Weber a game changer?

I was very surprised at the so far only rumored, but 99 delta certainty of the departure of Axel Weber as both Bundsbank chief but also as shoe-in candidate to succeed Mr. Soft Trichet at the helm of ECB later this year.

Every way I turn and analyse this event it becomes the biggest surprise in central banking in my life as a trader, and secondly this is hardly the kind of issue Ms Merkel wants on her hand ahead of the EU Council meeting end of March which by definiton and by virtue of politicians and policy makers raising the expectations for an ALL IN SOLUTION to Europe debt problems is the most important EVENT this year for Europe and its future.

Weber seems to lack support primarily in the PIIGS countries, surprise/surprise, which is CLEAR sign no one wants to take the medicin the market needs. Weber was the long-term safety net of this political/economical alchemy experiment with debt!  This is the link to Weber speech the other day which gives some insight into his thinking:  Weber speech
Bottom line:   The market is at EXTREME EUPHORIA - and this Weber thing could be the single event which changes the balances in the market, but more to the point my main game right now: Higher Marginal Costs continues as seen by the next two charts:

Treasury Yield moves - source: Dshort.com

and.... yesterday we hit 15/16 year trend line.....

30 year US Yield (trend channel back to 1980...)


I have given up on predicting the demise of the stock market but from the cyclical aspects of the basic analysis I make it's clear we have higher than normal odds of Mid-February being top in this run.

Stay long cash.

Steen

EU with its life on the line needs to do debt-swap or in our version: debt-swap for EU survival.....

A key premise for all our predictions in Limus Capital is to look at reaction functions for present consensus:

This is my partner Jesper Christiansen and I discussion from this morning - we do not claim to know or have inside knowledge, but the reaction function will dictate whether EU survives both in the short-and long-term.

The EU is facing it's biggest test in its history and so much so that an inability to secure a 'deal' up to or at the coming summit in December will mean major consequences....

There is vested interest by EU, lobbyist, and bureaucrats around Europe to maintain status quo - who does not want tax-free, high paid simple jobs, so there will be move to save the EU certainly, but increasingly the simple truth is dawning on investors:

There are now several countries in the EU for whom being outside EU would be a benefit. When the PIIGS lose their "cheap funding" by proxy of Germany it also loses its ability to maintain excess spending - next step becomes the market gets saturated for bond issuance for this smaller Quasi-Germany's(PIIGS), and here lies central premise to our thinking: You can continue to print money only to the point by which the marginal cost of capital increases above and beyond the FAIR PRICE as seen by the individual countries....We see 5.00% nominal rates as this point....Printing money is fun while it lasts but ultimately the bill arrives.....

The reaction function of the EU in the time ahead of December 15/16 Council Meeting.....

Clearly the EU and policy makers have continued to underestimate the reaction function of both investors and market in general. QE2 rates are continuing up despite theory would dictate differently...

Game Theory dictates that Germany will need to not only move on its stance but also provide debt relief, but how will they be "paid".....

Germany debt to GDP is a reasonable 75% to GDP, it's current account 7% of GDP, and its size of the GDP 3,3 trl. USD vs EU's total of 17 trillion (19%)

We think the ONLY real solution to this issue is to GIVE money from Germany to the PIIGS - a debt swap (A debt for Euro existence swap :-)) - and before you fall of your chair laughing...hang on...:


ECB is running out of capital (Cap. reserves: 78 bln. EUR -balance sheet 1.9 bln hence leverage 1-to-27 in ECB already)... to buy and support the PIIGS bond market. They are now long 70 bln. EURO plus and about 50 bln. EURO covered debt...hence ECB needs new-buyer of last resort. 

This could be EFSF, but if EFSF in the present situation starts buying PIIGS bonds it will deplete its ability to be a stand-by emergency fund... so there will be a need for further contributions to EFSF. We do not think this is likely. Germany and more to the point the Constitutional Court in Karlsruhe will come into play...

