Summary: Bank recapitalization is clearly in the works, but will it be done through ECB (outside democratic power, so politicians love it, but ECB hates it), EFSF (not enough) or at national levels (politicians hate that). Markets are “happy” at Dexia’s failure, as it might be enough to push eurocrats to do what has to be done, irrespective of coming elections somewhere. I previously linked to a DIY stress test calculator. Steve Jobs updated, follow me on Twitter and Facebook, or email me. Buy Aaron Brown's book – you have until G20 meeting to comply.
Views: EURUSD at a channel top, while US equity at range top. Time to sell today. Monday might be too late. Original views here and here.
For the Friday, some laughs from this video. Not safe for work! Strong language, fiscal analysis.
TV: Bloomberg, CNBC, BBC World News
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
Eurozone crisis: live blog – FT
Debt crisis Live Blog – The Source / WSJ
EURO CRISIS
If you don’t want to take on their sovereign debt, make ‘em grow! – Kantoos Economics
“If you are a central bank, running a suboptimal currency union with an inappropriate target on the verge of collapse in the midst of a major economic crisis, what is the last thing you would want to do?”
Mechanics of a euro breakdown – alphaville / FT
HSBC answers: can a country leave Euro, what would happen, what if Germany leaves? Conclusion: Euro was always a political project, has never been an optimal currency area and now up to the leaders to make it more of an optimal area, involving fiscal integration.
"Some Europe-wide entity probably will need to funnel money to Greece and other troubled nations and jointly guarantee the debts of the continent’s governments in a we’re-all-in-this-together show of solidarity. The great debate in Europe right now is over what entity will be stuck holding the bag."
Current key question: should EFSF be used to recapitalize banks – French say yes, Dutch and Germans say no. Politically far left and far right are gaining ground, as they voted no on EFSF. Some decision-makers think Europe should stop bailouts completely and leave it to IMF, as it is less prone to politicking.
Euroland: Market Discipline or Market Instability? – Morgan Stanley
“Lenders will often be regulated investors in the core, i.e., current account surplus countries such as Germany or the Netherlands. My sense is that politically a ‘banking union' with federal oversight and a euro area-wide backstop might be easier to engineer than a ‘fiscal union' transferring parliamentary sovereignty to the federal level, and I think policy-makers should focus more here.”
The EFSF needs to be passed by all countries. Freedom and Solidarity Party calls the plan an unfair bailout of profligate Greeks and fat-cat German and French bankers that poor Slovaks can’t afford.
FINANCIALS
EU Leaders Under Investor Pressure to Devise Bank Rescue Plan Before G-20 – BB
Long and good review of the situation.
Blood from an EBA stress test stone – alphaville / FT
The previous stress tests were inconsistent in their handling of Deferred Tax Assets, which count as Tier 1 capital. Long discussion and links to further reading.
“How this will be resolved is unclear. But Dexia crystallizes the need for smarter capital rules, credible stress tests and an aggressive plan to recapitalize Europe’s banks quickly should financial calamity strike.”
GS Comes To MS's "Defense" As It Is Now Actively Selling MS Calls, Buying Short Term CDS – ZH
scribd link to GS’s “trade idea” to buy MS calls and sell CDS’s
OTHER
The 1.1tr is 2.5% of GDP, withdrawn from banks by households and companies in July. Money went to wealth management products that finance corporations. But maybe the money is going through the shadow banking system and abroad and thus a rapidly increasing part of the financial system is beyond government’s control.
The Retirement Bubble – The Aleph Blog
“I don’t think retirement is realistic, and I am not planning on retiring, should I live so long.”
Volatility, Correlation, and Truth-Must read Volatility report – ZH
Artemis Capital Management, link to full report.
Volatility is change, and the world is changing – alphaville / FT
Comments the Artemis vol report
“The BOE grossly overestimated the U.K.’s trend growth potential, allowing the economy to overheat significantly and for a debt and property bubble to build up in the years leading to the financial crisis.”
OWS
Occupied Wall Street, Seen From Abroad – NYT
OWS costs $2 million in police overtime, and counting, NYPD says – nydailynews.com
Wall Street Protesters Gorge on ‘Occupie’ Pizza – BB
Why Did Liberals Embrace ‘OWS’? (Obsessed With the Tea Party) – The New Republic
Why OWS Should Scare Republicans: Jonathan Alter – BusinessWeek
Anti-Wall Street Protests Ignore Legitimate Gripe: Caroline Baum – View / BB
Why #OWS Doesn’t Support Obama: His “Nothing to See Here” Stance on Bank Looting – naked capitalism