Mish's Global Economic Trend Analysis

Prepare for Greece to Leave Eurozone; German Government Calls for Greece to Cede Sovereignty Over Tax and Spending Decisions to Eurozone "Budget Commissioner"; Text of the German Demands
2010-2011 Originations Best Default History on Record; Delinquencies Down 25% from Highs, Foreclosure Inventory Near Peak Level
GDP on Recession Track; Real GDP +2.8%, Misses Estimates; Inventory Replenishment Accounts for 1.9 Percentage Points; Five-Year Treasury Yield Hits Record Low
Portugal 10-Year Government Bond Yield at Record High
Greek Debt Solution Likely to Trigger Credit Default Swaps

Prepare for Greece to Leave Eurozone; German Government Calls for Greece to Cede Sovereignty Over Tax and Spending Decisions to Eurozone "Budget Commissioner"; Text of the German Demands

Posted: 27 Jan 2012 04:10 PM PST

Prepare for Greece to exit the Eurozone. Germany has made a request that in my opinion practically guarantees that outcome. The Financial Times has a pair of articles on the matter but the conclusion above is mine.

German Government Calls for Greece to Cede Sovereignty to Eurozone "Budget Commissioner"

Please consider Call for EU to Control Greek Budget

The German government wants Greece to cede sovereignty over tax and spending decisions to a eurozone "budget commissioner" to secure a second €130bn bail-out, according to a copy of the proposal obtained by the Financial Times.

In what would amount to an extraordinary extension of European Union control over a member state, the new commissioner would have the power to veto budget decisions taken by the Greek government if they were not in line with targets set by international lenders. The new administrator, appointed by other eurozone finance ministers, would take responsibility for overseeing "all major blocks of expenditure" by the Greek government.

Even before Germany circulated its proposal, the EU and International Monetary Fund had presented a 10-page list of "prior actions" Athens must implement before the new bail-out is agreed. According to a copy of the document, also obtained by the FT, Greece must cut an additional 150,000 government jobs within three years.

Actual Text of Proposal

The Financial Times posted on its website the complete text of the proposal. Here are snips from Assurance of Compliance in the 2nd GRC Programme

1. Absolute priority to debt service
Greece has to legally commit itself to giving absolute priority to future debt service. This commitment has to be legally enshrined by the Greek Parliament. State revenues are to be used first and foremost for debt service, only any remaining revenue may be used to finance primary expenditure. This will reassure public and private creditors that the Hellenic Republic will honour its comittments after PSI and will positively influence market access. De facto elimination of the possibility of a default would make the threat of a non-disbursement of a GRC II tranche much more credible. If a future tranche is not disbursed, Greece can not threaten its lenders with a default, but will instead have to accept further cuts in primary expenditures as the only possible consequence of any non-disbursement.

2. Transfer of national budgetary sovereignty
Budget consolidation has to be put under a strict steering and control system. Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time. A budget commissioner has to be appointed by the Eurogroup with the task of ensuring budgetary control. He must have the power a) to implement a centralized reporting and surveillance system covering all major blocks of expenditure in the Greek budget, b) to veto decisions not in line with the budgetary targets set by the Troika and c) will be tasked to ensure compliance with the above mentioned rule to prioritize debt service.

Expect Greek "Bank Holiday" Soon

Perhaps I am mistaken but I do not see any chance Greece will agree with this proposal.

German and IMF demands make meaningless any hint of a deal "soon". Germany has signaled it has had enough and will not throw another 130 billion euros down a rathole. The IMF signaled the same thing but not as emphatically.

Thus, if Germany does not back down and the IMF insists on a 10-page list of "prior actions" a Greek exit from the Eurozone is at hand.

