Good morning, again a long post as I did not put out a regular evening post yesterday – instead, I had a research review Back to School and a credit guest post The song of Roland. I also put out a new page, About this blog and me. An evening post, a weekender and a best of-posts coming later.
With the US Thanksgiving, the approaching Christmas and general dark moods and lack of proprietary action markets are low in liquidity and interest - the only things of interest are the emergency exits. The risk-off is in full swing and the eurocrats seem and sound terribly tired. Latest attempt to stop the rot is the proposed EU treaty changes and eurobonds. Of course that cannot and will not happen in the time that is left before something too big to fail and too big to bail out fails.
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The aftermath from this crisis will be huge - the ERM breakup from early nineties is peanuts and 2008 will pale in comparison. Even the 1930's will feel like a walk in the park, because as a society we are totally unprepared for the austerity and solidarity required. Nobody will take the responsibility and nobody will say: "this is something I can live without - please have this, because you need it more".
We got something after the previous downturns, though - a revolution in networks and availability of information. I wonder what we will get this time: better global and local governance, perhaps? Maybe breakthroughs in energy (shale oil/gas, solar, fusion, ethanol from sugar from wood pulp)? Or AI?
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Iran is rumored to be planning an announcement that it is a nuclear power – believing that nuclear deterrence is the best insurance against military aggression or economic sanctions. Saudi Arabia has announced a long time ago that they will develop their own nuclear program as a counterweight if Iran is allowed to proceed. Meanwhile, Israel and several other nations are pondering if and when to attack Iran. This is exactly the kind of nonsense the world could very well live without.
Danske Daily (25-Nov) – Danske Bank (pdf)
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT
EURO CRISIS
But no single action can save the euro. This is not just because Germany wants others to feel the pain for a long time, but also because the damage from poor leadership and procrastination is so extensive. The euro will require a full redesign through new treaties, with Eurobonds and possibly much else besides. If this is to happen, though, it must first survive. It is time for Mrs Merkel to grasp that her country risks being caught up in the euro’s catastrophic failure—and for Mr Draghi to admit that he risks finding himself without a job.
End the European Blame Game! Keynote at the British Foreign Press Association’s 2011 Awards Night – Yanis Varoufakis
Leftie economists saw the whole debacle as confirmation that free market capitalism cannot be civilised and, indeed, that it does not work. Based on precisely the same facts, free marketeers concluded that it was all the fault of government getting in the markets’ otherwise brilliant ways. In short, Crises confirm everyone’s prejudices, locking us ever more firmly into the same mindset that produced them in the first place.
Walk Thru For The Upcoming European Treaty Changes - Is A Redemption Fund The "Plan Z" Endgame? – ZH
European funding needs are huge but European debt issuance has dried up – there are nowhere near enough hard assets to fund secured assets.
Now the superiority of the western model is so apparent that we have cash-strapped eurocrats looking to raise money from the Communist leaders of a country, most of whose citizens live in abject poverty. This writer is proud to call himself British; he would be disgusted to be regarded as European.
European Bailout Time Of Death: EFSF Cut In Half Due To "Market Conditions" – ZH
according to the latest news out of the FT, the EFSF won't get 4-5x leverage. Nope. It will, in fact be lucky if it can be doubled, which however kills the whole point as it needs to be well over €1 trillion to even exist.
according to the latest news out of the FT, the EFSF won't get 4-5x leverage. Nope. It will, in fact be lucky if it can be doubled, which however kills the whole point as it needs to be well over €1 trillion to even exist.
Why treaty changes won’t help – economistmeg.com
Even if all 27 EU countries agreed to treaty changes, the process of holding referendums and ratifying the changes in various parliaments would take several months, if not years. With bond yields rising in the periphery and core alike, action must be taken immediately. The chances of agreeing treaty changes to achieve fiscal integration are low, but the chances of doing so in the time frame necessary are close to zero.
Losing one's Religion(s) – Macro Man
But the Germans are only just noticing that they may just have set fire to their own house in the process as yesterday billows of smoke were spotted coming from their own bastion of probity, the mighty Bund market. In itself is a religion up in flames. Who would have thought in 2008 as the UK government took on the crippling burden of bank debt that only 3 years later a headline would cross the screen "Bunds sold for Gilts as traders seek safe haven".
