Ero Zone Contagion is Spreading

The Game Is About Done

November 23, 2011

Karl Denninger - It's pretty-much over at this point....

This morning Germany had a failed Bund auction. That's not particularly noteworthy; it happens from time to time.

But what's noteworthy is what happened to bond yields everywhere through Europe in response: They blew out.

The Greek and Italian "problem" is no longer about Greece and Italy. It has been creeping into Spain and more-recently France, but this morning jumped into Germany and everywhere else "all at once."

Capital has said "no more" to the lies in Europe. While this does not mean an instant implosion it does mean one important thing: The willingness of capital holders to continue to permit deficit spending is coming to an end, and with it the false "GDP" that this lie has "supported" will also come to an end.

Our lawmakers, for their part, continue to sing a happy song about how we'll get it done -- but not today, since the supercommittee was an abject failure. Covering up the failure was the fact that there were departments that had 10, 20 even 30% increases in the funding found in the appropriations bills that were passed in the House even while the "committee" was trying to find a way to "cut" spending.

Folks, this political game of lie, lie and lie some more cannot go on forever. Eventually the waiter appears with the check and you either pay it, wash dishes, or get arrested for theft. In the political world that "arrest" comes in the form of capital holders saying that they no longer believe you will ever pay and borrowing costs go up -- way up.

The Fed cannot "print" out of this and neither can the ECB. If either try that they will engender an all-on revolt, never mind that as purchasing power falls the fixed costs of staying alive go up relative to incomes and the war is lost anyway.

Reality must eventually be faced. That day is here for Europe and it will soon be here in the US. We have permitted the lies and stealing -- both indirectly and now, as we've seen, it appears directly through MF Global -- to go on for too long.

To those Seniors (and soon-to-be-Seniors) and others who say "but we were promised!" and "I vote damnit - you better give me what you said I'd get" respond: The till is empty and your check is going to bounce.

Occupy Wall Street? Well sure, but while you're at it, why aren't the Seniors encircling the Capitol and refusing to leave? Why isn't the underlying truth being discussed and why aren't the jackals that led to this happening being forced from office and run out of town on a rail?

I'll tell you why: Because everyone thinks that they can manage to somehow "get theirs" while "someone else" will take the hit.

I'm sorry to tell you that it isn't going to work out like that.

There's no point in continuing to play this game. MF Global showed us -- you're right, you hedge or you place your bet, you still lose your money! How many farmers, airlines, industrial producers and other legitimate entities using the market for risk management got screwed by that little game and why is it that Corzine is not in handcuffs? FINRA? What's that -- it appears Corzine didn't have a valid (and required) securities license. Self-regulation not only failed so has any resemblance of actual law enforcement.

The same game was run over in Europe with sovereign CDS. You hedge, you bet right, the ISDA declares that you were "voluntarily" exchanging your bonds and the hedges you bought were worthless. Your "exchange" was as voluntary as is handing over your wallet when there's a gun up your nose, but that doesn't matter -- the word "is" can be redefined any time the people in charge want, and they want.

Your money, that is.

It will not be long ladies and gentlemen, when the bulk of the folks running the algorithms deduce that they're exposed to the same risks - they have to post margin too, you know, and if it can be stolen then their capital isn't safe either. These deposits aren't supposed to be "at risk" when there's no position actively open -- that's a performance bond against possible failure to pay, but is supposed to be exactly as safe as a bank deposit in a checking account under FDIC limits.

Well, it wasn't. The CDS you bought on Greece wasn't. And it will only take another event like this or two before people conclude that everything is unsound as the jackals running the game will redefine the meaning of words to suit themselves and, failing that will simply steal the money.

30+ years of lawless behavior has now devolved down to blatant, in-your-face theft. They don't even bother trying to hide it any more, and Eric "Place" Holder is too busy supervising the running of guns into Mexico so the drug cartels can shoot both Mexican and American citizens.

What am I, or anyone else, supposed to do in this sort of "market" environment? Invest in.... what? Land titles are worthless as they've been corrupted by robosigning, margin deposits have been stolen, Madoff's clients had confirmations of trades that never happened and proved to worthless pieces of paper instead of valuable securities and while Madoff went to prison nobody else has and the money is still gone!

Without enforcement of the law -- swift and certain -- there is no deterrent against this behavior.

There has been no enforcement and there is no indication that this will change.

It will take just one -- or maybe two -- more events like MF Global and Greek CDS "determinations" before the entire market -- all of it -- goes "no bid" as participants simply stuff their hands in their pockets and say "screw this."

It's coming folks, and I guarantee you this: Whatever your "nightmare" scenario is for such an event, it's not bearish enough.