Turning EFSF into the European version of TARP is relatively elegant short-term solution as it will safe-guard and be an offer to Merkel (German banks owns the biggest chunk of PIIGS debt) to 'save' the EU but also get capital injections to the overall bank sector. It will fly best politically in our estimation but...it will not solve the solvency issue of governments - and here we come full circle as ONLY forgiveness of debt will help. It's not use to pay for your 'cousins overdraft' for the next year or two years, if he is unemployed, faces higher and higher charges from the bank, and is down with stress!

A debt swap from PIIGS to Germany would increase solvency in PIIGS and slightly deteriorate Germany solvency - however we estimate a swap for the 250 bln. EUR worth of debt in PIIGS system would take Germany's debt to GDP from 73 pc to 85 ish.... still inside range of overall G-7 but clearly at a point where credit rating and forward looking growth would be impaired.

Whether the Germans feels this is unjust or not is not really the point. The EU is now in its worse crisis and SOMEONE needs to save it - the only person in the room is GERMANY.......what German does next will tell us where EU goes...

  We remain with our scenario of the EU disintegrating before 2013 - as the most likely solution and reaction function will be a mini-max solution where EFSF gets more funding, gets expanded mandate but will fail to secure solvency both at the bank and a sovereign levels, and do not forget we are probably on a riot-point for many citizens around Europe.... so 2011 will be final test of EU, social tensions, and with increase likelihood a move towards the dramatic Crisis 2.0

Nice week-end despite all

Pure panic in Germany & the US is not far behind....

There is too much to report on this evening -Germany moved in total panic move to ban short-selling...

This has been my greatest fear: A STUPID DESPERATE move from the idiotic policy makers..... this DOES NOTHING to mitigate downside.... they are removing considerable liquidity from the market, the move will be seen as penalty to holding German assets, German moves early and leaves trail for others to follow - can u say REGULATORY ARBITRAGE?

This is classic panic in crisis - if looked upon in history the politicians and central banks has learned nothing but to repeat the mistake of 1920s.... gr8 work - I was worried before tonigt - now I can hardly sleep.

Below most of the research I got tonight on the issues (thank to Ed, Jesper, Eric, GS, Nomura et al)

====================

Goldman:

Germany imposes temporary ban on shorts

	Germany's Bafin has just put out a press release banning short selling of sovereign CDS starting tonight and lasting through March 31, 2011, possibly inspired by the UK and US banning of shorts at the height of the financial crisis (Reuters' English translation of headlines below) In our view, its likely that this drastic move has been triggered by the planned passing by parliament of the German share of the EUR 440bn package on Friday.   Dirk Schumacher, who also just landed has heard that there seems to be more resistance to the help package than previously thought. So far, we have not heard of similar moves in other Euro-zone countries, but it seems likely that several of them might follow suit later this week.  As I discussed in my note on Sunday, policymakers are determined to protect the Euro-zone, and they have identified the financial markets as the key obstacle for stability, which implies risks of further regulation.  Stay tuned as we learn more Dirk & Erik 19:28 18May10 RTRS-GERMANY'S BAFIN ANNOUNCES BANK ON NAKED SHORTSELLING OF CDS ON EUROZONE GOVERNMENT BONDS 19:31 18May10 RTRS-GERMANY'S BAFIN SAYS BAN TAKES EFFECT FROM MAY 19 TO MARCH 31, 2011 AND 'WILL BE CLOSELY MONITORED' 19:32 18May10 RTRS-GERMANY'S BAFIN SAYS BAN ON SHORT-SELLING ALSO APPLIES TO SHARES OF 10 LEADING FINANCIAL INSTITUTIONS 19:33 18May10 RTRS-GERMANY'S BAFIN SAYS STEP 'DUE TO EXTRAORDINARY VOLATILITY WITH GOVERNMENT BONDS IN EURO ZONE' 19:35 18May10 RTRS-GERMANY'S BAFIN SAYS MASSIVE SHORT SELLING COULD HAVE LED TO EXCESSIVE PRICE MOVEMENTS 19:36 18May10 RTRS-GERMANY'S BAFIN SAYS MASSIVE SHORT SELLING COULD HAVE ENDANGERED FINANCIAL SYSTEM STABILITY 19:40 18May10 RTRS-GERMANY'S BAFIN SAYS SHORT SELLING OF SHARES BANNED AT AAREAL BANK AG, ALLIANZ SE, COMMERZBANK AG 19:40 18May10 RTRS-GERMANY'S BAFIN SAYS SHORT SELLING OF SHARES BANNED AT DEUTSCHE BANK AG, DEUTSCHE BOERSE AG, DEUTSCHE POSTBANK AG 19:41 18May10 RTRS-BAFIN SAYS SHORT SELLING OF SHARES ALSO BANNED AT GENERALI DEUTSCHLAND HOLDING AG, HANNOVER RUECKVERSICHERUNG AG 19:42 18May10 RTRS-BAFIN SAYS SHORT SELLING OF SHARES ALSO BANNED AT MLP AG AND MUENCHENER RUECKVERSICHERUNGS-GESELLSCHAFT AG

