Observation of the day: Greeks are not Germans

It may appear an obvious observation but to the euro and (for a while at least) the bonds markets Greeks and Germans were the almost exactly the same. Twins.

Two recent pieces on public radio highlight how very different from the Germans the Greeks can really be.

The first radio spot describes the failed efforts of a Greek computer scientist to make the revenue system (the tax man) more efficient in Greece. All he thought they needed was a little technological help to point them in the right direction.  Heh, not quite.
http://www.npr.org/blogs/money/2012/01/05/144747663/how-a-computer-scientist-tried-to-save-greece?ft=1&f=100

This longer piece (nearly an hour) aired this weekend and I caught it on Saturday.  It goes into the desire to create the euro and how Greece basically lied to get into the eurozone and the epic borrowing binge Greeks went on after 'easy money' appeared after the Euro was introduced.  While its long it is a good overview of how Europe got into this mess.
http://www.thisamericanlife.org/radio-archives/episode/455/continental-breakup

Greece's credit history is not the best.  Since their independence in the early 1800's they have spent more than 50% of their time in default. (This time is different, 2008, Reinhart & Rogoff, page 99) Do you really think they would adopt the fiscal discipline of Germany after being handed their unlimited gold card?

ht @BarbarianCap

Linkage roundup

Some reading material for you from my twitter stream:


http://t.co/vXWLZxuV - Italy near tipping point of increased margin requirements. I'm not the only one talking about this
RT @zerohedge: Hugh Hendry says he has made bets that will deliver a 40-to-1 return if the ECB cuts rates below 1% next year http://t.co/PAv4msUK
RT @edwardnh: The fact Greece's exit from euro has been discussed openly is seismic shift http://t.co/QVaWF7si
I'll get bullish when this stops going up. http://t.co/6vmUhc60
97% of family businesses don't make it past the 3rd generation http://t.co/MZAwrwRK
RT @FGoria: MT @M_McDonough: Italian CDS implying, country may be at risk of losing its investment grade status: http://t.co/mIVWCwkk
RT @mbusigin: Note that we did work on this in August, which gave us a different (bullish) signal: http://t.co/ivxLrhzB
RT @mbusigin: The few times realised volatility has eclipsed implied volatility, it presaged large declines: http://t.co/zTRw4ZDE
RT @edwardnh: Greece gets ultimatum: accept austerity plan or forgo extra bailout cash | Business | The Guardian http://t.co/DZSOBkDY -- Greece later backed down.
RT @edwardnh: France and Germany to withhold aid, Greece to be ejected http://t.co/WtNwsF6M #in $$ 
Greek referendum provides political cover http://t.co/MFDzDUCk
RT @PragCapitalist: THE GREEK REFERENDUM AND THE ROLE OF DEMOCRACY: I set off a bit of a firestorm on Twitter this afternoon when I ... http://t.co/O8GZFHvQ
New international bond etf's for Germany, Canada, and Australia $aud $cad $bund http://t.co/OemicVIk
Balestra Capitals Matthew Lucket Talks Gold, Deleveraging Story, and China Credit Problem http://t.co/9vGl387V @historysquared

Mr. Bond (Market) is not impressed

Do I look impressed?

Even before the Greek referendum drama of the last 24 hours the bond market was not impressed with the latest Euro crisis 'solution'.

With Portugal, Ireland and Greece all tipping over the edge the next domino to watch is Italy.

Last week's news of a 50% 'voluntary' haircut for some Greek debt vaulted world equity and currency markets higher in a massive relief and short covering rally.  Mr. Bond market was not so impressed.

While both the absolute and relative yield of Italy's 10 year bond did fall a bit late last week on the news of the news of a new solution to the Greek debt situation announced Thursday morning by Friday afternoon Italian yields were creeping upwards again.

Germany - Italy spread

The German/Italian 10 year spread has blown out to new highs

Italy 10 year

Very close to breaking recent highs

The news of a Greek referendum on the latest round of negotiations shocked the markets and drove almost every risk asset downward with only the dollar and US Treasuries rallying. Italian yields are not looking good from a technical perspective and if they break 7% it could be the final domino to fall before the real euro crisis starts.  I'll be watching these metrics closely.

