A Tale of Two Debt Markets

Some Monday's seem longer than others. Today seemed very long indeed. Almost vacation time and I need it very badly.

Homework Assignment
I have to admit that I have no idea what any of the following means, so if anyone has some thoughts I would appreciate it if you left a comment.

Market Ticker had a couple of posts up today which showed a monster change in the "Total Loans and Leases of Commercial Banks" which is dubbed TOTLL. Here is the first one:
Did the FED Just Bail Out Europe?
and then a follow up:
What the Hell? (Outstanding Credit)
It seems yet another change has been made concerning bank balance sheets and how some items are accounted for. The relevant notes from the FED can be seen here:
April 9, 2010 Notes
I really cannot make heads or tails of this thing. What I can gather is that banks are moving some things back onto their balance sheets but it is not clear why this is happening or what it accomplishes. Have at it.

A Tale of Two Debt Markets
The latest greatest saga is the credit issues facing the nation of Greece. Stop me if you have heard it before; country with structural budget issues in a recession and having no real desire or ability to cut spending needs access to cash or they will default. Same old story all over the world.

I am often reminded that the "bond market" is the most powerful force in the financial universe. I would offer that the bond market's influence is losing ground in the face of never ending manipulations by the central banks of the world.

Which debt market is the real one? Here are two to choose from:
1-Greece is facing rising interest rates on their debt due to various issues and that rate has hit about 7% for even short term debt, far above what "normal" nations can borrow at.
2-Greece is being handed loans at 5% from the IMF/Eurozone to sidestep those pesky debt markets.

So which is it? From all the stories I have read it is #1 but through some creative use of bailout threats the plan is to make #2 replace #1 using the "free" markets.

Here are some clips:
Bailout details ease Greek borrowing costs
Note this section:

"Short-term, Greece needs lower interest rates. If the rates do not go down, I think they will use the mechanism," Agapitos said. "I think it's been a case of a domino. Greece promised, now Europe has promised, now Greece has to take the gun and use it if the spreads do not go down."

Germany, which has vehemently opposed a bailout for Greece, said Monday that the time had not yet come for the aid to be used.

"Just putting up a fire extinguisher on the wall does not say anything about the probability that it will ever be needed," German government spokesman Christoph Steegmans said.

Another Hank Paulson "bazooka" convert.

The Baseline Scenario offers this missive:
Greece Saved For Now – Is Portugal Next?
Summary sentences:

Surely the eurozone will bail Portugal out also – but where would it stop after that? The stronger Europeans, by coming to Greece’s rescue at this time with little conditionality, are effectively showing all the weaker nations that they too can get a package. This will undoubtedly reduce the resolve for needed fiscal reforms across the European periphery.

We are still lurching from crisis to crisis in Europe.

What a mess.

Try and remember that sovereign issues are not peculiar to the Euro zone. US States are having the same kinds of problems.

What does this all mean?

Just as with mortgages, the free market said "no more at these prices" and so the government issued and bought them all. Greece has funding issues and cannot pay a punitive rate, so they will not. Well, at least not until the unneeded bailout plan is rolled out. Tuesday is a debt offering day for Greece so we may get an answer at that point.

The overall economic system cannot function without ultra low rates and to this end we are seeing the greatest expansion of sovereign balance sheets to make it happen. How long can borrowing rates stay at all time lows? 5 years? 10 years?

What is most disturbing is there is still no grand plan anywhere; everyone just moves from one crisis to the next never trying to see the big picture. At some point all of these promises will have to be paid up. I have written plenty on the "Total Miss Pricing of Risk" and here is another example. I wonder how long this can all go on.

Have a good night.