12-08-07 Herald Tribune proclaims the capitulation of Europe, but forgot to report the capitulation of the USA...

The report below was the above-the-fold front page headline of the Herald Tribune a couple of days ago.

Regarding the capitulation of the United States, all we got was that lame NYT Editorial on Christmas Day, a couple of years back...

JZ

LINKS:10-12-25 Banks and WikiLeaks - NYTimes
http://www.scribd.com/doc/46072423/
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Europeans, meet your new boss

More powerful than ever, bond traders admit to fear and confusion

‘‘Bond ‘vigilantes’? Wimps is a better word.’’

James Konrad, a bookish 27-year-old with a polite manner, used to make a living at a sports betting company, weighing the odds of muddy terrain affecting the surefootedness of racehorses. These days, he takes bets on the muddy terrain that is European politics.

ANASTASIA TAYLOR-LIND FOR THE INTERNATIONAL HERALD TRIBUNE
Tim Skeet, head of fixed income securities, at the Royal Bank of Scotland headquarters in London. ‘‘This has become less about number crunching and more about the oracle of Delphi.’’

Mr. Konrad trades up to £3 billion, or $4.7 billion, worth of euro zone bonds a day for Royal Bank of Scotland. The bets are just as uncertain, but the sums vastly larger, amounts that seem to stagger even him. ‘‘How do you make someone understand that you’ve traded a billion worth in bonds?’’ Mr. Konrad said. ‘‘A billion. It’s easy to get lost in the zeros.’’

The bond market has emerged as a mighty protagonist in Europe’s economic crisis, marking a seminal shift in power from politicians to a relatively obscure cohort of bankers. The collective day-to-day judgments of investors and traders like Mr. Konrad can now topple governments and hold the key to the survival of the euro.

If that market seems an unfathomable Goliath to outsiders, in interviews bond traders themselves confessed to being fearful and confused. They now juggle unprecedented levels of risk and wealth ­ some ¤6.7 trillion, or $8.3 trillion, in euro zone government debt, according to the European Central Bank.

Some worried openly that too many traders lacked the skills to decipher conflicting signals from Europe’s leaders in an industry ever more dependent on perception and political guesswork. The short-term fluctuations of bond rates, they conceded, were not always an accurate reflection of value and risk. Yet they were being taken as the last word by politicians on any range of government policies ­ and often misinterpreted, they said.

The outcome of their decisions, the traders are the first to admit, is not necessarily consistent or rational ­ or indeed clear in the message that it sends. Yet rarely has so much power rested in their hands.

‘‘We used to be able to measure everything to the nth degree,’’ said Tim Skeet, managing director of fixed income at the Royal Bank of Scotland, or R.B.S. ‘‘These days nothing is measurable. This has become less about number crunching and more about the oracle of Delphi.’’

Economists tend to treat the bond market as a rational player imposing budget discipline on politicians. Politicians portray it as having the conscience of a mob, blaming ‘‘bond vigilantes’’ for undermining Europe’s recovery and its cherished welfare state. The reality is more nuanced.

‘‘Bond ‘vigilantes’? Wimps is a better word,’’ said Andrew Balls, head of European portfolio investment at Pimco, which runs the world’s biggest bond fund. ‘‘I’d love to invest in all these bonds, but I’m too scared.’’

That fear among traders and their jittery investors helps explain why rates have surged for troubled countries like Italy and Spain, and why interest rates have hovered near negative territory for more trusted German bonds: so terrified are investors that they are effectively paying Berlin for the privilege of lending it money.

But in risk, there is also profit ­ lots of it. The amounts now at the command of the bond market have made it vulnerable to the kinds of speculation, volatility and returns more associated with the stock market. As government debt across the European Union has reached 88 percent of gross domestic product, according to Eurostat, some European sovereign debt funds have made investors annual returns of 9 percent.

With so much leverage at its disposal, the bond market’s judgments can have the power of prophecy ­ that is, they can be self-fulfilling, influencing events even as traders assess them from the safe distance of a trading floor.

If traders like Mr. Konrad judge Spanish bonds to be risky because of the chance that Spain’s government may default, they help make it more likely that Spain will indeed default, by raising its borrowing costs. It can have the dynamic of a vicious circle.

