Hands up – I admit I am a techno-skeptic. I hate technology for the sake of technology, I want technology that actually benefits me and improves my life. Apple’s iPad – what’s the point of the iPad? You can’t connect it to your work network and it still doesn’t support Flash. Social media, what is the point of Social media? If I want to communicate with someone I’ll either ring them up on my (okay I’ve actually got a smartphone!) phone or call round and see them. But then along comes Google and they are reportedly taking social media ‘citations’ as part of their ranking algorithm so I am suddenly forced to start paying attention.
What is a Citation?, who cares – well I do now because I need to earn them apparently to move my business forward. I have been running my online business at Stinkyink.com for nearly ten years. In that time we have survived Google's Florida update and all the others through to Panda and managed to grow our business based on good old fashioned link building and website optimization, but now suddenly I have to start paying attention to something else.
Let’s be honest here, I run a commercial website selling ink – it’s not the sexiest product in the world and is difficult to make exciting. Most people actually positively resent buying ink cartridges because the perception is that they are poor value for money so to get positive social media ‘citations’ is always going to be a tough call. So, kicking and screaming I’ve been forced to pay attention to Twitter and Facebook. Do you know what, I have just realised that Twitter is a really useful tool for me, not necessarily for promoting my business or myself indeed, but by being careful about who I follow and building up a list of relevant follows over the past few months I am finding that I spend useful time learning things. My biggest frustration is tweeting and then nobody responding, do I live in a vacuum?
So Twitter for us is becoming a useful resource. Those words are a bit like saying ‘that cabbage was very nice’ not a sentence that I would normally utter! I see friends of mine with commercial sites, who tweet once every six weeks ‘Sale’ or ‘special offer’ and even I understand that is not the way to earn ‘citations’ or anything else worthwhile, you do have to engage with these mediums to get any benefit and that takes time and attention, if you don’t have that time then stick with the trusted SEO methods of link building and optimization.
Continued on the next page
From Peter Tchir of TF Market Advisors
The Countdown to Sovereign Debt Write-offs Has Started
Don’t be fooled by the IMF’s announcement that Greece will get a new round of money. This bailout is merely to give a couple of months for the parties to seriously negotiate what haircuts and debt extensions investors need to take in Greece, and Ireland and Portugal. Virtually all the comments made by the parties involved fit in with the view that we are now in a phase where people are negotiating how much they will write off and what else they will do. Almost none of the comments indicate that anyone is really trying to put together a plan that is going kick the can down the road for a long time. I am fading this rally as only the most optimistic investor can believe that this problem doesn’t lead to real default/restructuring with haircuts in the next couple of months.
Why do banks waive covenants?
It looks like Greece has failed to meet the criteria the IMF had set out to provide more money, yet the IMF seems intent on releasing the next tranche. Banks typically waive covenants and release more money only when they truly believe the borrower will turn around, or when they extract enough value from the borrower that they feel safe making the new loan, or when they aren’t prepared to deal forcing the borrower into default.
Does anyone really believe that Greece is going to get turned around? I don’t. In fact I am highly confident that Greece will still not meet the criteria the IMF has set out when it is time for the next tranche. That will be the deadline for the default/restructuring. The IMF can waive the covenants this time because shortly they get to review the progress again and can fail them at that time.
The IMF, which allegedly has some collateral for the loans it is making, be receiving even more collateral on this latest tranche? Could they have perfected their security interests making their own loans extremely safe? That is a real possibility. If this next tranche only includes IMF money, or lending that is collateralized very specifically it would be another clear sign that the game has changed and the lenders are protecting their new loans at expense of existing bondholders.
Are the IMF, or the EU, or the ECB, or the banks prepared to deal with a default or real restructuring right now? The answer clearly seems to be no, but it is also clear that over the past month, the EU in particular has realized restructuring, possibly with losses needs to occur. Talk about the ‘Vienna accord’ and ‘voluntary private restructuring’ has become louder. That will take time. How do you easily pressure a bank into taking a loss, particularly while were still hopeful for a painless solution just a few weeks ago. These ‘voluntary’ decisions won’t be so voluntary, but it will take time for the governments to convince their banks en masse to reach an agreement.
Waiving the covenants and providing the next tranche of IMF money, particularly if fully secured, is completely consistent with the idea that we have entered a relatively short period of negotiations leading to real restructuring.
Germany is laying the groundwork for real write-offs.
Germany was the first EU member to suggest private sector haircuts. It has seemed more open to private sector losses than any other
government. Not only has the German Finance Minister been outspoken on his desire to include the private sector in any package, but the Bundesbank issued a statement that it is confident that the Euro can withstand Greek default. That was the first time in this crisis that a statement has come out trying to prepare the markets for a potential default. As statement start to come out stating that the banking system is strong enough to withstand a default, you know someone is seriously considering a default. I believe that this statement, which has been largely ignored, is a tell. It is the first step in the process of trying to soften the market.
