My editorial from the last Weekender held up pretty well. This week we were supposed to get more details on the EU Summit's plans to stop the rot, but the Greek plans for a referendum on the austerity package stole the show. The roller coaster markets, the rumors, cliffhangers and late saves made this a very political week. I believe the markets will be very disappointed next week due to the lack of action by G20 and the general dragging of feet.
Quote of the week: No surprise, really — it took very little analysis to see that the latest moves were basically irrelevant to the real problems. But what we’re seeing now is that procrastination is no longer an option. The question is whether Europe is capable of doing anything real. – Paul Krugman / NYT
Quote of the week2: We debated back and forth and decided we didn’t want to be the first house to do it. There’s a lot of downside – you don’t want to be on the cover of the Financial Times. – Head of European Credit Trading for an US institution on selling CDS on EFSF International Financing Review
Past
News (Fri evening) – BTH
Week in review – DealBook / NYT
Weekly Scoreboard – BTH
Macro: Summary for Week – Calculated Risk
Credit: Weekly Update – Danske Bank (pdf)
Weekly Bull/Bear Recap – Rational Capitalist Speculator
Succinct summation of week’s events – The Big Picture
Future
Macro: Schedule for Week – Calculated Risk
This week in EU – euobserver.com
Weighing the week ahead – A Dash of Insight
Next Week’s Tape – MarketBeat / WSJ
Weekly Focus – Danske Bank (pdf)
Calendars
Economic Calendar – fxstreet.com
Monthly Economic Calendar – fxstreet.com
Economic Calendar – BB
EU calendar – europa.eu
EM Week ahead – beyondbrics / FT
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT
EURO CRISIS
multiple points, so nasty but true.
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?
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.
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.
Dicing with debt, EFSF edition – alphaville / FT
If the longer maturity is not getting demand, how about short-term money markets?
Pricing CDS on the EFSF – alphaville / FT
Funny take on the above article and an attempt to calculate
Euro Area Macro Handbook Nov 2011 – Danske Bank (pdf)
72 pages of macro data and commentary.
German new factory orders are dropping. The recession is now at the core.
Unlike in the post-war decades, Germans no longer want to escape to “Europe” from their difficult fatherland. Today’s generations are far too comfortable with being German to see Europe as the answer to all of their problems.
But at a certain point, a nation and a people need to do what it takes to protect their own interests, which is what Germans are trying to do. Creating a new Mark-based monetary union with fellow northern economies that maintain strict fiscal controls could help salvage something when the next economic tsunami hits Europe.
ECB's Teutonic Mario chills bond rescue hopes – The Telegraph
The language is code for what amounts to a German veto on further bond purchases… he is a New Keynesian soulmate of the Fed's Ben Bernanke, rather than the "hard money" doctrines of Jean-Claude Trichet. His curse is that he has to pretend otherwise.
ECB President Mario Draghi cuts the euro's last lifeline – The Telegraph
Having said it is no part of the ECB's function to act as lender of last resort to governments, it's hard to see how he can now reverse his stance. Instead, he's nailed his colours to the mast of the Bundesbank tradition. Not until the debt crisis spreads to the core, threatening the single currency as a whole, could he be persuaded.
The Challenge for Mario Draghi at the ECB – Foreign Affairs
As the European debt crisis grows more unwieldy by the day, the ECB may be the only entity with enough financial firepower -- the ability to bail out debt-ridden countries -- to reassure global markets. Critics argue the Bank should have stepped in as a lender of last resort long ago. Now the pressure is on Draghi take risks his predecessor refused.
Eurozone downturn accelerates at start of Q4, as German growth slows and France joins Italy and Spain in contraction
The only chance the euro zone has to escape the evolving debt deflation without a systemic collapse is by allowing the European Central Bank to take on a quasi-fiscal role in backstopping national government debt and allowing national governments to add net financial assets to the system without fear of insolvency. Short of this, we should definitely expect things in Euroland to get worse, not better.
GREECE
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.
And many ordinary Greeks, if not a majority, now want to break the pact. If the road to getting there wasn’t fraught with financial chaos, most would gladly give up Greece’s membership of the euro zone. Like Damocles, they want to give up the riches and go back to their old, simpler life.
Composition of Greek Government Doesn’t Really Matter – economistmeg.com
Greece can either undergo a decade of recession/depression to regain competitiveness or it can exit the eurozone and reissue the drachma. The latter option would be painful, but would allow Greece to regain competitiveness almost overnight and return to growth in a matter of months. Ultimately, I think this is the option that any Greek government—whatever its composition—will choose.
What's Really At Risk in a Greek Default – The Curious Capitalist / TIME
What do we care if the Greeks make a bad choice? Unfortunately, irrational Balkan behavior, though technically contained, has affected Europe and the world in the past. What would it mean in the early 21st century to have a country that is nominally part of the stable West, tearing itself apart? Political chaos in Greece shouldn't technically hurt the effort to raise funds to bolster Italy—but it's not hard to see how it could.
The fact Greece's exit from euro has been discussed openly is seismic shift – The Guardian
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.
Don’t watch Papandreou. Do watch the Greek banks. – Wonblog / WP
Daniel Gros: “It’s difficult to get good data,” he says. “But I’m trying to watch the Greek banking system to see whether there’s a rush to withdraw deposits. Right now, it’s been surprisingly slow. but if it accelerates that could spell the end.”
ITALY
Italy threatened with Troika, Merkozy sends inspectors – Mish’s
Italian settlement fail penalty, bond sell-off — causation or correlation? – alphaville / FT
Berlusconi Waxes Nostalgic About Lira, Among Other Musings – MarketBeat / WSJ
Berlusconi: Life was cheaper before the euro – euobserver.com
G20 SUMMIT
G20 defers – alphaville / FT
El-Erian: A disappointing G20 communiqué – alphaville / FT
Lacklustre G20 closes after being hijacked by eurozone crisis – euobserver.com
G20 is a dud – why are we ever surprised? – tradingfloor.com
Confidence and the G20 – Bruce Krasting
OTHER
Paul Volcker: Financial Reform: Unfinished Business – The New York Review of Books
Excerpts from SocGen’s latest research note: Credit-fuelled gullibility lies at the heart of most bubbles, but such gullibility provides quality fodder for fraudulent schemes too. No one notices on the way up.
Global Business Cycle Monitor – Danske Bank (pdf)
U.S. and especially European leading indicators negative.
U.S. Non-Farm Payrolls Danske Bank (pdf) - Mish’s - The Capital Spectator - tradingfloor.com - Econompicdata - alphaville / FT - Free exchange / The Economist - Wonkblog / WP - Mish’s - The Curious Capitalist / TIME - Calculated Risk 1 - Calculated Risk 2 - Calculated Risk 3 - Calculated Risk 4
The epistemology of US banks’ European exposure – alphaville / FT
Attempt to calculate the true exposure from public data. Interesting text on what is accounted for and how.
Joseph E. Stiglitz: The Globalization of Protest – Project Syndicate
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.
The Quant Stock Screening Bible – World Beta
Book Review: The Greatest Trades of All Time – The Aleph Blog
Global systemically important banks: Assessment methodology and the additional loss absorbency requirement – BIS