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Sunday, February 19

20th Feb - Pari Passu, Yeah, Right...

Good morning, several links on Volcker rule and ECB bond swap below. Consensus seems to be that ECB has effectively subordinated other debt holders and this will set an important and unfortunate predecessor for future haircuts. Eurogroup decides on the second Greek bailout package starting from 14:00 GMT, and there are reports that Greek debt sustainability will not be reached with the current measures - though this surprised hardly anyone.

If you are just returning after the weekend here’s what you missed:
Sat - Credit Guest by Macronomics
Sat - Back to School research papers, courses etc
Sat - Weekender linkfest, mostly ECB bond swap 
Fri - Weekly Support weeklies
Fri - Press Digest Telegraph, Economist, Spiegel
Fri -
Best of The Week best of the past week

Emerging London Headlines – beyondbrics / FT
  -Greek debt deal closer, but sustainability becoming an issue
Morning Briefing BNY Mellon
Morning Briefing Supplement BNY Mellon
  -a pre-Eurogroup meeting rundown
Market Preview – Saxo
FX Update Saxo
  -another Greek Week, but China hits headlines by easing policy
Press digests by Reuters: FT 

Debt crisis: live – The Telegraph
Europe Crisis Tracker – WSJ
Tracking Europe’s Debt Crisis – NYT

Germany drawing up plans for Greece to leave the euroThe Telegraph
Plans for Greece to default, potentially leaving the euro, have been drafted in Germany as the European Union begins to face up to the fact that Greek debt is spiralling out of control - with or without a second bailout.

Quick Reality CzechA Fistful of Euros
Edward Hugh: The problem with export driven economies is that once external demand (in this case mainly from German industry) weakens, domestic demand is not strong enough to maintain the growth dynamic.Thus such economies are inherently unstable.

"What If We All Became Greeks?"Pension Pulse

A Primer on the Euro BreakupVariant Perception / scribd
53-page paper, h/t The Big Picture

The ECB Has Opened Pandora’s BoxZH
Mark Grant: The consequences of their horrendous mistake will soon be upon them as institutions not coerced or forced into buying European sovereign debt will be leaving the playing field en masse as the realization dawns upon investors of just what has taken place.

Pari Passu and BouillabaisseTF Market Advisors
Long discussion and analysis of what the ECB bond swap means, given  pari passu (all on equal footing)

Subordination by the ECB is a done deal Sober Look
It is a poor policy decision by the ECB and will have negative repercussions for sovereign debt markets in Europe even before the subordination by the ESM becomes a major issue.

What is the Volcker Rule?Macro and Cheese
Although the Dodd-Frank Act is now law, the Volcker Rule is not slated to be implemented until July 21, 2012, on the two-year anniversary of the original bill. This post provides a brief overview of the Volcker Rule and its key statutes

The Dodd-Frank act: Too big not to failThe Economist
Flaws in the confused, bloated law passed in the aftermath of America’s financial crisis become ever more apparent

Dodd-Frank’s complexity conundrum: Heads I win, tails you loseWonkblog / WP
complex regulations might be better at minimizing unintended consequences, but they also tend to be more burdensome to comply with; simple regulations are clearer but tend to give regulators a heavier hand. It’s a conundrum that’s helped fuel the Republicans call to junk the law altogether.

The Trouble with the Volcker RuleZH
Richard Whalen: If we want to segregate customer activities from principal trading, that can be done but only if we go into the process fully aware of how banks take risk and support overall economic activity.  The key failing of the Volcker Rule is that it attacks with operational constraints a problem that should be addressed via enforcement of legal, professional and financial rules between these two important and necessary sides of the house.

The Cancer of Debt and DeficitsJohn Mauldin / The Big Picture
The Answer We Don’t Want to Know · The Cancer of Debt and Deficits · Income Measures What You Contribute to Society · Taxing Consumption · An Update on My Daughter  · Some Thoughts on Writing and the Future of Employment

Mental contortions of a printing machine operatorLighthouse IM
Investing money for 4 years for 0.15% return is not “riskless return” – it’s “return-less risk”. Perversely, the Fed has created a situation where raising interest rates would probably lead to inflation. It is boxed into ZIRP (zero interest rate policy) for infinity.

Myths about the Lender of Last Resort (1999)LSE (pdf)
This topic has been prone to the accretion of myths that sometimes obscure the key issues. As a start, Bagehot is often treated as the first to write on the subject, ignoring Thornton’s contribution. Next, Bagehot’s proposal that such lending be at ‘high’ rates is incorrectly translated into ‘penalty’ rates. This paper, however, concentrates on and criticizes four further myths: that it is generally possible to distinguish between illiquidity and insolvency; that national LOLR capacities are unlimited, whereas international bodies, such as the IMF, cannot function as an ILOLR; that moral hazard is everywhere and at all times a major consideration; and that it might be possible to dispense with LOLR altogether. (h/t Alea)

Big weekend developments in China and EuropeCredit Writedowns
PBoC cuts reserve requirement by another 50bpsDanske Bank (pdf)
Home prices edge lower, but tentative signs of stabilizationDanske Bank (pdf)
Easing lifts markets – a littlebeyondbrics / FT

When nobody expects a Chinese RRR cutalphaville / FT
SocGen, Nomura, Standard Chartered views

S&P500 Q4 Profit Margins Decline By 27 bps, 52 bps Excluding AppleZH

Stressed VAR is still a "protractor in the jungle" Sober Look
The old VAR was a procyclical risk measure and thus capital allocator. The SVAR is an improvement,

Is Ray Dalio the Steve Jobs of Investing? aiCIO
Business as usual ends at the gates of Ray Dalio’s Bridgewater Associates. Inside the $125 billion hedge fund’s Westport, Connecticut-based headquarters, radically different behavior at an individual and corporate level rarely ceases to astonish. Cameras rest in every cranny; almost all meetings are recorded. Meetings are nasty, brutish, and long. One individual casts a long shadow over every decision, large or small.

Ray Dalio sells $250m stake in BridgewaterBW, WSJ
The equity stake comes as Bridgewater’s founder, Ray Dalio, seeks to reduce his ownership in the Westport, Conn., firm. Mr. Dalio, who owns about 60% of Bridgewater, may reduce his stake to about 20% over the next 10 years, people familiar with the matter say. Several top executives at Bridgewater have been buying stakes as part of this transition.