For BTPS & SPGBs all inter dealer screens have gone blank
Posted by WARREN MOSLER on November 9th, 2011
As previously discussed, it’s hard to see how anyone with fiduciary responsibility can buy Italian debt or any other member nation debt after EU officials announced the plan for 50% haircuts on Greek bonds held by the private sector.
Yes, all governments have the authority, one way or another, to confiscate an investors funds. But they don’t, and work to establish credibility that they won’t.
But now that the EU has actually announced they are going to do it, as a fiduciary you’d have to be a darn fool to support investing any client funds in any member nation debt.
The last buyer standing is and was always to be the ECB, which will now be buying most all new member nation debt as there is no alternative that includes survival of the union.
And when this happens there will be a massive relief response, as the solvency issue will be behind them, with the euro firming as well.
Then the reality of the state of their economy take over, as GDP continues to fade and unemployment continues to rise until they figure out austerity can’t work and instead they need to proactively increase their member nation’s budget deficits.
Hopefully this doesn’t take quite so long as it took to figure out the ECB has to write the check.
But this one might take even longer as it will be a function of blood in the streets rather than funding capacity.
> (email exchange)
>
> On Wednesday, November 09, 2011 5:37 AM, Dave wrote:
>
> For BTPS & SPGBs all inter dealer screens have gone blank and there is no liquidity left.
> There are really no quotes for even 10y BTPs for example and the last bids were hit
> about 80BP wider for the day vs Bunds.
>
November 9th, 2011 at 8:25 am
apart from technicalities that few understand, it’s really sad live in the country you allude to. especially knowing the problem.
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November 9th, 2011 at 8:36 am
“Hopefully this doesn’t take quite so long as it took to figure out the ECB has to write the check.”
You optimist you. :)
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Art Reply:
November 9th, 2011 at 11:43 am
@Neil Wilson,
Think about this too–unless the EU had compromising info on executives leading the private sector entities that agreed to the Greek haircut, you have to assume that there was some kind of quid pro quo offered to Europe’s financial sector in return.
Whatever it was, (1) it’s almost certain to bite us all in the a** at some future date, and (2) it’s the penultimate example of agency risk – again. Govts get what they want, financial sector gets something it wants, while non-bank debt holders and EMU citizens get the shaft.
I wonder how much longer this kind of stuff can go on at its current and recent historic (~last 10-20 years?) pace.
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WARREN MOSLER Reply:
November 9th, 2011 at 3:52 pm
putting the private sector reps in a locked room with no food and no facilities until the agree to a solution proposed by the EU resulted in a voluntary settlement…
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November 9th, 2011 at 10:17 am
do you really think the market has come to the realization the ECB has to write the check…i hear no retoric to that affect.
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WARREN MOSLER Reply:
November 9th, 2011 at 3:48 pm
lots of pundits are now saying it, and france has been pushing for it but losing the argument to germany
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November 9th, 2011 at 11:09 am
Iceberg! Iceberg!!
And you egoistic MMTeers kept the binoculars for yourselves! :) (Of course, this is intended to be a joke… but it could also be the first comment of a EZ decision-maker would s/he come to understand MMT ;)
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Art Reply:
November 9th, 2011 at 11:29 am
@PG,
The binocs have always been freely extended in my experience. :)
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November 9th, 2011 at 11:12 am
Warren, they speak about spread etc, but what I know is that the btp spread is in secondary market. and the rise on 10-year is also in the secondary market, so “circulating” treasuries.
how this affects primary market? confidence? or there is some strict influence, like a mathematical relation?
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Art Reply:
November 9th, 2011 at 11:37 am
@Luigi,
At auction, bids will fall close to yields prevailing in secondary market. If they don’t, the arbitrage opportunity will be exploited away pretty quickly.
That said, there can reportedly be either official arm twisting of primary dealer banks who bid at auction (in the U.S., would work differently in EMU, if it works at all), public and quasi-public institutions (foreign govts esp of export partners, central banks, public ‘rescue’ funds), etc that might try to back stop the auction. That would in turn set a cap on secondary market yields, at least temporarily.
But in this specific case, as Warren points out, any entity with a fiduciary duty (and technically all of the above have them) is taking serious risk after the haircut on Greek debt. At this point, the only hope for the EMU (and lesser extent the EU) is for EFSF debt to receive a fair bid and use those funds to backstop Italy. Of course, at this point the EFSF doesn’t have anywhere near the authorized capital that would eventually be needed.
