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| Source: For everything else, there is xkcd |
EURO CRISIS
The end of the beginning? – alphaville / FT
EZ leaders have woken up, but where is the money going to come from? Banks need 100-260bn, of the 440 EFSF billions 100 committed to Ireland and Portugal and only 190bn left to support bond markets – which would last 22 weeks given the ECB’s purchase rate.
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."
Explaining the ECB’s latest program – Felix Salmon / Reuters
ECB lending money to banks at attractive rates, but this is no recapitalization. There is no guarantee that ECB offers to roll these loans later so banks are not lending it. Instead they probably buy short-term Italian and Spanish bonds and pocket the yield differential. And what happens then, November 1 2012 or January 31 2013 all the borrowed money has to be repaid to the ECB, with interest.
The Ticking Euro Bomb article series:
Act 1. How a Good Idea Became a Tragedy – Spiegel
Act 2. How the Euro Zone Ignored Its Own Rules – Spiegel
Act 3 & 4 What Options Are Left for the Common Currency? - Spiegel
Special Report: A fight for the soul of the ECB – Reuters
Is There A Table Limit? – ZH
Peter Tchir: “Stop the madness. Let Greece default. Let Portugal and Ireland negotiate real haircuts on their debt. Let some weak banks (even large weak banks) fail. Then provide support. Support the best of the rest. Provide infusions. Create new institutions where necessary. Stocks will be lower, but a floor can be provided.”
Early Talk of “Nuclear Option,” Unlimited Sovereign Bond Purchases by the ECB – HistorySquared
“Politicians will be left with money printing. No votes are needed. No public support is needed. No debate is needed. Like magic, it goes away. Or rather, the problems created ; the financial repression, the inflation tax, and the transfer of wealth from citizens to banks are hidden from public view.”
BRICS to the Rescue – EconoMonitor
Michael Pettis is on fire: “If Europeans do not want to fund credit-impaired European governments, they should not ask foreigners to do so. Slower growth and foreign debt will not help resolve the problem of insolvency.”
The 4 Trillion-Euro Fantasy – Economix / NYT
Boone & Johnson: Huge financial packages not enough. Policies needed to stop the accumulation of debt and periphery must be made competitive with lower real wages.
How to rescue the euro: Ten commandments – voxeu.org
Hans-Werner Sinn, one of the most respected and listened Germans
Magical Thinking – The Street Light
What do the EU's finance ministers think will be different one month from now?
Peter Tchir: The latest EFSF “collateral” package shows once again, just how wrong Europe has it…Dreams of Eurobonds…Fantasies of EFSF leverage.
Select slides from Morgan Stanley’s Global Exposure Guide
“The evolution of monetary union in Europe was an incompletely theorised agreement. For Germany, it was a means of extending the economic discipline of the Bundesbank to more profligate trading partners. For France, it was a way of putting European monetary policy under greater political, and particularly French, control.”
The crisis that was always coming – alphaville / FT
An excerpt from an essay written in 1992 “Maastricht and all that”. Nothing has changed.
An excerpt from an essay written in 1992 “Maastricht and all that”. Nothing has changed.
Brown against it while Blair for it. Brown’s five points: sufficient convergence, flexibility, investment stimulation, financial services, growth and jobs. Brown won. Must-read.
The euro crisis: Is anyone in charge? – The Economist
Roundup of who supposedly does what, and who (IMF) end up doing it.
Evans-Pritchard: “the Bundestag will not prop up the ruins of monetary union for much longer…There will be no fiscal union, Eurobonds, debt pool, EU treasury, fiscal transfers. There will be a stability union - or no monetary union…If this means the euro will shed some members or blow apart – as it almost certainly does – then the rest of the world must prepare for the day.”
“Fabius Maximus”: At least the eurocrats now publicly recognize the seriousness of the situation, but are ready to only fix the banks.
EFSF / “DEATH STAR”
Levering the EFSF — privately… and painfully – alphaville / FT
Nomura: leverage is simply asking for ECB balance sheet expansion. Private money would not like it, because there are correlated default risks between the guarantor pool and the asset portfolio of the EFSF. Loss tolerance of the sovereign guarantor is limited, and that’s why structured sovereign finance is not a big business.
Everything You Wanted To Know About EFSF (But Should Be Afraid To Ask) – ZH
Nomura’s nice research paper, full scribd paper.
“It's a solution to a problem that no longer exists. Back in July the eurozone crisis was a multi-billion euro problem. Now it's a multi-trillion euro problem…The debate moves on to Cannes in November and the next G20 summit, by when the crisis will have entered another acute phase”
German bailout vote is 'too little, too late' – The Telegraph
RBS: rescue fund too small, leaving ECB to prop up the system, Germany’s IPF: collapse of monetary union now appears unavoidable.
