Category: Market Action

Brinksmanship regarding the Greek bail-out is getting … er … brinkier:

Greek Prime Minister George Papandreou set a one-week deadline for the European Union to craft a financial aid mechanism for Greece, challenging Germany to give up its doubts about a rescue package.

Papandreou said he may turn to the International Monetary Fund to overcome Greece’s debt crisis unless leaders agree to set up a lending facility at a summit March 25-26. The IMF option has already been dismissed by European Central Bank President Jean-Claude Trichet and French President Nicolas Sarkozy, who say it would show the EU can’t solve its own crises.
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Papandreou toyed with the idea of going to the Washington- based fund, saying today that Greece is already living in an IMF-style fiscal corset without the financing that goes along with it.

“We are under a basically IMF program,” he told a European Parliament committee earlier. “We don’t want to be in a situation where we have the worst of the IMF, if you like, and none of the advantages of the euro.”

The IMF stands ready to respond to a Greek aid appeal, which hasn’t come yet, spokeswoman Caroline Atkinson told reporters in Washington today. Papandreou said he still prefers a European solution and that the EU announcing more explicit support for Greece would be enough to bring down borrowing costs without the need to actually tap emergency funds.

That poor little boy who said the Emperor had no clothes! Now he’s a terrorist!

Germany’s Finance Minister Wolfgang Schaeuble told the Bundestag on March 16 that the country may have to consider ordering “intelligence agencies to set up surveillance of who is getting together with whom for which kinds of speculative processes, and where” to protect the euro.

“I find it sinister and silly, it is a complete overreaction,” said Philip Whyte of the Centre for European Reform, a pro-European Union research institute in London. “There is a certain school of thought in continental Europe that everything is always the fault of hedge funds.” Schaeuble’s comments reflected “a longstanding paranoia about the Anglo-Saxon model of capitalism.”

European politicians blamed speculators after the euro tumbled against the dollar and the cost of insuring Greek government debt rose by a third this year, causing budget cuts that triggered street protests in Athens. Greek Prime Minister George Papandreou and French President Nicolas Sarkozy said that trading in credit default swaps exacerbated the crisis.

I’ve previously noted international problems in bank regulatory reform … but there are also national problems:

If the Senate can produce sweeping bank-reform legislation, expect House and Senate lawmakers to continue squabbling at least a year more or longer, said House Republican Leader John Boehner on Wednesday.

“If the Senate is able to produce a bill, I think it’s just as likely that we’ll be talking about the same issue a year from now as we are right now,” Boehner, R-Ohio, told an enthusiastic crowd of bankers at the American Bankers Association government relations summit.
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Senate Banking Committee Chairman Christopher Dodd, D-Conn., on Monday introduced a revised bank-reform bill without Republican support. He plans to have the panel vote on the bill next week and hopes to have the bill considered by the Senate in April.

“I don’t know how they ever come to an agreement on some kind of a bill they can bring back to both houses and pass,” Boehner said.

Summers has defended his staff.

Good volume in the Canadian preferred share market today, led by the two TD OperatingRetractibles, with the selling dominated by National Bank. There was also a decent bit more price volatility, with six entries on the Performance Highlights, while PerpetualDiscounts lost 3bp at the same time as FixedResets gained 8bp. That took the FixedReset median weighted average yield down to 3.46%, equal (to five significant figures) to its all-time low on January 11.

Former Lehman executives (and note that an “executive” can be anybody with a title) who, it would seem, prefer to remain anonymous, are trying to play down Repo 105, discussed on PrefBlog on March 12. But it’s a tangled web we weave…:

The only people who would worry about using an old trick to reduce leverage from 13.9 to 12.1, the second executive said, are “yappers who don’t know anything.”

Again, the examiner’s report takes pains to show otherwise. It quotes a senior vice president calling Lehman’s leverage targets “a very hot topic.” The firm’s own definition of a material leverage shift was one-tenth of a point.

In my experience, 95% of the sell-side are yappers who don’t know anything, and the other 5% are simply disingenuous.

And, of course, blind faith in the regulators is misplaced:

Securities and Exchange Commission Chairman Mary Schapiro said her agency’s oversight of Lehman Brothers Holdings Inc. was “terribly flawed,” days after a bankruptcy examiner found the SEC didn’t try to stop the firm’s exaggeration of liquid assets.

