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| No more naked shorts! |
Summary: European bans for naked short CDS in the pipelines done. Regarding the big huge final solution (“Death Star”/ Super EFSF), the eurocrats are disagreeing in public, EFSF leverage effectiveness and legality are questioned by analysts. Even the Greek haircut level is still in the open. By the way, even a 50% cut in the Greek debt is not enough, as a lot of the debt is from IMF (super-senior). Someone recently calculated that to get an effective 50% debt cut, those debts that can be cut, should be cut by 100%. Merry Christmas! EDIT: Apple missed.
News (Tue evening) – BTH
Danske Daily – Danske Bank (pdf) (online on Wed morning)
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
Morgan Stanley sees New Fiscal Rules Imposed on European Countries – HistorySquared
Link to full scribd MS: Crisis Credibility and institutional change 12th Oct
The size and composition of government debt in the euro area – ECB (pdf)
Policy implication #6: beyond the size of government debt its composition is also a
key factor behind public finance vulnerabilities. Duh!
Eventually, French Spreads Fail (E.F.S.F.) — redux – alphaville / FT
Though the French bond yield is still low, the spread to Germany is increasing uncomfortably fast.
“At the end of the day, someone will get bailed out. By bailing out Greece, Germany and France are indirectly bailing out their own banks, but with an added bonus: a preserved union.”
“Spain’s property bust is only getting worse. The wonder is that the country’s economy and banks are still this resilient.”
Waiting for the Barbarian Invasion in European Banking – Asia Times
“What has to happen is that the present owners of the banks are wiped out, the senior creditors turn into common stockholders, and new money comes in to recapitalize the banks. That would shred the cozy relationships of European crony capitalism, but probably be very good for the European economies. So: don’t own any European financials at all for the time being–not stocks, not bonds, not nuffin’.”
Of interest, as Austria is one of the “core names” in EFSF and a possible Erste bailout is coming at an inconvenient time
EFSF / “DEATH STAR”
There Is No Bailout Spoon: The Math Behind The Re-Revised EFSF Reveals A "Pea Shooter" Not A "Bazooka" – ZH
Partial research note from Citigroup’s chief economist Buiter: “that would likely not fund the Spanish and Italian sovereigns until the end of 2012.”
Peter Tchir: “it is quite possible they didn't realize what they had agreed to. If some new EFSF is created, all of the future bargaining power in Europe will be shifted from France and Germany to PIIS… Forcing banks to take a big realized hit on Greece and not being able to execute CDS, will be another excuse for investors to trade banks further below "book value" as "book value" will be an even bigger joke than it already is, and will cause more concerns about capital ratios at banks.”
A leveraged EFSF is pure poison – The Telegraph
Professor Belke / Berlin's DIW Institute: “any leveraging of the EFSF would be "poisonous" for France’s AAA rating and would set off an uncontrollable chain of events. It counteracts all efforts made so far to stabilize the eurozone debt crisis, which are premised on the AAA rating of a sufficiently large number of strong economies. In extremis, it would probably cause the break-up of the eurozone”
EU summit/G20 to kick off the final phase of Maximum Intervention – tradingfloor.com
“From here on out, we will see more extend-and-pretend measures, but the ratio of those measures to the inexorable necessity to destroy the debt and extend accountability for past bad decision making will shift more and more in favour of the latter. The cost for this will be a great deal of turmoil – perhaps 12-24 months of real pain, as entitlement expectations are gutted and uncertainty.”
EFSF leverage ahoy – alphaville / FT
“But there remain all the attendant questions of collateral — or lack thereof, and of how investors might view the correlation between EFSF’s exposures. Presumably, we can look forward to hearing more about those issues soon…”
Peter Tchir: “The Grand Plan ensures the spread of contagion… Go back to letting Greece default. Let CDS trigger. Deal with the fallout. It may not be as bad as people fear, in fact, in may provide a stable base that can let Europe really address the problems.”
FINANCIALS
Goldman Sachs reported a bad quarter: Dealbook WSJ Money Game Term Sheet NetNet The Atlantic (from Abnormal Returns)Merril Lynch revisions to UK banks’ earnings forecasts.
Volcker Rule Risk Concentrated in 25 Banks – The Big Picture
Highlights from a Bloomberg report: 13 bank holding companies will have to comply with 17 comprehensive reporting requirements, while 12 banks have to quantify only eight measurements. Together, these 25 represent 99.6% of all trading assets.
BCBS issuing a press release on the "Update on Basel III implementation"
Abstract of "Progress report on Basel III implementation"
CHINA
China still deciding where and how to land – alphaville / FT
China's Inflation Rates: Signs of Market Imperfections – The Street Light
OTHER
Monetary policy as threat strategy. Chuck Norris and central banks – Worthwhile Canadian Initiative
“Central banks run monetary policy not so much by doing things, but by threatening to do things. If their threats are credible, we never observe them carrying out those threats, and we often observe them doing the exact opposite”
Markets are rational even if they're irrational – The Physics of Finance
Very good review of behavioral vs. rational schools
What moves the markets? Part II – The Physics of Finance
“News sometimes but not always causes market movements, and significant market movements are sometimes but not always caused by news. The EMH is wrong, unless you want to make further excuses that there could have been news that caused the movement, and we just don't recognize it or haven't yet figured out what it is. But that seems like simply positing the existence of further epicycles.” – Part I here.
DIVERSION
The illusion of attention – The Guardian
“Focused attention can make you oblivious to sights and sounds that would otherwise be glaringly obvious”
The Significance of the Travelogue – Old World Wandering
Feynman on bad science – old but classic – Columbia