Here are this week's previously highlighted links. Earlier this weekend I posted the Weekender linkfest with weekly summaries, calendars and standard article links. Have fun, leave a comment, follow me on Twitter, Facebook or email me.
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"”Best of the Week” is republished with permission of MoreLiver’s Daily."
"”Best of the Week” is republished with permission of MoreLiver’s Daily."
EURO CRISIS
The debt crisis in Europe has never been a liquidity crisis. That's why the bailouts have failed to stop it. Investors are fleeing the bonds of certain European countries because they believe their economies are fundamentally broken, simply uncompetitive compared to either stronger countries in Europe or up-and-coming emerging markets. That means investors don't have confidence in their long-term outlook, and thus their ability to handle their large debt loads.
multiple points, so nasty but true.
The Revolt of the Debtors – Project Syndicate
Nobody can know at this point whether Portugal or Italy might be the next stops on this road of resistance. The result, however, is quite predictable: soaring risk premia throughout the periphery.
Approaching the Italian endgame – alphaville / FT
Citigroup’s Matt King: The Italian endgame is getting nearer and a crisis is increasingly probable, and would do much to expose the inadequacies of the bailout mechanism as a whole. Also points to EFSF funding trouble and possible feedback loops as the Italian bond flirts with the 6% yield.
Eurozone banks selling assets in Emerging Europe – to tart up their capital ratios under crisis pressure…Governments promised at last week’s summit that there would not be ‘excessive’ deleveraging of assets by banks operating in the ‘Member States’ of the European Union. Note that wording.
Select excerpts and comments + the full research note on scribd.
Eurodämmerung – Krugman / NYT
I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro. This then leads to emergency bank closing, and once that happens, a decision to drop the euro and install the new lira. Next stop, France.
The ECB continues to believe that financial stability is not part of its core business. As its outgoing president, Jean-Claude Trichet, put it, the ECB has “only one needle on [its] compass, and that is inflation.” The ECB’s refusal to be a lender of last resort forced the creation of a surrogate institution, the EFSF. But everyone in the financial markets knows that the EFSF has insufficient firepower to undertake that task – and that it has an unworkable governance structure to boot.
He described derivatives markets as a vast, opaque structure which has lost touch with reality and which is eroding fundamental values.
Crats, Maybe, But Not Much Techno – Krugman / NYT
The ECB has placed its faith in the confidence fairy, while imagining that it can run policy in a way that has never worked in several centuries of central bank experience. Meanwhile, the European policy elite has simply wished away the clear evidence that the euro zone needs to make an adjustment that is virtually impossible unless inflation targets are raised.
Very long article by Satyajit Das from Oct 27th
Markets Have Voted – allaboutalpha.com
Three problems: European identity crisis, more government, both citizens and policy makers in denial.
EFSF
The EFSF is still not designed - probably because the flaws in their plans become apparent every time they try to structure it, but that hasn't stopped them from asking for money. What is China supposed to say, you don't even have a vehicle and you want them to commit money?
Use the EFSF for ‘Sovereign Cleansing’ of Eurozone Banks – EconoMonitor
As long as this situation persists, Europe will lack a credible threat towards Greece or Italy. The contagion risk from default is just too big. A credible threat requires that European banks are disconnected from high-risk sovereigns. The EFSF can provide the means to accomplish this.
You Can’t Spell Tooth Faeries Without EFSF – Peter Tchir / ZH
The leveraged EFSF is the best part of the “story”. They have no clue how to execute this part. As we wrote the other day, they can’t do a CDO because there is no diversity in assets. They can’t do a proper “wrap” because if there is a loss on an underlying bond, it will almost certainly be greater than 25% thus causing the “wrapped” bond to have a loss regardless of whether the “wrapper” honors their commitment – which isn’t certain.
Funny take on the reluctance of investment banks to price the CDS above article and an attempt to calculate
GREECE
Roundup of views from six German newspapers: the common currency is even closer to the abyss.
In Praise of Papandreou's Referendum Decision; Eurocrats Terrified of Democracy; Parade of Cowards – Mish’s
Good roundup of views.
The goal of Papandreou’s move presumably is to renegotiate the terms of the deal imposed on Greece. To get the heretofore dictatorial Troika to take him seriously, he’s effectively threatened the nuclear option of blowing up the rescue package, which means default. And the disruption of a default suddenly changes the calculus of a Euro exit. The incremental short-term damage would not be that much worse, and the longer term benefit of regaining sovereignity, controlling its currency, and as a result, being able to depreciate the drachma would likely more than offset the costs.
Papandreou did the EZ a favour by providing an opportunity to change course. One way or another, a disorderly Greek default is in the cards with its attendant contagion. At that point a real solution is inevitable – one that requires EZ leaders and the ECB to play on the same side with credible rules for all.
But, while it has been possible to bully a weak Greek government into accepting reform in return for funding, it's rather harder to make credible threats elsewhere.
An Outline of Critical Events Affecting Greek Referendum – Credit Writedowns
Interesting views: France and Germany are done with Greece and now it is a question of ringfencing. Italian government will remain weak and eventually fall, austerity will not work and the real EZ crisis can begin.
Greek bond accounting, encore (et enfin?) – alphaville / FT
BNP marks down Greek bonds by 60%. The current official haircut figure is 50%, but that is for the nominal amount. Long article on how the real NPV haircut is contingent on many things, especially coupon.
OTHER
Paul Volcker: Financial Reform: Unfinished Business – The New York Review of Books
Difference Engine: Luddite legacy – Babbage / The Economist
A tipping point seems to have been reached, at which AI-based automation threatens to supplant the brain-power of large swathes of middle-income employees.
DIVERSION
Talk to Al Jazeera - Slavoj Zizek – Youtube
Thought-provoking.
A Curated Linkfest For The Smartest People On The Web – Simoleon Sense