Greek collapse

CHART OF THE DAY: 'Total Collapse' In Greece

Busines Insider,

1 March, 2012

You think our ISM report was bad?

Check out the Greek ISM, which has now come in sub-50 for 30 straight months, and which is now at a survey low of 37.7.

There's something remarkable you have to realize here, which is that to some extent, ISM reports are mean reverting. Eventually it gets hard for more companies to have sequential declines than in the month before, because you just get so some kind of floor in business.

So the deep declines month in and month out is staggering.

As The Economist's Ryan Avent puts it, this is "total collapse."

Greece Default SWAPS Don’t Have to Pay: ISDA

Bloomberg,

2 March, 2012

Default insurance on Greek debt won’t be paid out, the International Swaps & Derivatives Association said after it was asked to rule whether part of the nation’s $170 billion bailout was a credit event.

The group said the European Central Bank’s exchange of Greek bonds for new securities exempt from losses being imposed on private investors hasn’t triggered $3.25 billion of outstanding credit-default swaps. ISDA’s determinations committee, including JPMorgan Chase & Co. and Pacific Investment Management Co., said the switch didn’t constitute subordination, one of the criteria for a payout under a restructuring event.

“The situation in the Hellenic Republic is still evolving” and today’s decisions “do not affect the right or ability to submit further questions,” ISDA said in a statement. The decision is not an expression of the committee’s “view as to whether a credit event could occur at a later date,” the association said.

A swaps payout may still happen if Greece uses collective action clauses on private investors who refuse to take so-called haircuts on their debt holdings, according to ISDA’s rules. Officials including former ECB President Jean-Claude Trichet have opposed triggering swaps because they’re concerned traders would be encouraged to bet against failing nations and worsen Europe’s debt crisis.

‘Big Issue’

“There’s value to getting some clarity even if the ruling’s no,” said Peter Tchir, founder of New York-based hedge fund TF Market Advisors. “It’s a pretty big issue for what they’re trying to do in other countries.”

It costs $7.3 million in advance and $100,000 annually to insure $10 million of Greek debt for five years, signaling a 95 percent probability of default within that time. Greek 10-year bonds slumped to a record 19.14 cents on the euro after the ruling.

Political determination to avoid the stigma of a credit event has been waning as Greece struggles to meet the conditions of its latest 130 billion-euro ($170 billion) bailout. Standard & Poor’s downgraded the nation to “selective default” on Feb. 27 because of the government’s decision to retroactively insert CACs into bond terms.

While Greece is negotiating the biggest ever debt restructuring, the volume of credit-default swaps on the line has tumbled. The net amount of debt protected is no more than for some companies and represents less than one percent of the nation’s bonds and loans outstanding.

Credit-default swaps on Greece now cover $3.25 billion of debt, down from about $6 billion last year, according to the Depository Trust & Clearing Corp. That compares with a swaps settlement of $5.2 billion on Lehman Brothers Holdings Inc. in 2008.

Counterparty Concern

Despite concerns at that time about a daisy chain of losses if counterparties failed to meet their commitments, the Lehman settlement and those of swaps guaranteeing debt of Fannie Mae and Freddie Mac were “orderly” and caused no major disruptions for the market, according to regulators.

A settlement on Greek swaps may bolster confidence in the $258 billion sovereign insurance market and also help boost the government bond market, Tchir said. Efforts to circumvent a trigger risk undermining credit markets.

“The relevance of sovereign CDS has been called into question, but they still have value,” said Georg Grodzki, head of credit research at Legal & General Plc in London.

Insurance payouts may still happen if Greece uses the collective action clauses its parliament introduced or if it fails to make a payment in future. If an event is declared, auctions will be held to set a recovery value on the bonds, and swaps sellers will pay buyers the difference between that and the face value of the debt.

Failure to Pay

Swaps on western European governments can pay out on a credit event triggered by failure to pay, restructuring or a moratorium on payments. Restructuring events are the most subjective and have been removed as a trigger event for U.S. companies.

A restructuring event can be caused by a reduction in principal or interest, postponement or deferral of payments or a change in the ranking or currency of obligations, according to ISDA rules. Any of these changes must result from deterioration in creditworthiness, apply to multiple investors and be binding on all holders.

The determinations committee that decides whether to trigger swaps consists of representatives from 15 dealers and investors. The group rules whether a credit event should be declared after a request is made by a market participant. The question on Greece was posed anonymously.

‘Pain to Come’

“Technically the issue of the ECB subordinating other investors hasn’t yet inflicted pain -- just the threat of pain to come,” said Bill Blain, a strategist at Newedge Group in London.

A request on Irish swaps was rejected last year when ISDA’s determinations committee ruled the International Monetary Fund’s preferential creditor status in that nation’s rescue didn’t constitute subordination.

“Restructuring almost always causes confusion,” Tchir said. “The fact that it is a restructuring does leave it lot more subjective than it would be otherwise.”

Greek Economy Suffers Record Collapse In February

Zero Hedge,

1 March, 2012

There are those who recall that not ten days ago, according to the IMF's Greek (un)sustainability analysis, worst case scenario no less, Greek GDP would somehow miraculously post just a 1% drop in 2013. Unfortunately this won't happen. According to the overnight PMI update out of Europe (where was saw the jobless rate at the highest since 1997), the Greek economy just imploded at a record pace. This follows the already horrendous budget revenue data from January which came in down 7% on expectations of a 9% rise. Sure enough, as expected the fact that the entire country has taken the rest of 2012 off with no incentive to actually work, will do miracles for Greece. From Reuters: "The Markit Manufacturing Purchasing Managers' Index (PMI) for Greece fell to a survey low of 37.7 points in February from 41.0 in January, staying below the 50 mark that divides growth in activity from contraction for each of the past 30 months. Production and new order volumes fell at the sharpest pace in the near 13 year history of the survey as austerity sapped demand. New export orders fell for a sixth straight month and at the steepest rate since May 2010." Translated: the situation is hopeless and getting worse. Expect the German, pardon Troika, Kommissar to be shocked, shocked, to find out that not only do banks in Greece have no deposits left, but the entire economy picked up and left.

Some disturbing charts validating the sad reality of Greece:

More from Reuters:

Greek manufacturing shrank at its fastest rate in at least thirteen years in February as production and new orders declined at record rates, driving the sector deeper into recession and forcing firms to shed more jobs, a survey showed on Thursday.

Greece will apply additional fiscal austerity to shore up its finances as part of a new rescue package it agreed with its euro zone partners and the IMF to avert a chaotic default and emerge from a severe debt crisis.

Greece's 215 billion euro economy shrank by an estimated 6.8 percent in 2011, its fourth straight year of recession. It is seen contracting this year as well.

"The latest survey provided another stark reminder of the difficulties the Greek economy is facing. Problems of accessing credit, combined with austerity, are undermining activity and demand with little evidence of this situation improving anytime soon," Markit senior economist Paul Smith said.

Greek firms struggled to access working capital and meet vendor demands for cash payments to deliver inputs. The fall in production led to more job losses.

"While companies are trying to maintain employment via reduced working days and hours, the inevitable impact of rapid declines in output and sales are further cuts to payroll numbers, which fell at a marked and accelerated pace," Smith said.

Greece's unemployment rate hit 20.9 percent in November, the latest available data, highlighting the pain of higher taxes and cuts in public sector pay and pensions which suppress economic activity.

So if wondering what is sending markets higher, it is the return of the expectation that the global economic collapse (whereby sliding US consumer spending and income somehow drives consumer confidence higher) will force banks to do what they do best: CTRL+P.

Full PMI release here.