In Between Days: Eurotrashed, Amazon, and No Shutdown

by CC September 27, 2011 12:48 am • Commentary

Tomorrow’s Tape: Confidence Builder


  • 9:00 a.m. ET: Case-Shiller home-price index for July. Slight improvement seen, from “awful” to “slightly less awful.”
  • 10:00 a.m.: Conference Board consumer-confidence index for September. Slight improvement seen, from “depressed” to “slightly less depressed.”


Consumer confidence, Fed speakers and home price data are on deck for markets Tuesday, as traders keep their focus on the stream of headlines from Europe.

Stocks bounced Monday, after it appeared European officials were actively discussing ways to try stop the spread of the sovereign debt crisis and strengthen their banking system. The Dow was up 2.5 percent at 11,043, and the S&P 500 rose 2.3 percent to 1,162.

On Tuesday, Greek Prime Minister George Papandreou meets with German Chancellor Angela Merkel at 3 p.m. ET, after he speaks to German business leaders in Berlin.

Economic data includes the S&P/Case-Shiller home price index at 9 a.m. ET, consumer confidence at 10 a.m. and the Richmond Fed survey at 1 p.m. The Treasury auctions $35 billion in 2-year notes at 1 p.m.

“The 2-year is pretty much locked into a pretty tight range. It’s really hard to see that that’s going to change any time soon. As a consequence, I would think the auction has the potential to be a little on the sloppy side…especially if the stock market continues to firm,” said Ward McCarthy, chief financial economist at Jefferies.

As stocks rallied Monday, bond prices fell, driving yields higher. The 10-year was yielding 1.904, its highest yield since last Tuesday, the day before the Fed announced its latest easing program — “operation twist.” The 2-year was yielding 0.231 percent Monday.


Here’s a quick look at where things stand with the euro-zone crisis for those who need help navigating this confusing and complex situation.

GREECE’S VOTES — The most immediate trip wire is the Tuesday vote in Greece’s parliament on a crucial tax amendment that is being seen as a first test of confidence in the Socialist government as it tries to push unpopular reforms in the face of rising internal party resistance. The next real test will be a second set of reforms — even more controversial because they slash pensions, cut public-sector jobs and raise taxes on the poor — that will come before parliament in the next few weeks.

TROIKA TALKS — The crucial talks between the European Union-European Central Bank-International Monetary Fund “Troika” with the Greek government remain on hold as Greece pulls together another six billion euros in cuts and taxes to hit its promised 2011 target. At stake is the next eight-billion-euro bailout payment, without which Greece goes broke within weeks. The troika has a mid-October deadline and could resume meeting already next week. Euro-zone finance ministers now signal they won’t decide at their next meeting Oct. 3 on the next Greek aid tranche, as earlier expected.

EUROPEAN FINANCIAL STABILITY FACILITY — The 17 euro-zone governments must still all ratify the embellishments sealed at the July 21 EU summit for the European Financial Stability Facility, including lending capacity boosted to 440 billion euros and the right to purchase euro-zone government bonds on the secondary market (a task the ECB has unhappily performed for Spain and Italy for over a month). The German parliament is expected to pass the measure Sept. 29, albeit possibly with help from the opposition, but the question of what collateral Greece will provide remains an open question for Finland and some other euro-zone parliaments. During meetings of the IMF over the weekend, the U.S. and other major nations were pressed European leaders to increase the effective size of the EFSF to perhaps trillions of euros by borrowing against it. This is because the foreseen 440 billion euros would be woefully inadequate to persuade markets that the facility can stand behind bigger default risks in Italy and Spain. These discussions are at a early stage, and it is far from clear they can forge a political consensus. German officials say the idea is moot as long as the ECB continues to reject it. Domestic politics, particularly in “German Bloc” countries, pose a major hindrance to throwing more money at the euro-zone periphery. Opponents to a revamped and bigger plan also worry that reopening the July 21 agreement risks protected highly politicized talks, meaning delays that would make a Greek default inevitable. Movement on this is unexpected before Troika approval of the next bailout tranche.

EUROPEAN STABILISATION MECHANISM — Talk that approval of the euro zone’s permanent rescue fund may be expedited isn’t substantiated so far, given the still-pending EFSF approval in many parliaments. Germany would have no objections to an earlier introduction of the European Stabilisation Mechanism, German Finance Minister Wolfgang Schaeuble said Saturday, but he stressed that the need to have the ESM agreement ratified by all 17 members of the euro zone would inevitably slow the process.

SECOND BAILOUT — The second 109-billion-euro bailout for Greece, also decided upon July 21, is now in doubt. The main stumbling bloc is a public-sector involvement (PSI) provision demanding that Greece’s creditor banks “voluntarily” agree to swap at least 90% of maturing Greek debt for longer-term paper. Any sign of compulsion would be seen as a default event. Greek officials now say they have commitments for 85% with a 21% haircut. Greek officials now say some of the country’s creditors believe the current plan to write down Greek bonds isn’t large enough and needs to be doubled to around 40%. Other estimates go even higher. This new bailout pact could fall apart if the Troika rejects Greece’s new cuts as inadequate to fill budget gaps.

