Bond Vigilantes Call Sovereign Debt Interest Rates Higher And Currency Traders Sell The Euro As The European Sovereign Crisis Deepens On News That van Rompuy, Merkel and Sarkozy Negotiate A Convoluted Default Mechanism

Financial Market Report For November 29, 2010

Theyenguy reports that Rompuy, Merkel and Sarkozy on November 28, 2010, negotiated and announced, a Leaders’ Framework Agreement to establish a permanent crisis mechanism, that will replace that European Financial Stability Fund , EFSF,  that expires in mid-2013. This sovereign debt default mechanism is called the European Stability Mechanism, ESM. We see that today, Germany is the power force, in attempting to find a way out of Europe’s sovereign crisis.  Ambrose Evans Pritchard commented, on May 2, 2010, in the, in words reminiscent of Margaret Thatcher: “If the aim of Helmut Kohl and Francois Mitterrand at Maastricht was to tie down a ‘European Germany’ with the silken chords of emu, they failed. Monetary union has delivered a ‘German Europe’ after all. And he continues, We now know the answer to Henry Kissinger’s question: “Who do I call if I want to call Europe?” Only one person matters. The Chancellor of Germany.

Forex Live provides the Market News International reports  EU Van Rompuy’s Statement On Mechanism For Future EMU Crises:  “European Council President Herman Van Rompuy Sunday greeted the  announcement by Eurozone Finance Ministers of their agreement on the creation of a new permanent crisis facility, the European Stability Mechanism, ESM. The ESM, which will start in mid-2013 after the temporary European Financial Stability Facility expires, would provide liquidity to troubled EMU states in exchange for stringent fiscal and economic policy adjustments. It also includes a process by which private creditors might have to face lower interest rates, extended maturities or haircuts on the face value of bonds issued by states that are determined to be insolvent. But that process would not affect any bonds purchased before June 2013.  Below is the verbatim text of Van Rompuy’s statement:

“The President of the European Council, Herman Van Rompuy, welcomes the statement of the Eurogroup on the European stability mechanism. It follows an agreement between the President of the European
Council, the President of the Commission and the President of the Eurogroup that, in view of markets developments, it was important to clarify some issues urgently notably in relation with the role of the
private sector. Our framework will be fully consistent with the IMF approach.

This agreement, together with the implementation of the measures proposed by the Task Force on economic governance and endorsed by the European Council of a month ago, will strengthen the economic  governance and the cohesion of the Euro area. Herman Van Rompuy will submit in December a text on a limited Treaty change which will reflect today’s decision by the Eurogroup.”

Open Europe Press Summary of November 29, 2010 reports: “The Eurozone Crisis Mechanism Will See Bondholders Involved On A Case-By-Case Basis From 2013. Eurogroup Statement ECOFIN Statement Eurozone finance ministers also reached agreement on the creation of a new permanent resolution mechanism for ailing eurozone countries. The new fund will replace the existing €440bn EFSF when it expires in 2013.

In spite of Germany’s demands to make bondholders take automatic “haircuts” in the event of future eurozone bailouts, under the scheme agreed yesterday the involvement of the private sector will be decided on a case-by-case basis. Eurozone finance ministers will decide by unanimity whether assistance is needed by a eurozone country. However, if the country’s debt position is considered unsustainable by the IMF, the ECB and the European Commission, the concerned government will have to enter negotiations with its private sector creditors to restructure its debt. To this end, “collective action clauses” will be annexed to all eurozone government bonds issued after June 2013.” 

Furthermore, Open Europe relates that Der Spiegel reports that Volker Wissing, financial expert from the FDP, German Chancellor Angela Merkel’s coalition partner, has said that, if there are no talks by mid-December about the future participation of banks and financial investors in sovereign defaults, “there will be an uprising in the FDP.”

EuroIntelligence reports “Markets Give Thumbs-Down To Irish Agreement: A snapshot of the bond markets this morning, as compared to Friday morning. The yield spread – the measure of risk is unchanged in the case of Ireland and Spain, and it is marginally low for Greece and Portugal. But the spread is only a difference. German yields themselves rose further, to 2.76% this morning, which reflects market concerns about the bailout burden on Germany, but without alleviating the concerns about default risk in the periphery. It is a kind of the worst of both worlds scenarios. This is an exceptionally bad reaction to the deal, especially as a lot of questions are now answered. To us, this suggests that the markets are concerned about Ireland’s fundamental solvency, something no bailout package can ever address. And we cannot see how interest rates at 6% are consistent with solvency”.

Ambrose Evans Pritchard writes Contagion Strikes:  “Spreads on Italian and Belgian bonds jumped to a post-EMU high as the sell-off moved beyond the battered trio of Ireland, Portugal, and Spain, raising concerns that the crisis could start to turn systemic. It was the worst single day in Mediterranean markets since the launch of monetary union.

While the Irish rescue removed the immediate threat of “haircuts” for senior bondholders of Irish banks, it leaves open the risk of burden-sharing from 2013 on all EMU sovereign bonds and bank debt on a “case-by-case” basis. Traders said bond funds have been dumping Club Med bonds frantically to comply with their “value-at-risk” models before closing books for the year.

