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Monday, November 21

21st Nov - D&D: Devaluations & Defaults?

D&D: Devaluations & Defaults? (source)
Today some research from Nomura, GS and MS plus lots of editorials and views. The discussion is definitely moving towards the “New Europe”, and consensus that the current system and its fixes are more or less finished. A lot of material and a long post, but so it is after the weekend’s publishing spree. 

Let's roll the d20 and see what comes up next: a wandering van Rompuy, a mystical Sovereign Wealth Fund from the far-away lands or perhaps a magical +1 EFSF? The excitement just never stops in the D&D universe!

Please notice Saturday’s particularly nice Weekender - When a massacre is a comic relief and ECB to QE or not to QE?, an euro crisis-special on the possibility of quantitative easing by the European Central Bank. Also, the standard Best of the week just got online. Leave a comment, follow me on Twitter, Facebook or email me.

Quote of the Day: And what is the new president of the ECB doing? Lecturing people on the need for discipline. – Paul Krugman / NYT

Quote of the Day 2: But no, the ECB will defend its credibility. And it will end up as the highly credible defender of the value of a currency that no longer exists. – Paul Krugman / NYT


News (Mon morning) – BTH
Danske Daily (21-Nov) – Danske Bank (pdf)
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT

EURO CRISIS
The Complete And Annotated Guide To The European Bank Run (Or The Final Phase Of Goldman's World Domination Plan)ZH
Excellent report with tons of charts from the GS – just be careful as the post mixes
NYT article and Tyler’s comments in the content.

European ERM 1992 Replay: Same Problems, Same Issues, Same Countries, Only the Politicians Differ; Irony of the Maastricht TreatyMish’s
The irony of the Maastricht Treaty is that it did temporarily bring about the currency stability everyone wanted. However,  that currency stability came at the expense of something far worse - inherent interest rate instability (coupled with heightened fiscal instability). It just took some time to play out.

Lessons from the euro crisis, part IIMarginal Revolution
Fiscal cuts hurt GDP and can be disastrous but for most Western countries those cuts will have to come. We do not know when is a good time for the cuts or if they are even possible, and most importantly, we do not know when the bond vigilantes show up.

Words may be getting heated in the eurozone, but don't mention the warThe Guardian
The tensions in Europe arise from the fundamental competitiveness problem created by a single currency. But the crisis is exacerbated by a dogged pursuit of austerity.

Time running out for a happy ending?Daiwa
EFSF route seems dead, ECB route dead as it would solve the immediate problem but probably make the deeper issues underlying the crisis worse, fiscal union & euro bonds is the only realistic possibility left.

The euro is a macro-economic weapon of mass destruction - it simply must be defused.The Telegraph
'There’s no such thing as an orderly break-up”, argued my friend, a perceptive and highly-educated man, as we discussed the eurozone over dinner. His argument was that a down-sizing of the single currency should be resisted at all costs.

Jim O'Neill Describes Europe's Surreal Times, Asks If Germany And The Euro Area Even Want The Monetary Union Any LongerZH
Also rather interesting points on Japan: During the last decade Japan’s GDP growth per capita was larger than in Europe or US – but yen is very strong. Either the yen will weaken as the fear of USD losing value will wane (as the recovery picks up) or even more of Japanese production moves abroad and their GDP will plummet.

ECB
ECB system support heading for new recordMoney Moves Markets
Short article and a chart of monetary policy lending to banks, “other” lending and SMP.

No help from the ECB?Humble Student of the Markets
If I were to take that speech at face value, then the most generous interpretation is that Draghi is saying that we will not print unless the ECB mandate is changed. In that case, the markets won't like this at all.

Print or PerishJohn Mauldin / The Big Picture
Germany is in a game where the costs of leaving the euro, or a real euro break-up, are extremely high. But the costs of bailing out the profligate members of the Eurozone are also extremely high. Either way the cost is formidable. It is not a choice of whether they will bear a huge cost burden, but just what form that burden takes. The Germans would like the rest of Europe to get their budgets and deficits under control BEFORE they have to accept those costs. Not getting those agreements means that there will be no end to the amount of money Germany will have to pay.

Why the Euro Doomsayers Are WrongPIIE
By being selective and refusing to give unconditional help, ECB has pushed countries to reform and austerity with a “nuclear” threat. The author sees the current crisis as “round one”, with more to come and a happy end down the road. Worth reading just to get an upbeat perspective.

Central Bankers: Stop Dithering. Do Something.NYT

PIIGS
Nomura "Goes There" With "The Legal Aspects Of A Eurozone Breakup"ZH
Full research note on scribd: Eurozone break-up risk has risen notably over the past few months, as European policy makers have failed to put in place a credible backstop for the larger Eurozone bond markets. Given this increased risk, investors should pay close attention to the ‘redenomination risk’ of various assets.

