Good morning! Today the bond auctions and especially the EU-US summit are followed for possible headlines – I covered the summit in my usual review & what’s ahead- post Weekender. Expect more from the European rumor factory this week – it seems the IMF/Italy bailout package was “just a trial balloon”. The Calendar page has been updated. My best links of the last week can be found here. Friday evening’s post might have escaped the attention of my European readers. You can follow me on Twitter and Facebook and email me for suggestions and requests. – MoreLiver
News (Mon morning) – BTH
Danske Daily (28-Nov) – Danske Bank (pdf)
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT
Frustration on handling of eurozone crisis to mark EU-US summit – euobserver.com
EURO CRISIS
Goldman: "As The Endgame Approaches, The Rally In AAA-Euro Area Sovereign Bonds No Longer Seems Sustainable" – ZH
In a ‘break-up’ scenario, the creditor ‘core’ countries will be confronted with a wave of insolvencies, which would also worsen their fiscal position. And in the middle ground between these two outcomes, where we currently stand, the ECB will be intermediating growing intra-Eurosystem imbalances. Through this monetary channel at the heart of EMU, the ‘shadow’ credit risk of the core countries is already rising, and at an increasingly rapid pace.
In a ‘break-up’ scenario, the creditor ‘core’ countries will be confronted with a wave of insolvencies, which would also worsen their fiscal position. And in the middle ground between these two outcomes, where we currently stand, the ECB will be intermediating growing intra-Eurosystem imbalances. Through this monetary channel at the heart of EMU, the ‘shadow’ credit risk of the core countries is already rising, and at an increasingly rapid pace.
Very good roundup on Italy, IMF, bank recap etc. One way or another, Europe will experience a massive credit shock. Presumably, the ECB could help offset this by allowing governments to loosen spending to support demand and fund bank recapitalization. But the path we are on appears to provide ECB help only in return for more austerity. And it is that never-ending pursuit of austerity that leaves me bearish on Europe, regardless of the political news of the day.
MMT to the ECB – you can’t inflate even if you want to – Pragmatic Capitalism
Warren Mosler: If lower rates, quantitative easing or bank liquidity provision would be inflationary, where is that inflation in Japan, U.S. or Europe? So here we are, with the ECB demanding deflationary austerity from the member nations in return for the limited bond buying that has been sustaining some semblence of national govt. solvency, not seeming to realize it can’t inflate with its monetary policy tools, even if it wanted to.
The Euro Curse – Krugman / NYT
Sweden vs. Finland explains whole euro crisis: Finnish yields diverged from Swedish yields last April, when ECB begun to raise rates. This October the spread exploded. The ECB’s mistake was not a big issue, but maybe it signaled how mad the central bank is. P.K: If that’s what happened, then the ECB’s hard-money madness may have destroyed the euro.
In the end of the day, the costs of maintaining the monetary union continue to mount. Unless Berlin is willing to pick up the tab, there may be no way of paying for them. So the answer to our original question is: Germany is already a victim of the debt crisis. That's a fate Berlin can't escape, no matter how hard it tries.
"Even if they do two years of fiscal transfers, and the ECB buys all the bonds, and the problems are swept under the carpet, we are still going to be facing a crisis at the end of it," said professor Scholes. None of the “cures” on offer tackle the 30pc currency misalignment between North and South, the deeper cause of this crisis. What Fed-imposed QE for Euroland can do is make a solution at least possible stoking inflation deliberately.
Dan Alpert: …the only way to true devaluation in the southern tier takes us to the zonal exiting of some of the peripherals and the disclaiming of their Euro-denominated obligations in favor of repaying with a deeply devalued local currency.
It seems obvious that spending cuts in the periphery have to be offset by spending increases in the core, and also that a way has to be found to make the required real depreciation in the periphery feasible. But eurozone policy is for austerity everywhere, and a low inflation target for the area as a whole, which means crippling deflation in the periphery.
Jürgen Habermas has had enough. The philosopher is doing all he can these days to call attention to what he sees as the demise of the European ideal. He hopes he can help save it -- from inept politicians and the dark forces of the market.
'Merkel and Sarkozy Are Viewed with Suspicion' – Spiegel
Roundup of newspaper views on the duo from last Friday. The leaders of France, Germany and Italy were keen to present a show of unity at their Thursday summit in a bid to convince markets that the euro zone is in safe hands. But tensions lay below the surface, with Angela Merkel's continued opposition to euro bonds and a greater role for the ECB. Europe needs a strong Franco-German duo more than ever, argue German commentators.
It used to be easy to convince people to support the European project back when many benefited financially from the common market. But now that the euro crisis has divided the continent into winners and losers, people have lost faith in the EU. Reformists are warning that the EU needs to become a full political union or it will die.
Even the good times will be bad for EU, says Moody’s – alphaville / FT
Moody’s: The probability of multiple defaults (in addition to Greece’s private sector involvement programme) by euro area countries is no longer negligible…A series of defaults would also significantly increase the likelihood of one or more members not simply defaulting, but also leaving the euro area.
