24/1/2012: Europe's Latest Non-Leadership on ESM/EFSF

Another heated non-debate is sweeping Europe. In the latest round of bizarre, outright Kafkaesque rhetorical contortions, European leaders are now engaged in a heated discussion on the 'enlargement' of ESM. Alas, the whole thing is clearly heading for the same outcome as Europe's previous rounds of 'solutions'. Here's why.

Recently, as reported in German press (here) Angela Merkel started to yield on the idea that the 'permanent' ESM fund should be increased from €500 billion to closer to €1 trillion by, among other things, allowing for concurrent running of existent €250 billion EFSF facility and the setting up of the new ESM.

Sadly, this 'solution' is really a complete red herring, despite all the hopes the EU is pinning onto it. In fact, it so much of a fake, the markets are simply likely to laugh their way through it.

The EFSF is designed to run out of time in the end of 2013. ESM is designed to start the earliest in mid-2012. Which means that even in theory, combined ESM/EFSF can last not much longer than 12 months. In practice, however, even this is not going to happen.

Firstly, EFSF is becoming increasingly funded through short term debt issuance and this means that as we hit 2013, the rate of EFSF paper maturing is going to accelerate. To roll this into longer-dated paper will require more than just re-writing the statutes of the EFSF. It will require EFSF raising funding at the same time as ESM is raising funding. The likelihood of this being a successful market funding strategy is zero.

Secondly, ESM capital basis of (meagre) €80 billion is not going to be fully invested on the initiation of the fund. Which means ESM even in theory is not going to come out on day 1 and borrow full €500 billion capacity. In practice, it can't be expected to raise even 1/4 of that in the first year of operations.

Which means that even running concurrently, EFSF+ESM duo will not constitute a fund with anything close to €750 billion capacity. And this means that European leadership is clearly in line for winning the Global Non-Leadership Prize again this year. IMF, insisting on the concurrent running of EFSF/ESM as well, is going to be a runner up.

23/1/2012: Extreme Events

Going through 2 charts and mapping the big themes of the ongoing crises, one has to be in awe of the volatility. Here are the maps of extreme (3-Sigma-plus) events with 'directionality' reflected:

Lovely, aren't they? But the trick in the above is: we are not at the decay stage of volatility on the sovereigns re-pricing stage. This, to me, suggests that once the sovereign crisis re-pricing draws to conclusion (whenever that might happen - isa different story), there will be the need for finding that 'new normal' (reversion-to-the-trend target) for the markets valuations overall. And that is the whole new game, dependent less on the previous equilibrium that should have followed the Great Bursting period, but more on the future risks and trends in post-debt economies. Which, itself, really depends on whether any given market can sustain growth without endless supports (implicit and explicit) from the Government borrowings.

Just thought I'd throw few thoughts out there...

22/1/2012: An update to Euribor risk premium post

On the foot of the previous post, I recomputed risk premia for 3 maturities: 12, 9 and 6 months euribor. Here's the chart:

And some top of the line numbers:

To compare against rates dynamics:

22/1/2012: What do interbank lending rates tell us about risk valuations?

Here is an interesting set of charts for euribor:

Notice that as maturity span shortens, there is an increasingly rapid decline in the rates in recent month. This, of course, is a reflection of two forces acting simultaneously - the ECB LTRO and the rate drop in December. You can see this here in the context of 12 months euribor plot for end-of-month (and end of last week for January 2012):

Sounds good? Indeed, the short-term end of liquidity curve improved dramatically, but... here's a trick - the long-term end of the curve is not improving as much as (1) the repo rate supports, and (2) LTRO (3 year facility) should lead it to. To see this - here's a chart:

And the above term premium is rising despite the risk premium falling:

Note: the last chart above is not seasonally adjusted and, with exception for 2010, euribor rates tend to fall seasonally in January compared to December.

In fact, current risk premia are well above the long-term relations and at more extreme end of the spectrum than during the previous months:

The above suggests to me that what we are observing in the liquidity markets is a combination of some improvement due to ECB's LTRO move (substitution along maturity curve) and the (very) incomplete pass through of ECB rate change to funding markets. There appears to be no evidence in risk reduction anywhere in sight.

22/1/2012: 'Markets are crazy', says market economy Ireland

So we used to have an 'Innovation Island' here that was run by the Deputy PM who confused Einstein with Darwin. She was directly in charge of Innovation policies.

Now we have a 'Competitive Market Economy' that 'Is Open for Business', as we constantly remind our potential foreign investors (domestic investors we have simply taxed into oblivion already and are even expropriating their wealth through Minister Noonan's 'levy' on pensions), run by the Minister responsible for the following statements (source here HT to @brianmlucey for flashing this one out):

"Michael Noonan, Ireland's finance minister, criticised the involvement of private creditors in the [Greek PSI] talks, arguing that it had made the crisis worse. Mr Noonan told the German newspaper Sueddeutsche Zeitung it had been a "fatal" mistake to involve the private creditors and this had "driven the markets crazy". He said that markets would only calm when they were convinced that eurozone countries were making serious efforts to solve their debt problems."

So, 'markets are crazy' and proper risk sharing with private investors in the case of insolvency is a 'fatal mistake'.

