Global Macro Trading Journal

I was unaware of this scheme that can lead to more fiscal transfers in the EU

"Finally, does the EFSF really accomplish much? One of the most ballyhooed PIIGY bank feature is the ability of the EFSF to buy bonds at a discount and lend money to the country to buy them back, thus decreasing the notional owed by that country. Let’s say that the EFSF buys €20 billion of Greek 5.3% March 2026 bonds at 60% of face. So the EFSF spends €12 billion. In the proposal, the EFSF would now lend Greece €12 billion so that Greece could buy these bonds and retire them. Greece would have €8 billion less debt outstanding. That is good for Greece.

The EFSF would have used their guarantees to borrow the €12 billion it needs. But if the EFSF lends the money to Greece for 15 years at 4%, the market value of that loan has to be less than 60% of face. The ESFS loan would be longer dated with a lower coupon than the bond that is trading at 60% of face in the market. That loan has to have a lower valuation. Let’s say 55%. So the EFSF borrowed €12 billion and now has an asset with a mark to market of €6.6 billion. Greece benefits because it got to reduce its debt by €8 billion, but you cannot ignore that the EFSF just did a trade that cost them €5.4 billion on a mark to market basis. This scheme comes at a cost (or gift), and it is yet to be determined how much the AAA countries are willing to gift to other countries."

 

The EFSF can do anything and everything. In theory, it has the ability to resolve all the issues faced by the PIIGS. The problem is its absolutely piddly size and the unwillingness of the AAA members to commit to more.

 

My fear is that on the dark moments Lehmanphobia might lead them to doing just that

 

Maybe they'd like to stay AAA.

http://dealbook.nytimes.com/2011/08/03/the-economic-manifesto-of-elliotts-paul-singer/

He argues that Germany and France can only write so many checks before “elected officials are dragged out of the Reichstag by voters, or until German credit is on the verge of collapse.”

 

might be a while before Germany loses its AAA, but I think the "elected officials dragged" is a more likely event

 

Looking at Schatz and Euribor I take it Jean-Claude forgot to drop the "V" word?

 

just a silly thought, as there is another strong risk-off day ...

isn't this all just a bit self-fulfilling like October 2008?

ie, if equities decline, then Italian yields are likely to rise further, causing equities to decline etc. etc.

I could be wrong, but I can't see this risk-off mode stopping until someone (Fed and/or ECB) step in with some bond buying or money printing effort.

 

Indeed... The SIV they can "implicitly" guaranteed can only be so big. Otherwise, the ratings agencies, who have learned a trick or two about SIVs in 2007/08, will go ballistic.

 

Getting stopped out of a good deal of my currency (long) positions here. Not short currencies (vs. USD) just yet but salivating at the potential catch-downside in AUD, NZD, NOK and SEK amongst others.

 

FSG +7% today.

Josh Brown calls it "the apple computer of panicked markets."