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| Just like in 1992, the CA balances kill the euro dream |
A lot of writings coming out. The commentator's confidence in EFSF is completely gone. Comments are dominated by breakup scenarios, but some chance is seen for an eventual ECB backstop as long as some sort of fiscal union is in place first.
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| The banks are holding the accumulated CA balance. |
Essential to the muddle-through and buying time is dealing with the coming bond- and bill auctions. Auction yields and demand are closely watched, so the eurocrats will have to coerce banks to buy the issues- which should be easy, as the banks survive only with the continuing ECB support.
It doesn't matter to the banks, as the new bonds will soon be parked to ECB anyway. And they've got the nerve to talk about ECB credibility and not supporting member nations... The mission creep of SMP is just a smokescreen for an Euro Zone QE - the cowards simply do not have the nerve to call their actions with the correct name.
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| Hedge fund alpha is on the decline |
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| High stock correlation makes trading futile |
- MoreLiver
News (Mon evening) – BTH
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT
EURO CRISIS
Monitor: Euro debt crisis watch – Danske Bank (pdf)
It now seems that the market is attaching not only a credit premium between the individual countries, but also a credit premium to the euro itself.
Credit Suisse Goes For Broke: Predicts End Of Euro, Escalating Bank Runs On "Strongest European Banks" – ZH
We suspect this spells the death of “muddle-through” as market pressures effectively force France and Germany to strike a momentous deal on fiscal union much sooner than currently seems possible, or than either would like. Then and only then do we think the ECB will agree to provide the bridge finance needed to prevent systemic collapse.
The ‘Last Days’ of the Euro – alphaville / FT
Jonathan Wilmott / Credit Suisse: we’ve seen the end of the muddle through — also known as kicking the can down the road — because market forces will drag Sarkozy and Merkel kicking and screaming to the negotiating table.
The Real Reason The "Voluntary" Greek Haircut Is Hurting – Peter Tchir / ZH
Suddenly, everyone is discussing how the IIF “deal” made sovereign CDS worthless and that is why we are seeing a renewed sell-off in sovereign debt. That is just plain wrong. What the Greek “deal” did was make it perfectly clear, that banks that survive on the benevolence of the ECB directly and the IMF/EFSF bailing out their positions indirectly, will do what the governments tell them to do.
The euro crisis: How much time is left on the clock? – Free exchange / The Economist
ECB reluctant to save EZ without a real fiscal plan. Core countries reluctant to provide support without a mechanism to protect against moral hazard and resulting misbehaviour. Periphery struggling to demonstrate credibility of their reforms and fiscal consolidation amid collapse. Picture the 2008 collapse with a heavily depleted stock of fire-fighting equipment. The stakes in Europe are enormous. Failure is unthinkable. And yet, it looks increasingly likely.
Markets and the euro crisis: Choose your poison – Buttonwood’s / The Economist
In the euro zone, investors may be suffering from what Lombard Street Research neatly describes as "crisis solution fatigue". An FT story suggested a plan for eurobonds may be issued this week; last week, the market was pinning its hopes on the ECB and the IMF and it was long ago that the European Financial Stability Facility was the rescue vehicle of choice.
The legal aspects and abstractions of a euro redenomination – alphaville / FT
Commenting Nomura’s research piece I linked earlier today. If a country adopts a national currency, how will their foreign currency-denominated debt going to be handled.
Commenting Nomura’s research piece I linked earlier today. If a country adopts a national currency, how will their foreign currency-denominated debt going to be handled.
EA Balance of Payments: the Current Account – Rebecca Wilder / EconoMonitor
Within the EA, country-level current accounts are well out of balance. This is the central theme associated with the EA sovereign debt crisis: debtor countries are reliant on foreign inflows of capital from the credit countries to support current spending… The debtor countries are forced into a policy of internal devaluation (fiscal austerity, they call it) to shift relative prices and real exchange rates. This could work if global growth was going gangbusters, but it’s not.
Dear European Politician – Macro Man
1) What has changed to make you realize that the Euro may not work?
2) Why are you doing so little to make it work?
3) Whose fault is it that we are in such a mess and what will be done to those responsible?
BANKS
The (bad) State of the European Union and its Banks – Re-Define
The average maturity profile of Euro area bank liabilities is now less than 3.5 years and shrinking with an increasing number of banks, particularly those in troubled sovereigns now being dependent almost wholly on the ECB for their refinancing needs.
Jonathan Anderson / UBS: Outside central and eastern Europe, EMs are less dependent on eurozone banks than is commonly believed. And even in CEE, the picture may not be totally bleak.