Linkage roundup

Some reading material for you from my twitter stream:


RT @edwardnh: Why the latest eurozone bail-out is destined to fail within weeks - Telegraph http://t.co/sgj8HQcn
RT @credittrader: GReader: The Global Moral Hazard Dawns: Merkel Says "It Must Be Prevented That Others Come Seeking A Haircut" As... http://t.co/Tjd22kbQ
RT @theanalyst_hk: $$ Jim Chanos: Not Impressed By The Europeans, And Still Shorting #China http://t.co/OvdXeWIr #economy #europe
RT @JackHBarnes: Chart of the Day: North Dakota Annual Oil Production: http://t.co/lUWOqWst -- need to do more research myself on shale oil
Transfer payments over time in US http://t.co/sxiw6sF8
RT @zerohedge: And Now, For Some Semblance Of Sanity, Here Is One Hour Of Hugh Hendry http://t.co/5A5Jwgxu -- separate post on this soon(tm)
CITI: Failure To Trigger Greek CDS Could Cause The Whole Euro Bailout To Fall Apart http://t.co/TLDjUF7L -- be careful what you wish for
Meanwhile in China a swan finally takes flight... http://t.co/Z8w40PKd -- Condo prices are falling hard.
RT @AlephBlog: Fannie Squeezing Banks Makes 4% Mortgage a Mirage, Hinders Housing Rebound http://t.co/BKikceRX Higher lending standards fight lower rates
RT @AlephBlog: Money managers and commodities, the case against http://t.co/ynsn1qT3 Graph shows $$ managers drove commodity prices http://t.co/eNKE3nFA
RT @andrewyorks: *EU LEADERS CALL FOR BANKS TO HAVE 9% CORE CAPITAL LEVEL ok move that dial on the upper left to 9 http://t.co/WHLMk6Dm -- should be interesting when taking haircuts on Greek debt.
Skyscraper taller than any in London or Tokyo opens in Chinese village of 2000. http://t.co/IvHoRw4j #thiswillnotendwell
Underground bank lending in China - NPR - http://t.co/677IPKYK
RT @historysquared: $$ The cash commodity trading firms that account for 1 trillion in annual revenue 50% of all transactions http://t.co/TqTvhHM1
RT @ftasia: Iron ore plummets to 15-month low: As Chinese steel mills cut production, the price of iron ore dropped 7.2 per ... http://t.co/RVfC48zy
Blackberry outage made roads safer. http://t.co/agSNxNGX

Ray Dalio on the challenges in front of us

Ray Dalio of Bridgewater Associates has recently appeared on the Charlie Rose show as well as written a piece for the Financial Times. I think he does a good job of describing how we got here (continually borrowing money to improve our standard of living) and the tenuous situation we find ourselves in (Greece, falling home prices, etc.)

From FT.com

We are in the midst of a deleveraging, we are nearly out of ammunition and we are at each other’s throats. Being in a deleveraging and nearly out of ammunition is a very difficult position to be in. But, being at each other’s throats is our biggest problem.
Our character and our political and social systems are now being tested in ways that have typically been tested in past deleveragings. In deleveragings bad economic conditions typically lead to emotional reactions, social and political fragmentation, poor decision-making and increased conflict. When this occurs in democracies, the checks and balance system, which is intended to yield the best decisions for the whole, can stand in the way of thoughtful leadership and lead to ineffective “mob” rule. This dynamic can lead to a self-reinforcing downward spiral.

The video goes into a little more detail of his philosophy of knowing what you don't know and being willing to have your ideas and conclusions challenged throughout the corporate structure.  I suggest you read both the article and watch the interview.

Thanks to The Intrigued Trader and Also Sprach Analyst

Greek bond yields keep crawling higher

Greek 10 year bond yields are creeping higher again.  I don't know if 'creeping' is the best word considering their volatility over the last year but you be the judge.   The 10 year closed at 10.91% today.
You can see the spike to 12+% and then rapid decline in May when the 750+ billion Euro bailout package was announced.
Since then rates have started climbing again.  I wonder what will happen when rates climb above their pre-bailout levels?

Late Night Linkage

Postings have been light due to some business related demands.  Here's some links to my recent reads from the last few days.

Humor
Vuvuzela -- Will it blend? Youtube

Gold
Telegraph - did BIS gold swap spook the markets?

China
From Chinadaily - Property restrictions continue.
Chinadaily - Home price appreciation slows.
Chinadaily - Rate of lending slows in China.

Residential
From CalculatedRisk - A Chapter 13 bankruptcy can wipe away a 2nd lien.

Commodities
From FT -- The financialization of commodities.

LNG
From Hellenicshipping - A lot of spare LNG ships standing idle.

Lumber
Globe and Mail - Canada exporting lumber to China.

Sovereign debt
CalculatedRisk - How much debt is there and what is the probability of default?  It's a multi part series. Good stuff.
GMO - White paper on defaults in history. Very good. Intend to write longer blog post about this.

