Here are the best links from this week’s earlier posts. Yesterday’s Weekender had a long editorial on what to expect next week. I collected some recent journal articles in Back to School and explained Why I blog. You can follow me on Twitter and Facebook and email me for suggestions and requests.
EDIT: I updated the Calendar page.
EDIT: I updated the Calendar page.
- MoreLiver
EURO CRISIS
Why stricter rules threaten the eurozone – Center 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.
Comments on Simon Tilford’s and Philip Whyte’s excellent report, agrees on much, but Mish believes the only true solution is breakup. Who is to blame: The rules of the Maastricht Treaty were known by everyone at the outset and there were many architects of the Euro idea including Jean-Claude Trichet… Moreover, countries could have accepted or rejected the treaty. Every country had a vote.
Whose Debt Am I? – Peter Tchir / TF Market Advisors
First the EFSF had trouble raising money. Then EIB spreads widened. Then EXPT got crushed. And now Germany struggled to raise money.
Changing the Rules in the Middle of the Game – John Mauldin / The Big Picture
Changing the Rules - When Even Germany Fails - European Inverted Yield Curves - Time to Review the Bang! Moment - The Risk of Contagion in the US - Time to Start Watching China, New York, China, and Some Links.
European ERM 1992 Replay: Same Problems, Same Issues, Same Countries, Only the Politicians Differ; Irony of the Maastricht Treaty – Mish’s
The irony of the Maastricht Treaty is that it did temporarily bring about the currency stability everyone wanted. However, that currency stability came at the expense of something far worse - inherent interest rate instability (coupled with heightened fiscal instability). It just took some time to play out.
Monitor: Euro debt crisis watch – Danske Bank (pdf)
It now seems that the market is attaching not only a credit premium between the individual countries, but also a credit premium to the euro itself.
The ‘Last Days’ of the Euro – alphaville / FT
Jonathan Wilmott / Credit Suisse: we’ve seen the end of the muddle through — also known as kicking the can down the road — because market forces will drag Sarkozy and Merkel kicking and screaming to the negotiating table.
An alternative theory is that the imbalances were caused by internal policies – perhaps the creation of the euro and the gearing of monetary policy to German needs at the expense of the periphery? – which led to the severe internal imbalances. These imbalances created employment growth in the countries that suppressed consumption, and forced the countries that didn’t to choose between debt and unemployment. Of course since the latter countries had no control over monetary policy, the choice was largely made for them by the ECB with its excessively low interest rates, and their debt levels surged.
Death of a currency as eurogeddon approaches – The Telegraph
This has made it impossible to hedge against eurozone sovereign debt purchases, and thereby destroyed the market. Worse, it's made investors believe that the euro cannot be trusted, that it'll repeatedly find ways of reneging on contract. That's the point of no return. This is no longer a serious currency.
‘PLANS’ (EURO BONDS, EFSF ETC.)
Credit Suisse Goes For Broke: Predicts End Of Euro, Escalating Bank Runs On "Strongest European Banks" – ZH
We suspect this spells the death of “muddle-through” as market pressures effectively force France and Germany to strike a momentous deal on fiscal union much sooner than currently seems possible, or than either would like. Then and only then do we think the ECB will agree to provide the bridge finance needed to prevent systemic collapse.
EFSF, We Hardly Knew You… –TF Market Advisors
Peter Tchir: The EFSF should announce bonds sales to the Fed…The Fed has been dying to do some quantitative easing and has been looking for a liquidity crisis in need of some liquidity. It has also been looking (quietly) for ways to keep the dollar weaker.
Euro bonds: The tricky path toward greater fiscal integration, take two – Free exchange / The Economist
The first thing to note is the fantastically aspirational name these euro bonds are given: "stability bonds". The Commission has three proposals ranging along the continuum of moral hazard.
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)
Euro Schizophrenia in Germany – Testosterone Pit
Plans A: An integrated and centralized Eurozone, B: Eurobonds, C: ECB prints unlimited amounts of money to monetize the sovereign debt of whatever country needs it, D: Germany exits the EZ and starts a mini-Eurozone of like-minded states who believe in the exotic concept that a currency shouldn’t lose its value.
Worry About Narrowing European Spreads – The Source / WSJ
If, on the other hand, a euro bond is agreed, in effect it means Germany and the rest of the core have agreed to pick up the bill. Oh sure, countries at the periphery will agree to structural changes in their economy and to strict rules on debt and deficits. But those rules will be broken. Investors know that and German debt will consequently suffer. Already there are signs of this shift in sentiment.
BANKS
The Complete And Annotated Guide To The European Bank Run (Or The Final Phase Of Goldman's World Domination Plan) – ZH
Excellent report with tons of charts from the GS – just be careful as the post mixes NYT article and Tyler’s comments in the content.
Excellent report with tons of charts from the GS – just be careful as the post mixes NYT article and Tyler’s comments in the content.