“It was so terribly flawed in design and execution,” Schapiro testified to a Congressional committee today, referring to SEC examinations aimed at monitoring the soundness of Wall Street’s biggest investment banks. “We were ill-suited because of our enforcement and disclosure mentality.”
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Valukas’s March 11 report describes a gap between how Lehman and the SEC viewed the firm’s so-called liquidity pool, used to pay bills in a pinch, in the firm’s final months. Behind the scenes, the SEC questioned how quickly some assets could really be tapped. Still, Lehman didn’t tell investors that a growing share of the pool was being pledged as collateral to clearing firms, the report found.

The SEC deemed assets to be liquid only if they were convertible to cash within 24 hours. Lehman afforded itself five days. The SEC told Lehman it preferred the shorter limit and never enforced it, according to the report.

In another instance, the SEC didn’t take action after determining in June 2008 that Lehman had counted a $2 billion deposit at Citigroup Inc. among cash-like assets available in an emergency, according to the report. SEC analysts deemed the deposit’s designation as “problematic,” because withdrawing the money could have impaired Lehman’s trading.
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The silence of examiners, who focused more on stability than honesty with investors, was invoked as a defense as Valukas quizzed more than 100 executives and other witnesses about the financial health and reporting at Lehman, based in New York.

The Bloomberg story doesn’t explore the regulators’ obsession with “stability” in detail, or even define what it is. Stability of the Financial System? Stability of Lehman? Stability of their jobs? What? One way or another … so much for the third pillar!

Greece is still trying to extract better terms for its EU bail-out:

As long as “Greece is still borrowing at an unreasonably high interest rate, over 6 percent,” the country will keep “all options open” while preferring an EU solution, Papandreou said at a press conference in Brussels today with European Commission President Jose Barroso.

Bad news at the trough on St. Patrick’s day! The little green piggies haven’t spent enough on lobbying:

“Until government policies favor renewable energy over dirty coal, solar may seem too risky now for some investors,” said Landis, whose $260 million fund include SunPower Corp. and Suntech Power Holdings Co. “Coal may make sense short term.”

Solar companies’ profitability is falling because of competition from China and cuts to state support in Germany and Spain, where about 72 percent power-producing photovoltaic panels were installed in 2008.
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Germany may install 3,000 megawatts, or about a third of the world’s total, Simonek said. In the Czech Republic, a country of 10 million people, about 900 megawatts of solar power will be deployed, almost matching existing U.S. installations.

The rising global demand will help some companies weather the slump in panel prices caused by Chinese manufacturers stepping up production and cuts in solar subsidies in Germany and Spain known as feed-in tariffs, said Richard Caldwell, chairman of Australia’s Dyesol Ltd., which makes a conductive dye that produces electricity on glass and sheet metal.

“Companies in the industry like First Solar have had a shocker,” he said. “The Chinese have been flooding the market with cheap product. And we’re still getting over the change to the German feed-in tariff. It hasn’t been a good market.”

Who woulda thunk it? Competition in solar panels! And there we all were, thinking it was all about peace, love, granola and subsidized green jobs to replace all those subsidized auto jobs that have evaporated! Just think, if they can cut costs by another 90%, maybe it will even be worth thinking about!

Volume was good in the Canadian preferred share market today, but PerpetualDiscounts fell by 7bp. FixedResets gained 2bp to take yields to within a hairsbreadth of their all-time lows … another tenth of a beep in yield and we’ve got a new record.

PerpetualDiscounts now yield 5.97%, equivalent to 8.36% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.7% (maybe a little bit more) so the pre-tax interest equivalent spread (also called the seniority spread) now sits at about 265bp, a significant widening from the 245bp reported on March 10. I consider it highly peculiar that the spread should be so wide in the absence of any serious credit-based panics; I can only conclude that retail has decided that massive inflation is imminent – which is consistent with low yields on FixedResets – contrary to the beliefs of institutional bond investors. I note that Long Canadas now yield 4.02% while long RRBs yield 1.57% real, for a breakeven of 245bp.

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…. and you can call the recent rocketing in the breakeven spread either a return to normalcy or a harbinger of hyperinflation, depending on what answer you want to get … or what your client wants to hear.

The IMF has released the March 2010 edition of Finance & Development.

Europe will bail out Greece, if necessary:

Europe’s blueprint for a financial lifeline to Greece amounts to an unprecedented bet by finance ministers that they can avert a euro crisis by sidestepping the no-bailout rules intended to sustain the 11-year-old currency.

