”, and CASA [Credit Agricole] less than €0.5bn.Credit Agricole controls the Greek bank Emporiki as as subsidiary, while SocGen maintains stakes in Greek lenders as well — as we’ve previously noted. Evolution Securities’ analysts continue: The impacts can be material for some banks, marginal for the sector. We assume three scenarios: 30%, 50% and 70% default (S&P estimates a 30-50% recovery). To this, we add 10% loss on Emporiki’s €24bn loans for CASA. The worst potential impacts are at Fortis (10-24% of our SotP FV), Dexia (5-12%), CASA (7-8%) and SocGen (3-6%). The average impact for the sector is 0.7-1.6%. These impacts could be increased or reduced depending on which side of the CDS trade some banks have chosen – but here the visibility is non-existent.
European debt crisis: the possible domino effect – As Spain’s credit rating is downgraded a day after Standard & Poor’s cut its ratings on Greek and Portuguese debt, how far could the eurozone’s debt contagion spread? (slide show)
Have Goldman Sachs charges opened floodgates? On the face of it, the Securities and Exchange Commission (SEC) charge relates to a deal worth $1bn. That is the amount UK and German taxpayers have had to cough up to cover losses that their banks made on "Abacus 2007-AC1" – the sub-prime mortgage instrument that the watchdog alleges Goldman sold fraudulently. In the grand scheme of things, that $1bn liability is not a huge amount. After all, the sub-prime mortgage market grew to some $1.3 trillion at the peak of the credit bubble in March 2007, while the £500m loss on Abacus that landed in the UK’s lap is less than half a per cent of the government’s total deficit of £167bn ($255bn) this year. Goldman itself made profits of almost $3.5bn in the first three months of 2010 alone. But the issues raised by the SEC’s charges are a lot bigger than just this one collateralised debt obligation (CDO) – and throw open the sort of questions that worried investors when they rushed to sell shares in Goldman and other Wall Street giants.
US banks pouring millions into bid to kill Barack Obama’s finance reform bill – In the face of deep public anger over the financial crisis and government bailouts, banks have flooded Congress with lobbyists seeking to curtail key parts of the sweeping regulatory bill – such as provisions to create an office for consumer protection and more strongly regulate the vast derivatives market.JP Morgan Chase is at the forefront of lobby spending with $1.5m (£980,000) in the first quarter of this year alone – a sharp rise on the same period in 2009 – followed closely by Citigroup. Credit Suisse and Goldman Sachs have also spent more than $1m on lobbying Congress this year, more than double their previous spending. The banking industry is second only to healthcare interests in the amount it spends on political lobbying. Last year, America’s eight leading banks and finance houses spent $30m to influence legislation. The broader financial industry has more than 2,600 lobbyists registered with Congress.
FT.com – Fears rise for Hungary’s fiscal position – Mr Orban said Hungary’s fiscal deficit would be higher than the target set by the International Monetary Fund, which bailed out the country last year.He added Hungary should negotiate with the IMF to widen the deficit further in an attempt to boost growth.Lars Christensen at Danske Bank said the remarks only confirmed his view that the positive reaction on the Hungarian markets to Fidesz’s win was overdone. “Fidesz’s victory will lead to a loosening of fiscal policy, which is rather more negative than positive for Hungary,” he said.
Brendan Keenan: We’re back in crisis — all we can do is argue that everything is under control – "Utter panic" is how one analyst described the market for shorter-term government debt yesterday. There were virtually no buyers for Greek bonds due for repayment in two years and the interest rate on similar Portuguese bonds rocketed by a fifth. Like it or not, Ireland is back in this crisis. Our two-year yields rose by almost half a percentage point to 3.44pc. They have gone up 1.7 percentage points against German yields since the Greek drama began.Such rates, along with steep rises in the cost of insuring government debt, represent heavy bets that some or all of the peripheral euro countries will fail to pay their debts in full over the next two years. The other alarming thing for European leaders must be the way in which bond yields in the core euro countries fell, even as the peripherals were going through the roof. The eurozone now looks like two zones and what is a single currency is being traded as though it were two.
Greek debt crisis spreading ‘like Ebola’ and Europe must act now, OECD warns – The Greek debt crisis is spreading “like Ebola” and Europe must act now to protect the stability the financial markets, according to the Organisation for Economic Co-operation and Development. “It’s not a question of the danger of contagion; contagion has already happened,” OECD secretary general Angel Gurria said. “This is like Ebola. When you realise you have it you have to cut your leg off in order to survive,” he added, saying the crisis is "threatening the stability of the financial system".
FT Alphaville » Buiter on Greece and a blueprint for a new Europe – Citi’s global economist, Willem Buiter, has done some serious, serious thinking on the issue of sovereign debt problems in the eurozone. And here are the fruits of his labour — starting with Greece: In the ‘game’ between Greece and the Euro Area member states (EA) (where EA is shorthand for all the other parties at the other side of a potential conditional financial rescue effort for Greece), we argue that the only plausible outcome is where Greece does not default unilaterally but adjusts, most likely with restructuring of its debt, where the EA offers financial support with tough conditionality (‘tough love’).