Hello there! Again a massive Weekender linkfest. After the dust has settled, the true importance of the EU meeting is now understood. The dirty unpopular politics have been outsourced to the ECB. ECB alone decides what collateral it accepts and what haircuts it will use. With the unlimited 3-year LTRO it is hoped that a circular solution would be found – banks loan money from the ECB, buy Italian and Spanish bonds and deposit these back to the ECB. Liquidity problems solved! PIIGS survive!
This is the so-called Sarko-trade (or Corzine trade). Understanding its rules and limits is key to understanding the short-term developments of the European crisis. The banks need all the liquidity they can get and might not be interested in new bond purchases from the primary (=auctions) or secondary markets.
If banks would do the Sarko-trade in size, they would also become even more exposed to the ECB’s whims. This means the ECB and the governments could easily pressure them later to e.g. take "voluntary" writedowns (=PSI).
The recipient countries of these Sarko-trades would also be in a difficult position. If the level of fiscal austerity, technocratism and lack of criticism is not at a high level, ECB might increase the haircuts on those sovereigns and de facto bring down that country's financing. This is not folio hat stuff - ECB already kicked out Berlusconi - and if they could kick him out, they can get rid of anyone. The politicians know this and will prefer playing along.
The recipient countries of these Sarko-trades would also be in a difficult position. If the level of fiscal austerity, technocratism and lack of criticism is not at a high level, ECB might increase the haircuts on those sovereigns and de facto bring down that country's financing. This is not folio hat stuff - ECB already kicked out Berlusconi - and if they could kick him out, they can get rid of anyone. The politicians know this and will prefer playing along.
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| We had a decade unlike the others. Now it is back to 'business as usual'. |
Then to this weekend's wonderful links. Given the editorial, a dedicated section on the Sarko trade and a new Views with market analysis and opinions from sources that are, well, authoritative.
PAST
News – (Fri evening) – BTH
Recap 16-Dec – GMT
Politics this week – The Economist
Business this week – The Economist
US Macro Summary – Calculated Risk
Weekly Bull/Bear Recap – Rational Capitalist Speculator
Succinct Summation of Week’s Events – The Big Picture
FUTURE
Things that make you go hmmm – Grant Williams / The Trader
Weighing the Week Ahead – A Dash of Insight
US Macro Schedule – Calculated RiskWeekly Focus – Danske Bank (pdf)
Credit Weekly – Danske Bank (pdf)
Next Week’s Tape – MarketBeat / WSJ
EM Week ahead – beyondbrics / FT
Economic Calendar – fxstreet.com
Monthly Economic Calendar – fxstreet.com
Economic Calendar – BB
EU calendar – europa.eu
FX option vols – Saxo
Markets Live – alphaville / FT
Debt crisis: live – The Telegraph
Europe Crisis Tracker – WSJ
Interactive service, seems to have updated data. Good example by Big Picture. This has been moved “upstairs” among the regular daily links – for now.
Long article, unfortunately on three separate pages: Draghi may be signaling that the ECB will only ramp up bond purchases, in effect buying time, if European leaders commit that euro-zone countries as a whole will get a handle on the government finances of member countries.
My working hypothesis is that there will be a messy negotiated compromise to the European problem. It will include many participants and some leverage. Austerity. Sale of public assets. Haircuts on debt. Eurobonds. ECB bond buying. It will include everything that has already been mentioned and some things we have not yet heard about.
Congress is finally starting to confront the impact of the debt crisis in Europe on the U.S. And legislators on both left and right are casting a skeptical eye on the U.S.’ increasing support for the continent’s ailing banks.
Fitch Places Belgium, Spain, Slovenia, Italy, Ireland and Cyprus on Rating Watch Negative – Fitch Ratings
a ‘comprehensive solution’ to the eurozone crisis is technically and politically beyond reach...In the absence of a ‘comprehensive solution’, the crisis will persist and likely be punctuated by episodes of severe financial market volatility that is a particular source of risk to the sovereign governments of those countries with levels of public debt, contingent liabilities and fiscal and financial sector financing needs that are high relative to rating peers.