PLANS / RUMOR MILL
EFSF "Guidelines" – Peter Tchir / ZH
I think you are supposed to sell the news again, as there is nothing in this document that provides evidence that they get it, or that any scale can ever be achieved, and if anything, it makes you wonder if they will even get to the 440 billion of support the market thought they had back in July.
Still More Inane Attempts to Leverage EFSF; IMF to the Rescue? – Mish’s
Given there are few details on the proposal it's difficult to say precisely how this will fail, but fail it will, more than likely within a few days of announcement. Assuming the guarantees are separately tradeable as stated, the guarantees themselves may (or may not) trade at a reasonable valuation, but what about the underlying junk?
Bifurcated Euro Begins As AAA-Only 'Elite'-Bond Issuance Considered – ZH
Die Welt: Germany and the other 5 AAA-rated nations of Europe are discussing jointly issuing 'Elite' bonds.
Die Welt: Germany and the other 5 AAA-rated nations of Europe are discussing jointly issuing 'Elite' bonds.
ITALY /IMF RUMOR
http://www.creditwritedowns.com/2011/11/imf-ecb-italy-600-billion-euro-bailout.html
According to Austrian daily Der Standard, Italy is to receive a 600 billion euro bailout courtesy of the IMF…The ultimate source of this information is La Stampa, an Italian daily newspaper.
Uncle Sam To The Rescue After All: Latest Rumor Sees €600 Billion Bailout Of Italy From US, Pardon IMF – ZH
The IMF board of governors agreed December [2010] to roughly double quotas from around $375 billion to around $750 billion. But out of the 187 member countries, only 17 have legally accepted the increase, including Japan, the U.K. and Korea. Most of the countries with the biggest quotas, such as the U.S., China and Germany, haven't yet gone through the legal process, such as parliamentary or congressional approval, need to hand over their promised dues.
IMF's Italian rescue plan leaves many unanswered questions – Humble Student of the Markets
The IMF loan story has more questions than answers. While a rescue package from the IMF would certainly be extremely positive, at this point the story sounds more like a trial balloon than an actual concrete plan.
(Stories that) Italy is working on a very big loan package from the IMF. I have no doubt that there are ongoing discussions. There has to be. Either someone puts a finger in the dike or Italy goes tapioca… At this point there is zero possibility that Italy can refinance any portion of its $300b of 2012 maturing debt. If there is anyone at the table who still thinks that Italy can pull off a miracle, they are wrong. I’m certain that the finance guys at the ECB and Italian CB understand this.
There are two big stumbling blocks to this bailout: Will Monti be able to keep the wolves at bay with meaningful fiscal reforms? Where will the IMF get the money?
IMF Package Denial Sends ES And EURUSD Tumbling – ZH
PIIGS-BF
Former IMF Employee And Greek Statistics Head Faces Life In Prison If Found Guilty Of Making Greece Look Uglier – ZH
If convicted of “betraying the country’s interests”, he could face life imprisonment: “I am being prosecuted for not cooking the books,” Mr Georgiou told the Financial Times. “We would like to be a good, boring institution doing its job. Unfortunately, in Greece statistics is a combat sport.”
If convicted of “betraying the country’s interests”, he could face life imprisonment: “I am being prosecuted for not cooking the books,” Mr Georgiou told the Financial Times. “We would like to be a good, boring institution doing its job. Unfortunately, in Greece statistics is a combat sport.”
Peter Tchir: With Greece now directly involved in the negotiations, the risk that they trigger a Repudiation/Moratorium Event has increased. With some concern about whether Greece will receive the next tranche of IMF money, there is a potential that they have a Failure to Pay on the bonds maturing on December 19, 2011, which would take us into the Grace Period Extension section of the document. Greece being directly involved in the negotiations does NOT increase the likelihood of a Restructuring Credit Event. We believe that it will be even more difficult to reach agreement among the banks and that increases the probability of a Failure to Pay Credit Event.
ICAP Testing Trades In Greek Drachma Against Dollar and Euro – Mish’s
WSJ reports the world’s largest inter-dealer broker is preparing for the possible Greek exit from euro.
OTHER
An interview with Seth Klarman – Infectious Greed
Founder of Baupost Group (AUM 22bn) video interview
10 Market Conclusions Based On Recent Hedge Fund Exposure – ZH
Goldman Sachs US weekly kickstart has some data on hedge fund holdings. (I highlighted this on Weekender-post, but did you read this? – MoreLiver)
Prices either failed to rise or spiked initially, only to give up the gains within 6 months (article has links to previous article on the Iranian situation – MoreLiver)
Upcoming events – Portfolio Probe
R course at Imperial, Thalesians etc.
DIVERSION
A Curated Linkfest for the smartest people on the web – Simoleon Sense
There is no spoon: the dirty secret of asset manager analysis – Interloper
The quantitative results of any large portfolio analysis are predetermined by the market activity of the time slice being studied… Which is more useful, the three or five year numbers? We are only going to know after the next 24 months or so. THAT is the central dilemma
The Thorium Dream – The Big Picture
Video link to a document on via MotherboardTV – Wired had a story on thorium-based nuclear power on Dec 2009.