Against this, the ECB continues to lash out that restructuring/default is not an option. At least that is how it seems on the surface. A little below the surface and it seems like they are starting to take some steps to soften their stance. First, and most importantly, Draghi seems to be the main spokesman. Trichet seems to be quiet on the subject now. Many people (at least me) blame Trichet for making the situation worse through the ECB’s wanton purchase of Greek (and Irish and Portuguese) bonds in the open market. By bringing Draghi to the front line are they starting to distance themselves from ECB policy under Trichet? Are they setting him up as a scapegoat? It is plausible to me. Then even looking more closely at what Draghi says also indicates a potential softening. He says “The cost of a real default…” What does he mean by real? Is that to make it easier to wiggle out down the road and say whatever happens wasn’t a “real” default?
Germany seems to be moving further into private losses and preparing the markets for how contained those losses will be and the ECB is softening a bit and making it easier to blame its original stance on Trichet if they change their mind.
What about contagion risk?
There is real risk of contagion. That is another reason that the EU/IMF/ECB need to buy a few more months because not only do they have to restructure Ireland and Portugal. When the next plan is announced it will be comprehensive and Greece, Ireland, and Portugal will be included. I had been surprised how quiet Ireland has been. Other than being mentioned in general terms as part of a contagion argument, relatively few new specifics were being talked about. Suddenly this week, here they are. Allied Irish sub debt had a credit Event. Noonan is speaking about haircuts for senior Allied Irish bondholders. He is commenting on Greece. It is not a coincidence in my mind that suddenly he is speaking out, as he is likely involved in this next phase of negotiations. In fact, it seems that the number of finance ministers and ECB officials who are hitting the airwaves is expanding. I assume if that many people feel the need to comment, something serious is going on behind the scenes.
Contagion risk is there, but it is being addressed so Greece, Ireland and Portugal can be sorted out at once, and the banks that would be in biggest trouble can get help if they need it.
The Government Changes in Greece Point to Default
You could argue that the changes to the Greek parliament are an attempt to get approval to jam another round of austerity on its people. That could be, but I think it is more likely that Prime Minister Papandreou does not want to be labeled as the man who put Greece in default or who crushed the Euro, so he is trying to escape that role, or drag others into a group to share the blame. He is clearly politically savvy, he was an MD at Goldman, and prime minister. If I was him I would be trying to do things so that my name doesn’t go down in history as the person who broke the Euro.
Banks Can’t Handle the Defaults
I really think most banks can handle the defaults. The most likely outcome, in my opinion, is there is some amount of permanent debt reduction and any remaining debt has its maturity extended for a long time. The banks that aren’t mark to market would have to take a loss on any permanent reduction in principal but there is no reason they have to take a loss on any debt that they extend the maturity. So if a bank took 100 million of 2 year bonds, and exchanged them for 80 million of 10 year bonds, they would take a write off of 20 million. That seems manageable for most banks (and the governments can directly support any bank that can’t handle it). From a stock price perspective, no one is buying the stocks of banks with big exposure to Greece, Ireland, and Portugal, on the basis that they don’t have impairments in the portfolio. Given where debt is currently trading, and how much of the write off is permanent, and the trading price of new bonds, bank stocks may rally. I occasionally read articles about banks trading below book value as being cheap. I usually stop there because I believe smart investors try to figure out the value of the banks holdings are not easily fooled by non mark to market accounting. If I am correct, the banks will have some big losses, their share prices may not react much, and the various EU countries can bailout their own banks directly if they choose to.
CDS?
A subject that will get its own write-up, but from the data available from the DTCC, concerns about CDS on sovereigns seems overblown, even if there is a Credit Event. Of all the subjects written about, the only that seems to get the least accurate treatment is the potential impact of CDS on the outcome. The problem is a debt problem. The bulk of all losses will result from poor lending and bond buying decisions. CDS will spread some gains and losses around, but will not in itself have a meaningful impact on the market. Trying to compare AIG is wrong as AIG had almost nothing to do with single name CDS and had ridiculously loose collateral terms even by the 2007 standards, let alone today. Lehman, with massive amounts of debt saw its CDS settle with little confusion, and the market dealt pretty well with the loss of Lehman as counterparty on so many CDS trades. There were more surprising losses from things as simple as repo agreements than from its role as CDS market maker.
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Peter Risdon Says:
May 16, 2011 at 2:40 pm | Reply
The paragraph you quoted from ends with this sentence:
“According to the best-sited stations, the diurnal temperature range in the lower 48 states has no century-scale trend.”
That was a surprise given the tenor of this post: “… maybe this is the end to questions as to whether surface temperature increases actually exist.”