European banks' asset sales face disastrous failure – IFR
People involved in asset sale talks say price is the major sticking point. Lenders want only to sell higher-quality assets near to par value so as to avoid huge write-downs, which would erode capital further. By contrast, potential buyers want high-yielding investments and are offering only knock-down prices.
Manufacturing quality collateral – alphaville / FT
Regulators are demanding that banks set aside larger amounts of high-quality liquid assets to help them withstand periods of market stress. The problem is, despite large stimulus-motivated issuance by AAA governments, there’s still not enough of the quality stuff to go around. Stress in collateral markets is rising as quality collateral becomes impossible to find. The quality grab is not only forcing down yields in safe haven bonds, it’s seeing the rates charged for borrowing cash against the bonds fall to all-time lows.
Regulators are demanding that banks set aside larger amounts of high-quality liquid assets to help them withstand periods of market stress. The problem is, despite large stimulus-motivated issuance by AAA governments, there’s still not enough of the quality stuff to go around. Stress in collateral markets is rising as quality collateral becomes impossible to find. The quality grab is not only forcing down yields in safe haven bonds, it’s seeing the rates charged for borrowing cash against the bonds fall to all-time lows.
Suddenly, everyone is discussing how the IIF “deal” made sovereign CDS worthless and that is why we are seeing a renewed sell-off in sovereign debt. That is just plain wrong. What the Greek “deal” did was make it perfectly clear, that banks that survive on the benevolence of the ECB directly and the IMF/EFSF bailing out their positions indirectly, will do what the governments tell them to do.
Dexia Bailout On Verge Of Collapse, Threatens To Take France AAA Rating Down With It – ZH
Given the change in market conditions the commission, according to the article, is concerned at the ability of each country to finance its respective guarantee (most obviously Belgium) and therefore can renegotiate the October bailout deal…We suspect that there will be some renegotation that pushes more pain to bondholders in return for France shouldering more of the burden and so a DEXCL decompression vs Belgium-France compression trade makes some sense (as a risk-transfer trade) but cost of carry is high. Perhaps the simplest way (and cheapest) is outright short France credit.
Given the change in market conditions the commission, according to the article, is concerned at the ability of each country to finance its respective guarantee (most obviously Belgium) and therefore can renegotiate the October bailout deal…We suspect that there will be some renegotation that pushes more pain to bondholders in return for France shouldering more of the burden and so a DEXCL decompression vs Belgium-France compression trade makes some sense (as a risk-transfer trade) but cost of carry is high. Perhaps the simplest way (and cheapest) is outright short France credit.
ECB
"Whither Europe?" - UBS' George Magnus Asks What Happens After The ECB Prints – ZH
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?
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?
The Next Strategic Target: De Gaulle’s EU Legacy – PIIE
No euro area fiscal entity exists, so the ECB cannot perform a "bridge function" until the proper authorities take over. With a euro area fiscal entity decades away, any bridge set up by the ECB would only be a bridge back to its own printing presses in Frankfurt… The ECB now faces a new round of "strategic bargaining" with euro area governments to complete the partially built euro area institutional house. The issue now is how the ECB might influence the political process toward a "quantum leap" in European integration, as repeatedly advocated by former ECB president Jean-Claude Trichet and other policymakers.
The risks of sticking to über harte währung strategy – alphaville / FT
Dylan Grice / SocGen: It was not the inflation that led to Hitler’s rise – it was Germany’s insistence to keep the DEM linked to gold, forcing the economy through deflation and unemployment above 30%. (Exactly what they are doing now. Why they blame their history on inflation is anybody’s guess – MoreLiver)
ECB interventions – what lies ahead – Crédit Agricole
Investors' hopes lie in the ECB fixing the Eurozone bond market, but a QE-style unlimited purchase programme is a very distant prospect, in our view. Still, the ECB can and should do more to ease monetary conditions further in the near term. On the broad bank-funding side, the ECB is likely to cut rates further below 1.00% while placing growing emphasis on money and credit developments. Our central case is now for the Refi rate to be lowered to 0.50% by March 2012.
The crucial question, then, is what, if anything, governments can do to gain the ECB’s backing. For all its talk of non-interventionism, the ECB has become a political actor -- most notably by withholding support for the Italian bond market in the crucial week before Silvio Berlusconi’s ouster as prime minister. ECB President Mario Draghi never specified why. Nor did Draghi or German Chancellor Angela Merkel ever say what would qualify as behavior worthy of support, other than to pledge allegiance to the euro while insisting that the central bank won’t act as a lender of last resort.
GERMAN BOND AUCTION
The bund that broke the Bundesbank – alphaville / FT
It is the Bundesbank which is cornering the bund market on purpose. And it’s doing so to ensure that the one last repo rate in Europe that can be controlled remains suppressed. The rate is important to suppress because almost all interbank funding is now done on a secured basis against the best quality collateral.
