Greece and the IMF appear to be pushing for as much as a 75% haircut

Greece and the IMF appear to be pushing for as much as a 75% loss on NPV basis, while the banks, many of whom have written down 50% of their Greek holdings, appear willing to accept a 60-65% hit on the NPV basis. Participating in the haircut damages the ECB. It is possible that the loss, even from the discounted levels it purchased the Greek bonds, would wipe out the ECB’s capital. Alternatively, as we have point out previously, if the ECB does not take a haircut, it undermines the effectiveness of its sovereign bond purchases. The more the ECB buys the greater the haircut the private sector ultimately faces

Nervous Consolidation, Waiting for Other Shoe to Drop

The US dollar is trading within the ranges that were seen prior to the weekend as the market awaits fresh developments. The market remains apprehensive as additional rating fallout is expected, ahead of a resumption of Greek PSI talks and this week’s European sovereign supply (estimated 17 bln euros of bonds)

The S&P cuts were expected, a disorderly default by Greece won’t be

With the long-awaited euro zone downgrades by S&P now out of the way, we thought it would be useful to assess just how close current ratings are now to our own sovereign ratings model

The Swiss Franc is the most overvalued currency in the world, and the Indian Rupee most undervalued

That’s what the Economist’s Big Mac Index tell us. According to this index, the Swiss Franc and the Norwegian Krone are both more than 60 percent overvalued compared to the US dollar. Much further down are Sweden with over 40% overvaluation and Brazil which shows more than 30%.

The flip side comes with the Indian Rupee, which had been hitting record lows last year. Here, we’re talking about a 60% undervaluation

All S&P sovereign credit ratings in order from Australia to Greece for January 2012

In the wake of today’s extraordinary credit ratings action for the euro zone by Standard and Poor’s, below are the rating agency’s sovereign credit ratings

The Long Term Refinancing Operation was the hidden bazooka

After the better than expected Spanish bond auction, eurozone sovereign spreads came in significantly yesterday. Even before today’s auction, the widely watched Italian 10-year bond yield had fallen to 6.63 percent

Rumor Bought, Fact Sold, and Other FX Developments

The euro extended its recovery in early Europe but reversed course after the lukewarm Italian bond auction. Italy raised the funds it sought and yields did fall at the shorter term auction, but increase at the longer term and the bid-covers were on the low side. In some ways, this is the best Italy might be able to hope for given that the market has been warned by Fitch to expect a multiple step downgrade before the end of the month

Timing and Magnitude of Euro Bounce

The argument presented here is to underscore the over-stretched condition of the euro and to warn medium term investors of the risk of the euro bounce. The euro has dropped more than 11% since late October against the dollar and we suspect it has fallen to within almost 1% of what we anticipate to be a near-term bottom (~$1.25). The correction we anticipate should give investors a better selling opportunity and we target the euro to fall toward $1.20 by midyear

Where are the safe havens?

My latest post at Credit Writedowns Pro on protecting wealth in a world of recurring crisis is now up. I outlined eight principal investing risks that I see for for 2012 and strategies to avoid those risks. At the same time, the thought you should have in the back of your head is that these are just the known unknowns. But that there are unknown unknowns which create so-called Knightean Uncertainty and make this a dangerous investing climate

So what’s the dumb money doing right now?

All I want to know is: who’s buying this stuff in size? I might like the other side of that one

Euro Slides Ahead of BOE and ECB Meetings

The euro was recovering in early Europe, moving back toward the upper end of its recent narrow range and it reversed course sharply, triggering stops along the way as it dropped nearly a cent to $1.2695. The technical failure yesterday at $1.2820 may also have been more telling. News from the German stats office that its economy may have contracted 0.25% quarter-over-quarter in Q4 is a bit disappointing as some hoped for stagnation

Chart of the Day: The Shanghai Bounce

The Shanghai has put in its best two day performance since September ’09, rising 5.8 percent. After its post crash peak in August 2009, Chinese stocks have fallen almost 40 percent before hitting their lows last Friday