‘‘Whatever the Spanish government does ­ and it has done a lot ­ it doesn’t actually help much, because the market is pretty much convinced a full-fledged bailout is required,’’ said Nicholas Spiro, managing director of Spiro Sovereign Strategy, a consulting firm in London that specializes in sovereign credit risk.

It has not helped, of course, that for months the Spanish government denied or misrepresented the depths of its banking problems. Nor that before Spain ran into trouble, Greece had already defaulted on its debts, leaving many investors out in the cold.

If politicians expected the bond market to speak with one voice, traders commonly complained, it would help if politicians did, too. Indeed, in many ways Europe’s crisis has become a race between the frenetic demands of traders and the waltz of European leaders as they grapple with building institutions to secure their currency union. It is a nerve-racking contest.

Olivier de Larouzière remembers calling a crisis meeting in the Left Bank offices of Natixis Asset Management in Paris during one watershed moment on June 28.

That Friday, Mr. de Larouzière, who as head of fixed-income euro securities at Natixis manages ¤18 billion worth of debt, watched with one eye as the yield on Spanish 10-year bonds climbed beyond 7 percent, and with the other as Chancellor Angela Merkel of Germany and her European counterparts scrambled to persuade markets that a bailout for Spain would not be needed.

The yield, or interest rate, on a bond rises as its price falls. Both reflect the risk of the investment. The rise in the rate meant that bonds Mr. de Larouzière had previously purchased were losing value.

When the news ticker on Mr. de Larouzière’s screen announced that leaders had agreed in principle to lay the groundwork for the banking union that markets had been clamoring for, the yields eased back. But his relief did not last long.

‘‘After the weekend, questions began circulating on the floor,’’ he recalled. ‘‘We suddenly realized that this would only really take effect in 2013.’’

Once stung, Mr. de Larouzière was left too wary to buy Spanish debt. He was not the only one. By Monday afternoon, with few takers, yields were rising again. That made the headlines Tuesday, in turn fueling another rise. A week after the summit meeting, rates were higher than on the eve of the talks.

That kind of negative perception can be infectious, particularly when mixed with real data from governments that have grown increasingly alarming. These days Mr. de Larouzière says, ‘‘Italian bond yields should not be where they are,’’ meaning the country’s progress in making policy overhauls was better than it was being given credit for. But he is still selling his Italian debt, fearing that a tsunami of collective pessimism will make it harder for Rome to raise the ¤100 billion it needs this year.

‘‘This is less about economic fundamentals and more about fundamental human emotions ­ it’s about fear,’’ he said. ‘‘Default? Breakup of the euro zone? That sort of thing was just not on the radar’’ just a few years ago.

Those concerns are new for most traders who came of age when much of Europe carried a triple-A credit rating. The picture has changed so quickly that Mr. Konrad, though not yet 30, has straddled the two eras.

On the R.B.S. trading floor, Mr. Konrad sits behind a wall of real-time numbers: yields, futures and a spreadsheet with color-coded bond issues flicker across seven computer screens. There is a calculator on his desk.

But these days his history degree comes in handy. To come up with the 600-plus price quotes a day he makes for his bonds ­ about one a minute ­ Mr. Konrad’s assessment of a country’s election results is in many ways as important as its latest G.D.P. report.

Illustrating the point, Mr. Skeet, his colleague at R.B.S., stands in front of a flip chart with a large red marker, drawing an ever denser web of feedback loops underpinning market sentiment, which he described as ‘‘a complex, volatile mixture of informed insight combined with gut feel and herd instinct.’’

As someone who has studied German and French literature, Mr. Skeet worries that modern markets are not prepared for this new world. ‘‘Some people are too reliant on models without asking questions,’’ he said. ‘‘We ought to go from a highly technical, data-driven, data-sensitive approach to a more intuitive, qualitative approach.’’

Mr. Konrad is the only one with a humanities degree on his desk. The other four have either mathematics or science degrees, like most traders on the floor.


While Mr. Konrad spends part of his time trying to gauge shifting political currents, his more mathematically minded colleagues model his thoughts for trading purposes. The results are not always consistent, he conceded. ‘‘There is some irrationality to the market,’’ he said.
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