Source: FINVIZ.com/forex_charts.ashx
Note: The announcement of Greek referendum came late Oct 31. The above chart is showing how fast the global financial system is reacting to such high-impact news.

Showdown time! Eurozone leaders confront Greece over shock calls for referendum which pushed Europe to the brink of financial disaster [Mail Online, Last updated at 6:23 PM on 2nd November 2011]
Original headline: The gloves are off! Greek PM prepares for showdown with Merkel and Sarkozy tonight as Europe teeters on the brink of financial disaster

George Papandreou has arrived in Cannes, France, after securing his ministers’ support for the vote in a mammoth seven-hour cabinet meeting last night. The referendum could take place next month.

If Greece rejects the austerity measures – part of a package to stop the sovereign debt crisis spreading, Europe faces being plunged into an economic catastrophe.

Mr Papendreou will face the wrath of President Nicolas Sarkozy and Chancellor Angela Merkel this evening ahead of the G20 summit.

The pair will then meet with other top world leaders who they will try to convince that the eurozone is not in terminal decline.

Ahead of talks tonight, the White House called for a ‘unanimity of purpose’ to come out of the talks.

Spokesman Jay Carney said: ‘Our goal is for there to be a unanimity of purpose coming out of the G20, which is the preeminent forum for these kinds of discussions.’

In Greece yesterday, little was done to calm the nerves of politicians and financial markets as Athens announced extraordinary plans to sack its military leaders amid rampant speculation that it was trying to head off a coup d’etat.

‘It’s all over. The government is about to collapse,’ said one Greek official. Greece’s former deputy finance minister Petros Doukas agreed: ‘The **** has hit the fan.’

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Markets rallied after big losses yesterday. In London the FTSE 100 was up 70.11 or 1.29% at 5491.68 this afternoon and in Germany and Paris, markets were up 2.62% and 1.76% respectively.

In the U.S., the Dow Jones was up 1.79% in early trading.

Economists warned that if Greece rejects the debt deal hammered out only last week, which would entail years of austerity, the entire future of the single currency is in peril.

They predicted that Italy, Spain and Portugal are likely to be plunged into a profound economic crisis because of their failure to get to grips with their towering debts.

The referendum would be an effective vote on whether or not Greece should remain in the straitjacket of the single currency and accept years of spending cuts and tax rises, or simply refuse to pay what it owes and crash out of the euro.

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Greece is effectively bankrupt and cannot pay off its debts, even with the tough austerity measures that have been forced upon it.

After fierce resistance, private banks and other investors agreed at a crunch summit in Brussels last week to write off 50 per cent of what its government owes.

The agreement was aimed at cutting Greek debt from 160 per cent of its earnings to 120 per cent by 2020. Without action, it would have ballooned to 180 per cent.

But the Greek people are furious at being asked to endure years of spending cuts and tax rises. There are increasing calls for the country to leave the euro, refuse to pay its way and reinstate the drachma.

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Labour peer Lord Soley said: ‘When the history of this period is written it may well be that the Greek decision will be seen as the economic equivalent of the assassination of Archduke Ferdinand at Sarajevo in 1914. It will trigger events way beyond the borders of Greece or even Europe.’

Stock markets around the world crumbled yesterday as the eurozone lurched towards financial catastrophe. The FTSE 100 index fell more than two per cent in London – down 122.65 to 5421.57 – wiping £32billion off the value of Britain’s blue chip firms.

But there were far more punishing losses on the Continent, with shares in Italy and Greece down nearly seven per cent on a day of carnage on the financial markets. The Paris stock market lost 5.38 per cent, Frankfurt tumbled five per cent and the euro fell around 1.5 per cent against the U.S. dollar.

Shares in French banks were the worst hit on fears over their exposure to Greek debt. If Athens defaults, lenders in France look set to bear the greatest losses. One, Societe Generale, fell more than 16 per cent.

British banks did not escape the bloodbath, with Barclays losing 9.5 per cent of its value and state-controlled Royal Bank of Scotland down eight per cent.

Borrowing costs in Italy soared again yesterday as the crisis threatened to spread from Athens to Rome.