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Luigi Reply:
November 9th, 2011 at 3:42 pm
@Art,
Well, I understand in general. Making a real example, Italian Treasury will issue, on 14 novembre 5 year, btp, at a 4,75% gross interest rate.
now, these are primary market. how they are affected by spread on 10-year?
sorry, probably the question is stupid, but I don’t understand much about bond market.
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WARREN MOSLER Reply:
November 9th, 2011 at 3:51 pm
nor can you be sure they don’t haircut efsf debt should it suit them
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WARREN MOSLER Reply:
November 9th, 2011 at 3:50 pm
investors have a choice between buying outstanding securities and the new ones, so the new ones generally have to offer competitive yields to get sold
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Luigi Reply:
November 9th, 2011 at 4:06 pm
@WARREN MOSLER,
So in general new ones have a more high yield?
And this how involves reserves etc, I mean, the choice to buy new debt, but influenced by
monetary policy like fed funds target?
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Art Reply:
November 9th, 2011 at 5:58 pm
@Luigi,
So if the newly issued bonds promise a 4.75% annual coupon, the auction bids will *price* them so the yield to maturity is close to the prevailing YTM on similarly dated debt. So govt can name the coupon but not the price.
Not sure what you mean by the 2nd question?
Luigi Reply:
November 9th, 2011 at 6:20 pm
@Art,
thanks Art, so the rate is similar to oher similarly dated, but always higher than circulating treasuries?
the second question is: there is a relation between target rate and treasuries rate, long and short term. So my question was about, relations between prices in secondary and primary, and fed funds rate.
anyway, there is a little glimmer of light:
http://www.reuters.com/article/2011/11/09/germany-euro-exit-idUSL6E7M965120111109
Anders Reply:
November 9th, 2011 at 6:39 pm
@Luigi,
New bonds issued, ie into the primary market, are generally priced to give a yield (not the same as coupon) which is close enough to the equivalent secondary market implied yield for a bond with similar characteristics.
Arbitrage provides a connection between already-existing bonds in the secondary market (look on Wiki). The equivalent connection between primary and secondary prices is as follows: the issuer (or rather its underwriters) will set the yield just as high as it needs to be in order to tempt buyers to buy primary and not what is available in secondary instead. Google “relative value” as this is key.
I don’t see how a publicly-trailed Greek exit can possibly avoid a horrendous bank run.
November 9th, 2011 at 11:45 am
what are BTPS and SPGB?
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Anders Reply:
November 9th, 2011 at 2:58 pm
@Gary, Gary – they’re Italian and Spanish govt bonds.
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Gary Reply:
November 9th, 2011 at 4:53 pm
@Anders,
Thank you
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November 9th, 2011 at 11:45 am
but ‘German “wise men” warn ECB is risking credibility’
http://www.reuters.com/article/2011/11/09/us-germany-wisemen-idUSTRE7A83OG20111109
I’m taking ECB, but only after 12, hard unfought rounds (lotsa punches, but nothings connecting). It’s a naive audience & incompetent judges. The referee could be the loser in a TKO.
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November 9th, 2011 at 11:55 am
The question of realizing that ECB is a lender of last resort is a matter of ideology. The reality will force them to make adjustments in practice, even if they will not admit it in public.
However the question of austerity – that is a matter of real distribution of wealth. That will really require serious struggle and “blood in the streets”. This will not come easily.
There is a lot of effort invested (in schools, politicians, media) to impose the way of thinking that requires the state to keep “saving” at the expense of the poor.
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November 9th, 2011 at 12:57 pm
“Then the reality of the state of their economy take over, as GDP continues to fade and unemployment continues to rise until they figure out austerity can’t work and instead they need to proactively increase their member nation’s budget deficits.”
If the member nations are not monetarily sovereign, how can they continue to run deficits as necessary to support their economies? Or is there some level of continuous deficit that is sustainable, maybe a debt growth rate less than the economic growth rate? Is that sustainable deficit level sufficient to reduce unemployment, and maintain it at a low level?
Is it easier for a member nation with a trade surplus to do? Is that why Germany is not in trouble, despite its fiscal austerity, and others are?
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ESM Reply:
November 9th, 2011 at 1:53 pm
@John O’Connell,
“Is that why Germany is not in trouble, despite its fiscal austerity, and others are?”