Bond Market Hammers Italy, Spain Ponders Outside Help

November 25, 2011

Reuters - Italy's borrowing costs soared to their highest levels since Rome joined the euro on Friday, piling pressure on the newly installed government of Mario Monti at the end of a week in which the euro zone crisis tainted even safe haven Germany.

A punishing bond sale, in which Italy was forced to pay a record 6.5 percent for six months paper, came after a disastrous German bond auction earlier in the week and the leaders of France, Germany and Italy failed to make headway in tackling the growing debt crisis.

Amid signs that the euro zone contagion is spreading, indications emerged in Madrid that the People's Party, getting ready to form a government in the coming weeks, may apply for international aid to shore up its finances.

After winning an election this month, the PP under Mariano Rajoy inherits an economy on the verge of recession, a tough 2012 public deficit target, financing costs driven to near unsustainable levels by nervous debt markets and a battered bank sector with billions of euros of troubled assets on its books.

Tuesday's launch by the International Monetary Fund of a credit facility for fiscally responsible countries at risk from the euro zone debt crisis gives it a potential lifeline it may wish to exploit.

"I don't believe the decision has been made ... but it is one of the options on the table, because I've been asked about it. But we need more time and more information on the current state of things," a source close to the PP told Reuters.

Italy's auction on Friday, described by one analyst as "awful," spooked investors further and pushed two-year yields on the secondary market to an eye-watering euro lifetime high of more than 8 percent.

Longer term debt is above a "red line" of 7 percent which forced Portugal, Greece and Ireland into bailouts that Europe could not afford for the much bigger Italian economy.

Spiralling borrowing costs have added to pressure on Monti's government of technocrats, hastily sworn in this month after Prime Minister Silvio Berlusconi was bundled out of office as economic pressures grew.

European Economic and Monetary Affairs Commissioner Olli Rehn threw his backing behind Monti but warned that swift action was needed to contain the escalating euro zone debt crisis.

He dismissed fears that the euro's survival was in question but said the crisis had reached the heart of the single currency.

"This contagion effect has been touching the proximity of the core and even touching the core itself," he told a news conference after meeting Monti in Rome.

"It shows that this is an increasingly systemic phenomenon, which calls for strong financial firewalls in order to contain this contagion and have a counterforce to this market turbulence."

EYES ON ECB

With the European Central Bank coming under increasing pressure to take more effective action, something it and Germany continue to oppose in public, officials suggested one possible scenario that could break the impasse.

A push by euro zone countries toward very close fiscal integration could give the ECB the necessary room for maneuver to dramatically scale up euro zone bond purchases and stabilize markets.

The ECB, which cannot directly finance governments, has been buying Italian and Spanish bonds intermittently on the secondary market since August to try to keep their borrowing costs and contain Europe's sovereign debt problem.

But Italian and Spanish yields have nonetheless reached levels that economists see as unsustainable, raising the possibility that Rome and Madrid will be forced to seek emergency international funding.

"We are not far from a point when the disruption in the markets is so big that monetary policy transmission does not work at all," said one euro zone official involved in shaping the euro zone's policy response to the crisis.

"If the ECB has the assurance that we are moving toward a fiscal union, they could be ready to go all out," he said

Belgium, which had prided itself on being able to stabilize its debt position despite having had no government for the past 18 months, saw its credit rating downgraded.

Political deadlock in Brussels prompted Standard & Poor's to cut Belgium's credit rating to double-A from double-A-plus, citing concerns about funding and market pressures, as the euro zone debt crisis continues to worsen.

"We need a reply that is clear and credible if we are to avoid the worst," Belgium's caretaker prime minister, Yves Leterme, told Belgian television.

The downgrade followed difficulties this week in Belgium's drawn-out attempt to form a government. Elio Di Rupo, leader of the French-speaking Socialists, had been trying to form a government based on a six-party coalition.

But he tendered his resignation on Monday after talks for a 2012 budget - agreement on which is a condition for forming a government - ground to a halt.

Greek, the source of the euro zone's debt crisis, provided another source of dispute.

Investors' worries intensified after reports that Greece was demanding harsh conditions from creditors on a proposed bond swap -- critical to reduce its debt and avoid default.

Banks represented by the Institute of International Finance agreed last month to write off the notional value of their Greek bondholdings by 50 percent to reduce Greece's debt ratio to 120 percent of its gross domestic product by 2020.

But Greece was demanding that its new bonds' net present value -- a measure of the current worth of future cash flows -- be cut to 25 percent, a far harsher measure than the banks had in mind, according to people briefed on the matter.