===============

FT: Spanish debt auction comes close to failure

By David Oakley

Published: May 18 2010 18:09

Spain came close to its first debt auction failure on Tuesday,
highlighting the funding problems for weaker eurozone economies.

The government's difficulties in selling €6.44bn ($7.96bn) in one-year
and 18-month bills sparked worries over its 10-year debt auction on
Thursday.

Madrid had planned to issue €8bn, but only just attracted that amount
of bids, with yields at record highs. This prompted debt managers to
reduce the size of the sale by €1.56bn. Normally a government bill
auction would be covered at least 1.5 times.

=================

Reid Says He Has Votes to Limit Debate on Financial Regulation
2010-05-18 19:32:56.875 GMT


By James Rowley
   May 18 (Bloomberg) -- Senate Democratic Leader Harry Reid
said he will have the 60 votes needed to limit debate on
legislation to overhaul financial regulation and move toward
final passage later this week.

   "A number of Republican senators have told me they will
vote" to limit debate on the measure, Reid told reporters
today. "It's time for us to vote" after almost a month of
debate on a new regulatory structure designed to prevent risky
investments that helped cause the 2008 financial crisis, he
said.

   The Senate has scheduled a vote tomorrow on Reid's push for
limiting the debate. Under Senate rules, it takes 60 votes to
approve such a motion. With a 59-41 majority, Democrats need at
least one Republican for the motion to pass.

   If Reid prevails tomorrow, a second procedural vote to
curtail deliberations would be needed before the Senate could
proceed to final passage unless Democrats strike a deal with
Republican leaders that would allow for a certain number of
amendments to be considered.

   Maine Republican Susan Collins said she would decide
tomorrow whether to support limiting debate. "We are making
progress in working through the amendments, that's very
encouraging to me," Collins told reporters. "The process thus
far has been open and fair," she said.

==============

Bafin Confirms German Ban on Naked Short-Selling at Midnight
2010-05-18 18:24:04.236 GMT


By Alan Crawford
   May 18 (Bloomberg) -- Germany's BaFin financial-services
regulator said that it will introduce a temporary ban on naked
short-selling and naked credit-default swaps of euro-area
government bonds starting at midnight.

   The ban will also apply to naked short-selling in shares of
10 banks and insurers including Allianz SE and Deutsche Bank AG,
BaFin said today in an e-mailed statement.

=====================

Nomura comment:

Couple thoughts coming out of cont'd discussion on the announcements which i think make sense are that these new bans are largely political.   In advance of the 21 May vote on Germany's loan guarantees, it would be understandable that they could try to get ahead of a US-like political and legal scuffle down the road about banks making money by being short the market and through CDS while Germany was bailing out Greece...
.. and if Germany is doing this, then the others could easily be close on their heels.
  While the market impact (given that since the package was announced CDS longs and cash bond shorts should have already gotten out) should be localized or is at least questionable, we are worried by the fact that policymakers feel the need to do this and continue staying involved and vocal..   (rather than allowing mkts to stabilize after the aid was offered)
  Policymakers' reaction function is becoming more and more erratic...  biggest pain trade would be risk off and EUR higher --- i'm not quite there yet though.

=========================

Congress blocks indiscriminate IMF aid for Europe


By Ambrose Evans-Pritchard Economics
Last updated: May 18th, 2010



Europe may have to clean up its own mess after all. The US Senate has
voted 94:0 to block use of taxpayers' money for IMF rescues that make
no economic sense or bail-outs for countries like Greece that far are
beyond the point of no return.

