PrefBlog

After skirmishing over the Greek bail-out, France has surrendered to Germany:

Germany and France have agreed to back International Monetary Fund aid for Greece, a German Finance Ministry official said, signaling a joint position after weeks of dispute over how to resolve the Greek crisis.

Germany and France, the euro region’s two biggest economies, are now pulling together before a two-day EU summit in Brussels beginning March 25, the official said on condition of anonymity. Greece has pressed the EU to make specific commitments on aid to help lower its borrowing costs.

Apparently, the IMF money will be spent on armanents:

In a bizarre twist to the Greek debt crisis, France and Germany are pressing Greece to buy their gunboats and warplanes, even as they urge it to cut public spending and curb its deficit.

Indeed, some Greek officials privately say Paris and Berlin are using the crisis as leverage to advance arms contracts or settle payment disputes, just when the Greeks are trying to reduce defense spending.

“No one is saying ‘Buy our warships or we won’t bail you out’, but the clear implication is that they will be more supportive if we do what they want on the armaments front,” said an adviser to Prime Minister George Papandreou, speaking on condition of anonymity because of the diplomatic sensitivity.

Ten-Year swap spreads are negative:

The 10-year U.S. swap spread turned negative for the first time on record amid rising demand for higher-yielding assets such as corporate and emerging market securities.

The gap between the rate to exchange floating- for fixed- interest payments and comparable maturity Treasury yields for 10 years, known as the swap spread, narrowed to as low as negative 2.5 basis points, the lowest since at least 1988, when Bloomberg began collecting the data. The spread narrowed 5.38 basis points to negative 2.38 basis point at 3:12 p.m. in New York.

A negative swap spread means the Treasury yield is higher than the swap rate, which typically is greater given the floating payments are based on interest rates that contain credit risk, such as the London interbank offered rate, or Libor. The 30-year swap spread turned negative for the first time in August 2008, after the collapse of Lehman Brothers Holdings Inc. triggered a surge of hedging in swaps. The difference narrowed to negative 20.5 basis points today.

“It’s hedge-related activity related to new corporate issuance,” said Christian Cooper, an interest-rate strategist at Royal Bank of Canada in New York, one of 18 primary dealers that trade with the Federal Reserve. “As more and more institutions receive, then swap rates will go lower.”

PerpetualDiscounts slid again on a day of elevated volume, losing 10bp, while FixedResets roared ahead, gaining 12bp and taking weighted median average yield down to 3.40%.

The Office of the Chief Actuary (part of OSFI) has released its eighth actuarial study, titled Technical Aspects of the Financing of the Canada Pension Plan, complete with OSFI’s usual dollop of patronizing paternalistic Panglossian pablum:

The review panel expressed concern that most readers would be unduly distressed that the Canada Pension Plan (CPP or the “Plan”) is not expected to ever be even one-third funded. As such, the panel recommended minimizing or removing “point-in-time” funded status indicators from the actuarial report and to focus instead on the fact that the adequacy and stability of the steady-state contribution rate is the critical tool for judging the sustainability of the CPP, and that the funded ratio (ratio of assets to liabilities), if kept in the report, is at most an indicator of the projected mprovement in the funded level. This paper was thus written with the purpose of analyzing and comparing the financing of the CPP using different measures, in particular, the unfunded obligations (liabilities less assets) and funded ratios of the Plan under various closed and open group methodologies, including a methodology more consistent with that used for occupational defined benefit pension plans.

Let’s donate the Chief Actuary to Europe – he can help advise them on what to do about those CDS-trading terrorists, who caused the Greek crisis all by themselves.

Speaking of the Greek crisis:

Europe’s stalemate over possible aid for debt-encumbered Greece deepened as European Central Bank President Jean-Claude Trichet spoke out against offering low- interest loans for which the Greek government has pressed.

