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Tuesday, November 22

22nd Nov - Stealth QE?

Spanish 2s10s inverted. B
No great news - except the Spanish have trouble even selling t-bills. Yield curves are inverted or about to invert, while CDS prices are exhibiting inversion across the markets. The link marked red is a must-read!

The links under IMF are probably the most relevant articles with any "new" information: as the ECB will not bend (yet), the IMF rumor had to be fired up again, and the fund announced technical changes allowing it to provide a lifeline to outcast countries. 

But the math is brutal - with the current war chest
Same spread as above, but longer time frame. Bad.
IMF could fund Italian and Spanish funding needs for couple of months at the current rate of ECB bond purchases - but as the plan of last week was that ECB would fund IMF, and IMF would bail out PIIGS, the IMF's announcement could and should be taken at least somewhat seriously. 
Should Germany cave in on the demands from everywhere else to allow ECB to do QE indirectly, the IMF's action at least makes it now technically possible. On the other hand, what is SMP but a mini-QE? 200 billion down the drain, if you ask me. Oh the joy when the ECB needs a recap in the endgame.

News (Tue evening) – BTH
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT

Why stricter rules threaten the eurozoneCenter for European Reform (pdf)
The introduction of the euro spurred the emergence of enormous macroeconomic imbalances that were unsustainable, and that the eurozone has proved institutionally ill-equipped to tackle. North European policy-makers have been reluctant to accept this interpretation. For them, the crisis is not one of the eurozone itself, but of individual behaviour within it. If the eurozone is in difficulty, it is because of a few ‘bad apples’ in its ranks. In this interpretation, neither the design of the eurozone nor the behaviour of the ‘virtuous’ in the core were at fault.

"Whither Europe?" - UBS' George Magnus Asks What Happens After The ECB PrintsZH
Full research note from 16-Nov on scribd: Some argue that Germany will, sooner or later, capitulate on this issue too, since the only real alternative to the ECB adopting a full lender of last resort role is the slimming down of the EZ in what would be dangerous, unpredictable and almost certainly acrimonious circumstances. If the crisis escalates alarmingly, the ECB does look a little more likely to be given the light to widen its remit, even if under conditions. But then what?

What's Lost With the Demise of the Euro? Only What Was Unsustainableof two minds
The inevitable return to national currencies. Rather than fear this return to transparent feedback, we should welcome it and hurry it along. Systems which cut off feedback and choke transparency with artifice and lies are doomed to implode. If Europe ditches the failed "folk" experiment called the euro, then the process of recognizing and pricing dysfunction can begin, and the stability that only transparency and feedback can provide will soon return to the EU.

Tracking the euro-zone economy in real timeFree exchange / The Economist
Showcases that uses soft and hard data to calculate weekly estimates of GDP figures.

Waiting To ExhalePeter Tchir / ZH
General taste of things – nothing particular but very articulate.

Deutsche Bank Could Transfer Financial ContagionView / BB
Simon Johnson: The German bank, however, is thinly capitalized. Its total equity at the end of the third quarter was only 51.9 billion euros, implying a leverage ratio (total assets divided by equity) of almost 44. This is up from the second quarter, when leverage was about 36…How does such a highly leveraged bank become “well- capitalized”? The answer is that “risk-weighted assets” were 337.6 billion euros as of Sept. 30. But what is a low risk- weight asset in the European context today? Incredibly, it is sovereign debt, which of course is far from riskless at the moment.

How much capital do European banks need? Some
The lack of market confidence in European banks is fed by the uncertainty about Eurozone sovereign debt. This column argues governments and banking supervisors should agree a recapitalisation package well before Christmas. It adds that the required amount to be raised by each bank should be presented as a euro amount and not as a ratio so as not to tempt banks to cut down assets instead of raising capital.

Systemic Risk Survey 2011 H2BoE
The perceived probability of a future high-impact event in the UK financial system increased sharply in 2011 H2, compared with 2011 H1, and was reported to be at the highest level since the survey began in July 2008. Looking over a short-term horizon, 54% of respondents found the probability of a high-impact event to be high or very high.

What is the contribution of the financial sector?
Andrew G Haldane (Executive Director, Financial Stability, Bank of England): what the positive contribution of the financial sector is during normal times; focuses on the value-added of risk and government subsidies in national accounting, and makes an important distinction between risk-taking and risk management.

