Wednesday, May 19, 2010

INTERNATIONAL NEWS WRAP; German short sales; German debate taking place today;ECB independence at risk


· German short sales – they first hit the tape on Reuters around 12pmET on Tues and were officially unveiled later in the trading session; they will be place until Mar 31, 2011.  The ban covers so-called naked short-selling of specific European financial stocks (Aareal Bank AG, Allianz SE, Commerzbank AG, Deutsche Bank AG, Deutsche Börse AG, Deutsche Postbank AG, Hannover Re AG, MLP AG and Munich Re AG, as well as Generali Deutschland Holding AG).  Germany is also prohibiting investors from buying credit-default swaps on sovereign debt unless they own the underlying bonds.  BaFin said the ban will apply to euro-zone debt offerings that trade in the regulated segment of one of Germany's exchanges, as well as CDS linked to euro-zone debt, if the swaps aren't being used to hedge against a default risk.  Germany acknowledged however that its new rules might not have much impact as much of the naked CDS trading takes place in London, which isn’t subject to the ban.  Germany's ban on speculative short-selling will stay in place until corresponding European rules are implemented.  WSJ     

· Short sales – the UK’s FSA says the German ban would not apply to branches of German institutions outside the country.  "The scope of these bans relates to German participants or business taking place inside Germany and does not cover branches of German institutions outside Germany or in the UK."  Reuters 

· Short sales – no coordination throughout Europe - It was not clear whether other euro zone governments would follow Germany's lead, though Austria suggested it would seek to discuss an Europe-wide measure at a European Union finance minister's meeting on Friday; however, A Europe-wide ban on naked short selling and naked credit-default swaps of government bonds is “doubtful,” Eddy Wymeersch, Europe’s top market regulator, said; France said it isn’t considering a ban on naked short selling and called for a meeting of market regulators on sov debt trading – Reuters/Bloomberg  

· Short Sales - Belgium's markets regulator said it was consulting with other European watchdogs about whether to restrict trading in securities – Reuters

· Short Sales - The European Commission called on countries in the 27 member state block to work together when it comes to implementing trading restrictions; "These measures will be even more efficient if they are coordinated at European level”….In the statement, Barnier said: "It is important that member states act together and that we design a European regime to avoid regulatory arbitrage and fragmentation both with the EU and globally."  Reuters 

· Short selling plans from Germany – comments from JPMorgan’s Stephen Dulake - Cash bonds will be the biggest loser, in investment grade especially, where we perceive the gap risk to have risen markedly. Even prior to these announcements, anecdotal evidence was accumulating that some dealers had built-up large bond inventories and had positions which were wrong-sized relative to available liquidity. Liquidity will dry-up further if these same dealers begin to question the efficacy of certain hedges, particularly bid-side liquidity.  all this is happening against the backdrop of the cash bond-CDS basis being the most crowded trade in credit markets, at least in our view. Moreover, we believe that some bondholders have recently undergone a Lehman-like moment and have completely reappraised the riskiness of some of their holdings; we are, of course, referring to peripheral European banks and corporates. Lehman's collapse led to a rethink on managing things like counterparty credit exposure; in the same vein, recent developments mean that sovereign risk is now seen as a meaningful driver of corporate credit risk.  link

· Euro – the euro hit fresh lows late on Tues - aside from all the worries around budgets, etc, one of the issues being cited for euro weakness late in the afternoon today was the inability to hedge out European risk.  If you can't buy CDS on sov debt now w/o owning underlying sov debt (per the new German rules unveiled today), then what else is a good way to hedge away euro-area risk??  By shorting the euro outright.  

· Germany's economy is recovering again after an unusually harsh winter slump, the economics ministry said Wednesday (DJ) 

· Germany’s plan to deal w/budget transgressors could be an even bigger deal than the short selling restrictions – “As a last resort, a managed insolvency proceeding for bankrupt states”  This last line is raising fresh worries (FT Alphaville)    

· Europe update – M Wolf oped in the FT – says a Greek debt restructuring is likely at some point.  The peripheral European economies historically have been bailed out by weaker currencies – that is impossible w/the euro union.  Wolf says the eurozone will prob. end up surviving.  FT

· European bailout plan – some hedge funds think the effort will fail - “The EU and the IMF effectively went all-in with a bad hand in the highest stakes game of financial poker ever played with the world,” says Kyle Bass.  HFs that made money during the US credit crunch now see similar opportunities unfolding in Europe – Bloomberg

· Europe update - Volcker said it will take “years” to restore economic balance in Europe following the continent’s debt crisis.  Bloomberg

· Greece has concluded repaying 10-year, 8.5 billion euro bond maturing on Wednesday - Reuters 

· German debate taking place today - the Bundestag started debate on the European Stability Mechanism at 9am CET (3am Eastern) this morning.  They won't vote, but the debate will last throughout the day, and Bundestag members' questions to the government will be answered in the afternoon.  Merkel, in comments to the parliament, said the euro was in danger - "Every one of us here can feel that the current crisis of the euro is the greatest challenge that Europe has faced for decades, since the signing of the Treaty of Rome," she said. "This challenge is existential. And we have to rise to it”

· Germany to push forward w/financial tax - Merkel said European leaders had to ensure banks could not "exort" the state any more and the EU would introduce its own financial transaction tax or levy if the Group of 20 nations did not reach such an agreement in June.  London Telegraph.

· German bond demand lackluster – analysts blamed the runup in bund prices, in large part thanks to the German gov’t’s own new short sale restrictions, caused demand to be tepid.  Reuters 

· Portugal bond auction - sold 500 million euros ($609 million) of bills due in February next year.  The securities were issued at an average yield of 2.443 percent.  The debt attracted bids for 2.3 times the amount offered, compared with a ratio of 3.1 in Mar.  Bloomberg

· Dollar crisis?  Doesn’t seem like it – the ECB says no bids received in 7-day dollar tender; The total lack of demand for today's 7d USD tender- combined with a only $1bn for yesterdays 84d offering- suggests that Eurozone banks continue to have a sufficient supply of USD, at least for now.  Bloomberg

· Euro value – IMF says euro’s current level is close to an “equilibrium” value and its decline to the lowest level in four years against the dollar may help Europe’s exports; “The euro is rather close to what we would consider equilibrium value after an extended period at which it traded above that value.” – Bloomberg

· ECB independence at risk according to former Federal Reserve Governor Frederic Mishkin due to the recent debt purchases – Bloomberg 

· BOE minutes published this morning - While the MPC has become more nervous about the potential spill over effects of sovereign stresses to the UK, no members voiced any preference for a change in monetary policy. This reflects the heightened uncertainty of the situation, and the more two sided nature of risks around the inflation outlook. The MPC is in wait and see mode for now - but notes that faster fiscal deficit reduction plans are needed. The May minutes noted there had been no real surprises in the activity data. The main issue was the unravelling sovereign crisis around Europe that had reached its peak around the time of the MPC meeting, that took place on Friday 7th and Monday 10th May. The MPC noted that there was significant uncertainty around the growth outlook. And despite the EU/ECB support package announced on the Sunday, risks to growth appeared to the downside

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