My theory is that the state with the strongest potential Euro-exit currency will have the equivalence of monetary sovereignty. The value of the Euro, which is a blend of tax credits against all EMU states, is necessarily lower than the value of a tax credit against the strongest state (looked at in isolation). As such, if Germany left EMU and redemoninated all of its liabilities into Deutschemarks, the Deutschemark would be stronger than the rump Euro. Given that, Germany becomes the safe haven, since if the worst happens, German debt actually rises in value.
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Mario Reply:
November 9th, 2011 at 2:28 pm
@ESM,
that’s neat and sounds good. Do you think a currency shift to the DM wouldn’t effect the German economy that much (relatively speaking)? I could agree with that, especially since the EU strength is really considered to be Germany as it is now. Makes sense to me. Nice one.
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Art Reply:
November 9th, 2011 at 6:10 pm
@Mario,
“Do you think a currency shift to the DM wouldn’t effect the German economy that much (relatively speaking)?”
Those sweet 37 hour work weeks and single earner households they’ve enjoyed would have to be given back.
“I could agree with that, especially since the EU strength is really considered to be Germany as it is now.”
Mostly because its EMU export markets were expanding credit at a pace sufficient to buy Germany’s output. As Marshall Auerback has put it, the German economy is the penthouse in a roach motel.
Yes, they make some awesome products, cars and beer especially, but the real benefits they currently enjoy will be less if EMU dissolves (and certainly less if financial system implodes). The one thing that would ensure they continue to enjoy their current standard of living is sufficient eurozone net govt deficits, but they fear a repeat of the Weimar years. And it probably doesn’t help to point out that the strong recovery associated with Hitler’s WW2 ramp-up was made possible by large deficits. :(
MamMoTh Reply:
November 9th, 2011 at 9:49 pm
A shift to the DM will not affect much the Germans. Their trade surplus will shrink, which is actually to their advantage.
And they don’t just have beers and cars. They are the best at producing pretty much any industrial equipment.
All they have to worry about is when China will be able to compete with them in quality which might happen sooner than the Germans think.
WARREN MOSLER Reply:
November 9th, 2011 at 3:55 pm
my theory is it’s just a matter of time. check out the chart of German CDS over the last 10 years or so
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Art Reply:
November 9th, 2011 at 6:01 pm
@WARREN MOSLER,
Right, Germany’s no more monetarily sovereign than the rest. It should have greater influence over the ECB, but as Weidmann quotes show, still lives in mortal fear of unleashing another Weimar.
WARREN MOSLER Reply:
November 9th, 2011 at 3:55 pm
they need some kind of ecb support to be able to fund deficits large enough for a decent economy in the current credit environment
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Art Reply:
November 9th, 2011 at 6:00 pm
@John O’Connell,
“Is it easier for a member nation with a trade surplus to do?”
Yep, see Finland too. But even that’s unsustainable long-term without sufficient deficits in the EMU (ignoring exports outside the eurozone).
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November 9th, 2011 at 3:02 pm
Warren, I’m at a bloomberg and if you hit ALLQ on the 10 yr BTP, you do see the odd real axe: a 5×5 from Credit Agricole from 7pm this evening (UK time) and a 10×10 from this afternoon, both with bid-asks of only 20bps or less, so your correspondent seems to paint a slightly misleading picture.
I do take your point about fiduciary duties though.
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WARREN MOSLER Reply:
November 9th, 2011 at 4:00 pm
thanks, checking it out with Dave who sent it to me
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Art Reply:
November 9th, 2011 at 6:12 pm
@Anders,
Word was that ECB was buying. That could show up through a private sector desk, couldn’t it?
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November 9th, 2011 at 3:07 pm
Also – interestingly, the BTP curve shows yields highest at the 5yr (although maybe the levels aren’t real anyway)
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November 9th, 2011 at 4:56 pm
The question is rather silly, but I don’t really understand the meaning of this:
> For BTPS & SPGBs all inter dealer screens
> have gone blank and there is
> no liquidity left.
> There are really no quotes for even 10y BTPs for example
> and the last bids were hit about
> 80BP wider for the day vs Bunds.
I mean, BTP-Bund spreads have gone particularly high, but how can you say there are “no quotes for 10y BTPs?
Thanks in advance!
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November 13th, 2011 at 6:00 am
[...] this suggests that it’s politics driving Italy (and soon France) toward the brink. Quoting Warren Mosler Auerback says that: Given the 50% “voluntary” haircut imposed on holders of Greek debt, [...]