Improvising their way through the euro’s harshest test since its debut in 1999, officials meeting in Brussels late yesterday and today worked out a strategy for emergency loans in case Greece’s plan for 4.8 billion euros ($6.6 billion) in tax increases and wage cuts fails to stave off fiscal disaster.

There is no word as to whether the EU will demand management changes, vilify the top guys, claw back pay or threaten criminal charges. S&P affirmed Greece at BBB+.

Moody’s is shift municipal ratings to the global scale:

Municipal bond issuers led by California Treasurer Bill Lockyer began pressing companies that rate their debt two years ago to show investors how they would be rated on a corporate scale. They claimed that the scale cost them more in interest rates because state and local borrowers default at a lower rate than higher-rated corporations.

U.S. Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, called the different rating scales “ridiculous” at a hearing on the $2.8 trillion market in May 2008.

This cosmetic change was last reported on PrefBlog in September 2008 in Global Scale for Municipal Credit Ratings a Bust?. So, the story so far is: CDOs, etc., must get their own scale because global scales are ridiculous. Municipalities must get their own scale because the global scale is ridiculous. Can’t tell your players without a political programme, can you?

In a speech at the Heyman Center on Corporate Governance, Julie Dickson acknowledged the issue of regulatory capture, but didn’t offer any insights:

Simon Johnson, a professor at MIT, says that the failure of supervisory judgement is often linked to regulatory capture. Regulatory capture refers to supervisors thinking like the industry they regulate because they either come from industry, or hope to work in the industry. In some cases there may be a belief that it is easier to just agree with industry rather than to fight their lobbying efforts. He has written many articles on this, which I read with great interest as they contribute to the debate around regulators, incentives, and judgement.

My own view is that clear mandates and accountabilities, independence, resources, and international assessment programs are key to getting the incentives right. I would also say that I have seen some very courageous supervisors in my time, and that sometimes people recruited from industry are even more demanding, having experienced first hand some of the dynamics within institutions. So this issue is rather complex.

There was an interesting and unusual note in today’s FOMC release:

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

A good day in the Canadian preferred share market, with volume at above-average levels. Six issues traded more than 100,000 shares on the Toronto Exchange. PerpetualDiscounts gained 3bp and FixedResets were up 8bp, which took yields of the latter down to 3.47%, the second-lowest on record.

Under proposed legislation, the New York Fed will be politicized:

The Federal Reserve Bank of New York president, who supervises five of the seven largest U.S. banks, would be subject to White House appointment and lawmakers’ approval under legislation proposed today.

Also, one member of the Fed Board of Governors would be designated vice chairman for supervision, and no firm under Fed oversight would be allowed to vote for or have past or present employees serve as directors of regional Fed banks, according to the bill to overhaul financial regulation. Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, unveiled the proposed legislation in Washington.

This might make a bit of sense if one could point to elements of the Credit Crunch and make a case that Fed failure to regulate was responsible. Unfortunately for logic lovers, however, it was basically Fed-regulated entitites who bailed out Non-Fed-regulated entities (JPM/BSC, BAC/MER) and the spectactular bankruptcies (AIG, LEH) were non-regulated. But it’s not logic, it’s politics!

CLOs are coming back!:

The market for collateralized debt obligations backed by high-yield, high-risk loans is poised to reopen in the U.S. for the first time in a year after losses on mortgages prompted investors to flee bundled securities.

Citigroup Inc. is underwriting a $500 million fund managed by New York-based WCAS Fraser Sullivan Investment Management LLC, scheduled to price as soon as this week, according to people familiar with the offering, who declined to be identified because terms are private. The deal refinances an existing collateralized loan obligation and increases its size by more than 50 percent.

The offering would mark the first new issue backed by widely syndicated loans in the $440 billion market for CLOs since last March and a return to investments that contributed to $1.76 trillion of writedowns and credit losses at the world’s largest financial institutions. Citigroup and WCAS Fraser Sullivan are marketing the deal after prices on CLO debt staged a record rally on signs of economic recovery.
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JPMorgan Chase & Co., Bank of America Corp. and Deutsche Bank AG have also been approaching managers of leveraged loans since last year to offer terms for new CLOs to restart the market, according to people familiar with the discussions. CLOs pool loans and slice them into securities of varying risk intended to provide higher returns than similarly rated investments.