Charting The Futility Of ECB (Non) Sterilized InterventionsZH
ECB has bought 250bn of bonds. The rising trend in bond yields has not reversed. How would the EFSF bond purchasing program change the picture, if ECB has not?

What Does ‘Lender of Last Resort’ Mean?The Source / WSJ
English businessman Walter Bagehot proposed in the 19th century that, in a panic situation, the monetary authorities should lend unsparingly but at a penalty rate to illiquid but solvent banks. Stephen Lewis: A central bank is lender of last resort to solvent financial institutions when, in a dysfunctional market, it supplies them with liquidity against the sound collateral they are able to provide.  ‘Lender of last resort’ responsibilities do not stretch to insolvent institutions. Nor does it cover central bank lending to governments. That is more usually called monetization of the public debt.

Euro area: ECB to defend an informal cap on ratesDanske Bank (pdf)
The debt crisis is heading towards the end game. Mistrust has spread to Italy, Spain and beyond. In the absence of  further  policy action,  interest rates spreads  would probably continue to widen and the whole euro project could come to an end…  We believe that the ECB will defend an informal cap at possibly 7% interest rates on 10-year Italian and Spanish government bonds.

One Massive Circle Jerk: Presenting The Scam That Is ECB Bond Purchase "Sterilization"ZH
ECB’s bond purchases are offloaded to other financial institutions (mostly banks). Banks get the money to buy the bonds from ECB:  In essence what the ECB does, by pretending to not monetize and pretending to sterilize, is taking on not only interest rate risk one level removed, but also bank solvency and liquidity risk!

IMF Enhances Liquidity and Emergency Lending WindowsIMF
The reform replaces the Precautionary Credit Line (PCL) with the more flexible Precautionary and Liquidity Line (PLL), which can be used under broader circumstances, including as insurance against future shocks and as a short-term liquidity window to address the needs of crisis bystanders during times of heightened regional or global stress and break the chains of contagion.

IMF Liquidity Line Leads to Stock Rally, BrieflyMarketBeat / WSJ
But it also raises questions about whether the IMF has the money to really provide all that much liquidity right now. (Two months of funding Italy and Spain – MoreLiver)

IMF Announces New "Precautionary and Liquidity Line"; Fed Discusses More Stimulus; Both Much Ado Over Nothing; Expect Continued Bull Market in Meaningless HeadlinesMish’s
Includes comments from BoA/ML.

Spain pays 5.1% for three month moneyalphaville / FT

Spain Election And Benchmark Switch Rouse Duds, As Country Pays Record Yield In Bill AuctionZH
On the t-bill auction and the request by Spanish Treasury to Thomson Reuters and BB to change the benchmark bond and some quotes from FT and Reuters.

What's Going OnMacro Man
Spanish T bills at 5.11% for 84 day as we write. when teh T-Bills go, thats it. Kaboom. "Bring me a new periphery waiter, this one is broken!"

Running through Italian unilateral euro zone exit scenariosCredit Writedowns
So the euro area countries can de-peg like the gold standard countries did and unwind the euro structure by running the “euroization” process in reverse. Here’s how one could do it.

Belgium steals the Euromess spotlightalphaville / FT
The spread between Belgian and German bunds has widened on Tuesday on fresh fears the country won’t be able to coble together a budget for 2012. Comments from RBS.

Hung out to dry in emerging Europealphaville / FT
Foreign bank ownership, if the owners are from western Europe, usually only means one thing today: deleveraging. Comments from Fitch, FT, Nomura.

What do we really know about the long-term evolution of central banking? Evidence from the past, insights for the presentNorges Bank
Taking a functional, instead of an institutional approach. The survey covers the provision of both microeconomic (financial stability) and macroeconomic (monetary stability) central banking functions in the West since the Middle Ages. The existence of a number of important trends (some unidirectional, some cyclical) is underlined.

Buffett May Be No Match for Mobsters With Tattoos View / BB
William Pesek’s story on Yakuza’s influence on business.

Experienced advice for “lost” graduate students in EconomicsAriel Rubinstein (pdf)
Some smile-inducing moments.