BP / Oill spill
WSJ - BP has replaced old cap, trying new one in an attempt to stop leak.  (This is at least 24 hours old.)

Euro
Telegraph - Legal challenges to bailout of Greece.
WSJ - Moody's downgrades Portugal.

Debt
Annaly - The debt deleveraging continues.

Late Night Linkage

Some links of stuff I've been reading recently:

http://alephblog.com/2010/07/05/watch-the-state-of-the-states/

Canadian home sales falling.  Prices next?
http://globaleconomicanalysis.blogspot.com/2010/07/vancouver-home-sales-drop-30-percent.html

A different look at Dr. Copper
http://humblestudentofthemarkets.blogspot.com/2010/07/dr-copper-teeters-over-abyss.html

China home prices
http://www.telegraph.co.uk/finance/china-business/7875713/Chinas-property-market-braced-for-30pc-drop.html

Payroll number may take a header next month due to birth death model
http://jessescrossroadscafe.blogspot.com/2010/07/note-to-mish-bls-added-145897-imaginary.html

Greece -- Default now or later? Good reads.
http://www.nakedcapitalism.com/2010/07/greece-is-restructuring-debt-now.html
http://mpettis.com/2010/06/what-might-history-tell-us-about-the-greek-crisis/


Iran discovers large gas fields
http://www.hellenicshippingnews.com/index.php?option=com_content&task=view&id=109332&Itemid=79

More oil found in North Sea
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7873355/North-Sea-oil-hopes-rise-of-the-biggest-discovery-in-a-decade.html

Libya eyes purchasing stake in BP.  Cue irony.
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7873702/Libya-eyes-stake-in-bargain-BP.html

China building more nukes
http://www.chinadaily.com.cn/business/2010-07/06/content_10069093.htm

BP considering selling assets to pay fines
http://www.bloomberg.com/news/2010-07-05/bp-said-to-consider-selling-colombia-venezuela-fields-to-pay-spill-costs.html
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7866766/China-seeks-9bn-of-BP-assets-in-Argentina.html


Ozzie mine tax revised
http://seekingalpha.com/article/212933-miners-win-as-australian-government-revises-mining-tax

ECRI predicts more frequent recessions in future
http://www.businesscycle.com/news/press/1887/

Steven Keen gets some more press on his Minsky model predicting what will happen next.
http://www.nakedcapitalism.com/2010/07/steve-keens-scary-minsky-model.html

http://www.creditwritedowns.com/2010/07/mandelbrot-fractals-and-the-art-of-roughness.html

Recent jobs report was not good
http://www.thereformedbroker.com/2010/07/03/the-truth-about-those-job-numbers

I was only joking about Greece selling islands!

I was only kidding!
When I joked (here and here) about Greece selling off some islands it was entirely in jest.

Evidently Greece is now putting numerous islands up for sale in an attempt to pay down some of their debt. From the Guardian:

Now Greece is making it easier for the rich and famous to fulfill their dreams by preparing to sell, or offering long-term leases on, some of its 6,000 sunkissed islands in a desperate attempt to repay its mountainous debts.

Only 227 Greek islands are populated and the decision to press ahead with potential sales has also been driven by the inability of the state to develop basic infrastructure, or police most of its islands. The hope is that the sale or long-term lease of some islands will attract investment that will generate jobs and taxable income.

ht: BusinessInsider

A final update on the Greek 'bailout'

I'm closing the running commentary on the upper right corner of the blog regarding the Greek financial situation.  Below is a copy of the text and links. 

The Greek drama has moved from the front page back a few sections and is on a 'slow burn'  I don't expect the situation to be resolved with the monstrous bailout package and as you can see from the chart Greek 10 year yields have started to slowly creep upwards.   In my opinion this will hit the front pages again and it won't be good news.  When? That's the big question. . . .
-----
Wondering how long the Greek drama will play out . . . Just because the EU promises some cash doesn't mean it is going to happen. The German constitutional court may have something to say about violating the Lisbon Treaty.
A Telegraph article lays out the details (13 April, 2010)

How much are the Irish and Italians going to contribute?

p. s. 10 year Greek bond spreads expanded on April 13th. I guess 40 billion euros is only good for one day.

April 20: Bond spreads hit new extremes last night again.

April 21: 8.11% -- spreads widened further.

April 22: 8.84

April 23: Greece pulls the rip cord and officially asks for aid. Want to guess how many days until this wears off?

April 26: 9.56% -- Aid request good for one day.

