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Wednesday, November 9

9th Nov - Game over?

Well, my Wednesday morning words on the very temporary joy of Berlusconi resigning became true even quicker than I anticipated. So now it is down to choosing from two bads: eurozone breakup or massive quantitative easing and backstop by ECB. The core countries would not be happy with the second choice, so that's why French and Germans are studying the idea of a smaller euro zone. But how exactly would a new EZ of the core countries deal with the PIIGS debt in their bank's balance sheets? Who is going to recapitalize the old ECB? Where are they going to sell their industrial production and services? To China?

If in the morning I said this is not about Berlusconi, it is about Italy, now I say this is not about Italy, it is about Europe. The game is over.

News (Wed evening) – BTH
News (Thu morning) – BTH (online later)
Danske Daily – Danske Bank (pdf) (online later)
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT

French and Germans explore idea of smaller euro zone Reuters
German and French officials have discussed plans for a radical overhaul of the European Union that would involve establishing a more integrated and potentially smaller euro zone, EU sources say.

There Is No Happy Ending For EurozoneAlso Sprach Analyst
The Euro crisis can’t be solved by more meetings, summits and calls.  This is not a crisis that can be solved by cutting interest rates by 25 bp or 50 bp, and probably not even cutting interest rate all the way down the zero… Eurozone is finished.

I have been examining and re-examining the situation, trying to find the potential happy ending. It isn't there. The euro zone is in a death spiral… Can this cycle be interrupted? I think so. I think that an ECB guarantee to backstop sovereign debt, coupled with massive purchases to establish credibility and a substantial easing in monetary policy, could change the dynamic, particularly if quickly followed up with a major fiscal commitment from core economies to support bail-out efforts and invest in peripheral economies while peripheral economies focus on substantial labour market, public-sector, and tax reforms. How likely does all of that sound?

On The Bright Side...Peter Tchir / ZH
quick, well-written view on euromess.

Plotting a disorderly EZ break-upalphaville / FT
Martin Wolf, Citi and Roubini on disorderly scenarios.

Are global investors slow to move on euro break-up risk?Reuters
Investor faith in European governments and institutions to eventually sort this out would appear to be a lot higher than much of the daily commentary would suggest. If they are wrong, there is a very big shock still to come.

We’re now in the event horizon of the black hole of EU
Backdrop was EU Summit’s non-solution, while margin hike and Italian politics were triggers. Rest assured that officials are scurrying around the world, but look at what they came up with last time.

America and China must crush Germany into submissionEvans-Pritchard  / The Telegraph
One can understand German worries about money printing – and especially the loss of fiscal sovereignty and democratic control – but matters have already moved on. It is too late for that. As for the EU authorities with their mad contractionary fiscal and monetary policies in an accelerating slump, they seem to have achieved little by toppling two elected governments in one week.

Europe’s leadership deficitFelix Salmon / Reuters
Europe has a leadership problem raised to the 17th power. One weak or bad leader — Papandreou, or Berlusconi — can suffice to hole the euro project below the waterline. But parachute in the best of all possible leaders into Greece and Italy, and you still have a problem. There’s Germany, and France, and the ECB, and even the likes of David Cameron and Tim Geithner meddling where they’re not really welcome. And the only way that this crisis can work itself out effectively is if they all agree on the same solution.

1100 Vs 1250 And The Sentiment Couldn't Be More DifferentZH
LCH margin hike cancellation would not help much, IMF or EU big announcement close, banks are “clever” with how they calculate risk so inter-bank trouble ahead

Merkel: ‘The ECB Has a Clear Mandate, Stability of the Currency’EconoMonitor

Margin Call of 4-5 Billion Euros as Clearing House Raises Deposit Requirements on Italian Bonds; Roman Empire Under Pressure – Mish’s
Steen Jakobsen: Major investment banks calculate the “margin call” to be around 4-5 billion EUR on Wednesday

Italian bond yields through 7 per centalphaville / FT
Yields surge, curve inverted, CDS around all-time-highs.

Liquidity and the Italian bond standoffalphaville / FT
Liquidity at the short end is very low, partly explaining the curve inversion

CEE: scorched as Rome burnsbeyondbrics / FT
After lenders based in Greece, Austria and Belgium, Italian banks have the largest proportion of their foreign assets held in CEE – so banks looking for funds are dumping CEE assets.

The Euro Is in the ECB’s Hands NowThe Source / WSJ
Should they not turn on the printing presses and pour appropriate liquidity into the European financial system, the risks of default will only grow and the threat of contagion through the global financial system will once again be on the increase. And this time, the blame will be put firmly at the door of the ECB–and its new president.

Don't Bank on ECB Rescuing ItalyWSJ
1) ECB has repeatedly said it has no mandate to act as lender of last resort to countries 2) to do so would breach European law 3) ECB would get a huge balance sheet risk. That isn't a risk any responsible central bank can take alone. After all, last-resort lending is simply the backdoor socialization of risks.

With Berlusconi Gone Will Europe’s Leaders Be Able to Save the Euro?View / BB
Much as Berlusconi’s exit may please his fellow European leaders, they cannot stand aside as Italy threatens to unravel. On the evidence of recent months, there is every reason to fear they will. Lately Europe’s collective failures of leadership have rivaled and even exceeded the Italian prime minister’s.

Italy CDS vs bonds: CDS win!alphaville / FT
Slightly hardcore material, for fixed income-people only.

Italian Exposure By BankZH
Intesa 60.2 bn, UniCredit 42.1bn, Banca Monte 32.5bn and stock prices were showing it.

What is holding Italy back?Daniel Gros /
Can Italy ever overcome its decade-old growth slump? This column shows that Italy’s growth fundamentals are all in pretty good shape, except one - good governance. Worldwide Governance Indicators show a dramatic worsening during the Berlusconi governments especially when it comes to the rule of law, government effectiveness, and control of corruption. Progress on improving these might in the end be more important for growth than the reforms the EU demands.

Five reasons Italy should scare youThe Curious Capitalist / TIME
1) Too big to fail 2) Italy’s problems are deep 3) Italy’s political system is not up to it 4) contagion and 5) Italy is the biggest threat to world economy right now.

Guest post: China’s culture powerbeyondbrics / FT

Some Things You Should Know About Chinaof two minds

Where To Invest Now? Goldman Cautiously 'Un'-OptimisticZH
Full research note of 57 pages on scribd

Research GlobalDanske Bank (pdf)
Euro area in recession, US and China recover

It’s How Big, Not How Often, That CountsThe Psy-Fi Blog

Risk, Uncertainty, and Expected Returns - Bali, Zhou – Fed (pdf)
Variance risk premium can explain industry, size and value premiums.

What I Lost in LibyaThe Atlantic
While covering the Libyan civil war, the author was seized by Muammar Qaddafi’s forces and held in captivity with two colleagues; a third was killed. This is the story of how an academic found herself imprisoned in Tripoli.