Schaeuble Claims German EFSF Contribution Has Maxed Out at 211 Billion Euros; Why Should Anyone Believe Him? – Mish’s
List of German FinMin’s previous lies suggests he is just playing bad cop to PIIGS – or “If perchance he is telling the truth it is by accident. What "accident" might that be? Simple. Greece defaults before Schaeuble commits more German funds”
$4T bonds of heightened credit risk countries, $0.4T bank losses from investments in sov bonds and other financial institutions, $0.2T bad bonds in ECB. Complete disagreement how to proceed.
Euro Zone’s Leveraged Solution to Leverage – EconoMonitor
Satyajit Das: “The circular nature of the scheme is surreal. Highly leveraged vehicles, in part backed by weakened nations like Spain and Italy, are to undertake the “rescue” of the same countries and their banks.”
The EU dream has turned into a nightmare – The Telegraph
“The peoples of the EU’s richest and poorest countries are thus equally powerless in the face of what amounts to a bureaucratic dictatorship of unelected apparatchiks – who, in a vain bid to save their pet project, are now talking about the need for a further bail-out fund of £1.7 trillion.”
GREECE
Recaps of banks vs recoveries on sovereigns – alphaville / FT
GS: 60% haircut, 54bn losses on Greek banks and 22 bn to other banks. But who will pay?
Eurocrats generally refuse to consider someone leaving EZ because of costs of exiting, treaties prohibiting it and the operational mess. Analysis: costs of exit vs. austerity, treaties meant to be broken, conversion not hard – so Greece might very well leave.
BANKING CRISIS
The euro banks: Holey grail – The Economist
Additional capital needs for Basel 3, marking PIIGS debt to market, recession and perhaps PIIGS default.
Deutsche Bank Finds Risks in BRIC Banking System, European Sovereign Debt – History Squared
Summary and full scribd link to DB’s research piece
As Predicted On Friday, Dexia CDS Rips And Stock Implodes On Partial Nationalization – ZH
Includes lengthy commentary from Nomura:
“There is pressure on the ECB to not bail these banks out by buying their unsecured debt so they are mortgaging off their assets to cover their shortfalls. They bought $460 billion of bank debt during the original crisis in 2009. And guess what these banks did with the money? They bought Greek, Spanish, and Portuguese sovereign debt!”
Portfolio: Dexia Bank's Collapse and the European Financial Crisis – STRATFOR
Dexia is a good lesson. “Dexia, however, is not a normal consumer or business bank. Instead, much of its business comes from supplying credit to various parts of the Belgian state apparatus…
FINANCIAL CRISIS
Credit - Misery loves company – Macronomics
Bill Gross Starts Q4 With A Cold Shower: "Forget Double Digit Returns - Bonds, Stocks And Real Estate Are Overvalued" – ZH
Goldman's Jim O'Neill: "Let's Worry About Everything" – ZH
Among other things points out that foreigners are buying JP bonds (debt-to-GDP 220%), given JPY level, low yield, so it is just too much cash and buying anything that does not have euro printed on it.
Too many bullets for stocks to dodge – Humble Student of The Markets
Markets expect either avoiding Greek default or TARP-like bank rescue. Both difficult, and recession coming.
BofA Merrill Lynch Global Research slides on adjusted yield curves (Fed’s zero interest rate policy makes it impossible to have a traditional inverted curve). The adjusted curve is flat and recessionary.
Buy back Tuesday? – Macro Man
EMERGING MARKETS
Chanos calls China syndrome – The Globe and Mail
Long article on Jim Chanos, the famous short-seller who made loads of money shorting Enron.
Underground lending, property downturn, bad debt/bank recapitalization, hot money outflows. Scribd-link to full document.
Rebalancing Chinese Economy: That Almost Impossible Math – Also Sprach Analyst
The drive to transform Chinese economy into consumption-driven model has so far failed. The response to the crisis has, given the drop in exports, to increase investments even further.
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.
OTHER
Commodities become more… benign – alphaville / FT
BarCap’s research notes on commodity price vulnerability to a recession and comparison of return deviations from normality
The Shiller P/E Ratio – Turnkey Analyst
To Samuel: Stocks seem expensive, stocks relative to bonds seem cheap, thus bonds are expensive.
You Don’t Have Alpha – Quantivity
Abnormal returns reward regime-sensitive risk premia traded via established systematic trading methodologies.
Evolution and the Overconfidence Phenomenon – Turnkey Analyst
High Noon at the Swiss National Bank – Lighthouse IM
SNB will report on Thursday noon FX reserves for Sep.
What makes a reserve currency? – alphaville / FT
HSBC’s views: most of the time it comes from countries with largest public debt (but not too much): Large number of appropriate securities denominated in the currency is needed.
DIVERSION
Twitter tweets our emotional states – WP
Proof that Mondays stink. Don’t miss the good graphic.
The End of the Future – National Review
Peter Thiel: “Modern Western civilization stands on the twin plinths of science and technology.” Has the speed of sci/tech development decelerated, and is it why we are over-leveraged and thus nowhere?