Mish's Global Economic Trend Analysis

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ICAP Testing Trades In Greek Drachma Against Dollar and Euro Posted: 27 Nov 2011 04:55 PM PST ICAP Plc, the world's largest inter-dealer broker (one that carries out transactions for financial institutions rather than private individuals), is now Testing Trades In Greek Drachma Against Dollar, Euro ICAP Plc is preparing its electronic trading platforms for Greece's potential exit from the euro and a return to the drachma, senior executives at the inter-dealer broker said Sunday. ICAP is the latest firm to disclose such preparations, joining the growing ranks of banks, governments and other key players in the global financial system whose officials are worried enough about the stability of the common currency to be making contingency plans for a possible break-up. The firm has been testing systems that would allow dealer banks to trade the drachma against both the dollar and the euro, the ICAP executives said, cautioning that the measures taken in recent weeks were precautionary. They said the currency pairs would not be accessible for trading unless required by market events, and may never be used. Certain decisions, such as how many decimal places would be used when representing the drachma's exchange rate, have not been finalized. But ICAP said the currency templates could be tweaked depending on dealer requests, and that the project could be used as a roadmap for how to prepare for an outcome involving multiple currencies leaving the euro. So far, testing has only involved the drachma, no other currencies. ICAP has reloaded the drachma templates for spot foreign exchange and derivatives called nondeliverable forwards that were removed from the system when Greece's old currency was replaced by the euro in 2001. A Barclays Capital research report last week showed that nearly half of 1,000 investors surveyed thought at least one country will leave the euro in 2012. Separately, a Bank of America Merrill Lynch research report Friday titled: "Eurozone: thinking the unthinkable," said a partial union with only some countries exiting the euro was the "most probable scenario" out of all the breakup possibilities. But the researchers stressed that while the currency implications were "worth examining," a breakup of the euro was still a far-fetched event. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Still More Inane Attempts to Leverage EFSF; IMF to the Rescue? Posted: 27 Nov 2011 09:50 AM PST Politicians never give up on bad idea except by death or removal from office. In spite of obvious failures to leverage the EFSF fund (still without rules as to how the fund even works), French president Nicolas Sarkozy is back at it, hoping to create a three-fold expansion of the EFSF via tradeable insurance certificates with guarantees on as much as 30 percent of the bonds. Bloomberg reports Euro Rescue Fund May Insure 30 Percent of Bonds The European Financial Stability Facility may insure bonds of troubled countries with guarantees of between 20 percent and 30 percent of each issue to be determined in light of market circumstances, according to EFSF guidelines to be considered by finance ministers this week. The insurance would be in the form of tradable partial protection certificates, to be issued by an independent Luxemburg-based special purpose vehicle, the guidelines show. The step is one of several new tools including setting up private funds with investors and selling short-term debt aimed at increasing the EFSF's power to combat the debt crisis. Euro-area finance ministers are due to meet in Brussels on Nov. 29 as governments bid to regain the confidence of financial markets. The proposal to attach guarantees of up to 30 percent of future EFSF bond issuances' worth may create a threefold expansion of the 440 billion-euro ($583 billion) fund, according to the guidelines distributed to lawmakers in Berlin. The EFSF's pool of potential aid would also be increased by setting up so- called credit investment funds with private investors to buy the bonds of euro-region states that struggle to sell their debt. French President Nicolas Sarkozy has said that the bailout fund might be worth $1.4 trillion after European governments agreed last month on steps to leverage existing guarantees as much as fivefold. European leaders are next due to hold a summit on Dec. 8-9. The new instruments may need to be supplemented further, German Finance Minister Wolfgang Schaeuble told reporters in Berlin on Nov. 25 following talks with Dutch Finance Minister Jan Kees de Jager and Finnish Finance Minister Jutta Urpilainen. Leaders will seek a "separate path" of help from the International Monetary Fund to boost the EFSF, Schaeuble said. IMF help must be "substantial enough to help Italy and Spain," de Jager told reporters, saying that talks on creating credit investment funds had run into "problems." Given there are few details on the proposal it's difficult to say precisely how this will fail, but fail it will, more than likely within a few days of announcement. Assuming the guarantees are separately tradeable as stated, the guarantees themselves may (or may not) trade at a reasonable valuation, but what about the underlying junk? Also recall the bigger the leverage, the faster the EFSF will eat up its principle. Then what? IMF to the Rescue? Not a single one of these clowns is taking into consideration the fact the German Supreme court has said "no more". What happens when the EFSF is quickly consumed on Portuguese, Spanish, and Italian debt? Is that when the IMF is supposed to come to the rescue? Or before? In Latest Rumor Sees €600 Billion Bailout Of Italy From US, Pardon IMF, ZeroHedge says Forget about it. The European desperation is palpable ahead of the EURUSD open in a few hours, which has to deal with the aftermath of the Friday afternoon downgrade of Belgium, the junking of Portugal and Hungary, and the prospect of an imminent downgrade of AAA-stalwarts Austria and France. So what does Europe do instead of actually proposing the inevitable debt repudiation that is the only and final outcome? Why more rumors of course. To wit: last night saw the preannouncement of Welt am Sonntag indicating that in order to bypass the lengthy process of treaty changes, Europe would instead proceed with bilateral agreements that would somehow enforce fiscal stability and convince the market that European states would follow the German leader. Well since that is sure to have absolutely no impact, overnight Italian La Stampa is out with a fresh new rumor which cites "IMF sources" according to which the US-headquartered and funded organization would provide a €600 billion loan to Italy at 4-5%. In other words, Uncle Sam, in his role as primary funding agent of the IMF would lose massive amount of money on the "market to fair value" arbitrage, only to bail out the latest European domino. From Dow Jones: The International Monetary Fund could offer Italy between EUR400 billion and EUR600 billion in financial support to give Italian Prime Minister Mario Monti a window of 12 to 18 months to enact reforms sufficient to restore waning market confidence in Italy's ability to repay its debt, Turin daily La Stampa reported Sunday, citing IMF sources. The IMF "Italy package" would consist of loans at an interest rate of between 4% and 5%, compared with the 7% to 8% the country paid at its most recent bond auctions, the report says. However, ZeroHedge also points out a Dow Jones wire from September ... The IMF board of governors agreed in December to roughly double quotas from around $375 billion to around $750 billion. But out of the 187 member countries, only 17 have legally accepted the increase, including Japan, the U.K. and Korea. Most of the countries with the biggest quotas, such as the U.S., China and Germany, haven't yet gone through the legal process, such as parliamentary or congressional approval, need to hand over their promised dues. Think this Congress will throw more money at the IMF? I don't. Thus, once again, all we have for another week is more nonsensical rumors and a rehash of leverage ideas that have already failed in the market. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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