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Monday, December 12

12th Dec - Post-summit pain bouncing

Markets have spoken, and are not very happy with the summit. The euro, bond yields and stock markets all show pure risk-off. If the markets are allowed to fall some more and  yield levels deemed unsustainable are again reached, EU is going to have a very hard time convincing anyone that their solution is working (unless they turn on the printers). What they should be doing right now is to intervene (ECB SMP) and threaten (more statements!) right now. The longer the risk-off continues, the harder it is to later repair the damage. Market might be forgiving and understanding, but it does have a long memory. Pain is stored and trust is diminished. 

The pain will come back, and Sarkozy will be robbed of presidency. Merkel will be robbed of German prudence: either Germany leaves and lets the Deutsche mark appreciate, destroying their competitiveness and pulling them into a long recession as they recapitalize their banks - or alternatively they turn on the printer and do what the text books suggest. But for the Germans, living off taboos and voodoo is in their cultural genes (they still believe inflation brought Hitler to power, while it was in fact deflation). They very well might do stupid things just to be prudent. May the Force be with you.

Moody's and Fitch's said the summit was too little too late, while S&P was only somewhat cautious.

Meanwhile, Iran is doing military exercises and nasty rumors say that the US stealth drone (that was not shot down, as it looked pristine) was brought down with electronic warfare equipment from Russia or China, and now Iran is trying to trade the drone for missile know-how, nuclear tech and modern SAM launchers. Given the development costs of similar tech and especially good counter to the product means it is a good deal. This is a planned deal. The master went fishing by throwing Iran into the lake and pulling a nice catch out of the waters.

In today's links there are few interesting pieces in the EU Summit Aftermath section. The PSI, debt brakes, ECB and the UK's decision to go and have something better to do are discussed extensively. And a link to a document about my hero, Feynman!

- MoreLiver

News (Mon evening) – BTH
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT

EURO CRISIS
No. The Bundesbank has not reached its limitKarl Whelan / voxeu.org
A recent Vox column argues that the Bundesbank is selling off assets to lend to peripheral central banks, that this process is about to end, and the result will be a catastrophe. This column argues that such claims are based on a misrepresentation of the Bundesbank’s accounts and a misunderstanding of ECB monetary policy. The Eurozone may be in crisis but for entirely different reasons.

SUMMIT AFTERMATH
A Deep Seated Hostility Towards European Construction?Credit Writedowns
Edward Hugh is in flames with this post. Excellent roundup.

A sub-optimal solution to the Euromessalphaville / FT
Roundup of comments from RBS, Rabobank, MS, Evolution, Cailloux

EU Summit: The jigsaw pieces are slowly coming togetherPICTET
All combined, the available funds will totalise some €900bn, which is still short of 1,500bn euros that will be probably necessary if you take into account the combined financial needs of the periphery and the banking recapitalisation costs. Due to this funding gap it is difficult to imagine an exit of the crisis without a step up of the central bank’s intervention.

Three Key DevelopmentsMarc to Market
ECB’s liquidity increase, EU summit and UK’s decision to stay out of the proposed new treaty.

Will Sarkozy Survive the First Round in French Elections?Mish’s
Recent polls show Sarkozy second to Mr. Hollande, both in first and possible second round. Hollande has stated that if he wins, he will renegotiate the last summit’s decisions. Also ZeroHedge.

The Sarko and Corzine tradealphaville / FT
“Loan money from ECB and lend it to
Italy” is a bad idea: would increase leverage (ahead of Basel III), ECB’s collateral claims are senior so bank bond holders would get hurt if something goes wrong.

No Draghi Ex MachinaKrugman / NYT
It’s actually quite remarkable how many sensible people base their analyses on the presumption that the ECB will do what has to be done… But as far as anyone can tell, the monetary cavalry aren’t coming. And the bond market has figured this out.

This is a new all-time low for the EUSaxo Bank
There is simply no way that Germany and France can implement the newly proposed “automatic policy” of debt brakes…We are one step closer to my “meeting of the Cardinals” next year, a new and “final” summit that takes place as the EU is more or less forced to declare a kind of Chapter 11 and realign itself drastically to allow it to become a sustainable operation.

Are Europe’s new debt rules impossible?Wonkblog / WP
Very good table from SG’s research showing how much member countries must cut their debt and budgets given the 1/20 rule and the 0.5% structural deficit limit.

Fines all round?alphaville / FT
Comments the above table: What was supposedly agreed in
Europe on Friday just ain’t gonna happen.

Whose PSI is it anyway?alphaville / FT
There is no magic rulebook because creditors exist in effectively a kind of anarchy with sovereign debtors. Sovereigns will typically enjoy legal immunity unless they specifically sign it away…

TMM announce the late running of The End of The WorldMacro Man
Critical measures to end the crisis: 1) cash to cover refinancing of Italy and Spain, 2) long-term bond buyers, 3) structural reform and 4) growth.  1 and 2 seem to be taken care of, while 3 and 4 remain open issues. TMM: Simply said, the World isn't ending just yet, friends.

FEAR OF DOWNGRADES
Moody’s: EU sovereigns remain under pressure  Credit Writedowns
Full press release via Credit Writedowns. Comments from ZeroHedge

Fitch offers critique of last week’s EU summitMarketBeat / WSJ
A lack of a comprehensive solution will put more short-term pressure on Fitch’s euro zone ratings, ECB is the only truly credible firewall against liquidity and even solvency crisis in Europe

French Downgrade – Even More Likely Than YesterdayTF Market Advisors

Sovereign downgrades and the eurozonealphaville / FT
Who would be hurt most by the downgrade? Sarkozy’s presidency and EFSF, of course, but also banks. RBS: French and German banks would be least sensitive as their ratings are already materially lower than their sovereign.

EU-UK RELATIONS
PM’s statement on the European Councilnumber10.gov.uk

EU commissioner picks fight with London after UK vetoeuobserver.com
Olli Rehn warned the UK that the City of London could not escape expanded European regulation of the financial sector and insisted that Brussels is on firm legal ground in the use of the EU institutions to police the new 'fiscal compact'

Sarkozy: UK decision has created 'two Europes'euobserver.com

Britain and the European Union – continuity or rupture?euobserver.com

OTHER
Jon Corzine, rogue traderFelix Salmon / Reuters
As a result, his big sovereign bet was, relative to the size of the company which made it, by far the largest rogue trade of all time.

The Volatility ParadoxRick Bookstaber
This pro-cyclical dynamic arising from lower volatility in times of increasing risk-taking is the volatility paradox. The main take-away from the volatility paradox is that we shouldn't use shorter-term, contemporary risk measures when they are very low.

How dealers may have exacerbated the funding crisisalphaville / FT
BIS: As their own funding conditions deteriorated, securities dealers tightened terms on securities financing and reduced their market-making activities… liquidity declined as market-makers sought to reduce inventories, the values of which had become significantly more volatile. But this reinforced volatility, as trades moved prices by more than previously.

Russia: Finally, politics is getting interestingDanske Bank (pdf)
More protestors than anticipated, middle-class still at home, but presidential elections in March might change that.

DIVERSION
Horizon: Richard Feynman - No Ordinary GeniusYoutube
Full-length (90 minutes) BBC documentary

You Say You Want a Devolution?Vanity Fair
For most of the last century, America’s cultural landscape—its fashion, art, music, design, entertainment—changed dramatically every 20 years or so. But these days, even as technological and scientific leaps have continued to revolutionize life, popular style has been stuck on repeat, consuming the past instead of creating the new. Also, a very nice commentary by Marginal Revolution.