Look for a "bank holiday" in Greece soon.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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2010-2011 Originations Best Default History on Record; Delinquencies Down 25% from Highs, Foreclosure Inventory Near Peak Level

Posted: 27 Jan 2012 01:10 PM PST

Here are a couple of interesting charts from the LPS Mortgage Monitor, January 2012 Mortgage Performance Observations report. Data as of December, 2011 Month-end.

click on any chart for sharper image

Originations Decline

Government Responsible for Most Refinance Activity

Quality of Loans Improves

Foreclosure Inventory Near Peak Level

Horrendous Performance of Loans in Foreclosure in Judicial States

The quality of recent loans has gone up and delinquencies are lower, but the rest of the data shows numerous problems. Foreclosure inventory is near record levels and more foreclosures wait in the wings. Home sales has stalled and home prices continue to decline according to Case Shiller.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

GDP on Recession Track; Real GDP +2.8%, Misses Estimates; Inventory Replenishment Accounts for 1.9 Percentage Points; Five-Year Treasury Yield Hits Record Low

Posted: 27 Jan 2012 09:45 AM PST

The headline real GDP number of 2.8% does not sound too bad until you dig beneath the surface. A full 1.9 percentages points of that 2.8% was inventory replenishment. Real GDP vs. a year ago is +1.6% and that is on a recession track as well.

Five-Year Treasury Yield Hits Record Low

Bloomberg reports Treasury Five-Year Yield Declines to Record Low as GDP Misses Forecast

Treasury five-year note yields fell to a third consecutive record low after slower-than-forecast U.S. growth added to speculation the Federal Reserve will expand asset purchases to spur economic growth.

Ten-year note yields fluctuated as stockpile rebuilding accounted for 1.9 percentage points of the 2.8 percent economic expansion, sparking concern growth may be weaker than expected in the first three-months of this year. Fed Chairman Ben S. Bernanke said Jan. 25 he's considering additional bond purchases to boost growth after the Federal Open Market Committee announced that the target lending rate would stay low through late 2014.

Yield Curve over Time

click on chart for sharper image

Stock Symbols in Above Chart

$IRX Brown: 3-Month Yield
$FVX Blue: 5-Year Yield
$TNX Orange 10-Year Yield
$TYX Green: 30-Year Yield

Sustained economic weakness is the only reasonable explanation for this decline in yields. Yes, there is Fed intervention. However, the reason the Fed is intervening is "sustained economic weakness".

However, the Fed's actions are counterproductive. Driving down interest rates does not encourage bank lending, rather it does five things the Fed does not want.

Five Unwanted Results of Fed Policy

Low interest rates clobbers those on fixed income - See Hello Ben Bernanke, Meet "Stephanie"
Low interest rates and quantitative easing encourages bond market speculation and sure profits instead of bank lending - See Premature Dollar Obituaries and Mainstream Economists' Monetary Insanity; Keynes-Inspired Great Depression; Lessons Not Learned
Low interest rates encourage commodities speculation especially food and energy and that puts a price squeeze on manufactures. Input prices rise, but demand and prices decline. - See Chart of the Day: Apparel Import Data in Square Meters and Dollars; J.C. Penney's Slashes Prices on All Merchandise by "At Least 40%", Offers Every Day Low Pricing
Low interest rates drives up the price of gold - See Gold, Silver, $HUI React to Bernanke Pledge to Hold Rates near Zero "At Least" through Late 2014; Hello Stephanie, Ben Promises More of the Same
The beneficiaries of the Greenspan Fed and the Bernanke Fed policies have been the 1% not the 99%

Fed Policy Not Working

Fed policy is not working, nor will it work.

This is what happens when an academic wonk with no real-world practical thinking sits in a box with other academic wonks with no real world experience and they collectively divine economic policy as if they were god.

The Fed is responsible for the housing bubble, the resultant collapse, and the anemic economic recovery.

GDP on Recession Track

Here is an interesting chart from Doug Short regarding Real GDP and the Next Recession

click on chart for sharper image

Doug Short writes ...

As the chart illustrates, the latest YoY real GDP, at 1.6% is up from last quarter's 1.5% (to two decimal points it's 1.56% versus 1.46% for Q3). At 1.6% the YoY number is below the level at the onset of all the recessions since quarterly GDP was first calculated — with one exception: The six-month recession in 1980 started in a quarter with lower YoY GDP (at two decimal places it was 1.42% versus today's 1.56%). And only on one occasion (Q1 2007) has YoY GDP dropped below 1.6% without a recession starting in the same quarter. In that case the recession began three quarters later in December 2007.

