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Summary: EFSF ratified, next open issue is the bank recapitalization. Banks don’t want to as their stock prices are low and recap would dilute current owners – they’d rather shrink their balance sheets to meet the criteria from EBA, and that would mean credit crunch. This is going to be the main news driver over the coming days, ahead of the G20.
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Current plan: EFSF, bank recap, Greek default and then full backstop from ECB and sovereigns. But the CDS prices of European financials and sovereigns are still moving up – or are the banks that have sold them short just covering to avoid the disclosure embarrassment of Erste? Either that, or the markets are not trusting the eurocrats’ plan. If so, the recent risk-on fun in equity space could end soon.
I’ve previously posted a credit guest post. The #OWS collection is updated, two other posts from yesterday were Euro ‘Death Star’, and Brother, can you spare a yield?, where I had a few slides of my own. Feed me with a comment, follow me on Twitter, Facebook or email me.
Quote of the Day: “I’ve only been into global macro for the last 3 years or so, and you can sum everything up in: find the key indicators, study deep history, it’s never different this time, the shift in sentiment and price happens incredibly rapidly, and structure your trades using long term option like structures with a fixed annual cost and asymmetric payoff because it’ll take longer than you think.” - HistorySquared
News (Thu evening) – BTH
FX option vols – Saxo
TV: Bloomberg, CNBC, BBC World News
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT
EURO CRISIS
You shall not default, the ECB commands it – alphaville / FT
“Frankly though, we’re amazed if the ECB thinks it has the suasion power to tell sovereign debtors what to do. And by linking the euro explicitly to a no-default rule, we would argue that they only make it more likely that sovereigns will leave the euro altogether in order to default.”
“Finland enjoys a current account surplus of €3.3bn and its overseas assets exceed liabilities by €28bn. Its 2012 public sector deficit is forecast to be just 0.9pc of GDP with total debt just 50pc of GDP which itself is forecast to grow 1.8pc next year. It can stand alone.”
Dear Josh: The Euro Voting Process Explained – The Reformed Broker
Parody: “Communiques are sent by pigeon only (although owl-bound messages have gained some level of acceptance recently).”
EFSF & RECAP
Credit Suisse Buries European Banks, Sees Deutsche Bank And 65 Other Bank Failing Latest Stress Test, €400 Billion Capital Shortfall – ZH
“In our estimation of what could be the “new EBA stress test” there would be 66 failures, with RBS, Deutsche Bank, and BNP needing the most capital – at €19bn, €14bn and €14bn respectively. Among the banks with the highest capital shortfalls, SocGen and Barclays would need roughly €13bn with Unicredit and Commerzbank respectively at €12bn and €11bn.”
EU banks may raise £200bn – BBC
If the banks are given too much time, they might start shrinking their assets (stop loaning) to improve their capital ratios. MS estimates a balance sheet shrinkage of 2 trillion euros would make the banks meet the new requirements – better to force them to recapitalize.
Taking the stress test to nine (ex-bad stuff) – alphaville / FT
“To our mind, it’s odd to mark to market sovereign debt because of the darkening economic outlook and not include a macro stress-test. (Unless that is you are blaming speculators for the yields of peripheral debt and not the dreadful fundamentals, austerity packages etc)”
Capital demands could stifle economy, warns Deutsche – Reuters
DB would need €9bn to meet 9% capital bar, Ackermann: "It is not the capital position which is the problem, but the fact that sovereign debt as an asset class has lost its risk-free status”
Van Rompuy And Barroso Announce €440 Billion EFSF Fully Functional; Now, How Do They Expand It To €3 Trillion? – ZH
Capital Shortfall Estimates of European Banks Range from 8 to 413 Billion Euros; EU to Offer Additional Extend-and-Pretend Time – Mish’s
GREECE
“Voluntary” Greek bond exposure quotes du jour – alphaville / FT
“Maybe our naivete was to accept too easily the requests by governments”, complains a Greek bond-owning bank.
Greek Politics Oct 2011 – Nomura (pdf)
ITALY
Mario Draghi fears Italian debt spiral – The Telegraph
“Italy risks a debt spiral without "drastic" steps to cut spending and restore confidence in public finances, the country's central bank governor has warned.”
Berlusconi Will Defend Government in Parliament as Confidence Vote Looms – BB
Italian bond yields: this crisis isn’t over – Pragmatic Capitalism
“Italy has become the true endgame…We either move towards full fiscal union or we move towards a break-up of the EMU.”
ECB & BIS
Monthly Bulletin Oct 2011 – ECB (pdf)
The supply of money – bank behaviour and the implications for monetary analysis – ECB (pdf)
Statistics Pocket Book Oct 2011 – ECB (pdf)
Portfolio and risk management for central banks and sovereign wealth funds – BIS
Collection of 12 papers from a Nov 2010 event.
High frequency trading in foreign exchange markets – BIS (pdf)
Reserve Bank of Australia’s Debelle address to ACI HFT Conference in Sydney
Monetary policy lessons learned from the crisis and the post-crisis landscape – BIS
The future of inflation targeting, central banks' operational frameworks and global central bank cooperation
The financial crisis in the light of the euro area accounts: a flow-of-funds perspective – ECB (pdf)
OTHER
Most Analysts Lack Historical Context and Suffer from Various Behavioral Bias’ – HistorySquared
“Chinese land prices are up 800% since 2002. They pull a 10% drop and soft landing out of their ass as best I can tell.” – Excellent short read on what global macro trading is about.
It depends on who you listen to – Macro Man
List of things that are good for the markets.
Reuters Outage Challenges FX Market’s Resilience – The Source / WSJ
On Wednesday Reuters FX dealing systems went down for 90 minutes. Last March the system was down for four hours.
Academic Alpha vs. Practical Alpha – Turnkey Analyst
“Trust, but verify–soak in the numbers from the academic papers, but always redo the results to ensure they ‘smell’ right.” – nice case study of turning a journal paper into system that did not work.
The growing audience for dividends – Abnormal Returns