On Technical Barriers to Leaving the Euro and Learning from Others’ ExperienceEconoMonitor
1) Use a temporary currency, 2) Do not fear parallel currencies, 3) Default early, but not often and Not all exit problems are mere technicalities

Buyers Of Last Resort: As Dumping Accelerates, Here Is Who Is Stuck Buying Another €741 Billion In Italian BondsZH
Barclays analysis and data from Morgan Stanley: Italian banks and and the ECB

Japan's Kokusai Liquidates Remainder Of Euro Sovereign Exposure, Just As European Primary Issuance Supply SurgesZH
Includes a nice table from Morgan Stanley listing EZ bond- and bill auctions for the rest of the year.

On Capital Flight and Forced RepatriationBruce Krasting
If this happens (the folks in Brussels are pushing hard) a very dangerous precedent will have been set. Flight capital will have been made illegal. Where might this go? It will go to Spain very quickly. After that it will go to Italy where there are truly huge fortunes outside the country. I see a development like that as being a lights out event. It will come to the USA. EU residents have tons of assets here.

Greek "Unity Government" Effectively Collapsed Already; Showdown Underway; New Democracy Party Wants Rollbacks on Austerity MeasuresMish’s
These coalition "unity" governments in both Greece and Italy are struggling already, and over things that would seem to be a given like signing a document that appears to be a formality to what has been agreed upon.

NEW EUROPE
The Failed Political Economy of the Euro CrisisPIIE
1) realize crisis has erupted and that it implies a radical departure from ordinary politics, 2) resolution requires new leadership, 3) new thinking and new, clear principles, 4) focus on key concerns and not get distracted 5) economics over law and constitutions, 6) program for resolution and reform 7) no consensus is possible, 8) transparency, 9) international support, 10) program  sufficiently financed, 11) program implemented early and decisively, 12) expenditure cuts over tax hikes.

To Put Europe Back on Track Try Listening to VotersView / BB
Clive Crook: The EU may not come through its current troubles in one piece. But if it does, it will need to engage, this time seriously, with fundamental questions that were raised and too quickly dismissed in the years before the euro was created.

What price the new democracy? Goldman Sachs conquers EuropeThe Independent
While ordinary people fret about austerity and jobs, the eurozone's corridors of power have been undergoing a remarkable transformation

European Union prepares for the 'great leap forward'The Guardian
As EU politicians desperately try to save euro, plans emerge to deepen the union, widening Brussels regulatory powers

Europe Needs Institutional CreativityPIIE
At the core of
Europe’s predicament is an obvious mismatch: The key decision makers at the European level are leaders whose accountability derives exclusively from national electorates. Most have no mandate to work for the common European good.

2021: The New EuropeWSJ
Niall Ferguson peers into Europe's future and sees Greek gardeners, German sunbathers—and a new fiscal union. Welcome to the other United States.

EMERGING
Jim O'Neill: Welcome to a future built in BRICsThe Telegraph
After 10 years of emerging market growth it is time for a new world order – with the BRICs taking their rightful place at the top table , says economist Jim O'Neill in an extract from 'The Growth Map: Economic Opportunity in the BRICs and Beyond'.

Jim O'Neill: China could overtake US economy by 2027The Telegraph
China could overtake the United States as the world's largest economy by 2027 and urged a fundamental rethink of the operation of the G7 which he believes is too dominated by the West.

OTHER
Things That Make You Go Hmmm.... Such As Basel I...II...III... And OnwardZH
Grant Williams’ latest newsletter with multiple topics.

Global Banking Glut and Loan Risk PremiumPrinceton (pdf)
Mundell-Fleming lecture conference draft 7-Nov: This paper pieces together evidence from a global flow of funds analysis, and develops a theoretical model linking global banks and US loan risk premiums. The culprit for the easy credit conditions in the United States up to 2007 may have been the “Global Banking Glut” rather than the “Global Savings Glut”

DIVERSION
The most important living psychologist?The Psychologist
…That’s according to Steven Pinker. Lance Workman interviews Daniel Kahneman, Nobel laureate and co-creator of behavioural economics (Jan-2009).

A curated linkfest for the smartest people on the webSimoleon Sense

Cracking the BBC’s Code at Bletchley ParkWired

The Good Bad SonNew York Magazine
Saif Qaddafi had an affinity for America. And for a brief, tantalizing moment, the feeling was mutual.

Why Artifical Intelligence Is Closer Than We RealizeMother Jones

New Museum Exhibit Invites Visitors to Smell the Moon, Nuke an Asteroid or Colonize MarsSciAm

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