Yields on 10-year Italian bonds jumped 21 points to 4.61pc, threatening to shift the crisis to a new level. Italy’s public debt is over €2 trillion, the world’s third-largest after the US and Japan.

“The EU rescue fund cannot handle Spain, let alone Italy,” said Charles Dumas, from Lombard Street Research. “We we may be nearing the point where Germany has to decide whether it is willing take on a burden six times the size of East Germany, or let some countries go.”

Italy distanced itself from trouble in the rest of southern Europe early in the financial crisis, benefiting from rock-solid banks, low private debt, and the iron fist of finance minister Giulio Tremonti. But the crisis of competitiveness never went away, and the country has faced a political turmoil for weeks.

If Portugal and Spain have to follow Ireland in tapping the EU’s €440bn bail-out fund – as widely feared after Spanish yields touched 5.4pc – this will put extra strains on Italy as one of a reduced core of creditor states. The rescue mechanism has had the unintended effect of spreading contagion to Italy, and perhaps beyond. French lenders have $476bn of exposure to Italian debt, according to the Bank for International Settlements.

In Dublin, Fine Gael, Labour and Sinn Fein have all vowed to vote against the austerity budget in early December, raising doubts over whether the government can deliver on its promises to the EU.
Echoing the national mood, Sinn Fein leader Gerry Adams said it was “disgraceful” that the Irish people should be reduced to debt servitude to foreign creditors of reckless banks. “The costs of this deal to ordinary people will result in hugely damaging cuts,” he said.

One poll suggested a majority of Irish voters favour default on Ireland’s bank debt. Popular fury raises the “political risk” that a new government elected next year will turn its back on the deal.

Premier Brian Cowen said there was no other option. “We are not an irresponsible country, ” he said, adding that Brussels had squashed any idea of haircuts on senior debt. Irish ministers say privately that Ireland is being forced to hold the line to prevent a pan-European bank run.

There is bitterness over the EU-IMF loan rate of 5.8pc, which may be too high to allow Ireland to claw its way out of a debt trap. Interest payments will reach a quarter of total revenues by 2014. Moody’s says the average trigger for default in recent history worldwide has been 22pc. “The interest bill is enormous. The whole process lacks feasibility,” said Stephen Lewis, from Monument Securities.”

Bespoke Investment Group charts show Spanish Credit Default Swaps Go Parabolic

Michael Patterson and Krystof Chamonikolas of Bloomberg report Hungary Stocks Enter Bear Market, Bonds Sink on Concern Crisis Will Expand. Hungary’s benchmark equity index dropped more than 20 percent from its 2010 peak and government bonds sank as a surprise interest-rate increase compounded concern that Europe’s debt crisis is spreading east.

Zoltan Simon of Bloomberg in article Hungary Follows Argentina in Pension Fund Ultimatum reports
Hungary is giving its citizens an ultimatum: move your private-pension fund assets to the state or lose your state pension. Economy Minister Gyorgy Matolcsy announced the policy yesterday, escalating a government drive to bring 3 trillion forint ($14.6 billion) of privately managed pension assets under state control to reduce the budget deficit and public debt. Workers who opt against returning to the state system stand to lose 70 percent of their pension claim.

Currency traders sold the Euro, FXE

The currency traders sold the Euro, FXE: it fell 0.95% today to close at 130.73.

An Elliott Wave 3 down commenced on November 4, 2010, as the Euro peaked out at 141.50 and fell to 139.83 on November 5, 2010, as presented in Elliott Wave Surfer Chart in article EUR/USD – Wave 3 of 3 Down Has Already Begun.  I comment that the 3 of 3 Waves are the most sweeping and energetic of all economic waves, they build wealth on the way up and destroy wealth on the way down. This wave, will for all practical purposes, destroy the Euro; and wipe out all European economic structures as they are known today.  

Currencies that the currency traders have strongly sold since November 5, 2010 include:
Euro, FXE, -6.5%
New Zealand Dollar, BNZ, -6.2%
Swedish Krona, FXS, -5.6%
Australian Dollar, FXA, -4.8%
South Africa Rand, SZR, -4.7%
Indian Rupe,  ICN, -4.3%
Swiss Franc, FXF, -4.0%
Russian Ruble, XRU,  -3.9%
British Pound Sterling, FXB, -3.9%
Emerging Market Currencies, CEW, -3.6%

November 5, 5010, was a day that will live in financial infamy as the bond vigilantes sustained the interest rate on the 30 Year US Government Bond, $TYX, above 4% on the principle that the US Federal Reserve Quantative Easing 2 constitutes monetization of debt. It was at this time also that the bond vigilantes called sovereign debt interest rates higher globally as Mrs Merkel called for a sovereign debt default mechanism. This stimulated a fall in world government bonds, BWX, from 62.60 on November 4, 2010, to 61.68; these fell strongly today from 57.93 to 56.89.

Competitive currency devaluation is well underway; it has come as the currency traders have commenced a global currency war against the world central bankers for control of the world’s resources and people.

