Wednesday, May 05, 2010


Ooooohhhh boy. That wasn't part of the rescue plan, was it?

The standard approach to crisis management is "UPOD": under-promise, over-deliver. This is the "shock and awe" approach to bailouts that we saw last spring (via huge QE programs and a Dr. Evil-esque allocation promise to the IMF, which hasn't done much good for Greece, it must be said!)

Sadly for holders of risk assets, the Europeans have taken the more treacherous "OPUD" strategy: after talking about sums as high as €130 billion last week, the Greek program underwhelmed that figure by €20 bio or so.

And so Greece came under the kibosh yesterday, dragging the rest of the world's risky assets with it. While there's no real trading in Greek 2yrs anymore, the best guess yield is now about 15%. That's not good.

The obvious question therefore becomes: what now? What happens when the authorities hit Greece with their best shot, and it just ain't good enough? Well, for starters, the rumour-mongers start hunting bigger game, like Spain. While yesterday's "Fitch downgrade" rumour proved to be unfounded, there are enough tendrils of smoke wafting up from Iberia to suggest the presence of fire. (Unless those are just ash clouds from Iceland.....)

While the SPX got a rather rude tap yesterday, 'twas little more than a peck on the cheek compared to what's been happening in the IBEX. The Spanish index is nearly 20% off of its January highs, has broken a previous low, and really needs to reclaim the technically significant 10,000 line quickly or else face risk of a splattering.
More ominously, the yields spread between Spanish bonds and Bunds has crept to a post EMU high. The chart below shows the yields spread in 5yrs, at nearly 150 bps....but the picture looks similar elsewhere along the curve as well. It's one thing for a little country like Greece to have a yield blow's quite another for one of the larger Club Med countries (and your next World Cup champions....) to go haywire.
Hmmmm. What's a poor policymaker to do? From Macro Man's perch, the eventual outcome is looking more and more inevitable. Remember last year, when J-C Trichet used to waggle his finger during press conferences and looked down his nose at the Anglo-Saxon money-printers?

Karma's a bitch, ain't it? For it's looking increasingly likely that the ECB will need to step in and buy Eurozone government bonds...particularly those at the periphery. They've already ejected the ratings agencies from the equation and torn up the collateral eligibility rulebook....why not go the whole hog into outright QE?

Sure, the Bundesbankers won't like it.....but the German exporters clearly will as the euro heads down the pan! Note how the € is losing serious ground against even sterling, the currency of a country with Moe, Larry, and Curly vying to be prime minister.

Tomorrow's press conference might be a bit to soon for the ECB to announce QE...but then again, maybe it won't.

Macro Man may not be in a position to post tomorrow...if not, enjoy your UK election and ECB presser!


Donlast said...

The Greek bailout is just stupid. Who do those in power think they are fooling. Debt piled on debt to cure a solvency problem? The contagion that is spreading is total disillusionment with governance and those ruling the roost in Europe and America. And next up - China.

CV said...

But QE tomorrow by the ECB would be UPOD no?


( ... won't happen though)

Nic said...

You can't polish a turd and you can't put lipstick on a PIIG.
"Shock and Awe" this was not ...

econobserver said...

This PIGS crisis reminds me the 1997 Asian Crisis. The big difference is that the world(US Fed) can rescue by cutting rates then, nobody has any room to cut now. Well, as MM said, ECB can QE this time. German exporters will love it. We have this conversation before.

BTW, since MM is going to be absent tomorrow, according to the reliable "market is toast when MM does not post" indicator, I plan to clear my positions and stay at the sideline. What will you do?

Leftback said...

This situation is getting increasingly difficult to trade and making it difficult to manage risk. Overnight government and central bank arbitrage is not my favorite investment theme. Long Treasuries and US IG corporates (have been for months) with occasional hedging - it is working but this market is really a pain in the ass.

k1 said...

LB- I sympathize on the difficulties of trading this market. Question for the gallery: on Monday a story was making the rounds that "junk bonds were priced very near par", suggesting that the yield hogs had succeeded in chasing the risk premium out of the HY market. Anybody verify this or put a play on?

Short junk bonds seems a relatively "safe" play in this climate.

Leftback said...

k1: In retrospect, Long LQD:Short JNK was a good pairs trade to put on, and I suspect it still will be good from here. JNK is full of some of the worst turds imaginable. I hear that a few people are setting up to short Prime MBS this summer. It's finally time for reality to catch up with the jumbo crowd.

Our Man in NYC said...

The S&P stopped right on it's Fib retracement...

Leftback said...

The show may be over for now, it's time for the UK elections. Got your Swing-O-Meter ready, MM?

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Rossco said...

shcomp , hg1, all unnderperforming AUD .... I think the Aussie is the next to get it