Quote of the Day:

Fitch considers that the proposal to reduce Greece’s public debt burden via a debt exchange with private creditors will, if completed, constitute a rating default, and result in the country’s IDR being lowered to ‘Restricted Default’ (‘RD’) upon completion. The ratings of GGBs affected by the exchange, including those not tendered but restructured under CACs, which are expected to be imposed retrospectively on bonds issued under Greek law, will also be lowered to ‘D’ (‘default’) at this time.

Shortly after completion of the exchange with the issue of new securities, Greece’s sovereign rating will be moved out of the ‘RD’ category and re-rated at a level consistent with the agency’s assessment of its post-default structure and credit profile.

Fitch regards the imposition of retrospective CACs as a material adverse change in the terms and conditions of GGBs in the context of an imminent debt exchange and confirms its assessment that the exchange will be distressed and de facto coercive on private holders of Greek bonds. Nonetheless, the primary credit event is the exchange itself and Fitch will rate Greece and its securities accordingly.

Fitch Research [Emphasis mine]

Macro Overview

BoE Split on QE

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• The BoE were split today on their decision to leave QE unchanged. Can you believe it? We’ve stopped talking about base rates … I can’t remember the time we did. The only thing we talk about is monetization of debt, printing paper promises up the wazoo. Nobody pauses to question the validity of the underlying promise. Except perhaps the holder of Gold – who took the hard currency to a new 3 month high of $1780 today.
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• The game is getting tighter for the Brits. Only a few months ago we were lamenting the CPI at over 5%! But we’re already talking about increasing the current rate of asset purchases. It’s a currency war out there… bring out the heavy artillery.

Default Semantics – It’s All Greek To Me

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• I’ll try to keep my comments on Greece brief. To be honest I have Greece-writing-fatigue. The politicians have bought themselves some more time. But it appears that the Feds are inflating everything… even the cost of time!
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• Already the doubts are creeping in and we have not even got to the implementation + riots on the streets stage yet. The Independent writes in an article today:

That pessimistic view was reinforced by a confidential document on Greece, compiled by European and IMF analysts, that was leaked on Monday night. The secret report showed that Greece’s debt burden could easily still stagnate at an unsustainable 160 per cent of GDP at the end of the decade if the economy does not return to growth quickly.

Analysts also expressed doubts over whether the Greek government would be capable of delivering the austerity measures that have been demanded by Greece’s European creditors in exchange for the new bailout funds.

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• The article also details the leakage of a secret Troika report which showed that the bailout may not even make a dent in the Greek debt to GDP ratio. You can’t make this up.
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• Already the mob is reforming, they are restless, they may have little power individually right now and some of them may have “riot-fatigue” … but they also have numbers on their side.
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• Fitch is the latest agency to shut the door on Greeceafter the horse had bolted and long galloped gaily over the horizon. As Forbes implied in their article, it’s not really enough to save them from default – it’s like giving a bankrupt man a new limit on his credit card… it means you can live a little longer, but it doesn’t help, it only hurts.
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• I’ve stopped using ISDA terminology as it no longer has any meaning. So I think Fitch downgraded Greece to official rating “stick-a –fork-in-me-I’m-done”. After stopping time to ponder whether a 70% gun-to-the-head haircut on the NPV of a bond constitutes a default… errmmm… let me think about that for a minute… one day we’re gonna look back on all this and laugh… but first let us join hands and weep.
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• The Greek 5 yr CDS (if indeed it makes any sense anymore to call it Credit “Default” Security) is back trading above 10,000 bps … if indeed that number even makes any sense anymore…I don’t know anymore.
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• Here is an interesting question though; if you were a hedge fund with a shed load of CDS protection on Greece would you have considered buying the distressed bonds off the banks (perhaps in concert) in order to have enough sway among the bond holder committee to put a spanner in the CAC-enforced bond swap and force a CDS default trigger? I guess we’re about to find out. Something tells me this is all going to get very litigious.

Market Overview

What’s Happening To The Consumption Revival?

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• I dunno about you but if consumption was on the up and up I’d kinda expect a better day from WMT and DELL. Both stocks seem to be having difficulty putting out optimistic vibes about consumption patterns.
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• Chinese Flash Manufacturing disappointed too, but this is not a number I give huge credence to. We’ll see later on when inflation numbers are published how things are fairing. If inflation is too high then this is a worrying sign for the Central Bank as it will have little room to stimulate consumption in China. If inflation is too low it may be a sign of a genuine slowdown taking course.
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• Tomorrow look out, more consumption plays reporting including Gap and Target.

Land Of The Rising Dollar

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• I say this because factors which determine the backdrop for Japanese stocks originate largely from outside the country.
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• Japan’s growth comes from its export engine. It’s main trade partners being the US and China. So the Japanese economy is highly dependent on consumption patterns outside its borders and across its seas.
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• The Yen is falling, but for no other reason than it has simply lost its luster as a safe haven currency. The fact that we have been talking about the Yen as a safe haven currency speaks volumes in itself. Chart of the Day today is the Yen-Dollar.

Chart of the Day