Did you mean that we can now say the answer to that is that surface temperature increases do not exist? Or that, pace Keenan in the WSJ, the data do not contain statistically significant trends?
andyrussell Says:
May 16, 2011 at 2:58 pm | Reply
I don’t think diurnal temperature range is very important. Do you?
What’s more, the “century-scale” bit covers some interesting detail. Before Fall et al., it seems that the only work on diurnal temperature range showed a negative trend from the mid-century to 1980s-ish. What Fall et al. found was that this has increased again since the 1980s. So there’s no “century-scale trend”.
But that tells you very little about mean surface temperature trends.
Mark Says:
May 17, 2011 at 10:45 pm
I have heard it claimed that the reduction in diurnal temperature range over the past few decades provides evidence that GHG increases are responsible for the warming. In that sense, some people think diurnal temperature range is important.
Incidentally, I don’t think Fall et al. were the first to find that DTR has increased since the 1980s. I read a paper that said much the same thing a few years ago.
Sorry for the lack of references to back up these statements. I’m a little too busy at the moment to chase them up.
andyrussell Says:
May 18, 2011 at 8:43 am
Ok, so I’m probably not giving DTR as much significance as it deserves.
My point is that I don’t really care about DTR. I don’t think I know anyone who has a particular interest in DTR. If this paper had been published by anyone else I wouldn’t have looked at it. It’s not very interesting. It’s just another paper on climate observations that fits in with the “consensus view of climate change” or however you want to put it. That’s useful, but not to me or most people.
If, however, the paper had shown what Watts has been saying it would show for quite a while now (i.e. that the postitive temperature trend in the surface station record in the US was an artefact of poor station siting) then that would have been very interesting. To me and to many other people.
But it didn’t.
Ben Says:
May 16, 2011 at 4:49 pm | Reply
So Peter… If the diurnal high and the diurnal low both rise by 1°C, you think this means there has been no warming? After-all, the diurnal range hasn’t changed! Others might draw a different conclusion.
Peter Risdon Says:
May 17, 2011 at 8:26 am | Reply
I understand diurnal range has significance, and the relationship between day and night time temperature ranges is important, especially with regard to the period 1950 to 1980 when the effect of man-made global warming, it has been argued, was masked by a cooling but revealed by the changes in the relationship between these ranges.
I further understand that this argument is based on the idea that human pollution caused this daytime cooling, that it affected the range of day time temperatures as well as the difference between night time temperatures which continued to show warming, and daytime ones that didn’t. This makes day time temperature range significant: if this is right it would be expected to show a variation that correlates with human activity.
But this isn’t my field; I’m just reading what I can in an attempt to understand as much as possible about an important issue and, for me at least, that means reading Watts and reading this blog. Just searching out stuff you’re already disposed to accept isn’t good enough. My comment was prompted by what struck me as a somewhat partial quotation and exasperation: I’m with Feynman when he said you should point out the problems with a theory, not just the things that support it.
[It's not really a "partial quotation" is it? That sentence you are interested in is stuck on the end of the abstract as a new paragraph and isn't really related to the 2 sentences I quote and which are related to the subject of this post. I'm not really interested in DTR and I doubt Watts was either. - AR]
At least Watts invites people with different views to post on his blog and has been at the forefront of attempts to cross the ideological divide, not least with Judith Curry.
Ben, of course you’re right. Andy, a century is an arbitrary scale, of course.
I’d still be interested in your take on statistical significance.
JMurphy Says:
May 17, 2011 at 12:05 pm | Reply
In what way has Watts atempted to cross “the ideological divide” ?
Ben Says:
May 17, 2011 at 3:16 pm | Reply
Peter, I encourage a critical (i.e. thoughtful) reading of Anthony’s blog but my god do you really think he’s “at the forefront of attempts to cross the ideological divide”? Anthony has done more to harden denialist thought than anyone, with the possible exception Marc Morano.
The “different views” he solicits are unthreatening fig-leaves.
andyrussell Says:
May 17, 2011 at 3:24 pm | Reply
I’ve got no problem with most of what Keenan says, although he’s not the first/only person to be saying these things. There’s a JoC paper from 2010 and it was one of the useful points to come out of the UEA email enquiries (i.e. working more with stats people). Not sure where the funding was supposed to come from for these new people though!
I suppose the bigger problem comes down to climate science covering so much stuff – you can’t just look at problems from a stats/dynamics/modelling/chemistry/radiation/whatever perspective for too long before a) not getting very far or b) needing to doing something you’ve not done before.
omnologos Says:
May 19, 2011 at 7:21 am | Reply
Am surprised nobody claimed it was irrelevant as the US only covers 2% of the globe…
andyrussell Says:
May 19, 2011 at 7:43 am | Reply
Maybe that’ll be Watts’ next move: if you can’t find anything in the US, let’s give Europe a go.
I can’t imagine there’d be much enthusiasm left for such a project, though.