GREECE
The IMF’s Greek sunk cost – alphaville / FT
It wouldn’t be in this situation if a debt restructuring had been advised to Greece and its EU creditors earlier in the bailout, most likely before any IMF money had landed in Athens. The restructuring would have hurt, but surely it would have hurt less than the pathological procrastination that has since taken over.
It’s Not So Easy To Get Away From This Voluntary Greek Bond Swap – Dealbreaker
More on the PSI mess of the Greek bonds.
SARKO (CORZINE) TRADE
The Eurozone’s policy breakthrough? – Interfluidity
If the ECB prefers that Italy “face market discipline”, it can quietly hint its concern and steepen the haircuts it imposes when the country’s bonds are offered as collateral. Banks will start to divest, replacing them with whatever the ECB favors.
The Corzine Trade vs French Downgrade – TF Market Advisors
As banks rely on the ECB to fund themselves and to put on disproportionately large positions who will lend to them? Who will buy the shares? At first it may seem good, but they will be at the mercy of the ECB and the politicians. With Greece the politicians have already shown a willingness to try to dictate policy for banks. The on again off again rumor of a financial transaction tax will come back.
Banks resist European pressure to buy government debt – IFR
With bank debts coming due and most firms unable to raise fresh funds in bond markets – which remain largely closed – bankers say it is much more prudent to use ECB loans to pay off their own creditors rather than speculate that European governments pay back all their debt.
The euro crisis: Is everything fixed? – Free exchange / The Economist
Banks around the periphery are in a difficult situation. If the sovereign fails, they fail and vice-versa. Given this, there might be some logic to a move to go all-in on the sovereign's debt: hope that funneling ECB loans into sovereign debt will take some pressure off the government, and that over time confidence will return and everyone's bets will turn out all right. On the other hand, markets and regulators are pushing against such a move, demanding that such banks raise capital and reduce exposure to risky debt.
Christmas t.t.t.timing – Macro Man
The argument against this is that the problem isn't actually solved and is rather just being stored up for the future. but we feel that the more that reasons to be short euro are hung on longer and longer term arguments, as the short term concerns are defused, then the more likely we get a relief rally.
ECB Liquidity: Back-Door Bazooka Or Suspension Of Democracy, BARCAP Opines – ZH
BARCAP: Liquidity is needed to keep the patient alive for 3 years or so. But that's pointless if no surgery is done over that time to heal the patient. The surgery is now a go. The democratic experiment is over.
The MF Global Trade Is Not Coming To (European) Town - Why The ECB's 3 Year LTRO Is The Latest Bailout Flop – ZH
BANKS
Deleveraging in the Eurozone – Kinsella & O’Sullivan /voxeu.org
The capital shortfall at EU banks is 8% higher than originally thought, according to the latest assessment from the European Banking Authority. This column examines the evolution of loan-to-deposit ratios in big European banks. It says banks have been buying back their debt securities, hoarding profits, limiting bonuses, and deleveraging. However, write-downs of sovereign debt have largely offset these efforts.
…buy some incredibly expensive credit protection. Credit protection that might be so costly so as to significantly exceed the present value of the expected losses on the asset…And why would any bank pay over the odds for protection? Because regulations grant capital relief for buying it anyway — in the form of lower risk weights. In addition to which, it may kick out the losses over a longer period.
ParaNoyer – The View from the Bridge
The other factor that Noyer has chosen to ignore is that the UK banks have been through a recapitalisation process…On Friday the Basel Committee on Banking Supervision confirmed that French banks such as Soc Gen and Credit Agricole could not double count assets in their insurance company subsidiaries for Tier 1 capital purposes.