Lord Adair Turner, head of the UK’s Financial Services Authority, warned that Italy’s towering debts of 120 per cent of GDP present a much bigger threat to Britain’s banks than Greece.

Inside the News: Greece seen tipping Europe into recession [ReutersVideo, Nov 1, 2011]

Inside the News: ECB and IMF to press Greece over vote: RBC [ReutersVideo, Nov 2, 2011]

Euro zone needs lower rates, stimulus measures, says OECD [ReutersVideo, Nov 2, 2011]

A look at whether Mario Draghi can save the euro [ReutersVideo, Nov 2, 2011]

Greek PM risks all on referendum [AlJazeeraEnglish, Nov 1, 2011]

Greeks greet referendum with cynicism [AlJazeeraEnglish, Nov 1, 2011]

‘Papandreou may not survive no-confidence vote’ [AlJazeeraEnglish, Nov 1, 2011]

Rovelli Says Greece Uncertainty `Killing’ Stock Market [Bloomberg, Nov 1, 2011]

Donovan Says Greece Referendum Makes Sense Politically [Bloomberg, Nov 1, 2011]

Markets dive on Greek referendum shock [euronews-en, Nov 1, 2011]

http://www.euronews.net/2011/11/01/markets-dive-on-greek-referendum-shock/

[From euronews.net] Greek Prime Minister George Papandreou’s decision to let his people vote on the country’s bailout package caused the world’s financial markets to go into freefall on Tuesday.

The deal to rescue Greece and prevent a wider sovereign debt crisis is now in disarray just days after European leaders had agreed the outlines of a second bailout for Athens at marathon summit talks in Brussels.

Around Europe and on Wall Street there was a massive sell-off in the region’s stock markets with banks suffering worst, and French banks, which are among the most exposed to Greek government debt getting hammered.

“We have just added fuel to the fire and we don’t understand at all the decision of the Greek PM,” said Marc Touati, chief economist at Assya Compagnie Financiere in Paris.

“If there is a referendum the ‘no’ will win. Greece is playing a suicidal game that could lead to its exit of the euro zone so there is fear on French banks, but also on (euro zone) states.”

Investors have lost confidence in the Greek government, even more so when it was learned the prime minister had not informed his own finance minister before announcing his decision to hold the referendum. European leaders were also taken by surprise.

French President Nicolas Sarkozy and German Chancellor Angela Merkel scrambled to limit the damage.

They will hold an emergency meeting with the Greek prime minister in Cannes before the G20 Summit to push for a quick implementation of Athens’ bailout deal, Sarkozy’s office said in statement, but whether that is possible remains to be seen.

Andrew Lim, banking analyst at Espirito Santo in London, said that a Greek “no” vote could trigger a “hard default”, forcing banks to take losses of about 75 percent on their Greek sovereign bondsand raising the threat of a systemic risk.

“If we get a hard default in Greece, it will exacerbate the situation with Italy and Spain. It just increases the problem of Italy going down the same route, and that’s the real risk,” Lim said.

Hellas Frappe by Marina Spanos:

My name is Marina Spanos. I am a Greek-Canadian citizen who lives half her time in Greece, and half her time in Montreal, Quebec. I am a freelance journalist, graphic artist and translator.

…

I noticed that everyone I knew wanted and desired an alternative scope on the matters that concerned their nation, their heritage and simple everyday life, because much like myself they were tired of mainstream media news but could not find an alternate way to learn more about the matters that concerned them most. A blog, was the only logical answer, so I began the blog in late January 2011.

Another reason I started up this blog is my own personal frustration with the ignorance that is allowed to exist in the world and the system that fuels it. I am strongly in the opinion that too much important information is being controlled by people in power who shouldn’t even be trusted to hand out complementary perfume samples, let alone direct public opinion.

… much to my surprise people really started to question what they were hearing, what they were reading… People began to debate the information that they were being served to by the mainstream media. Subjects such as politics, the economy and science became “fashionable” once again. The result: They have now set out on their own journey to uncover the truth. For me… it was mission accomplished.