Trichet’s demand for stringent terms and German Chancellor Angela Merkel’s push for sanctions against nations that breach deficit limits heightened the chance that Greece will leave a March 25-26 summit empty-handed. That could force Prime Minister George Papandreou to decide whether he’s ready to fulfill his threat and turn instead to the International Monetary Fund.

Looks like there might finally be some action on the Fannie & Freddie front:

U.S. Treasury Secretary Timothy F. Geithner said the government should end the “ambiguity” over the government’s involvement in mortgage finance companies Fannie Mae and Freddie Mac.

“Private gains can no longer be supported by the umbrella of public protection, capital standards must be higher and excessive risk-taking must be appropriately restrained,” Geithner said in testimony prepared for the House Financial Services Committee that was obtained today by Bloomberg News. The hearing is scheduled for tomorrow at 10 a.m. in Washington.

Volume jumped up as PerpetualDiscounts got hammered again, losing 36bp, while FixedResets continued to show strength, gaining 3bp which took yields on the latter down to 3.42%. Volatility was also pretty good.

Spend-Every-Penny gave a speech to the UK Chamber of Commerce deemed to be too boring for the Department of Finance website. Highlights were:

“Issues like the concept of ‘too big to fail’ and ‘systemically important’ — quite frankly our view is that these are not useful discussions, and at the end of the day that these concepts are not workable.”

“We are against capital tax, we are against the tax on financial transactions, we are prepared to consider certain issues on contingent capital.”

“When you look at the causes of the crisis, one of the clear causes was excessive leverage, not only in some of the American institutions, but also some of the European institutions.

“Our primary concern overall is to get the leverage rules right and to try and get an agreement on that among our colleagues.”

Boston Fed boss Eric Rosengren also endorsed the idea when giving a speech on March 3, but only when answering a question; it was not part of his prepared remarks.

There was a good long article on the US TruPS CDO market today, albeit a little short on what I consider the interesting detail:

Hildene is part of a lawsuit seeking to prevent a TPG Credit Management LP affiliate from buying trust preferred securities from CDOs for pennies on the dollar. The firm tried to fire Cohen & Co. from managing deals in which Hildene invests. It’s attempting to block BankAtlantic Bancorp from retiring debt held by CDOs at a fraction of face value.

The moves by TPG Credit and BankAtlantic have in part kept the $50 billion market for CDOs backed by the trust securities, known as TruPS, from rebounding, according to Citigroup Inc., even as credit markets recover from the biggest financial crisis since the Great Depression. Since 2000, 1,813 banks and thrifts sold TruPS and other debt that were packaged inside the deals, according to Fitch Ratings.
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Financial institutions relied on TruPS before credit markets began to seize up in 2007 because interest on the securities is paid from pre-tax income and may be suspended without penalty. The securities, which rank between senior bonds and common equity for repayment in a bankruptcy, also count toward regulatory capital requirements. New York-based Citigroup, 27 percent owned by the U.S. government, sold $2 billion of TruPS last week after repaying bailout funds.

Community banks need the CDO market to revive to issue TruPS because they sell debt in increments of as little as $10 million, which insurers or mutual funds won’t buy. CDOs bought the most TruPS issued by smaller banks before credit markets froze, according to Citigroup.

European CDS spreads are increasing:

French President Nicolas Sarkozy is opposing Germany’s push for an International Monetary Fund loan to Greece, favoring a European solution for the nation as it struggles to lower the region’s biggest budget deficit. Greek bonds fell as the EU divisions widened.
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Swaps on Greece jumped 22 basis points to 337.5, according to CMA DataVision prices. Contracts on Portugal climbed 14 to 138, Ireland rose 11 to 135.5, Italy increased 7.5 to 105.5 and Spain was up 11 basis points at 112. These countries are collectively known as the PIIGS.

PerpetualDiscounts got hammered today, losing 52bp, while FixedResets gained 7bp to set a new all-time yield low for that index. Volume was good, and there were a lot of entries on the performance highlights. Volatility = Good!

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.