Does Minister Noonan believe in slavery? Because if he doesn't then there is no alternative in the case of Greek crisis resolution options to PSI. Of course, Minister Noonan believes in slavery - the modern variety of it - slavery that subjugates those who do not emigrate from Ireland to decades of involuntary repayment of privately accumulated debts they did not contract to accumulate. Minister Noonan has no problem with the Government of Ireland simply undertaking all private debts of a private insolvent banks and forcing ordinary people - not shareholders or lenders to these banks who were paid to take the risks in the first place - to repay them. Just like that. Without any consent: "Give us your money, granny, or else!"

But there's more to the statement above, which shows Minister Noonan in an equally unpleasant light. You see, Minister Noonan swears by the wisdom of the IMF and the ECB and the European 'partners' when it comes to his domestic policies. He did so officially earlier this week when he used Troika endorsement of Ireland's 'progress' in the programme as the reflection of their support for his policies. Yet, it is the very same Troika he so blindly follows into Ireland's economic oblivion which deemed Greek debt levels unsustainable - aka non repayable even were the modern day debt slavery terms (as imposed in Ireland) deployed in Greece as well.

So, for all our Irish concerns about the sanity of the Troika 'solutions' for Ireland, there's an even greater concern that should be preoccupying our minds - concerns for the positions taken by our own national leaders. And for all those would-be foreign investors into Ireland - please remember, you are about to invest in the economy run by those who think that 'markets are crazy' and contracts for risk pricing are 'fatal mistakes'.


PS: Never mind, Minister Noonan's only plan for Ireland is to attempt, asap, borrowing in the 'crazy' markets to finance his 'sane' fiscal management strategies.

20/1/2012: Non-News from a Road to the Second Bailout

This story in the Irish Times yesterday clearly requires a comment. So here it goes.

Here's the best time-line and explanation as to Minister Noonan's 'efforts' to secure 'savings' on the Promissory Notes.

Now, consider the following from the Irish Times today:

"We think there’s a less expensive way of doing [restructuring of the Promissory Notes] by financial engineering, and we’re not talking about private-sector involvement or restructuring,” said Mr Noonan in Berlin "...it is about pointing out to the troika that there are difficulties and that it could be less expensive – and everyone still gets their money.”


"A senior German official said Berlin could envisage extra programme funding being used for the Irish banking sector not currently earmarked for this purpose."

The above might mean many things:

1. Ireland still has some funds due under the original 'bailout' that were earmarked for banking measures, but were not yet used in the last recapitalizations round in July 2011. This will not in itself constitute any new measures materially impacting Ireland's Government debt projections. It will not constitute a second bailout (as the funds are already earmarked under the first bailout), but by reducing funding available for fiscal and other banking requirements it will increase the probability of such a bailout in the future.
2. Ireland can be allowed to borrow more from the EFSF/ESM, swapping the Notes for marginally cheaper funding. This too will not constitute any material impact on Ireland's Government debt projections. But it will constitue a second bailout.

Neither option involves any possibility for 'private sector involvement' and at any rate, Minister Noonan's reference to PSI is a red herring - there can be no PSI in relation to the Promissory Notes as these do not involve private investors or lenders at all.

However, both (1) and (2) have material impact in terms of Ireland requiring a second bailout - both increase materially the probability of such an eventuality.

Lastly, there is a catch. The problem of capital adequacy, highlighted by Minister Noonan, means that 'financial engineering' can only involve temporary relief in terms of payments timing, not material relief in terms of NPV of the debt assumed by the state under the Promissory Notes. We will be allowed to borrow more time. At a cost of longer loans, and more repayments in the end. Which, of course, does nothing to achieve sustainability of the 'solution' from the point of view of us, taxpayers, who Minister Noonan expects to pay for all of this. But it probably does give him a chance of holding a 'triumphant' pressie announcing some sort of a 'deal'.

So in the nutshell, the Irish Times story is... errr... a non-story. A sort of traditional Spin that comes out of the Government every time they are caught... errr... fantacising the reality. As NamaWineLake put is so excellently:
"...it has been four months since Minister Noonan’s meeting with the ECB and others in Wroclaw where he, to use his own words “had a ball to kick around” and has proposals. It is two months since Enda Kenny discussed the matter with Angela Merkel. It is more than two months since Minister Noonan said that “technical discussions” were ongoing. And yet the Troika yesterday downplayed any progress in the matter saying that Minister Noonan had merely “requested discussions”."


Or maybe, just speculating here, Minister Noonan is bringing up the Promissory Notes once again this week because next week we are about to repay another tranche of Anglo bonds? Last month, around the time of the repayment, there was much-a-do-about-nothing going on in referencing the very same Promissory Notes?

However, there is, in the end, something openly honest about Minister Noonan's windy trip down the 'Imagine the Superhero, ya Villain' lane.

"[Minister Noonan] said he hoped that the ECB would extend its programme of low-interest loans beyond next month to improve euro zone bank liquidity in the hope it would stimulate the market in longer-term sovereign debt papers."

Point 1: LTRO-2 was already announced, so Minister Noonan is either uninformed, or pretends to be uninformed to posit himself as a a heroic 'rescuer' proposing a real 'solution'.

Point 2: Minister Noonan clearly shows that his sole concern is how to raise more debt for Ireland. Not how to balance the books (in which case he shouldn't need banks to pawn their assets as ECB to buy Government bonds with this fake cash), or reform the economy (in which case growth would resume and the State shall not require the said scheme, again) and not with restoring functional banking system to health (since functional healthy banking system lends to the real economy, not to Minister Noonan).

At last, truth revealed?