Well that was exciting. What's next?

I'm certain you already know by now but the markets took a serious hammering today.  While some are claiming a trade error took us down nearly 1000 points on the Dow before recovering the proximal causes of this recent selloff are still with us:

Greece is on a slow downward spiral towards default or a very severe recession / depression.  After the most recent bailout announcement the markets calmed down for one day before continuing to de-risk.  The contagion has spread and now Spain, Portugal and Italy are possibly next.  Who and when is next I don't know.

China continues tightening and is determined to stamp out rising property prices.  I have some more information that I intended to post on this but I've been a bit busy.  Fortunately I was finishing up de-risking a few portfolios yesterday.

The Fed's purchase of mortgage backed securities ended March 31 so from now on the money supply will start to contract.  The Fed is effectively tightening right now.

The home buyer tax credit deadline ended a few days ago so the housing bounce is over with.

Bank lending continues to contract for both households and small companies.

I've gone over these items before but the Greek situation started the ball rolling downhill.  Until several of the above items are resolved what happened today was not a 'one time event'.

Greece -- The government subprime bomb continues smoldering

Bond yields continuing blowing out in Greece.  The question becomes what will trigger the explosion or defuse this situation???  Here's a synopsis from the articles mentioned below. I suggest you read both.

German Chancellor Angela Merkel is trying to wait on any decision until after the May 9 regional elections.  If the elections go poorly this could make it worse for Greece.

There are court challenges prepared for the bailout from Germany to Greece readied and it appears there may be a ruling from the German constitutional court in early May as well.

While I haven't found any news reports, I wonder how the Italians, Portuguese, and Irish think about bailing out the Greeks?  Their economies are a total mess as well and any resistance from these countries will also fan the fires.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7632366/Maastricht-madhouse-fuels-EMU-wide-contagion-from-Greece.html

http://www.ft.com/cms/s/0/47b429f4-5091-11df-bc86-00144feab49a.html

As I mentioned on the comment bar to the right, the official declaration for aid by Greece only helped their bond market for one day.

Some evening linkage

Glad to see Mr. Faber is coming around to my opinion on China's coming bubble popping. :)

http://www.creditwritedowns.com/2010/04/marc-faber-symptoms-of-a-bubble-building-in-china.html


A video on strategic defaults from pbs.org



HT  -- http://www.ritholtz.com/blog/2010/04/strategic-defaulters/

Greek rates go crazy
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7621289/Escalating-Greek-default-fears-rock-Europes-debt-markets.html

Greek bond yields widen further

Greek bond yield widened further today, blowing past the pre bailout highs.  The attached chart does not show today's print which was 7.61% 

Goldman Sachs' news has overwhelmed the news cycle while Greece slowly sinks . . .

Some Friday Links -- Fun for all. A physics lesson tossed in as well.

Been busy with tax day but here's some links and comments . . .

Greece 10 year bond yields keep rising and are very close to piercing pre bailout yields. 
Some German profs are preparing a lawsuit.  -- Telegraph.co.uk
Has Greece hit the Chandrasekhar limit and just doesn't know it yet?  Once you go passed the limit there is no turning back.

Some back and forth on strategic defaults fueling consumer spending:
Pro Tinfoil: Creditwritedowns
Anti Tinfoil: The Big Picture

Creditwritedowns pulls together a lot of subjects and puts a nice bow on top describing a theory I agree with:  We are in a balance sheet recession that will not produce a strong rebound and will take a long time to reconcile.  I posted the Koo and Chanos videos recently but Mr. Harrison does more work tying it all together. 

Total copper inventories have now risen for 2 weeks straight and are close to penetrating their recent peak level; LME inventories have dramatically slowed their decline and Shanghai inventories hit new highs today.  Copper's getting smacked today.  I'll write more about this soon(tm).

German legal threats may ruin Greek aid

As I mention on the side bar to the right the German courts may not approve of aid to Greece.  Here's the details (Reuters)

Greek 10 year spreads widened Tuesday and Wednesday after the weekend announcement of aid to Greece.  If this trends keeps up bond spreads will very quickly be wider than before the aid announcement.

I have no idea how much longer this can go on.  The IMF may swoop in and provide their share of the funding immediately or a political showdown in Germany may resolve the lending issue.  Even if aid does arrive will it do any good?  They are so far in debt that some sort of default / currency depreciation (that means leaving the euro) may be the only solution.

ht Credit Writedowns

Watching the Greek tragedy -- 10 year Greek bond rates

The Greek Tragedy is not over, even with 'assurances' by the EU and IMF they stand ready to help.  If you'd like a front row seat to events and watch what everyone else is watching I suggest you keep an eye on 10 Greek bond yields.  While yields spiked and fell back earlier this year they have begun creeping upwards.  If they continue upwards this will eventually precipitate another risk-off selloff in the markets.