EURO BONDS & GERMANY
One Eurobond to rule them all – alphaville / FT
In order to be effective, a central bank must act as a monopoly…The ECB, by its very construct, is only a quasi monopoly. It controls euro reserves, but it depends on national central banks to influence their respective bond markets, of which there are many. (article has very nice excerpts from sources that are worth a deeper look – MoreLiver)
German Resistance to Pooling Debt May Be Shrinking – Spiegel
The German government remains officially opposed to controversial euro bonds. Behind the scenes, however, press reports indicate that some within Chancellor Merkel's government have begun discussing the conditions under which they might accept a pooling of euro-zone debt.
Why Merkel Remains Opposed to Euro Bonds – Spiegel
Long text. The related articles suggested on the sidebar are also interesting, if you have the time.
Angela Merkel and the euro: The new iron chancellor – The Economist
As they await her final word on the euro, seasoned Merkel watchers have grounds for both hope and fear. She has no wish to be the chancellor who let the currency fall apart. But to unleash the ECB or to embrace eurobonds could precipitate a domestic crisis that would be almost as catastrophic… When the bell rings, it may be too late to dive.
The euro zone: Is this really the end? – The Economist
This attitude has to change, or the euro will break up. Fears of moral hazard mean less now that all peripheral-country governments are committed to austerity and reform. Debt mutualisation can be devised to stop short of a permanent transfer union. Mrs Merkel and the ECB cannot continue to threaten feckless economies with exclusion from the euro in one breath and reassure markets by promising the euro’s salvation with the next. Unless she chooses soon, Germany’s chancellor will find that the choice has been made for her.
For months economists have been arguing that Germany holds the key to ending the Eurozone crisis. Should it relax its anti-inflation stance and allow the ECB to inflate away sovereign debt? Or should it write a cheque of its own to the EFSF? Neither, says this column. There is a simple solution, if only Eurozone leaders can see it. Eurobonds are the answer – but with conditions.
Run on the Eurozone has Started; Horrendous Idea that Will Not Die; Hitler Enters the Equation; Merkel Reiterates the Obvious; No Hope or Future for Eurobonds – Mish’s
on euro bonds: The idea is preposterous. There is no scope for a deal and no time for a deal even if there was scope. Moreover, and even if there was scope and time, it would require a German referendum and treaty changes by all 17 Eurozone countries.
The sovereign debt crisis and the future of European integration – ECB
Speech by González-Páramo, Member of the Executive Board of the ECB: We cannot completely delegate governance to financial markets. The euro area is the world’s second largest monetary area. It cannot depend solely on the opinions of ratings agencies and markets. It needs economic governance arrangements that are preventive and linear. This underscores my central point that a much more comprehensive approach to economic governance is now the priority for the euro area. And this means more economic and financial integration for the euro area, with a significant transfer of sovereignty to the EMU level over fiscal, structural and financial policies.
Behold The New Anschluss: ECB's Paramo - "Prepare To Give Up Significant Sovereignty" – ZH
In other words, courtesy of one failed monetary experiment Germany will succeed, without sheeding one drop of blood, where it failed rather historically some 70 years ago.
In other words, courtesy of one failed monetary experiment Germany will succeed, without sheeding one drop of blood, where it failed rather historically some 70 years ago.
PIIGS
The price of credit-default swaps can be used to estimate the probability of sovereign default. This column examines the case of Italy, looking at how default risk varies across maturities and how this has evolved since January 2011. It suggests that markets are pricing in a heightening of risk two years from now – mostly probably due to political tensions and the risk of deadlocked reform.
1st strategy option “shock therapy” à-la IMF, ECB etc., 2nd fiscal adjustment is “back loaded. Results depend on what other are doing: Consider the case of Italy: if it alone implements a fiscal restriction of 1 point of GDP, it loses 1 point of GDP, but if all countries together implement the same restriction, Italy will lose almost 2 points of GDP (the same more or less happens with all the other countries).
GERMAN BUND AUCTION
'The Crisis Has Hit the Entire Core of the Euro Zone – Spiegel Roundup of views from seven German newspapers.
