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| Tantrum time! No bond buys before QE/more SMP! |
Lots of material today, a pity since now I didn't have time for an editorial. But just as an appetizer, a new nick for the dynamic duo: Sarcomengel. There will be plenty of those tomorrow.
Today's sections: ECB, Treaty change, Bank stress tests and a very nice Breakup.
News (Thu evening) – BTH
Recap 8-Dec – GMT
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT
EURO CRISIS
Eurozone Leaders Rendezvous at ‘The Last Chance Saloon’? – Satyajit Das / EconoMonitor
Best pessimistic post I’ve seen in weeks, going through IMF, ECB printing, EFSF-type vehicle
Citi sees a long recession in eurozone, and it will, via diminished demand for imports and banks infect especially CEE, but also UK.
DB’s Chief Economist Thomas Mayer on the debt crisis – Deutsche Bank
ECB should set a cap on Italian bonds in unlimited quantities, if necessary.
Eurobonds are likely to increase the risk of joint defaults in the Eurozone – voxeu.org
Wolf Wagner: As government advisors and central bankers race through the different options to save the euro, this column argues that one such proposal, Eurobonds, will actually increase the risk that several Eurozone countries fail together. It shows using basic arithmetic that these bonds, sometimes labelled ‘stability bonds’, may actually be more likely to harm Eurozone stability.
Student With 0.0 Grade Average Has EU Insight – Jonathan Weil / BB View
The never-ending comedy that is Europe’s sovereign-debt crisis has reached its Otter moment. That’s when the world realizes the fundamental principle guiding every important government decision is this: “I think that this situation absolutely requires a really futile and stupid gesture be done on somebody’s part!”
Is the European Dream Over? – Ian Buruma / Project Syndicate
Since the EU is neither a nation-state nor a democracy, there is no “European people” to see the EU through hard times. Rich Germans and Dutch do not want to pay for the economic mess in which the Greeks, Portuguese, or Spanish now find themselves.
Predictions about the eurozone – Marginal Revolution
Roundup of writings from years gone by suggesting that the euro will not work.
Interactive EZ graphics:
Euro zone meetings in 2011 – Reuters
Timeline of Euro zone debt crisis in 2011 – Reuters
Euro zone debt crisis in graphics – Reuters
BREAKUP
Post-euro economies, charted – alphaville / FT
ING’s Mark Cliffe shows charts estimating the effects of euro breakup on different (ex)member countries, including loss of output, inflation, house prices and (new) national currencies. Charts go out to 2016. FULL REPORT HERE: PDF
Citi: Euro Breakup Would Result in Years of Global Depression – MarketBeat / WSJ
If Spain and Italy were to exit, there would be a collapse of systemically important financial institutions throughout the European Union and North America and years of global depression.
Banks Prep for Life After Euro – WSJ
Some central banks in Europe have started weighing contingency plans to prepare for the possibility that countries leave the euro zone or the currency union breaks apart entirely, according to people familiar with the matter.
The awful decisions facing the euro zone's leaders – Wonkblog / WP
The alternative is worse, of course. It's an unbelievable catastrophe, in fact. But how do politicians explain the abstract and unpredictable consequences of a break-up to their people? Do they tell them to go read this op-ed by William Buiter? Or this report from Nomura? Or this report from UBS? Elections are not decided by readers of the Financial Times.
The alternative is worse, of course. It's an unbelievable catastrophe, in fact. But how do politicians explain the abstract and unpredictable consequences of a break-up to their people? Do they tell them to go read this op-ed by William Buiter? Or this report from Nomura? Or this report from UBS? Elections are not decided by readers of the Financial Times.
ECB
Draghi Turns On Spigots, but Still a Drag – Credit Writedowns
Markets liked most, but the most important stuff: more bond purchases and IMF support were denied.
Draghi Courts Bundesbank in Bid to Avoid Trichet’s Fate on Bond Purchases – BB
Good article on Draghi, the lessons from his predecessor and the current situation.
Draghi drags his feet – Free exchange / The Economist
This division is worrying. If the ECB is split on the straightforward case for an interest-rate cut, it can scarcely summon consensus on the more complex business of government-bond purchases.
ECB to investors: Keep panicking – Wonkblog / WP
The market thought the idea was for the leaders to agree on fiscal measures and ECB to support the bond markets. ECB thought it was a bad idea.
The market thought the idea was for the leaders to agree on fiscal measures and ECB to support the bond markets. ECB thought it was a bad idea.