The recent debt auctions by Greece have been met with lower bid / cover ratios and lower foreign participation. 

Non-domestic investors accounted for 80 percent of purchases of the first bond in January, 77 percent of the second, and 57 percent of the third. Reuters

While the Greek issue has slid back off the front burner it has not been resolved.  Abrose Evans-Pritchard has an interesting blog post about this very issue recently and his conversation with Carmen Reinhart regarding the slow motion trainwreck that is Greece:

But I digress. Professor Reinhart said Greece cannot hope to escape from its debt trap under the current EU austerity plan. The cure of devaluation is blocked by EMU membership. The restrictive monetary policy of the European Central Bank — a contraction of both M3 money and lending to firms, record low core inflation — must inevitably unleash deflationary forces in Club Med states already trapped in credit busts.
A country can in theory deflate its way back to competitiveness by an `internal devaluation’, ie relative wage cuts, in this case by 20pc to 25pc . . .

On a parting note, Professor Reinhart says the only budget deficit that matters in a crisis is the “cash deficit”, and this reached 16pc of GDP in Greece last year — not the 12.7pc officially registered under “accrual” accounting.
As countries near default, they typically find all kinds of way to disguise their troubles, by shifting debts between government agencies and delaying payments.
“In the end, everything comes out of the woodwork. You realize that it is even worse than you thought,” she said.

Greece is seriously behind the 8 ball and faces tough choices with no easy solution.  They can either drastically cut spending and face a severe recession, accept IMF/EU austerity and lending support, or even default and leave the Euro. I think the last option is least likely but I'm not making any bets for a positive outcome regardless of what happens.

Carmen Reinhart has a recent  interesting paper regarding country growth rates declining as debt/GDP levels rise.  I am currently reading the book she co wrote - This Time is Different and the paper is an excellent primer to the detailed description in the book. Read the paper and then consider buying the book.

The pragmatic capitalist also has some video by MIT professor Simon Johnson about the Greeks.

The locals are also fleeing the Greek financial system.  From the Telegraph:  (ht Zerohedge)

More than €3bn (£2.6bn) of deposits held by Greek households and companies left the country in February, while in January about €5bn of deposits were moved out, according to the latest figures available from the Bank of Greece.

Switzerland, the UK and Cyprus have been the largest recipients of the money, with the wealthiest Greeks looking to move their deposits to Swiss banks accounts to escape the more punitive tax measures many fear will be introduced in the wake of the country's economic crisis.

It's never good when the locals start pulling money out of the banks. . . .

Loan sharking Greece, I see someone in Germany is reading my blog

I doubt I have that much influence on German M.P's as the idea of posting collateral for a loan is not that exotic. . .

"The Greek state must sell stakes in companies and also assets such as, for example, unpopulated islands," Frank Schäffler, a member of parliament for the pro-business Free Democrats, told the Bild daily.

Getting the Greeks to hand over title after they default could be another matter.  For those of you who think that unlikely; Greece has spent the majority of time since 1800 in default.  (This Time Is Different, 2009, page 98 & 99)

Hugh Hendry debating economists and ambassadors on the Euro and Greece. Loan sharking in the EU.

Hugh Hendry, in the guise of the evil speculator debates Stiglitz and the Spanish ambassador to the UK on the current situation in Greece.    The Greek situation is a mess and in my opinion a 'bailout' would create a tremendous moral hazard.  Ireland, Spain, and Portugal would all scream foul and demand their own cash / backstop.    Only if the bailout includes draconian spending cuts and severe punishment for failure would it actually solve the problem.  Considering we are talking about Greece which has a 200 year history of reneging on its debt the odds drop by quite a bit of a sucessful workout.

Even if you could get the Greeks to promise to spending cuts, would they follow through with it?  The Germans (presumed donor) could agree to purchase Greek debt ONLY AFTER they cut their budget each and every year until the have a balanced budget.  No balanced budget, no more debt buys by Germany.  Perhaps the Germans could attach a percentage of  EU funds flowing to Greece as their payment source? 

Even better, take the title to a few Greek Islands as collateral.  Don't pay up, you get an island (or 20 or so) 






There's some great commentary afterwards at zerohedge on this debate. Go on over and check it out. 


ht Zerohedge