The Debts of the Lenders: Chinese Bond Holders Demand Higher Interest Rates

In a sign that bond holders of Chinese property developers are growing impatient, the market raised rates as the prospect of risk appetite diminishes.

Yields on the $3.9 billion of bonds issued by Kaisa Group Holdings Ltd., Country Garden Holdings Co. and seven other developers since January widened by an average 2.26 percentage points relative to Treasuries as of last week, according to data compiled by Bloomberg. That’s more than the 2.05 percentage- point increase in spreads for the seven dollar-denominated bonds sold by other companies in Asia outside Japan.

Investors are demanding greater yields to lend to China property firms, a sign they expect borrowers will have a harder time meeting debt payments amid a government clampdown down on lending. Goldman Sachs Group Inc. and Credit Suisse Group AG cut their profit estimates for Chinese real estate companies after a 12.8 percent rise in real estate prices in April from a year earlier spurred the state to increase regulation.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aPRgPERaqqQA&pos=2

The Debts of the Spenders: An Interesting Look at the US Stock Market

Is the smart money always right? Take a look for yourself with the Commitment of Traders report as published by the CFTC and released every Friday. Note the large drop in OI in mid-March as small specs went bullish and big players reversed or just dropped out of the game altogether.

This hearkens to a point that popular Zerohedge blogger has repeatedly made - the stock markets are run by hi-fi trading machines and not real volume.

The Debts of the Spenders: British Austerity Package - 300k Jobs to Be Cut

There was a time when the British Pound was considered a flight to safety "haven" trade. With measures such as these, perhaps it may regain that status once again. Will Greece have the courage to take such measures? Recent evidence shows that it alas does not.


http://www.timesonline.co.uk/tol/news/politics/article7134040.ece

The Debts of the Spenders: ECB Cuts Back on Bond Purchases

After last weekend's pan-European bailout more details are beginning to emerge. Faced with internal dissent over rising inflation concerns, the central committee trimmed purchases of Spanish and Italian bonds. Most of the ECB’s bond purchases seem to have been made on May 10, the first day the rescue plan was in force, and buying has diminished since then.

Further details on exactly how they plan to sterilize or keep monetary purchases from spilling over into the broader market will be released later.

http://www.bloomberg.com/apps/news?pid=20601068&sid=alPFAHw0MnlE

The Debts of the Spenders: EU Agrees To Print Almost $1 Trillion and Buy Government Bonds

"Death to speculators!" was the rallying cry heard round the weekend as European leaders struggled to contain the Euro from crashing. One wonders where exactly they will get the money to do so. The answer of course, is the printing press, or more accurately off balance sheet transfers to ensure a smooth flow of liquidity (e.g. credit moving around the world). Nearly all of these transfers will be done at the institutional level and between psuedo government agencies such as the IMF and World Bank. This measure is critical as it prevents runaway inflation from entering the wider economy. . . .at least temporarily.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aeHrwqUq9G9A&pos=1

The Debts of the Lenders: Turkish Growth in Stark Contrast To Greek Shrinkage

The whole irony behind the Greek drama is the concurrent rise of its age old rival, Turkey. A large part of the fiscal imbalances were brought about by military spending in preparation for a potential war in the Aegean over Cyprus.

But this conflict was ages ago and the political situation has calmed down quite a bit with the Turks routinely begging for entry into the EU zone every few years. The Turks have a dynamic, growing economy that is poised to overtake every other nation within the EU bloc. Indeed, the perenially high interest rate banking sector is finding itself enjoying a period of relative calm amid the chaos being wrought just a few kilometers away from its borders.

Perhaps nothing is more ironic than Turkey turning away the IMF at the very same time that its neighbor is begging for foreign intervention.

In March this year it sold $1 billion of 11-year dollar-denominated bonds at the lowest yield on record, after the government decided it did not need help from the International Monetary Fund.

If Turkey had joined the EU then its fortunes would've been tied to a moribund political economy with decisions made by bureaucratic vote instead of the independence necessary to launch itself upwards.

Additionally, the larger and more youthful demographic make for a more appealing picture than the image of aging Greek pensioners burning rubber tires or firebombing their local banking branches.

Finally, its close proximity to Iraq may be considered a boon instead of a burden. The security situation has calmed down considerably since the martial law era of the 1970s and 1980s when Kurdish insurgents ran amok throughout the countryside. While a de facto Kurdistan exists in northern Iraq, the US presence in the region has actually stabilized the situation instead of inflaming it. While Turkey may not be able to benefit directly from the oil wealth in Iraq, its economy may experience secondary bonuses such as improved trade links via a land route that was formerly closed off during the Sadam years.