Nonetheless, being the dynamic individual that I am, I then set out to take the blog to newer levels. That is why I have decided to develop it into an online news magazine. This requires that I begin feeding it articles everyday, accept articles from contributors and diversify every category.

…

Papandreou Calls For Referendum Blackmailing Greek People With Future in EU [Hellas Frappe, Oct 31, 2011]

… The media that supports the government will dramatize the event saying that if we vote yes then we will have to accept Bulgarian-style factory wages and loss of sovereignty and if we vote no then we will have to learn to live on coupons, and go back to the drachma.  …

… remember Article 44 of the Greek Constitution which stipulates that a referendum for financial matters cannot be held and must instead be voted on in parliament by 151 votes! …

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And here comes the conspiracy part of this whole bit of news. We all know that Papandreou has been accused by main opposition New Democracy MP Panos Kammenos of committing treason on CDS contracts (click for that story here). What if this last move by Papandreou has some connection to this?

The Olympia website just released an article saying that there is only one way that Greece can be “THROWN” out of the Eurozone and that is if there is a military coup.

This is not that far-fetched, just five days ago coincidentally Forbes magazine also published a similar article claiming that the real solution to the Greek problem is a military coup. In fact the report said that instead of Germany trying to fund the Greek debt they should instead sponsor such a coup.

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What Papandreou did not achieve through Europe, in regards to the CDS contracts accusations made against him by Panos Kammenos, he might now be trying to achieve from a side door, in other words by provoking a chaotic environment so that a military coup can happen. In other words, the abolition of democracy in this country.

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CDS are not paid if a credit event is triggered because there is a declaration of war. But hedge fund holders can cash in if there is an abolition of democracy such as a “military coup”…. Here is the link for that http://www.zerohedge.com/article/cia-warns-greek-military-coup-rebellion-if-austerity-intensifies

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Beglitis Replaces Chiefs of Staff With Loyal PASOK Soldiers [Hellas Frappe, Nov 1, 2011]

… Defense Minister Panos Beglitis added even more fuel to the fire a little earlier by firing the Hellenic Chiefs of Staff to replace them with officers that are loyal to the socialist party.

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Beglitis’ decision to make these changes can only be described as purposely provoking a chaotic climate.

And possibly even triggering the “coup” we spoke about in yesterday’s article…

Are we headed for another Lehman moment in Europe? [RT America interview of Reggie Middleton, Oct 20, 2011]

… Lehman was one bank relatively small. The European banks have the same essential problem that Lehman Brothers did it is just sad that there are so many of them. … To be absolutely honest the only solution to the problem is the politically unfeasible solution and that is debt destruction. … What I’ve been seen in the media basically game playing and political ??? trying to use more debt to solve an indebtedness situation, trying to use financial engineering to solve a problem that was caused by financial engineering. … <Σ: US taxpayers [through their saving accounts] are second in line – once again – next to investors> … Very difficult to predict the timing [of a …] One guarantee is that a Lehman type collapse is going to happen in Europe. …

Who is Reggie Middleton and What is BoomBustBlog? [by his own BoomBusBlog, July 25, 2010]

Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts to uncover truths, seldom if, ever published in the mainstream media or Wall Street analysts reports. Since the inception of his BoomBustBlog, he has established an outstanding track record, including but not limited to, the call of….

1. The housing market crash in the spring of 2006 and publicly in September of 2007 …
2. Home builders falling and their grossly misleading use of off balance sheet structures to conceal excessive debt in November of 2007 ….
3. The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies) …
4. The warning of Lehman Brothers before anyone had a clue!!! …
5. The fall of commercial real estate in general (September of 2007) and the collapse of General Growth Properties [nation’s 2nd largest mall owner] in particular (November 2007) …
6. The collapse of state and municipal finances, with California in particular (May 2008) …
7. The collapse of the regional banks (32 of them, actually) in May 2008 …
8. The collapse of the monoline insurers, Ambac and MBIA in late 2007 & 2008 …
9. The overvaluation of Goldman Sachs from June 2008 to present …
10. The ENTIRE Pan-European Sovereign Debt Crisis (potentially soon to be the Global Sovereign Debt Crisis) starting in January of 2009 and explicit detail as of January 2010 …
11. Ireland austerity and the disguised sink hole of debt and non-performing assets that is the Irish banking system …
12. The mobile computing paradigm shift, May 2010 …

Selling More CDS on Europe Debt Raises Risk for U.S. Banks [Bloomberg Business Week, Nov 2, 2011]

U.S. banks increased sales of insurance against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the first half of 2011, boosting the risk of payouts in the event of defaults.

Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose by $80.7 billion to $518 billion, according to the Bank for International Settlements. Almost all of those are credit-default swaps, said two people familiar with the numbers, accounting for two-thirds of the total related to the five nations, BIS data show.

The payout risks are higher than what JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc., the leading CDS underwriters in the U.S., report. The banks say their net positions are smaller because they purchase swaps to offset ones they’re selling to other companies. With banks on both sides of the Atlantic using derivatives to hedge, potential losses aren’t being reduced, said Frederick Cannon, director of research at New York-based investment bank Keefe, Bruyette & Woods Inc.

“Risk isn’t going to evaporate through these trades,” Cannon said. “The big problem with all these gross exposures is counterparty risk. When the CDS is triggered due to default, will those counterparties be standing? If everybody is buying from each other, who’s ultimately going to pay for the losses?”

Hedging Strategies

Similar hedging strategies almost failed in 2008 when American International Group Inc. couldn’t pay insurance on mortgage debt. While banks that sold protection on European sovereign debt have so far bet the right way, a plan announced yesterday by Greek Prime Minister George Papandreou to hold a referendum on the latest bailout package sent markets reeling and cast doubt on the ability of his country to avert default.

The CDS holdings of U.S. banks are almost three times as much as their $181 billion in direct lending to the five countries at the end of June, according to the most recent data available from BIS. Adding CDS raises the total risk to $767 billion, a 20 percent increase over six months, the data show. BIS doesn’t report which firms sold how much, or to whom. A credit-default swap is a contract that requires one party to pay another for the face value of a bond if the issuer defaults. …

Five Banks

Five banks — JPMorgan, Morgan Stanley, Goldman Sachs, Bank of America Corp. and Citigroup Inc. — write 97 percent of all credit-default swaps in the U.S., according to the Office of the Comptroller of the Currency. The five firms had total net exposure of $45 billion to the debt of Greece, Portugal, Ireland, Spain and Italy, according to disclosures the companies made at the end of the third quarter.

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In theory, if a bank owns $50 billion of Greek bonds and has sold $50 billion of credit protection on that debt to clients while buying $90 billion of CDS from others, its net exposure would be $10 billion. This is how some banks tried to protect themselves from subprime mortgages before the 2008 crisis. Goldman Sachs and other firms had purchased protection from New York-based insurer AIG, allowing them to subtract the CDS on their books from their reported subprime holdings.

‘AIG Moment’

When prices of mortgage securities started falling in 2008, AIG was required to post more collateral to its CDS counterparties. It ran out of cash doing so, and the U.S. government took over the company. If AIG had collapsed, what the banks saw as a hedge of their mortgage portfolios would have disappeared, leading to tens of billions of dollars in losses.

“We could have an AIG moment in Europe,” said Peter Tchir, founder of TF Market Advisors, a New York-based research firm that focuses on European credit markets. “Let’s say Greece defaults, causing runs on other periphery debt that would trigger collateral requirements from the sellers of CDS, and one or more cannot meet the margin calls. There might be AIGs hiding out there.”

Dexia Bailout

The bailout of Dexia SA by Belgium and France last month resembled AIG’s rescue.

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Counterparty CDS

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Triggering Default

European leaders are doing everything they can not to trigger the default clauses in CDS contracts to avoid putting the banking system at risk. They persuaded bondholders to accept a 50 percent loss on their holdings of Greek debt in an agreement reached in Brussels last week with the Institute of International Finance, an industry association. The deal calls for a voluntary exchange of debt.