It is the Bundesbank which is cornering the bund market on purpose. And it’s doing so to ensure that the one last repo rate in Europe that can be controlled remains suppressed. The rate is important to suppress because almost all interbank funding is now done on a secured basis against the best quality collateral.
Germany: we can monetize our debt, but the ECB can’t! – Pragmatic Capitalism
What will the other national central banks make of this? And better yet, what will they do about it? If Germany is seen as being in direct violation of the Maastricht Treaty then the entire charade becomes a violation of such magnitude that all nations involved have to begin wondering why they’re abiding by the German austerity plan while also adhering to the German rule of no ECB engagement in periphery bond markets?
More on the German bond auction – Pragmatic Capitalism
Regardless of whether we deem this to be a “monetization” or a “suspect” response to their own illiquid bond auction, one thing is clear – the situation in Europe is deteriorating as even the most liquid of bond markets are now clearly at risk. The great irony here is that the arrangement in Germany allows them to intervene in their own markets while they frown on the idea of the ECB intervening in markets (although it’s still occurring).
Revisiting Today's "Failed" Bund Auction: Less Than Meets The Eye – ZH
"failed" Bund auctions happen all the time. SocGen’s analysis letter, today's pics are from here.
"failed" Bund auctions happen all the time. SocGen’s analysis letter, today's pics are from here.
'The Crisis Has Hit the Entire Core of the Euro Zone – Spiegel
Roundup of views from seven German newspapers.
Do you believe in Merkels? – alphaville / FT
It’s highly unlikely that the Bundesbank will fail to make payments when they fall due, but this week has exposed a qualitative difference between a true sovereign currency, and one designed by committee, held together by ideology and political sticking-plaster. This uncertainty has bred the euro discount, and the result is the bizarre spectacle of cheaper money for the UK government than for the Germans.
It’s highly unlikely that the Bundesbank will fail to make payments when they fall due, but this week has exposed a qualitative difference between a true sovereign currency, and one designed by committee, held together by ideology and political sticking-plaster. This uncertainty has bred the euro discount, and the result is the bizarre spectacle of cheaper money for the UK government than for the Germans.
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.
PIIGS
Nomura "Goes There" With "The Legal Aspects Of A Eurozone Breakup" – ZH
Full research note on scribd: Eurozone break-up risk has risen notably over the past few months, as European policy makers have failed to put in place a credible backstop for the larger Eurozone bond markets. Given this increased risk, investors should pay close attention to the ‘redenomination risk’ of various assets.
The legal aspects and abstractions of a euro redenomination – alphaville / FT
Commenting Nomura’s research piece I linked earlier today. If a country adopts a national currency, how will their foreign currency-denominated debt going to be handled.
Commenting Nomura’s research piece I linked earlier today. If a country adopts a national currency, how will their foreign currency-denominated debt going to be handled.
On Technical Barriers to Leaving the Euro and Learning from Others’ Experience – EconoMonitor
1) Use a temporary currency, 2) Do not fear parallel currencies, 3) Default early, but not often and Not all exit problems are mere technicalities
Latest Idiotic Plan: No Losses for Banks or Bondholders because "Losses Undermine Confidence" – Mish’s
That's right folks, we are going to bail out the banks and no one has to take any losses (except taxpayers of course who will "share" 100% of the risk). Otherwise there will be a "loss of confidence" in the same banks that plowed into Greek, Spanish, Irish, and Portuguese debt because supposedly there would be no losses on sovereign debt.
OTHER
Grant Williams’ latest newsletter with multiple topics.
Policy News Trumps Economic Data As Biggest Driver Of Tail Risk Events – ZH
A research note from Goldman Sachs: US Daily: “Market Movers” – Policy News at Home and Abroad Driving Markets
A research note from Goldman Sachs: US Daily: “Market Movers” – Policy News at Home and Abroad Driving Markets
Lest We Forget: Why We Had A Financial Crisis – Forbes
It is clear to anyone who has studied the financial crisis of 2008 that the private sector’s drive for short-term profit was behind it. More than 84 percent of the sub-prime mortgages in 2006 were issued by private lending.
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.
Leads to lower volatilities and risk reversals and erratic spot action. Interesting topic that is not discussed much in the open. If you have any suggestions for readings, contact me – MoreLiver
DIVERSION
Use open-ended open source-stuff. Also other good ideas.
Buffett May Be No Match for Mobsters With Tattoos – View / BB
William Pesek’s story on Yakuza’s influence on business.
Sarkozy Warns of Euro Zone Collapse! Or, Rather, Sarkozy’s Brother Does. – MarketBeat / WSJ
Good story how the initial knee-jerk reaction was that it is the French PM speaking – continues with a story from Falkland war with a message of “Carrier Lost” on Telerate screen..
The Commandant: A Master Interrogator Reveals His Secrets – Farnam Street
Stephens didn’t believe in violence, instead, he applied many forms of psychological pressure.