The chart of the Optimized Currency, ICI, -0.3%, documents, that a debt deflationary bear market is underway.

US Dollar, $USD, rose +0.6% to close at 80.81

The USD/JPY rose; its inverse, JYN, fell.

Stocks fell lower

The weekly chart of World Stocks, ACWI, clearly showing an Elliott Wave 3 Down, fell 0.6% to close at 44.20.

European Financials, EUFN, -1.8% European financial stocks collapsed under selling pressure.

Emerging Market Financials, EMFN, -3.0% Emerging market financial stocks broke down today.

Banco Santander, STD, -2.2%

Turkey, TUR, -2.6%
Germany, EWG, -2.2% as The Telegraph reports: EU Rescue Costs Start To Threaten Germany Itself
United Kingdom, EWU, -1.6%
Spain, EWP, -2.8%
Italy, EWI, -2.8%
Europe, VGK, -1.3%
Europe Small Cap Dividends. DFE, -1.7%
Austria, EWO, -1.7%
Poland, PLND, -2.0%
Emerging Europe, ESR, -1.6%
The United Kingdom, EWU, -1.6%  
The New York Composite, NYC, -1.0%

International Dividend Payers, DOO, -1.4%
International Discretionary, IPD, -1.3%

International Utilities, IPU, -4.0%
CenterPoint Energy, CNP, -1.2%

Clean Energy, ICLN, -1.6%
Solar Energy, TAN, -2.2%
Wind Energy, FAN, -1.3%

Airlines, FAA, -1.0%

S&P Mid Term Futures Volatility, VXZ, may possible be in the start of an Elliott 3 wave up.

Inverse volatility, XXV, fell.

Proshares 200% ETFs; the rise provided an excellent opportunity to enter a short position or add to one’s short position.

Asia Excluding Japan, UXJ, +0.9%. It rose to support at the edge of a head and shoulders pattern.
Europe, UPV, -0.0%. It also resides on the edge.
Emerging Markets,  EET, +0.6%. In a bull market one buys dips and in a bear market one sells rises.
Financials, UYG, 1.3%

Debt deflation is underway in the Base Metals, DBB, and very strongly underway in Timber, CUT.

Base Metals, DBB, +.2%
Lead, LD, -4.0%
Tin, JJT, 2.1%
Timber, CUT, -0.4%
Natural Gas, UNG,  -4.3%

As a result, Copper Miners, COPX, fell 0.6% today. And International Basic Materials, DBN, fell 1.1%

BHP Billiton, BHP, resides at the edge of a massive head and shoulders pattern.  

Michael Patterson and Krystof Chamonikolas of Bloomberg report Baltic Index Drops A Third Session As Fleet Growth Lowers Rates. Having a position long base metals or their miners is not conducive with a falling BDI Index as seen in this chart.   

World Government Bonds and International Corporate Bonds fell sharply.

World Government Bonds, BWX, -1.8%; world government bonds broke down today under strong selling pressure as bond vigilantes called sovereign debt interest rates higher and as those owning bonds, sold. The last thing a bond holder wants to hear are words like “leaders’ agreement” and “default mechanism” and “haircut”; such define crisis, and given that the wise sold out of their bonds today.

International Corporate Bonds, PICB, -0.7%. Interest rates on corporate bonds are rising globally; this is destructive to capital investment and growth.  


Peter Boone and Simon Johnson in Baseline Scenario outline four scenarios for resolution of the sovereign crisis, so aptly put by the International Monetary Fund chief described as sovereign crisis, as Philip Aldrick, Economics Editor of The Telegraph wrote in November 19, 2010 article, IMF Chief Dominique Strauss-Kahn Urges Leaders To Cede More Sovereignty To EU ……  The Eurozone Endgame: Four Scenarios  

Evidence abounds that Portugal, Italy, Ireland Greece and Spain no longer have sovereign debt seigniorage, and are not viably obtaining and will not be viably obtaining revenue from sovereign debt sales; any upcoming bond sales are being done by banks which submit debt or have submitted debt to the ECB for funding of new debt issues. Such means of obtaining money is simply a Ponzi financing, it is monetization of debt, and cannot be sustained much longer. Theyenguy believes the sovereign crisis will intensify, and that out of  Götterdämmerung, an investment flameout, that according to Bible Prophecy, a Sovereign, Revelation 13:5-10, and a Seignior Revelation 13:11-18, an Old English term for top dog banker who takes a cut, will emerge to establish fiscal sovereignty and credit seigniorage for both Europe’s financial institutions and residents.

Robert Wenzel questions activities of the President’s Advisory Council on Financial Capability relating that it will hold its first meeting on Tuesday November 30 at 2:00 PM at the Treasury. According to the Treasury, the meeting will include “the unveiling of a new coordinated National Strategy for Financial Literacy. That National Strategy is designed to guide the ongoing efforts of the federal government and private organizations to empower average Americans with the financial skills they need to strengthen their long-term economic security and stability.”

Keywords: fiscalsovereignty, asovereignandaseignior, sovereignandseignior,

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