DEFAULT — Some believe the call haircuts will push ratings agencies to declare Greece to be in temporary, controlled default, particularly if pushed deeper than planned. Even the PSI plan under the July 21 agreement will result in a temporary technical default according to ratings agencies, but private sector involvement in this case will be voluntary instead of compulsory as in the case of a deeper haircut of 40% to 50%. The other option is a disorderly default, as in Argentina 10 years ago, which turned into a creditors rout and a bank run. The new EFSF options could be used to help prevent a Greek default, or to try to insulate the rest of the euro zone from such a default by pushing capital into European banks and building a fire wall around larger, vulnerable euro-zone nations like Italy and Spain. All this is academic if the Troika withholds the eight billion euros next month.

RECAPITALIZATION — The IMF is pushing for European banks to prepare their defenses by boosting their capital reserves to be better protected against sovereign defaults. France, where banks are seen as particularly vulnerable, is pushing back. The IMF and U.S. support a mandatory recapitalization of the euro-zone banks with state money. The idea has at least some support within the ECB.


From a Citi report on US bank exposure o Europe

Interestingly, extrapolating the IMF’s seemingly rough estimate for Europe’s bank losses to the U.S. – using relative exposures reported in first quarter 2011 BIS data – revealed a significantly smaller implied loss than we would have guessed. While a range of different weightings to different countries and banks yields somewhat different results, the U.S. bank exposure appeared to be about 1/9th as large as the European banking system’s exposure to the six nations used to estimate the 300 billion euro capital hit (see Figures 3-4).

A simulated hit of say $45 billion across the thousands of U.S. banks represented in the BIS data would represent 4.5% of the U.S. banks’ now heightened level of tangible common equity. While significant growth concerns away from Europe are at work, U.S. bank equities have already fallen 22% in the past 3 months. A good part of assessing future economic damage to the U.S. should be a judgment that market assessments of risk have already become quite dire.

To be fair, the 2008 Lehman event showed that it might take just one systemically important financial institution with worse exposures than the average to do harm in the financial system and ultimately the world economy. In the aftermath of the Lehman event, G-20 leaders vowed to avoid further failures of SIFIs. Followed by actions, this helped in part to restore confidence and functioning to the financial system. We imagine officials hoped to generate such a confidence response this week with quite similar statements. However, political roadblocks – now legislated or otherwise – to additional intervention in markets has raised doubts about both the effectiveness and willingness to act.


The news that Amazon’s tablet was real was a great scoop, but not quite a shock to the industry. Bezos all but confirmed it months ago, and supply-line leaks had it coming in late summer, which was optimistic but not far off; the Fire will be arriving on Wednesday.

One question I always had, though, was how Amazon would justify putting out this device when they’ve spent so long slagging the iPad as an e-reading platform? Simple: the Fire isn’t an e-reader. Sure, you can read books on it, but its main function is acting as a wedge for all those sadly-overlooked Amazon services. Apple sells you on one platform then keeps on nudging you until you accept the rest. iTunes, iPhone, iPad, OS X, it doesn’t matter which you do first, the point of the ecosystem is to make you use all of them. Amazon is trying for a similarly lateral play.

Amazon’s web services powers a ton of the web. They’ve got cloud coming out of their ears. A fraction of their infrastructure would power the day-to-day media and data needs of millions of consumers. They own the water main, but they lack a firehose. When people think music, they think iTunes. Movies, they think Netflix. TV, they think Hulu. Or any number of things. But Amazon does so many of these things, often with better pricing or selection. If they can get a device out there and dangle a suitably enticing carrot, people will find themselves entrapped in a web of savings…

… Come wednesday, expect a big value play to get consumers interested: a year of Prime, a bunch of free TV shows or movies, or maybe even a free ad-supported Kindle if you buy now, now, now! Anything they can do to take the wind out of the Nook’s sails and make their tablet a one-of-a-kind device and value, it’ll all be on the line. But even if they only sell a dozen, don’t expect them to fold. Amazon is too interested to stay away from this gun fight, even if all they’ve got this week is a knife.


Senate leaders agreed to a deal Monday evening that is almost certain to avert a federal government shutdown, a prospect that had unexpectedly arisen when congressional leaders deadlocked over disaster relief funding.

After days of brinkmanship reminiscent of the budget battles that have consumed Washington this year, key senators clinched a compromise that would provide less money for disaster relief than Democrats sought but would also strip away spending cuts that Republicans demanded. The pact, which the Senate approved 79 to 12 and the House is expected to ratify next week, is expected to keep federal agencies open until Nov. 18.