Excellent articles, several must-reads in this post. I had something to say earlier today, but I believe your interests are best served by reading the material and just thinking about the below three-point crisis map. MoreLiver’s Crisis Rules
1. Do they have a plan – if not, the leaders have trouble sticking to the same story
Quote of the Day: Last week a journalist conducted a poll asking if the euro crisis was over. Far from it – the ECB has just bought a bit more time for European leaders to waste. – Lombard Street Research
Joke of the YEAR: Guess who was hired to head the fund-raising of ESM? Jacques Santer, previously the president of the EU Commission that resigned in 1999 amid allegations of corruption. An independent panel at the time noted that "it is difficult to find anyone who has even the slightest sense of responsibility" in his institution. – euobserver.com
FX option vols – Saxo
Debt crisis: live – The Telegraph
Europe Crisis Tracker – WSJ
EURO CRISIS: GENERAL
Market Implications of an EMU break-up – Capital Economics (pdf)
47 pages of break-up porn. Base scenario Greece leaves this year, several other small countries next year. But even a bigger or even complete break-up is possible. Very quick summary at FT
Economic Adjustment In Euroland: Where Do We Stand? – The Daily Capitalist
This white paper by Tom Mayer, Chief Economist of Deutsche Bank Group, discusses a serious problem underlying the EMU. It seems that this problem is not easily solvable and threatens to wreck the entire euro system. Basically it comes down to the fact that the PIIGS’ central banks owe Germany’s Bundesbank a lot of euros which is impossible for them to refund, at least not without an very difficult restructuring of their economies.
Euro area recession expected to be short – Danske Bank (pdf)
Flash Comment: Euro area: PMIs signal that worst is over – Danske (pdf)
EURO CRISIS: ECB
Das Kapitulation – ZH
JPMorgan’s research note: But the biggest market-moving event so far this year is undeniably the positive aftershock from Germany’s capitulation on monetary expansion. The mechanism: the long-term refinancing operations (LTRO) of the ECB
JPMorgan’s research note: But the biggest market-moving event so far this year is undeniably the positive aftershock from Germany’s capitulation on monetary expansion. The mechanism: the long-term refinancing operations (LTRO) of the ECB
Margin call, the LTRO movie – alphaville / FT
Nomura’s research note: As the LTRO is a repo transaction the ECB takes in collateral in order to back any loans. This highlights one of the key differences from QE, which entails the asset risk being removed from the bank’s balance sheet and replaced with cash. Under the LTRO framework the economic benefit remains with the bank. (So what happens when the ECB makes a margin call??)
Go directly to the ECB, do not pass Go, do not collect €200 – alphaville / FT
ECB’s very first LTRO, by attracting the cheapest-to-deliver collateral (Greek debt), may have been a key catalyst in destabilising the Greek repo market…this time it could all lead to a withdrawal of funding on a much larger level.
ECB’s very first LTRO, by attracting the cheapest-to-deliver collateral (Greek debt), may have been a key catalyst in destabilising the Greek repo market…this time it could all lead to a withdrawal of funding on a much larger level.
EURO CRISIS: GREECE
Greek Bondholders Reject Deal; History Lesson on Defaults; The ECB's Dilemma; Deadline Laugh of the Day – Mish’s
The Greek debt talks fall apart – Felix Salmon / Reuters
80%+ Immediate Downside To Par For New Greek "Fresh Start" Bonds – ZH
Greece is stumbling and European political dithering has not helped. We are witnessing political masturbation at its worst. And what is this rubbish that the private sector creditors "have the upper hand"? I will repeat, it's high time Europeans banded together to resolve this debt crisis once and for all and they should start by teaching hedge funds a lesson. Let me be blunt: Fuck the hedge funds and anyone else holding out, just impose the debt deal on all bondholders and get on with it already.
EURO CRISIS: OTHER PIIGS
Once Greece is "sorted out", Portugal will come into market's focus even more. The notion that they can return to markets for funding in 2013 seems increasingly unlikely. Therefore a high probability of a Greek-style mess for Portugal will be pressuring European markets going forward.
And here is the paradox: if Greece succeeds in persuading the ad hoc creditors to accept a 3.5% coupon, which it won't absent cramdown and CDS trigger, Portugal will immediately if not sooner proceed with the same steps. There is however, a problem.
Major strikes are planned across Italy today. Below we look at some of the implications:
Monti’s reform proposals were passed by his cabinet on Friday, but parliament has up to 60 days to pass the measures, meaning Monti has a bit of breathing space – but not much.
IMF’s REPORTS (summaries, full pieces, commentary)
How to Exit the Danger Zone: IMF Update on Global Financial Stability – iMFdirect
Firewall, bank deleveraging controlling, bank capital increase, solvency of sovereigns top priority but growth is needed, countercyclical policy needed where available.
Driving the Global Economy with the Brakes On – iMFdirect
Our forecasts are based on the assumption that these measures will be adopted, and the Euro crisis will slowly decrease in intensity. If they are not, one can fear the worst. If they are adopted decisively, the world economy may perform better than our forecast.
Global Financial Stability Report Market Update – IMF
The euro area debt crisis has intensified further, requiring urgent action to prevent highly destabilizing outcomes.
World Economic Outlook Update – IMF
Global Recovery Stalls, Downside Risks Intensify
IMF released an update to their Economic Outlook earlier today: In other words: China has room for manoeuvre, everyone else has a delicate balancing act.
The IMF's latest forecast: Perverse austerity – Free exchange / The Economist
Got that? Cut the deficit too aggressively, and the negative impact on growth and the rise in the cost of debt service from higher spreads could result in a higher, not lower, debt-to-GDP ratio.
FOMC
Goldman Previews The Fed's Statement, Plays Down Expectations Of A "Dovish Surprise" – ZH
FOMC preview: Historical change in communication – Danske (pdf)
When Fed announces rates and presents new projections on Wednesday, it will mark a historical day in Fed communication. For the first time Fed will provide projections for the Fed funds rate based on the individual members’ forecast.
OTHER
Japan is expected to report its first annual trade deficit since 1980 on Wednesday. Guess what might happen to the huge government debt then?
A Backtest that Filters Company Fundamentals by Macro Environment – HistorySquared
JP Morgan published, publicly by mistake it seems, the results of a research project that sought to discover which company fundamental factors did well in varied macro environments. They examined 36 factors in 6 different macro states over 17 years.
Capital inflows, exchange-rate flexibility, and credit booms – voxeu.org
The prospect of expansionary monetary policy in Europe and elsewhere has triggered memories of hot flows of money, credit booms, and instability in emerging economies. This column shows that during capital-inflow bonanzas credit grows more rapidly and its composition tilts to foreign currency more markedly in economies with less flexible exchange-rate regimes. It proposes policies to help mitigate the boom and bust in these countries.
The Libertarian and the Lobbyists – Simon Johnson / Project Syndicate
Story A) governments just lost control or B) banks bought their way to no government control
DIVERSION
Confessions of a Davos spouse – Reuters
Are there any Davos Husbands lurking about? What do people talk about at the dinner parties? How’s the nightlife?
The Government Would Prefer It If You’d Stick To Stupid Insider Trading – Dealbreaker