Recap 6-11-12

Main Items:

  • The Eurogroup said that Spain could get up to €100bn. Details on the source of the funding and the ultimate amount has not been finalized, (although EU sources were quoted saying EFSF bonds were likely) and may not be known until results of the Spanish commissioned analysis. The IMF will not be involved in the funding and will only have a monitoring and reporting role. The conditions of receiving the aid should include financial sector reforms including restructuring plans and “horizontal structural reforms of the domestic financial sector” but details have not been disclosed yet. Debt to GDP ratio of Spain would jump from 81% to around 90% if the entire €100bn aid package is used.
  • WSJ: US Corporations have 500bn less cash than previously estimated
  • BBG: China Limits Access to Company Filings


  • China May Data:
  1. M2 Growth improved to 13.2% vs 12.9% exp and 12.8% prev. New Loans increased to 793bn vs 700bn exp and 682bn prev
  2. CPI declined to 3.0% YoY vs 3.2% exp and 3.4% prev
  3. IP improved to 9.6% YoY vs 9.8% exp and 9.3% prev
  4. Retail Sales declined to 13.8% YoY vs 14.2% exp and 14.1% prev
  5. Trade balance improved to 18.7bn vs 16.25bn exp and 18.4bn prev
  6. Electricity production registered at 389.8bn KWH in May. This was 2.7% higher than the production one year ago

Upcoming Data:

  • Tue: US Import Price index, AU Consumer Confidence
  • Wed: US PPI, Retail Sales
  • Thurs: SNB, EU Core CPI, Labor Costs, US CPI, Jobless Claims


We saw a classic case of buy on the rumor / sell on the news phenomenon today. And with the expected good news out of the way, the market looked ahead and found:
-The EU package looks like it will be a direct injection of bonds instead of cash, which means the leverage won’t decline as much
-The defacto additional debt (and risk of downgrades) may lead to downgrades. Spanish banks will also be subject. This is a problem because a cut below BBB = massive index based selling
-Greek elections next Sunday, with the probability of a coalition of any kind still appearing low, and SYRZIA’s hand apparently strengthened.
-EU is still in a recession
-Fears that Italy may be next
-US Growth Slowing
-Fiscal Cliff risk for the US in August as the Treasury runs out of cash in early Sept

Europe needs higher nominal GDP – the higher the better. And because EU banks are already heavily levered, a resolution will require both ECB easing AND additional bank equity injections.

Separately, note that signs of financial market stress have been bifurcated. In particular, the Euribor-OIS spread has remained low and stable, even as the 5y Financials CDS index has moved sharply higher:

This is likely an artifact of the LTRO’s. Short term liquidity remains plentiful for all banks with access to the ECB window, even as longer term solvency concerns remain high. The steepness of the 3m-5y yield curves is of course also the norm for EU sovereigns ex Germany. In any case, the point is that short term measures of the credit premium is not currently a good indicator of funding stresses, although if they DO start to move higher, a banking collapse is likely imminent, since it would signal an interbank funding freeze.


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