"This amendment will help prevent American taxpayer dollars from
underwriting dysfunctional governments abroad," said Texas Senator
John Cornyn, the chief sponsor. "American taxpayers have seen more
bailouts than they can stomach, and the last thing they should have to
worry about are their hard-earned tax dollars being used to rescue a
foreign government. Greece is not by any stretch of the imagination
too big to fail."

Co-sponsor David Vitter from Louisiana said America had run out of
money. "Our country already owes trillions of dollars in debt. We
simply can't afford to take on other countries' debt in addition to
our own."

It is unclear where this leaves the EU's $1 trillion "shock and uh"
package. Urlich Leuchtmann from Commerzbank said the IMF share of
$320bn was the only genuine money on the table, the rest being largely
euro smoke and mirrors, or plain bluff.

The measure is an amendment to the US financial overhaul law. Backed
by both parties, it can hardly be ignored by the Obama administration
whatever Tim Geithner may or may not want to do. The bill has to go to
Conference for reconciliation with the House, but the point is made.

It instructs the US representative at the IMF to determine whether a
country with a public debt above 100 per cent of GDP can be expected
to repay IMF loans. If this cannot be certified, the US must oppose
the rescue package.

This is obviously aimed at Greece, which will have a debt of 130 per
cent by the end of this year. The debt will rise to 150 per cent by
the end of its the rescue/death package, leaving Greece in a worse
position than before.

The IMF share of the Greek bail-out is 30 times quota, more than
double any other rescue in the history of the Fund. There is a very
strong suspicion in Washington that the IMF is being misused by French
chief Dominique Strauss-Kahn – French presidential candidate in
waiting – to support ideological purposes regardless of economic logic
or sanity. This can (and in my view most likely will) destroy the
credibility of the Fund itself unless the US and Asians can wrench the
institution back from the Europeans.

The US is the IMF's biggest shareholder and can veto aid packages,
though it has never done so because the Fund has never been so stupid
as to defy the world's dominant financial and strategic power.

In this case it fair to assume that China shares many of the Senate's
concerns. The latest US Treasury Tics data shows that China is
rotating is vast reserves back into dollars, and presumably away from
euro bonds. If we treat this as Chimerica – the US/Chinese single
currency or condominium – we have a force in the world that cannot be
pushed around.

Personally, I have changed my mind on Greece. My initial reaction
earlier this year was that it had to be saved to avoid a sovereign
Lehman. Many posters on this blog cried "shame", saying it was just
another moral hazard rescue for bankers. They were right. I flagellate
myself and wear a dunce's hat.

The correct policy would have been – and still is – to help Greece out
of its debt-deflation death spiral through an orderly "pre-emptive
debt restructuring" along the lines of the IMF package for Uruguay. In
Greece's case it would require a haircut of 50 per cent or so for
foolhardy creditors, ie your bank and mine, your pension fund and
mine. This would not do much good unless Greece also devalued by 30
per cent to 40 per cent to retrieve competitiveness and put the whole
fixed-exchange nightmare behind it.

This would be the normal IMF policy in these circumstances as
countless ex-IMF officials have stated. I suspect that many in the
Bundesbank and the Bundestag finance committee would have liked this
policy too – making an example of a country that was so far gone, and
had so flagrantly broken the rules.

The IMF-EU should instead have drawn up its defences in Iberia, along
the Lines of Torres Vedras – to borrow from Wellington. Portugal and
Spain are at least defensible – arguably – and more deserving.

The solution is being blocked because Brussels views any step back in
the EMU Project as intolerable. So the IMF is squandering its scarce
resources on an unworkable plan in Greece.

As we can now see, by misusing the IMF so cavalierly the euro-elites
have provoked a reaction from Washington that will vastly complicate
any future rescue for any eurozone state.

In fact, we are already living in a post-IMF world. There is no
bailer-of-last-resort. Sobering, isn't it?

===============================

BANK OF ITALY ALLOWS NEW REGULATORY CAPITAL RULES FOR EU BONDS
2010-05-18 17:42:11.416 GMT

 STORY TO FOLLOW.

--MARCO BERTACCHE

================================