Nov 11. Italy and Jefferson County, AL

The trading floor is closed for US rate products, screens are open.  Equities were able to stage a rebound as Italian yields fell from well above 7%.  The market was roiled early by S&P saying France was on review for a downgrade, (which they subsequently said was erroneous). 
–Ten yr treasury yield rose back above 2% to 205, as the 30 year bond auction was a bit sloppy.  The eurodollar curve steepened but red/green pack spread is still only 39 bps.  November eurodollar options expire today.
–I was skimming an article on Reuters about Jefferson County, AL declaring bankruptcy on debt related to sewer bonds of $3.14 Bln.  http://www.reuters.com/article/2011/11/11/usa-alabama-jeffersoncounty-idUSN1E7A920B20111111  You might think that a county in Alabama is a long way from Italy, but there are likely some parallels.  In any event, I started to think, how can a sewer system in a county with population of 660,000 have over $3B is sewer debt?  That’s $4750 per person! (where per capita income is $20892).  The article went on to say that JPM worked feverishly (the article didn’t really say “feverishly”, I just thought that word captured the essence of JP’s efforts) to avoid bankruptcy, WAIVING $647 MILLION IN FEES!  That’s nearly $1000 per capita!!  “Tell ya what JP, you can have the sewer and everything in it, and we’ll call it square.”  Now I don’t mean to say that I really have all the details on this story, and I know there was fraud and corruption and jail time for public officials, but REALLY?  Almost makes the missing $600 million to $1 billion thus far associated with MF look quaint.
–Now back to Italy.  Italy/Germany ten year spread declined from over 550 to just above 500. (Maybe yesterday was the final blowout of MF’s Italy position and the market just wanted to extract a small fee for providing “liquidity”).   But the fact is that Italian banks are stuck with Italian debt, which is more or less being funded by the ECB.  Which is to say that the ECB, or Germany and France, own the Italian banks (and the Greek banks, etc).  And the small political gesture of Bini Smaghi’s resignation to allow for France to name a replacement at the ECB doesn’t change things.  I guess that’s why a triple A rated country like France can urge a lesser credit like the USA to help out. 
–The tide has rolled out, in Alabama, at MF, in Greece, and in Italy.  The erosion begins at the margin, both financially and in the trust of financial institutions, and then in all institutional architecture.  Roll Tide.

Posted on November 21, 2011 at 12:36 pm by alexmanzara · Permalink
In: Eurodollar Options

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