Chart Of The Day: The EFSF Is Already Trading As AA+, Or Why The French AAA Rating No Longer Matters
Following the S&P "technical glitch" on Thursday which sent out a bizarre notice to a few subscribers notifying that a rating action on France is imminent, FrAAAnce is up in arms and demanding S&P blood. The reason: as everyone knows by now, the sanctity of the Eurozone is now contingent on those three A letters more than any other variable, because without said rating, France becomes ineligible for EFSF funding purposes (at any rating less than AAA), the EFSF's sole 'pristine' backer becomes Germany, and sends the EFSF yield curve into a tailspin, as it glaringly painfully obvious that Germany alone can't fund the trillions needed to preserve the Eurozone and purchase rolling Italian and other PIIGS debt. Yet one look at the yield curve of the EFSF as it already stand confirms that the market is not waiting for S&P, Moody's or any other rating agency, as it is now just a matter of time: after all recall that S&P itself said that it "would likely downgrade the credit ratings of France, Spain, Italy, Ireland and Portugal if the euro zone slips into another recession." Well as of yesterday, the EU itself warned the Eurozone may slump into "a deep and prolonged recession."The result: as of the past few days the EFSF no longer trades with an AAA implied rating. In face as can be seen on the chart below analyzing regression curves for various rating strata, the EFSF is now AA+ at best. Simply said, this means that the bond market has once again voted, and completely oblivious of the noise that is the puppet changes at the top in Italy and Greece, is already preparing for the next contingency casualty, which after France, is just one... at least in Europe.
Bunga Bunga Era Is Over: Italian Parliament Approves Budget Reform, Paving Way For Berlusconi ResignationThe Italian Bunga Bunga era is now over. Last week, after losing the vote of confidence, Berlusconi said that he would resign the minute the parliament voted through the 2012 budget reform. As of minutes ago, this has just happened, after 380 parliamentarians effectively voted to kick Silvio out. As per Reuters: "The Italian parliament gave final approval to a package of economic reforms in a vote on Saturday which clears the way for the resignation of Prime Minister Silvio Berlusconi and the formation of an emergency government. Berlusconi, who failed to secure a majority in a crucial vote on Tuesday, promised to resign once parliament passed the law, demanded by European partners to restore market confidence in Italy's strained public finances. He is expected to hand in his resignation to President Giorgio Napolitano later on Saturday. Former European Commissioner Mario Monti is expected to be given the task of trying to form a new administration to face a widening financial crisis which has sent Italy's borrowing costs to unmanageable levels." Of course, if Monti is unable to get the required majority of support, the country will proceed with general elections, which will throw the BTP yields into yet another maelstrom. And even if Monti succeeds in forming a technocratic "consensus" government, the question still remains: just how will he succeed in implementing the required austerity where Silvio failed?
Is there anything that hasn't already been said about the Eurozone's structural flaws and the absurdity of the half-baked "solutions" tossed together by its frenzied, fumbling leadership? Perhaps not, but we can fruitfully boil the mess down to a simple double-bind. The double-bind can be stated thusly: 1. If the European Central Bank (ECB) tries to save the private banks and bondholders by printing trillions of euros to buy up the mountain of hopelessly impaired sovereign bonds, then Germany will rebel and renounce the euro as an act of self-preservation. Germany knows that money-printing robs savers and the productive via the stealth theft of inflation, and its people will not stand idly by while their wealth is destroyed by ECB euro-printing. 2. If the ECB renounces money-printing, then the only economy solvent enough to fund the 3-trillion-euro bailout with actual cash is Germany, which will rebel against this debt-serfdom by renouncing the euro. There are only two paths, and they both lead to the same end-state: dissolution of the euro and the EU's monetary union.
Many wonder why hedge funds underperformed the market as dramatically as they did in October: simple - few, if any, had any conviction in the rally, and only those with an already abysmal Sharpe ratio and a penchant for risky beta chasing threw themselves headfirst into the turbulent short-covering riptide. David Kostin summarizes it best with the title of his latest weekly chartology: "Investors uncertain about lower uncertainty." - and indeed they are, as intuitively all know that nothing has been fixed and the only reason the market lurches from one extreme to another is the fear that a career rally will leave many of them with no LPs, if only to be faced with even worse news tomorrow, and suffer an even greater loss to AUM. Which is why those that are outperforming the market to date have battered down the hatches and are enjoying the sluaghter from the sidelines, knowing full well they will be able to pick off stocks at Greece-like valuations. As for the others: all the best, as the volatility experienced in the past few days will certainly persist through year end: "Investors are generally skeptical about the pace and magnitude of the market recovery. We expect uncertainty and below-trend growth to persist..."
The most comprehensive and concise summary of the events in the week just passed.
The Eurozone Turns Down Chinese Money And Quid Pro Quo