Volume slackened off today, with only twenty-two issues trading more than 10,000 shares. PerpetualDiscounts lost 9bp on the day – yields are approaching 6.00% – and FixedResets hovered at their 3.50% yield level.

Another boring day, as far as actual news was concerned. An explanation of Lehman’s financing technique looked interesting at first, but turned out to be only legal hairsplitting. OK, OK, so the outward leg of the repo is recorded as a true sale and that delevers the balance sheet. Fair enough. But how did they avoid putting the inward leg on the balance sheet? Fortunately, volume 3 of the Examiner’s report makes that part clear:

Unlike an ordinary repo transaction, Lehman did not record the borrowing of cash from a Repo 105 transaction even though Lehman was obliged to repay the borrowing. Instead, Lehman established a long inventory derivative asset representing the obligation under a forward contract to repurchase the full amount of securities “sold.”3009 As Lehman’s internal Repo 105 Accounting Policy explained, assuming Lehman borrowed $100 cash in exchange for a pledge of $105 of fixed income collateral, Lehman booked a $5 derivative, which represented Lehman’s obligation to repurchase the securities at the end of the term of the repo transaction. The $5 arose from the fact that when it came time to repurchase the pledged securities, Lehman paid $100 cash for $105 worth of securities. The transaction therefore had a $5 value to Lehman reflecting the market value of the “overcollateralization” amount of the Repo 105 transaction. Because it had a positive fair value of $5, the derivative was recorded as an asset under SFAS 133.

Volume stayed perky today, while PerpetualDiscounts lost 8bp and FixedResets gained 14bp, taking yields on the latter down to 3.50%. Yields on FixedResets have only been below 3.50% on three days – ever! – with the all time low being 3.46% on January 11, 2010.

March 12 is the fourth-lowest FixedReset index yield of all time, March 11 is fifth-lowest.

Nothing happened again today.

Volume was good in the Canadian preferred share market today, and so was the direction, with PerpetualDiscounts gaining 9bp and FixedResets gaining 7bp, with yields on the latter edging closer to the magic 3.50% level.

No news worth reporting today. There was some more Greek speculator-blame being tossed around, but I can’t make fun of Greek politicians every day!

It was a quiet day for Canadian preferred shares, but volume was good. PerpetualDiscounts lost 4bp and FixedResets gained 3bp, yields on the latter edging slowly, slowly, closer to 3.50%. Only a single entrant for the performance highlights; no prizes for guessing which sub-class of preferred!

PerpetualDiscounts now yield 5.94%, equivalent to 8.32% interest at the standard equivalency ratio of 1.4x. Long Corporates now yield about 5.9% – maybe a bit under – so the pre-tax interest-equivalent spread (also called the seniority spread) now stands at about 245bp, unchange from the level reported March 3.

The Brookfield Renewable Power FixedReset, 5.25%+262, announced February 18, commences trading tomorrow with the symbol BRF.PR.A.

Brookfield’s dalliance with General Growth Properties got a boost:

General Growth Properties Inc. said its biggest debt and equity holders offered to jointly invest $3.93 billion in the company, bolstering a plan with Brookfield Asset Management Inc. to bring the mall owner out of bankruptcy.

The investments from Bruce Berkowitz’s Fairholme Capital Management LLC and William Ackman’s Pershing Square Capital Management LP would allow unsecured creditors to be paid in full with cash, General Growth said in a statement last night. Their funds are in addition to $2.63 billion pledged by Brookfield.

Royal Bank may make US acquisitions, but only if they’re big enough to generate fawning press commentary:

Royal Bank of Canada is interested in U.S. banks with $10 billion in assets or more to add to its consumer lending business, said James Westlake, an executive who oversees the international unit.
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“Most of the deals we are seeing are 12 branches or 25 branches and they don’t really move the needle,” Westlake said. “But I wouldn’t detect anything that suggests we aren’t welcome.”

The recent Federal Budget had a paragraph I missed (on page 104):

One of the lessons of the global financial crisis is that financial institutions need to have access to a variety of funding sources. The Government will help federally regulated financial institutions diversify their funding sources by introducing legislation setting out a framework for covered bonds. Covered bonds are debt instruments that are secured by high quality assets, such as residential mortgages. The legislation will increase legal certainty for investors in these debt instruments, thereby making it easier for Canadian financial institutions to access this low-cost source of funding.