Sources:

http://www.gfmag.com/latest/features/10256-features-turkey.html

http://www.bloomberg.com/apps/news?pid=20601087&sid=aqjIaXUwvdMs&pos=7

The Debts of the Spenders: UK Rejects EU Bailout Fund

More to come later. This is a developing story.

EU leaders are worried that financial markets will continue to lack confidence in countries with high deficits.

Officials and diplomats in Brussels hope that a stabilisation mechanism will calm the international markets' fears about default in Europe.

But the loan guarantees are too much for the UK to swallow, and the UK Treasury will have nothing to do with them. Without the UK onboard the package looks pretty thin.

http://www.abc.net.au/news/stories/2010/05/10/2894423.htm?section=justin

The Debts of the Spenders: EU Nations Establish Emergency Fund to Defend the Euro

Faced with a total collapse of the Euro, Eurozone leaders vowed to create a stability fund to save their currency. The bureaucratically stodgy institution was shocked to its core after months of haggling over the Greek bailout turned out to be for naught. Leaders believed the 110 billion Euro bailout package for Greece would be the backstop required to return confidence to the markets.

The ECB's normally placid meeting on Thursday failed to create confidence after ECB President Trichet refused to discuss the "nuclear" option of pulling a Bernanke (e.g. having the ECB buy sovereign debt). The lack of any meaningful price action in PIIGS market debt has forced 2 year yields to double digits this week. While attractive at first glance to junk buyers, the high yield reflects the market's concern that the Greek government will be forced to re-structure - e.g. pay less than face value - on government debt.

Instead, their actions served only to produce the largest rise in implied volatility ever - exceeding 2008 levels.

Now, Eurozone leaders are working furiously over the weekend to create a continental bailout package. Notably absent from the table however was any mention of buying government bonds. Failure to do so would result in European financial institutions - banks, pension funds, and insurance companies - facing enormous losses. There are no easy solutions here. Even a re-structuring of government debt obligations would result in further write offs. But at least it would be amortized over time instead of vanishing in a blink of an eye (e.g. kicking the can down the road for another generation to handle).

Some notable quotes:

“We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters early today after the leaders met in Brussels.

“When the markets re-open Monday, we will have in place a mechanism to defend the euro,” French President Nicolas Sarkozy said. “If you don’t think that’s significant, you haven’t been to many EU summits.”

Europe will send “a very clear signal against those who want to speculate against the euro,” Merkel said.

All agreed on “the need for a clear, timely and strong response,” Canadian Finance Minister Jim Flaherty, who chaired the call, told reporters in Ottawa. “We hope to see a strong, early policy response in Europe.”

Europe’s unprecedented lending pledge has “proven insufficient to stop market contagion to the rest of the euro- zone periphery,” Michael Saunders and other economists at Citigroup Inc. said in an e-mailed note before the summit.

http://www.bloomberg.com/apps/news?pid=20601087&sid=azNNZZQK3AQI&pos=1

The Debts of the Spenders: LIBOR OIS Spread Widens to 2008 Levels

Markets are pressuring Trichet to pull a Bernanke and have the ECB buy European government bonds (Bernanke was responsible for structuring the agency debt MBS program under the Federal Reserve).

May 6 (Bloomberg) -- Money markets show banks may be increasingly reluctant to lend to each other on concern that quality of collateral backing short-term loans is diminishing as government finances in Europe worsen.

The spread between the three-month dollar London interbank offered rate, or Libor, and the overnight indexed swap rate rose to the most in more than five months, reaching 13.4 basis points today. The so-called Libor-OIS spread has increased from 6 basis points on March 15.

http://www.bloomberg.com/apps/news?pid=20601087&sid=avw1eFn6Kxy4&pos=3

The Debts of the Spenders: Bond Vigilantes Call IMF's Bluff

After pledging over 100 billion euros to bail out Greece, the IMF and ECB thought that the Greek contagion was over. They could not be more wrong. CDS on the other non-Greek PIIGS countries (Portugal, Italy, Ireland, and Spain) have expanded wider in anticipation of further bailouts while the Euro continues to sink like a rock. Fiscal stability, it seems, is irrelevant as the market is pricing in further bailouts.

Of course, the lenders of last resort, the US Federal Reserve, is always ready to step into the pipeline as a guarantor with swap lines (a la 2008).

Some questions that need to be answered before the Americans can step in:

- Will European MPs (members of Parliament) approve the package?
- What is the final bailout sum?
- What form will the aid arrive in?
- Will the IMF Completely Change the Rulebook because of Europe?