In contrast to popular belief, recessions typically start with GDP in positive territory. As you can see, Real GDP vs. a year ago is +1.6% and that is consistent with a recession track.

It is highly likely Bernanke was aware in advance that a full 1.9 percentages points of that 2.8% rise in GDP was inventory replenishment when he pledged on Wednesday to "Hold Rates near Zero "At Least" through Late 2014" and opened the door for another round of Quantitative easing as well.

Nonetheless, for reasons noted above, another round of quantitative easing will be counterproductive. The beneficiaries of Bernanke policy will be the 1%, not the 99%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Portugal 10-Year Government Bond Yield at Record High

Posted: 27 Jan 2012 09:39 AM PST

With an involuntary Greek debt restructuring in the works (see Greek Debt Solution Likely to Trigger Credit Default Swaps) it's time to focus on the next involuntary debt restructuring.

Portugal 10-Year Government Bond Yield

Expect a currency crisis to erupt in Portugal at any time. Round-after-round of emergency meetings (and all of them will fail), are just around the corner.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Greek Debt Solution Likely to Trigger Credit Default Swaps

Posted: 27 Jan 2012 08:12 AM PST

European finance ministers and politicians have come to the conclusion that a deal, even one involving a credit event, is better than no deal at all. Thus it is increasingly likely the Greek Debt Wrangle will trigger credit default swaps.

Opposition to payouts on Greek credit-default swaps from European Union policy makers is softening as disputes over a voluntary debt exchange threaten to push the nation into default.

Any agreement between the Greek government and the Washington-based Institute of International Finance on debt writedowns will only bind 50 percent of investors in the 206 billion euros ($270 billion) of notes being negotiated, Barclays Capital estimates. Hedge funds may resist a deal, seeking to get paid in full or compensated from insurance contracts

"Politicians seem less concerned than before about CDS triggers," said Michael Hampden-Turner, a credit strategist at Citigroup Inc. in London. "Having a payout on Greek CDS is probably better than the alternative: a loss in market faith of the product's ability to provide a hedge against sovereign risk."

Officials, including former European Central Bank President Jean-Claude Trichet, have insisted that a swaps trigger was unacceptable because traders would be encouraged to bet against indebted nations and worsen the crisis.

Greece said it may impose losses on investors who fail to support the debt restructuring by adding a so-called collective action clause, or CAC, into its bond documentation. That would force holdouts to accept the same terms as the majority.

Use of CACs would trigger a restructuring credit event and a payout of default swaps, according to rules from the International Swaps & Derivatives Association.

"A CAC is looking increasingly like the best option," Citigroup's Hampden-Turner said. "That route seems to tick a lot of boxes: they don't have a bond default, the official sector gets treated differently than the private sector, and everybody has to participate in the exchange without anybody getting paid in full."

ECB Opposition

While the ECB oppose any involuntary restructuring of Greek debt, policy makers such as Dutch Finance Minister Jan Kees de Jager say they aren't against a credit event.

The softer stance signals Greece is unlikely to get sufficient participation in a voluntary bond swap to make its debt burden sustainable.

The ECB is now alone in its opposition to a credit event. Then again, the ECB alone was against haircuts, soft defaults etc.

As late as May 7, 2011 former ECB president Jean-Claude Trichet insisted there would be "no Greek debt restructuring". I wrote about it in Trichet Reiterates Restructuring "Not on the Agenda", Market Reiterates "Trichet is a Pompous Fool".

Since then there have been two restructurings, and we are now headed for an involuntary restructuring that will trigger credit default swaps.

I suspect an effort will be made to placate the ECB somewhat so that the ECB does not take a loss on the 40 billion euros of Greek debt it stupidly bought, but otherwise, the ECB is about to have this crammed down their throats.

Portugal waits on deck.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Friday, January 27, 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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