VIEWS
May the Gamma be with you – The Trader
Credit Suisse’s presentation Feb 2011: Equity Correlation and Macro Investment Decisions, Crash Risk and Correlation Trading Paradigms by Mr. Mika Toikka
The Mother Of All Chart Porn - Presenting Goldman's Top 100 Favorite Charts – ZH
Goldman Sachs: In it, we take the best charts that we have published throughout the year and rearrange them to tell the story of the world. Our story is not just of 2011, but also of the years to come, as the world changes at a rapid clip.
The consensus is right, financials outperform, euro rallies, oil drops below $70/barrel, sovereign default…outside the Eurozone, US 10-year Treasury yields break out, an Italian sovereign upgrade, an E(M)U exit, fewer than five governments switch hands, Britain does great.
Deutsche’s Reid on shorter business cycles – alphaville / FT
DB: As policy flexibility to address structural problems has ended, business cycles will become shorter – and a recession in 2012 is probable.
Outrageous Predictions – Saxo Bank
Are Treasury bonds a crowded long? – Humble Student of The Markets
While investors may be rushing into US Treasuries, the safety trade is nowhere near a crowded long, which indicates that risk-off trade has more room run.
OTHER
Bubble Trouble – Reuters (pdf)
Olympus wanted $1.7 billion in financial market losses from Japan’s bubble days to fly away. Instead they came home to roost
Lehman Trader Goes Mad, Geithner Saves Citi: Top Business Books – BB
Madness, hubris and betrayal: Who needs drama when all the elements of a Greek tragedy, including Greece itself, can be found in the best business books of 2011?
Tool detects patterns hidden in vast data sets – EurekAlert
Researchers from the Broad Institute and Harvard University have developed a tool that can tackle large data sets in a way that no other software program can.
Book Bits For Saturday – The Capital Spectator
DIVERSION
The World this year – The Economist
The Dismal Education – Sunday Review / NYT
In other words, are selfish people disproportionately likely to become economists? Or is there something about being an economist (or being on the receiving end of economics education) that makes people selfish?
Rogoff on chess addiction and why he had to give up the game – Chessbase
One of the highlights of the London Chess Classic has been the visits of a large number of important and interesting people. One of them, the Professor and world-renowned economist Ken Rogoff, is also a chess grandmaster. He was whisked away from the VIP room at Olympia for an interview with the BBC, in which he very frankly discusses the dangerous side of his former chess career.
The case against Santa – 3 quarks daily
The exclamation at the end of Santa Claus is Coming to Town captures the moral ambiguity that the Santa myth imposes on us: “You better be good for goodness sake.” Could there be a more confused moral prescription?
Philip K. Dick on Beauty, Suffering, and the Nature of the Universe – brainpickings
What a woman with a fish necklace has to do with Blade Runner and the “terrible law of the universe.”
Schiedel and Friesen calculated a Gini coefficient of 0.42–0.44 for Rome. By comparison, the Gini coefficient in the U.S. in 2007 was 0.45… In other words, what we see as the glory of Rome is really just the rubble of the rich, built on the backs of poor farmers and laborers, traces of whom have all but vanished. It’s as though Rome’s 99 percent never existed. Which makes me wonder, what will future civilizations think of us?
Of interest to hackers, quants and military buffs. For more geopolitical fun in Asia-Pacific, I’ve recently stumbled to an interesting site The Diplomat – take a look!
Video + transcript: People look to Beijing to intervene against corrupt local officials, and Beijing is often able to shield itself from criticism by setting itself apart from local governments that are most often the targets of social unrest.
Decking the Halls, Carlyle Style – DealBook / NYT
The private equity firm produced a comedic mockumentary called “Holiday Founders’ Video,” which it will send to its investors on Friday.
The Zombie Apocalypse of Daniel Defoe – Lapham’s Quarterly
Defoe’s novel, published in 1722, is a mutant factual-fiction that recounts the plague epidemic of 1665, which dispatched almost 100,000 Londoners.
The Year in Volcanic Activity – The Atlantic
Great photos.