Keeping up the pressure – Buttonwood’s / The Economist
What Mr Draghi didn't offer is a blank cheque for politicians attending the EU summit. He may well have reasoned that the more he promised in advance, the less pressure the politicians would feel. Instead, he reiterated his demands… It is a sad state of affairs that it seems European politicians will only reform themselves with a gun at their heads but there it is.
ECB meeting: Draghi gives, Draghi takes – Danske Bank (pdf)
ECB: what started as a 100M dash is now a 10K road race! – Saxo Bank
The ECB is effectively telling the governments: This is no longer about liquidity but about solvency. Live up to your promises and good things will happen.
ECB offers liquidity tweaks, but patient wants stronger medicine – Saxo Bank
all about “liquidity enhancement”. With no indication of stronger move toward monetization, it is hard to see how the market will get much traction on risk from today’s meeting alone.
What the repo markets *want* the ECB to do – alphaville / FT
Nomura: To make matters worse, as far as increasing credit risk on the ECB’s balance sheet is concerned, the significant haircut differential between private repo and ECB repo leads to generally poor quality assets being posted to the ECB and quality assets being held for use in private repo or simply sold given the higher cash generating ability of the last two options.
What is the difference between LOLR to banks and to governments? – Marginal Revolution
The new game will be to generate lots of usable collateral, because the overall credit demands are going to be very high. Will the “not very tough cops,” namely the ECB-backstopped domestic banks, help the national governments avoid reforms and avoid IMF-enforced toughness? What does the endgame look like when the three years is up?
On the ECB’s ‘most significant non-standard measure’ – alphaville / FT
Since banks know they will get the liquidity they ask for, it suddenly makes sense for them to ‘transform’ as many illiquid holdings via the ECB as possible — even beyond their immediate liquidity needs. Meanwhile, because ‘prime’ collateral is of more use to them in public markets — a function of overall liquidity preferences– these securities are kept out of the ECB at all cost. A tiering effect begins to rip through the debt markets.
More on the ECB’s most significant non-standard measures – alphaville / FT
three-year LTROs, reserve cuts and collateral adjustments
three-year LTROs, reserve cuts and collateral adjustments
Introductory statement to the press conference – ECB
Eurosystem staff macroeconomic projections for the euro area – ECB (pdf)
TREATY CHANGE
EU might treat itself to treaty change – Macroscope / Reuters
29 articles and protocols that would need to be overhauled – and that’s assuming the European Parliament, eurosceptic Britain and others don’t come forward with a host of other demands. But even if that all went smoothly, there’s the ratification process.
Why the Euro Will Remain…a Different Kind of Currency – PIIE
Faulty initial designs need not preclude long-term success. A common currency area does not have to develop along the lines dictated by established economic theories, or be doomed to failure if it does not. Provided the political will is there, the euro can develop into its own unique and lasting supra-national hybrid currency.
Act II begins – TF Market Advisors
The moment a treaty agreement is announced (assuming it is) the market will turn its attention to the ECB, IMF, and Fed. The market will be desperately hoping that the ECB immediately follows up the “successful” treaty summit with a new and fresh commitment to become lender of last resort for sovereigns. Expect disappointment.
Markets have so far been supportive of the fiscal unification plan but only because they believe it will lead to a relaxing of the reigns on the ECB and it will therefore be allowed “print”. I don’t get the sense that this is the rationale for the Eurocrats, it certainly isn’t present in that letter. It is this divergence of goals that has the potential to lead to a very disappointed market as it did after the last summit.
The “Treaty” Negotiations – TF Market Advisors
Both the “prudent” and “irresponsible” countries have reasons to not like the idea of giving up sovereign power to Brussels, i.e. Merkozy.
Dear Herman, ... a polite request for EUTreaty change – Saxo Bank
Translates the treaty changes and comments: “People who enjoy meetings should not be in charge of anything” – Thomas Sowell
BANK STRESS TESTS
Latest Irrelevant European Stress Test Results Leaked – ZH
At least the amount at 110bn is closer to reality than the 4bn from the previous test. But the third-best bank in a super-stressed scenario is Intesa Sanpaolo…
Stress Test Reveal European Banks Need More Capital – DealBook / NYT
Germany’s banks showed more need for capital than in previous tests.
The problem with setting a capital ratio as a target is you can meet it in two ways. The big risk for the wider euro-zone economy is that the banks will do so in part by deleveraging, or cutting their lending.
Recommendation and final results of bank recapitalisation plan – EBA