Sovereign debt bubble thread

[PJL]

Incidently, I am seriously considering investing in gold or a least a gold ETF right now. I think we are ultimately going to see some serious inflation soon. Not necessarily the scaremongering hyperinflation, but certainly I think some 70s rates of 20-30% at times is a realistic end game for the whole thing, if only because the alternatives would be worse.

[Iormlund]

Been reading this report commissioned by a Dutch party.

Its counclusion is basically the same as mine.

With unchanged Eurozone membership, the only method of adjusting costs and prices in Med-Europe to be competitive without extreme and constantly reinforced austerity, leading to depression, would be stimulation of rapid inflation in The Netherlands and Germany for a decade or two; and acceptance over that adjustment period of large fiscal subsidy payments to the deficit countries – not loans to be repaid later, but unrequited transfers.

'Unchanged Eurozone membership' here means avoiding PIGS exit, as well as maybe French one as well.

[Sheilbh]

Massive quantitative easing by the ECB in the last months.

It's not really like QE, though it's very helpful and a reason to be thankful for Mario.  But as Iorm points out this isn't like QE which, from my understanding is based on government bonds from the market rather than specifically from banks and the banks are actually still depositing more in the overnight facility at the ECB.  Which makes sense.  This chart from the FT a while back suggests that there is some loose correlation between banks who need to refinance a lot of debt in the next three years and take-up:

This isn't QE.  It looks more like a pre-emptive bank bailout to stop a credit crunch moment, massive deleveraging to save Eurozone banks over the next few years.  It doesn't have the same potential stimulative effect of QE, it's what the Fed and the BofE were doing in late 2008-09 not what they've been doing since.

As the FT put it before the second round of LTRO:

OK, so, the LTRO is mostly about banks having cash to roll over their funding. That's important to nail down, because — as opposed to full QE — it's not clear this will arrest, rather than assist and help to fund, European bank deleveraging over the next few years.

There was a quote from Stephen Jen of SLJ Macro Partners doing the rounds last week, to the effect that the three-year LTRO could have kept even Bernie Madoff afloat. It's a comment about the ECB's loosened collateral criteria, but it's actually a pretty apt analogy beyond that, if you think about European bank balance sheets as a "bezzle" overall.

Since the bezzle is shrinking, European lenders are focused on paying off clients – the circa €1,700bn of bank debt maturing from 2012 to 2014 – versus taking in new investments that have to be funded. The LTROs come at the same time as the EBA's capital requirements, fresh capital to absorb bad loans will be difficult to find, etc.

Look at the LTRO that way, and you wonder if the actual QE is still to come.

And this is inevitably going to be larger. 

If you look at the BofE, for example, their balance sheet from £100 billion to almost £350 billion in the past few years through QE and other policies.  But the special liquidity scheme, bank bailouts for three years, are off balance sheet.  I'm not sure about the situation at the Fed.

As an aside I thought this was interesting on the possible options if a sovereign, or big bank were to go bust, and the ECB would be in negative equity:
http://ftalphaville.ft.com/blog/2012/02/29/903061/how-deep-are-the-ecb%E2%80%99s-pockets/

There are reports that if 66 / 75 / 90% of bondholders don't agree to the haircut deal than Greece will impose collective action clauses (CACs) which will be considered a default by the ratings agencies (certainly Moodys). However for the whole thing to go through smoothly then the threshold has to be reached by the 8th March.

The Greeks need 90% of bondholders to agree for the PSI deal to have the effect agreed in the terms of the bailout - if that doesn't happen then the bailout's doubtful and certainly the IMF have said they won't participate.  They need 66% of bondholders to agree to activate the CAC clauses they've retroactively inserted into all sovereign bonds.  I think that decision is in the next day or two.  But the date for the debt Greece needs to refinance is March 20th.

What role do the ratings agencies play in this?  I thought it was all decided by ISDA whether there's been a default or not.