GERMANY
Deep institutional memory the ECB has inherited from its ideological parent, the German Bundesbank. In their shared orthodoxy, printing money to buy government debt is the first step down a slippery slope that ends in hyperinflation…Forgiveness isn’t easy. But the sins of profligate euro- area governments, in historical perspective, are not so great.
They lent the money, they sold the goods, they profited from this.
ECB
Draghi Isn't Ready For His Closeup – The Capital Spectator
Perhaps someone should explain to Mr. Draghi that the quixotic pursuit of inflation credibility won't mean much if the euro goes the way of the dodo… Maintaining a credible inflation target has its place—and time, but none of that applies to Europe now. A long, clear history of central banking during financial and economic crises tells us so. And there's no guarantee that Germany won't be afflicted in time either.
Why the ECB Won't (and Shouldn't) Just Print – Hussman Funds
The call for massive ECB purchases of distressed European sovereign debt is not simply a call for a liquidity-providing intervention, but is an attempt to address a solvency issue. Liquidity issues can often be addressed through temporary increases in the stock of money, but to address solvency issues, you have to print permanent money.
The Inflationary Consequences of ECB Bond Buying – The Source / WSJ
Now, economists argue that there needs to be a significant inflation differential between the core and the periphery to lift the periphery back into competitiveness. So inflation would be a route to resolving the euro zone’s structural problems. But it’s doubtful whether Germans would accept high and rising inflation, because that would mean an erosion of their savings. Europe’s rescue would also be its destruction.
Now, economists argue that there needs to be a significant inflation differential between the core and the periphery to lift the periphery back into competitiveness. So inflation would be a route to resolving the euro zone’s structural problems. But it’s doubtful whether Germans would accept high and rising inflation, because that would mean an erosion of their savings. Europe’s rescue would also be its destruction.
The risks of sticking to über harte währung strategy – alphaville / FT
Dylan Grice / SocGen: It was not the inflation that led to Hitler’s rise – it was Germany’s insistence to keep the DEM linked to gold, forcing the economy through deflation and unemployment above 30%. (Exactly what they are doing now. Why they blame their history on inflation is anybody’s guess – MoreLiver)
PIIGS
Key Short-Term Events for Spain’s Future PM – The Source / WSJ
Potential Cabinet Front Runners of Spain’s Incoming Prime Minister – The Source / WSJ
Potential Cabinet Front Runners of Spain’s Incoming Prime Minister – The Source / WSJ
Evans-Pritchard: It Germany genuinely wishes to save Spain and Italy, it must allow EMU-wide reflation and mobilize the ECB as a lender of last resort to halt the bond crisis, since the EFSF rescue fund does not exist. To create a currency without such a backstop is criminally irresponsible. If this role is illegal under EU treaty law – and that is arguable – then EU treaties must be changed immediately.
The sequencing problem is obvious: a commitment conditional on reform progress will not bring back private investors immediately, because it does not reduce the perceived risk of substantial political obstacles to implementing the necessary measures. Only bold and largely unconditional commitments by both the European Union and Italy can break this dangerous impasse.
Ever since the collapse of Lehman Brothers, contagion has become the stuff of policymakers' nightmares. In recent weeks, with the very real prospect of default by European countries, the sleepless nights are returning. This column provides evidence that markets are bundling all European countries together. They believe that if Italy defaults, it would mean the end of the euro and no country would be left unscathed.
OTHER
Hedging Tail Risks by Socgen – HistorySquared
Three traits that lead to tail events: excess leverage in any of its many forms, unstable access to funding, and reluctant participation from investors. Full scribd link to the Art of Hedging – a primer on the hedging of tail risk
Hedge Funds Kiss Their Alpha Goodbye – MarketBeat / WSJ
Today’s pics are from this.
Citi’s high carbs diet – alphaville / FT
Latest acronym-craze: Canada, Australia, Russia, Brazil and South Africa, i.e. the world’s top commodity players.
Latest acronym-craze: Canada, Australia, Russia, Brazil and South Africa, i.e. the world’s top commodity players.
Career advice regarding tools – The Endeavour
Use open-ended open source-stuff. Also other good ideas.
The Neuroeconomics Revolution – Robert J. Shiller / Project Syndicate
The brain, the computer, and the economy: all three are devices whose purpose is to solve fundamental information problems in coordinating the activities of individual units – the neurons, the transistors, or individual people. As we improve our understanding of the problems that any one of these devices solves – and how it overcomes obstacles in doing so – we learn something valuable about all three.
Occupy Wall Street! The Musical – The Reformed Broker