RBC recently issued CAD 850-million five-years at 3.188%. As stated by RBC’s Hiren Lalloo in the ECBC 2009 Handbook:

There is no dedicated legal framework for the issuance of Covered Bonds in Canada. As such, Canadian Covered Bonds are based on contractual agreements structured within the general legislation.

The lack of specific legislation has been referred to as a risk factor for buyers of Canadian originated covered bonds, most recently in the DBRS assessment of the new RBC issue:

Despite the above strengths, the Covered Bonds have the following challenges. … And lastly, there is no specific covered bond legislative framework in Canada. This is mitigated by the contractual obligations of the transaction parties, supported by the opinions provided by legal counsel to RBC and a generally creditor-friendly legal environment in Canada.

Good volume on the Canadian preferred share market today, with PerpetualDiscounts off again, down 9bp this time, while FixedResets gained 3bp, bringing them closer to the 3.50% yield barrier. The market was again well-behaved, with only three issues gaining or losing more than 1% … two of them were Floating Rate gainers!

The US Budget squabbling has begun:

President Barack Obama’s budget proposal would generate bigger deficits than advertised every year of the next decade, with the shortfalls totaling $1.2 trillion more than the administration estimated, according to the Congressional Budget Office.

The nonpartisan agency said today the deficit will remain above 4 percent of the nation’s gross domestic product for the foreseeable future while the publicly held debt will zoom to $20.3 trillion, amounting to 90 percent of GDP by 2020.

A rise of debt to 70% of GDP in 1994 was nearly enough to trigger failure of bond auctions in 1994. Of course, the CAD is not a reserve currency, but 90% still looks scary! That implies that about 5% of GDP has to be taxed away just to pay interest!

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It should be remembered, when looking at the above graph for international comparisons, that it does not include provincial debt, which serves as an effective constraint on how much income can be taxed away for federal interest payments. Total Net Debt is a better figure, but I don’t have a time-series for that:

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The CBO projection does not include another recession:

CBO does not try to project business-cycle fluctuations in the economy beyond the short term (in this case, beyond 2014) but instead identifies and projects trends in the factors that underlie potential output, including growth in the labor force, the rate of capital accumulation, and the growth of productivity. During the first half of the 10-year projection period, real GDP is expected to grow rapidly enough to close the substantial gap that existed in 2009 between it and potential GDP. Then, during the remainder of the projection period, real GDP is projected to grow at about the same rate as potential GDP. That approach does not preclude the possibility of recession in the latter years of the projection period; instead, it assumes that the likelihood of booms or recessions in the future is about the same as it was in the past.

I’m pretty suspicious of medium-term budget projectionst that don’t include a recession – at least as a scenario. Averages aren’t much good, frankly.

I mocked MLEC when it was suggested and I mocked PPIP when its turn came around. So far, PPIP looks like a fizzle.

The Icelandic terrorists have rejected the IceSave shakedown. There is no word on whether this is causing a reconsideration of the Basel rules whereby bank debt is risk-weighted according to the credit rating of its sovereign.

The Europeans are musing about a possible European Monetary Fund:

German Finance Minister Wolfgang Schaeuble said the Greek crisis shows the euro region should consider creating an organization with powers similar to the International Monetary Fund.

“For the internal stability of the euro zone, we need an institution that has the powers and know-how of the IMF,” he said in an interview with Welt am Sonntag published today. “We shouldn’t rule anything out, including the creation of a European Monetary Fund.”
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The comments come after proposals for a European Monetary Fund were put forward last month by Deutsche Bank AG Chief Economist Thomas Mayer and Daniel Gros, director of the Centre for European Policy Studies in Brussels. Countries could draw on funds equivalent to the money deposited at the EMF and exceed that amount if they agreed to a “tailor-made adjustment program” supervised by the European Commission and governments, they said.

The EMF could also ease the disruption caused by the default of a member state by offering investors new EMF bonds in exchange for the defaulted bonds, they said. Bond holders would be required to take a “haircut.”

Meanwhile, Papandreou is worried about speculators:

Greek Prime Minister George Papandreou, drawing parallels with the 1947 fight to contain communism in Europe, called for trans-Atlantic cooperation to combat “unprincipled speculators” who threaten to bring a new global financial crisis.