Another trade group, the International Swaps & Derivatives Association, or ISDA, decides whether a debt restructuring triggers CDS payments. The committee that will rule on the Greek deal is made up of 10 bank representatives and five investment managers and needs 12 votes to reach a decision. ISDA said on Oct. 27 that the agreement would most likely not be considered a default since it’s voluntary.

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Favoring Big Banks

“The ISDA ruling favors the big banks that sold the CDS because those banks sit on the ISDA board,” said Tavakoli, a former head of mortgage-backed-securities marketing at Merrill Lynch & Co. “Smaller banks or other institutions that might have bought the swaps to protect against a default like this don’t have as much influence.”

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‘Risk-Creation’

“Geithner keeps asking Europeans to fix their shop, but he doesn’t do anything to rein in the risk-creation at home through these derivatives,” Whalen said.

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MF Global

MF Global Holdings Ltd., a broker-dealer run by former Goldman Sachs co-Chairman Jon Corzine, reported $1 billion of net exposure to Spain and $3 billion to Italy in its second- quarter financials, explaining in a footnote that the net was partly due to a short position on French bonds. Those hedges weren’t enough to protect MF Global, which filed for bankruptcy yesterday after losses in the portfolio wiped out its capital.

Hedging and other ways of netting help banks report lower exposures than the full risk they might face. Morgan Stanley said last month that its net exposure in the third quarter to the debt of Spain’s government, banks and companies was $499 million. The Federal Financial Institutions Examination Council, an interagency body that collects data for U.S. bank regulators and disallows some of the netting, said the New York-based firm’s exposure in Spain was $25 billion in the second quarter.

The net figure for Italy was $1.8 billion, Morgan Stanley said, compared with $11 billion reported by the federal data- collection body.

Ruth Porat, 53, Morgan Stanley’s chief financial officer, said during a call with investors after the earnings report last month that the data compiled by regulators didn’t take into account short positions, offsetting trades or collateral collected from trading partners.

“It’s the firms that don’t post collateral because they’re seen as more creditworthy that pose the counterparty risk,” said Tchir. “Those could be insurance companies, mid-size European banks. If some of those fail to pay when the CDS is triggered, then the U.S. banks could be left holding the bag.”

China’s leaders cautious on EU rescue plan [Keith B. Richburg, The Washington Post, Nov 1, 2011]

When President Hu Jintao travels this week to the glamorous French resort of Cannes for a summit of the world’s 20 leading industrialized and developed nations, it should be China’s moment to swagger on the global stage.

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China’s leaders will contribute to Europe’s bailout fund, economists and other analysts here said. But they are doing so mainly because they have little choice, since a continued economic crisis in Europe is bad for China, too.

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China’s ability to assist Europe — and to bankroll the U.S. debt through the purchase of Treasury securities — comes from its huge surpluses. The European Union, China’s largest export market, has a trade deficit with China of about $230 billion.

China’s leaders also are moving cautiously because they are acutely aware that Chinese public opinion is firmly against helping bail Europe out of its debt crisis. Comments on the hugely popular
Twitter-like microblogging sites,called weibo, offer a window into the popular sentiment.

For China’s netizens, Europeans enjoy a rich lifestyle with lavish early-retirement packages and several weeks of paid vacation each year, while the majority of Chinese can barely earn enough to make a living. So why should China’s government be using its hefty reserves — the people’s money — to help Europe instead of improving living conditions at home?

“The root of the heavy European debt is excessive welfare,” wrote one weibo user under the name “Turbulence and Change.” “They have a large number of lazy people. Even if China doesn’t offer a hand, Europeans still won’t live worse than Chinese. Furthermore, no European will die of hunger.”

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… the best way China could help Europe and the global economy in the long run is to return some of its huge reserves to Chinese consumers, which would increase their purchasing power — a wrenching long-term change that China’s leaders have already publicly pledged to make.

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China’s leaders have said they are awaiting details of the new European Financial Stability Facility before making any firm commitment. The chief executive of the fund, Klaus Regling, came to China last week and met top finance and central bank officials, but got no guarantees.

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