Friday, June 22, 2012

Euro by the Numbers

Don't listen to the politicians; read the numbers as added up by a hedge fund operator. They don't look good.


Charles Butler said...


First the 100 bn for Spain is a line of credit, not a loan. How much will be accessed is not yet known, but it certainly won't be all of it.

Second, the 564 bn in refinancing thru 2014. Is this even remotely credible? That's slightly below the sum total of current balance sheet debt.

bert said...

I think the figure for this year alone is over €140bn. So, yeah, remotely credible.

There's an understandable urge to take hedge fund operators' pronouncements with a pinch of salt, often because they're Austrian cranks, often because they're talking their own books.

This guy though is slightly different. He ran Goldman Sachs' international business, has strong Labour Party links, and was very close, both directly and through marriage, to Gordon Brown.

He also ran the BBC for a while, until he was forced to resign, a friendly fire casualty of the Iraq war.

Charles Butler said...

Bert - Something has to be gotten straight here. Your 140 billion is pretty accurate (145 for redemptions, in fact). However, 60 percent of that is t-bills which, oddly, represent less than 20 percent of total issuance.

The trick here is that Fulcrum are front loading the multiple accounting for the same item of short term debt will get recycled. Fair enough - but this has to be undone by removing successful short term issues not only from the calculation of what remains, but also from the initial figure. This is accomplished via the maturity profile which, in the case of Spain, shows refinancing needs for 2012 as 87 bn, rather than the 148 bn for h2 reported by a journalist doing a bit of book talking for his hedgie pal.

The FT piece is misinformation, plain and simple.

Goldman Sachs, btw, is not the Red Cross. His having worked there is a bug, not a feature.

bert said...

Charles, you misunderstand me. I'm not painting him as a moral giant. And his Goldman background would be a strange thing to cite if I was. I'm saying that he's not an attention-seeking little yapper. (FWIW, he's got a long history advising the Bank of England and the UK Treasury too. Again, not a completely unmixed character reference.)

Equally, I may be misunderstanding you. Davies explicitly says that rolling over maturing debt shouldn't normally be a problem, but in this environment is. You're objecting that each time maturing debt comes up for renewal, Davies adds it to the total that may be required from eurozone funding, on the assumption that the lender may decline to renew. And that this total by definition can't be the total amount the eurozone authorities may end up being exposed to, because that short term debt is being counted twice or more times, once for each time it comes round for renewal.

Is that what you're saying, more or less?

Charles Butler said...

Bert - Exactly. 1 bn in outstanding 3-mth bills on Dec 31, 2011 generates(assuming that there is no intention of retiring the debt) 4 bn in rollover requirements for all of 2012, at the end of which you still are only 1 bn in debt.

Even finding yourself shut out of the markets, and defaulting, doesn't change this. The 1 bn you fail to pay back is offset by 1 bn that you weren't able to borrow, precipitating the default. You still owe 1 bn.

The only way this analysis works is if you assume that you can default first and that the market would continue to lend in dollops of 1 bn every 3 months.

The impossible end result of this line of thinking is that in 2011 the tesoro 'redeemed' more than the actual outstanding stock of t-bills over the course of the year - and increased outstanding by 1 bn with respect to 2010 to boot.

The probability that a financial journalist would catch this verges on zero. But the source?

Real refinancing requirements for 2012, btw, are about 52 bn for t-bills and 35 for longer term.

bert said...

I checked this year's number, and missed the problem. Davies' table is misleading, in that it makes the multiyear figures scarily higher than they should be. I just had a look at the comment thread to see if anyone caught this. This guy didn't hold back. Not you, is it?

Charles Butler said...

Bert - no, I didn't. I have a go at the gibberish that gets spewed at Alphaville from time to time as 'capra.iberica'.

That commenter carries it over the whole 2012-2014 period. This makes the misrepresentation of the actual situation even more morally repugnant, given the tense times in which we find ourselves. In the case of Spain, the 13% of outstanding debt that is t-bills becomes, according to Davies, responsible for a redemption burden equal to about 50% of total outstanding of all maturities - to 30 years.

Were they speaking of a private corporation, these hucksters would be served a summons on Monday morning.

Charles Butler said...

Thanks for pointing me to the comment, btw.

Charles Butler said...

Bert - Davies re-edited the piece with a disclaimer. Still gets it wrong by summing through 2013.

Charles Butler said...

He's also removed any reference to Fulcrum, indicating that he realizes he was tricked by the hedgie. Interesting.

bert said...

That is interesting, well spotted Charles.
And also embarassing, which I suspect may be the reason for removing Fulcrum's name (have a look).

Usually the comments sections of big newspaper sites consist of everyone yelling and nobody listening, so it's good to see some kind of responsiveness to pushback here, even if it's not everything you'd like.

I have to say I think he's right when he says "The key point stands ..." People are lining up to point the firewall funds in all kinds of directions, and the permanent fund isn't even up and running yet. Intervention in sovereign bond markets; propping up bank balance sheets; ongoing funding of Spanish (or Italian) deficits; even a stimulus splurge for the periphery. Can't do all of 'em.

Charles Butler said...

Talking his own book. Too much.

In the meantime, I've added another tidbit over there that knocks a further 150 billion off the 2013 requirements.

You, and he, may be right. But at some point the degree to which current funding might come up short has to enter into the discussion. It can't all be amorphous and equally valid at minus 1 euro.