“Europe and America must say ‘enough is enough’ to those speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system,” he said in a speech today in Washington. “An ongoing euro crisis could cause a domino effect, driving up borrowing costs for other countries with large deficits and causing volatility in bond and currency rates across the world.”

Oh, golly! We wouldn’t want countries with large deficits to incur higher borrowing costs, would we?

Marc Auboin of the WTO is concerned that Basel III may choke trade finance:

There was a time when trade finance received favourable regulatory treatment. It was viewed as one of the safest, most collateralised, and self-liquidating forms of finance. This was reflected in the moderate of capitalisation for cross-border trade credit in the form of letters of credit and similar securitised instruments under the Basel I regulatory framework put in place in the late 1980s and early 1990s. The Basel I text indicates that “Short-Term self-liquidating trade-related contingencies (such as documentary credits collateralised by the underlying shipments)” would be subject to a credit conversion factor equal or superior to 20% under the standard approach. This meant that for unrated trade credit of $1,000,000 to a corporation carrying a normal risk-weight of 100% and hence a capital requirement of 8%, the application of a credit conversion factor of 20% would “cost” the bank $16,000 in capital.
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One of the key measures proposed by the Basel Committee to reduce systemic risk is to supplement risk-based capital requirements with a leverage ratio, to reduce incentives for “leveraging”. The intention of reducing such incentives is relatively consensual, and has been shared by economists, regulators, and bankers. The idea, under Paragraph 24 to 27 of the BIS draft proposals, is to impose such a “leverage” ratio, in the form of a flat 100% credit conversion factor to certain off-balance sheet items.

Ranjit Lall has published a working paper titled Why Basel II Failed and Why Basel III is Doomed:

According to conventional wisdom, the Basel II Accord – a set of capital adequacy standards for international banks drawn up by a committee of G-10 supervisors – is essential if we are to avoid another financial crisis. This paper argues that this conclusion is false: Basel II is not the solution to the crisis, but instead an underlying cause of it. I ask why Basel II’s creators fell so short of their aim of improving the safety of the international banking system – why Basel II failed. Drawing on recent work on global regulatory capture, I present a theoretical framework which emphasises the importance of timing and sequencing in determining the outcome of rule-making in international finance. This framework helps to explain not only why Basel II failed, but also why the latest raft of proposals to regulate the international banking system – from the US Treasury’s recent financial white paper to the latest round of G-20 talks in Pittsburgh – are likely to meet a similar fate.
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Basel II’s failure, I argue, lies in regulatory capture, ‘de facto control of the state and its regulatory agencies by the ‘regulated’ interests, enabling these interests to transfer wealth to themselves at the expense of society’. Large international banks were able to systematically manipulate outcomes in Basel II’s regulatory process to their advantage, at the expense of their smaller and emerging market competitors and, above all, systemic financial stability.

Good volume and mixed performance in the Canadian preferred shares market today: PerpetualDiscounts lost 24bp, but FixedResets gained 8bp, taking their yield down to 3.55%. It will be most interesting to see whether they can edge past the 3.50% boundary … with a Modified Duration of only 3.72, it seems that price gain in the neighborhood of 15-20bp will do it.

European leaders are continuing their desperate efforts to divert attention from the causes of the Greek crisis:

German Chancellor Angela Merkel said that Greece doesn’t need financial aid, as she turned her focus to restricting the use of derivatives to halt “speculators” from exploiting countries’ budget deficits.

“Credit-default swaps, where you insure your neighbor’s house just to destroy it and make money from it, that’s exactly what we have to curb,” Merkel said at a joint press conference in Berlin today with Greek Prime Minister George Papandreou.
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Merkel said that Greece has done its work and that Europe and the U.S. must ensure that financial-market speculators aren’t allowed to inflict further damage on Greece or on other countries.

“We must succeed at putting a stop to the speculators’ game with sovereign states,” Merkel said. “We can’t allow speculators to be the profiteers of Greece’s difficult situation.” While “technically not easy,” derivatives including credit-default swaps “must be curbed,” she said.

The Greek situation has spiralled (almost?) out of control due to European complacency. After years of turning a blind eye to the problem, they now have to face it … and no politician likes problems. Shoot the messenger!

Volume was good today but price action was muted, with PerpetualDiscounts gaining 2bp and FixedResets up 3bp. There were only two entries on the performance highlights tables – from the Floating Rate class, naturally enough!