Here is a fine selection of this week's best blog writings. Coming up next: Press Digest, Weekly Support and Weekender-posts. I'm thinking of experimenting with not inserting a break to the posts - meaning that the front page of the blog would show only one post fully. What do you think?- MoreLiver
EURO CRISIS: GENERAL
Staring into the Abyss – John Mauldin / The Big Picture
Excellent post, and even some concrete guidance for the eurocrats. Spoiler: they will not like Mauldin’s message.
Excellent post, and even some concrete guidance for the eurocrats. Spoiler: they will not like Mauldin’s message.
That’s not a bazooka… – alphaville / FT
Authors of still the best articles on euro crisis argue: Any successful program must recognize the fact that appetite for periphery debt amongst investors will not recover to “precrisis” levels, because default risk is now a reality that was not foreseen prior to 2009 and because debt stocks are now higher in the periphery – so the ‘bazooka’ should be €2.5 or even €5 trillion. Full document here
Authors of still the best articles on euro crisis argue: Any successful program must recognize the fact that appetite for periphery debt amongst investors will not recover to “precrisis” levels, because default risk is now a reality that was not foreseen prior to 2009 and because debt stocks are now higher in the periphery – so the ‘bazooka’ should be €2.5 or even €5 trillion. Full document here
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.
Long and insightful article: The time, effort and, in addition, vast sums of money wasted on Greece is a joke, indeed criminal. We all know that Greece will default – it is not an “if”, but a “when”.
Subordination 101: A Walk Thru For Sovereign Bond Markets In A Post-Greek Default World – ZH
Huge article goes deeper into how sovereign defaults happen and what they mean.
Huge article goes deeper into how sovereign defaults happen and what they mean.
Hell, Handbaskets and Hellenic Default – London Banker
If any OECD state were to default there would be very serious implications: the Basel Accord zero risk weight of government debt would be proved fanciful; the assumption of government debt as a liquid asset suitable for bank Tier 1 reserves to meet unanticipated and sudden cash demands will become unsustainable…
Why Are Greek Credit Event Swaps Still In The Mid 60′S? – TF Market Advisors
The Net Notional of Hellenic Republic CDS outstanding is only around 3 billion (less than 1% of the debt outstanding). After the PSI deal is done, the amount of debt would be reduced, but a default on a relatively small amount of holdout debt ($10 million I believe), would cause a Credit Event for the entire amount of CDS outstanding.
Greek Bondholders Reject Deal; History Lesson on Defaults; The ECB's Dilemma; Deadline Laugh of the Day – Mish’s
Paying Lip Service To Saving The Eurozone – Testosterone Pit
So, they’re going through a drawn-out step-by-step procedure of demands for reforms, promises, failed implementations, rebukes, withheld bailout transfers that then might still be made, and so on. The idea is to keep markets from panicking, give governments time to prepare for the inevitable, and render politicians blameless for Greece’s exit from the monetary union.
There are official creditors, and there are “official” creditors – alphaville / FT
IMF warns that even public creditors of Greece could have to participate in the restructuring, while ECB is (obviously) against it. IMF will not give more money before restructuring, so ECB will have to cave in, sooner or later.
IMF warns that even public creditors of Greece could have to participate in the restructuring, while ECB is (obviously) against it. IMF will not give more money before restructuring, so ECB will have to cave in, sooner or later.
Will the ECB take a haircut? – Credit Writedowns
While the ECB formally demands full repayment, since it bought the bonds at a discount, it could take some haircut notional and still be kept whole. The IMF, however, is less likely to accept a haircut, as it would likely fear the precedent.
EURO CRISIS: OTHER PIIGS
The problem here is that if you don’t “perfectly understand” why the country had the crisis in the first place, then you may not be able to put the consequences straight. Spain’s problems have a clear European dimension, a dimension which goes well beyond the simple difficulty of selling bonds which forms part of the Sovereign Debt Crisis.
The Portuguese government did meet its obligations under its bailout agreement in 2011, but only by using a one-off transfer of money out of the banks’ pension funds to the government. In 2012 there is no backstop and therefore targets are unlikely to be met.
What good might come from Europe’s crisis? Profligate governments in Italy and Greece, while pandering to the masses, have left their countries with crippling debt. This column draws parallels with Latin America and argues that the current hardship may sound a death knell for populism in southern Europe, as it has elsewhere.
EURO CRISIS: ECB
Collateral squeeze as strong as ever, Icap says – alphaville / FT
CAP: the collateral crunch hasn’t eased at all, except in Italy: Of course the fact that the Italian plunge coincided with the ECB’s LTRO three-year tender hasn’t gone unnoticed. If anything, the coincidence suggests that the idea to shovel huge amounts of Italian government debt out of the secondary repo market and into the central bank may have been orchestrated to suppress Italian (and Spanish) repo rates more than anything else.
Death sanitised through credit – alphaville / FT
The real point of LTRO was to keep secured lending in the interbank markets still working – with LTRO, ECB stepped in and became a “broker of last resort”. This helped the banks in their refinancing troubles and lessened the need to deleverage quickly.
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??)
OTHER
Debt and deleveraging: Uneven progress on the path to growth – McKinsey
Major economies have only just begun deleveraging. In only three of the largest mature economies—the United States, Australia, and South Korea—has the ratio of total debt relative to GDP fallen. The private sector leads in debt reduction, and government debt has continued to rise, due to recession. However, history shows that, under the right conditions, private-sector deleveraging leads to renewed economic growth and then public-sector debt
Where Are The Customers’ Yachts? – Pension Pulse
Long and interesting article. Research shows that “a few dozen have produced most of the investors’ returns,” Lack says. And don’t forget the “thousand-year flood” of 2008, when the hedge-fund industry “lost more money than all the profits it had generated during the prior 10 years,” he writes.
Global Financial Stability Report Market Update – IMF
The euro area debt crisis has intensified further, requiring urgent action to prevent highly destabilizing outcomes.
Everything You Wanted to Know About Credit Trading, But Were Afraid to Ask – TF Market Advisors
Very good article written in the form of a narrative story.
192 thinkers from Baron “Borat”-Cohen to Emanuel Derman give their answers
Most government bureaucrats, politicians, businesspeople, lawyers, and bankers really do believe they are providing a useful and perhaps even noble service. They view their privileges and socioeconomic rents not as perks unjustifiably pilfered, but as concrete confirmation of the worth and value which society—the people, the voters, the market, etc.—places upon their efforts. They think they deserve them.