No human can realistically be expected to understand or focus on the constant stream of Eurozone gyrations and in fact humans increasingly don’t, with the half-life of blather-driven euphoria declining rapidly. The latest gyration seems to be that Germany is contemplating letting the Eurozone collective rescue funds think about maybe one day putting up for discussion the possibility of considering buying bonds of distressed countries directly to try to drive down funding costs for those countries.
This seems to have helped Spanish yields more than did the announcement earlier this month that those funds might consider giving Spain €100bn in special senior debt to get its banks sorted, for sort of obvious reasons. If the EFSFSMCBFFFFF is buying hundreds of billions worth of Spanish bonds right alongside whatever brave dopes are buying them already, that buying pressure should push up prices and push down Spanish borrowing costs and improve Spanish sustainability in a virtuous circle etc. etc. If the EFSFSMCBFFFFF is instead putting in its money at a more senior level than those bondholders, then those bondholders are subordinated and, empirically, sad about it.
One weird thing though is that there is little assurance that “EFSFSMCBFFFFF buying the same bonds that everyone else is buying” is actually the same thing as “EFSFSMCBFFFFF ending up with the same bonds that everyone else is buying.” The (not yet ratified!) ESM treaty maybe requires the ESM to be senior to market creditors (maybe!), but also maybe allows it to buy market bonds, which generally are not senior to themselves. Seniority is ordinarily a matter of contract: if you buy one of a series of totally fungible publicly traded bonds, you generally expect to be treated pari passu with the rest of those publicly traded bonds.
Ordinarily! Read more »
On Monday, investors breathed a sigh of relief after the EU agreed to lend $125 billion to Spain’s banks. But billionaire investor Jim Rogers wasn’t relieved. He thinks the bailout is misguided – even the worst possible thing that could have happened. “Let them go bankrupt. Let them all go bankrupt!” he exclaimed on CNBC…Not only does he think it’s absurd, he’s all but certain the EU is making a bad situation worse. “The solution to too much debt is not more debt! This is most insane thing I’ve ever heard. It’s going to make the collapse, when it comes even worse – be careful. No, don’t be careful,” he added. “Be worried.” [CNBC]
So the deal is this. Spain has some banks, and those banks have some loans, and those loans have some problems. And so Spain wants to bail out its banks via a thing called the Frob, which is perhaps more confidence-inspiring in Spanish than it is in English? The Frob has the small problem of not having money, and this weekend the problem was solved by Europe – I like saying “Europe” because the actual institutions in these things always seem pretty ad hoc but in this case it means mostly the European Stability Mechanism but also the European Financial Stability Facility – promising it up to €100bn.
Now one thing about Europe is that it wants its money back, so the ESM loans will likely be senior to existing Spanish government debt. In some ways this is weird – Spain is financing a subordinated investment in the financial sector of its economy with a senior lien on all of its economy, and subordinated bailouts could both create more flexibility and give Europe upside in any recovery – but in other ways, this is the way the world works. As Zero Hedge put it, “the FROB loan is effectively a priming DIP”: when you really need the money, and you can’t afford to pay for it in rate, you pay for it in seniority.
This leads, theoretically, to sadness if you are a Spanish government creditor, because now you are subordinated. On the other hand, it leads, theoretically, to happiness because Spain is now funded through means other than a bond market that may shut at any moment, so it should be able to keep afloat and service its debt, including your debt, which is what you really want. Your expected recovery on default has gone down, but so has your probability of default, so there are offsetting effects. Which effect is bigger? That does not seem susceptible to an a priori answer but as of late this morning lower recovery seems to be winning: Read more »
“Nationalised Spanish lender Bankia is offering a Spiderman towel to young investors as part of a drive to hold onto deposits after being taken over by the state in the biggest bank rescue in Spain’s history.” [Reuters]
Short sale bans. Is there anything they can’t do?
Maybe. But does it matter? If your position is just that “speculation” on stocks is the moral equivalent of puppy-murder and should never be profitable, then you just say things like “let’s ban short sales” and don’t worry about the details. You take shorting of bank shares as a personal affront, and your goal is not to have functioning markets but just to prove that you’re tough. And your name might be Jean-Pierre Jouyet:
Jean-Pierre Jouyet, head of the AMF, the French securities regulator, said on Thursday night: “They [investors] wanted to test French resistance. This is our response, as always very determined, and it will be so for all those who want to put us to the test.”
But, as we’re seeing with new short sale bans from France, Italy, Spain and Belgium, this approach sometimes has problems, because most short selling takes place in an actual world where other things happen too. Like:
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Yesterday we learned the disturbing news that R. Kelly may soon lose his house, on account of not having paid his mortgage since June 2010. Kelly owes JPMorgan $2.9 million, plus unpaid interest accruing at $251 a day on the suburban Chicago spread and while he probably has a few other places in which to crash, this place is special as it comes with six full bathrooms, seven half-baths, and 12 walk-in closets. What was the R&B singer to do? His options appeared limited. Then, today, while thumbing through the international section…eureka. Read more »
“It is quite likely that Portugal” will be next in line for a financial assistance, Roubini said today in Prague at a conference of chief executive officers sponsored by ING Groep NV. “The big elephant in the room is not Portugal but, of course, it’s Spain. There is not enough official money to bailout Spain if trouble occurs.” [Bloomberg]
Luis Caselles Peréz, pictured, is a Spanish-born business student who recently set up a website in order to share a dream, which he states plainly:
“As a Master student, I feel that the environment evolving from this and the resulting new paradigms of the industry offer many learning opportunities. Being in my last year of Business School education, I have a great opportunity to become the man I always wanted to be: an Investment Banker.”