[Sheilbh]

Incidently, I am seriously considering investing in gold or a least a gold ETF right now. I think we are ultimately going to see some serious inflation soon. Not necessarily the scaremongering hyperinflation, but certainly I think some 70s rates of 20-30% at times is a realistic end game for the whole thing, if only because the alternatives would be worse.

I read an article somewhere, a while back, that argued that rating agencies should start to take account of inflation.  They used the example of the UK.  We've never defaulted.  We're a AAA nation who will always pay our debts.  But apparently if you look at the history of British debt we almost always inflate it away.  But that isn't taken account of by ratings agencies who are interested in the chance of default.

I think it may have been part of the Anglo-French spat on who should lose their AAA status first

[Admiral Yi]

The UK defaulted on its WWI debts to the US, along with virtually every other country in the war.

[Ed Anger]

The UK defaulted on its WWI debts to the US, along with virtually every other country in the war.

MAY GOD DAMN THEM.

I'll take my share in Jaffa cakes. And not them weird Serb ones either.

[Admiral Yi]

WELCH WELCH WELCH

[Sheilbh]

The UK defaulted on its WWI debts to the US, along with virtually every other country in the war.

Everyone defaulted on us too.  Hoover issued a moratorium in 1931 pending a deal on how to fix repayments going forward.  The deal never happened, everything just sort-of stopped in 1932.  We owed you £800 million, the rest of the world (Germany and France ) owed us £2.3 billion.  And we paid off our WW2 debt

Anyway you don't count.  I meant to real bondholders

[MadImmortalMan]

Henry VIII defaulted three times.

[Sheilbh]

Henry VIII defaulted three times.

But he was King of England.

[PJL]

There are reports that if 66 / 75 / 90% of bondholders don't agree to the haircut deal than Greece will impose collective action clauses (CACs) which will be considered a default by the ratings agencies (certainly Moodys). However for the whole thing to go through smoothly then the threshold has to be reached by the 8th March.

The Greeks need 90% of bondholders to agree for the PSI deal to have the effect agreed in the terms of the bailout - if that doesn't happen then the bailout's doubtful and certainly the IMF have said they won't participate.  They need 66% of bondholders to agree to activate the CAC clauses they've retroactively inserted into all sovereign bonds.  I think that decision is in the next day or two.  But the date for the debt Greece needs to refinance is March 20th.

What role do the ratings agencies play in this?  I thought it was all decided by ISDA whether there's been a default or not.

The ISDA is made up of the big banks who don't want this to fail. Which is like turkeys voting for Christmas - it's not going to happen. Therefore the real deciders of what constitutes a Greek defauilt will be the wonderful infallable ratings agenices as ever. And that will be decided this Thursday depending on the threshold (which I believe is actually 75% rather than the 66% you mentioned).

[Sheilbh]

The ISDA is made up of the big banks who don't want this to fail. Which is like turkeys voting for Christmas - it's not going to happen. Therefore the real deciders of what constitutes a Greek defauilt will be the wonderful infallable ratings agenices as ever. And that will be decided this Thursday depending on the threshold (which I believe is actually 75% rather than the 66% you mentioned).

Don't ISDA decide if there's been a 'credit event' or not?  Although it's automatic in case of the CAC's being activated anyway, right?

This is the FT blog on the CAC.  I think the Greeks are currently briefing they expect 75% to approve:

The first part makes plain that collective action clauses, which would let a majority of quorate bondholders bind others, will be triggered. There's been a lot of fuss about this, but it's worth remembering that the CACs now in Greek law bonds provide for a 50 per cent quorum within the 66 per cent threshold. That is it. The end.

I'm not sure what that would mean in practice though.

[MadImmortalMan]

I'm not sure what that would mean in practice though.

It means Grandpa Mataxis' pension is screwed.

[Iormlund]

So I just finished reading that report. It calls in no ambiguous terms for the Dutch to immediately exit the EZ and engage in zero-interest rates and QE to keep expected appreciation under control.

[jimmy olsen]

Some news trickling over that several major Greek pension funds are refusing the deal. I don't know how much of a chunk the refusers represent though.

Better to get something than nothing. Why are they refusing?