Bund auction reaction, the liquidity case – alphaville / FT
Perhaps only a liquidity issue, just as The Economist’s Free exchange-blog stated.
On the perils of plunging repo rates – alphaville / FT
The ‘specialness’ of German bonds being used for collateral funding — reflected by falling General Collateral rates — versus rising rates for other European debt markets. A symptom, possibly, of the ECB’s failure to monopolise the European money markets. This sort of specialness, for example, posed a major problem in US markets in 2008.
The ‘specialness’ of German bonds being used for collateral funding — reflected by falling General Collateral rates — versus rising rates for other European debt markets. A symptom, possibly, of the ECB’s failure to monopolise the European money markets. This sort of specialness, for example, posed a major problem in US markets in 2008.
Borrowing costs in the United States of Europe – alphaville / FT
Viewed in this context one can understand why investors were reluctant to buy German paper with a 1.98 per cent coupon. Why not wait and pick up double the yield on German-backed Eurobonds.
Viewed in this context one can understand why investors were reluctant to buy German paper with a 1.98 per cent coupon. Why not wait and pick up double the yield on German-backed Eurobonds.
BANKS
The state of investment banking – alphaville / FT
Market intelligence provider Tricumen released their report on the state of the investment banking industry on Wednesday. Their researchers sorted through an inordinate amount of company filings in order to determine the revenues by product segment, normalising along the way where possible. They also did interviews with a lot of insiders to try to build up a picture of trends
Measuring Financial Contagion – Economix / NYT
Simon Johnson: For large financial institutions – those with more than $100 billion in total assets – everything should be out in the open. If you want to operate in relative secrecy, stay small...You can only discipline a big troubled bank if you understand and can measure the consequences of its failure
European banks are becoming the focus of concern – Buttonwood / The Economist
Bank trouble (low stock price, difficulty borrowing money and bad balance sheets) make raising capital difficult and general confidence might be hit: Any action may come too late to stop a significant recession in Europe; already the purchasing managers’ indices are pointing to a downturn. And the rest of the global economy may not be strong enough to compensate.
ECB mulls ultra-long loans to help banks – Reuters
The central bank is looking into offering banks liquidity over a 2-year or even 3-year horizon, the sources said, aiming to free up the increasingly blocked interbank money market and give banks more leeway to buy and hold sovereign bonds.
European Banks Get ‘False Deleveraging’ in Seller-Financed Deals – BB
Banks selling distressed assets as regulators tighten capital requirements, are lending money to buyers to get deals done.
Banks selling distressed assets as regulators tighten capital requirements, are lending money to buyers to get deals done.
OTHER
The bursting of the global housing bubble is only halfway through – The Economist
Another concern is that Australia, Britain, Canada, the Netherlands, New Zealand, Spain and Sweden all have even higher household-debt burdens in relation to income than America did at the peak of its bubble. Overvalued prices and large debts leave households vulnerable to a rise in unemployment or higher mortgage rates. A credit crunch or recession could cause house prices to tumble in many more countries.
The 5 most important global political trends to watch in 2012 – Pragmatic Capitalism
Nomura: Euromess that only ECB can stop, US fiscal gridlock, MENA political turmoil, China’s power handover in March 2013, North Korea.
Pondering The Ethanol Debacle – HistorySquared
Ethanol is an interesting story. It’s a complete clusterfuck by any measure. Ethanol has sent global food costs soaring... The worst part is ethanol has dubious benefit to the environment, due in large part to the tremendous fertilizer required... It’s not economical, requiring large government subsidies.
DIVERSION
The behavioral economics of Thanksgiving – Wonkblog / WP
Hints from behavioral economists how to avoid eating too much. This will be useful for Europeans as well, as Christmas is coming.
Best non-fiction books of 2011 – Marginal Revolution
Steve Jobs and NeXT: Rare PBS Documentary circa 1986 – brain pickings
How to Be a New Yorker – The Village Voice
The eyeballing game – woodgears.ca
How are your visual-spatial skills? I got 4.12 points on my first go.
Crush the Castle – armorgames.com
A bit like Angry Birds, but playing with catapults and castles.