Here are the ending week's best reads collected to one post, in case you missed some of them.
EURO CRISIS: GENERAL
LTRO dramatically eased financial market tensions throughout Europe, revealing the important role of a lender of last resort. But underneath those tensions exist some very real and deep economic and political fractures in the European economy. And unless those fractures are quickly healed via a real fiscal union - not just an agreement to balance budgets, but a union in which rich countries transfer, not lend, resources to poor - the Euro experiment will be torn asunder.
Why the Eurozone Can’t Just Muddle Through – The Curious Capitalist / TIME
There’s a growing optimism that the common European currency can be saved, but the numbers argue that this is unrealistic.
Eurozone Problems – Krugman / NYT
Crisis is driven by private, not public debt. In Europe the internal current account imbalances, caused by divergences in price levels. Internal devaluation has not and will not work. None of the austerity countries are on a road to sustainability.
A Growth Compact for the European Union – Re-Define
Sony Kapoor’s version of the statement that the EU leaders should present.
Credit Suisse’s charts shows the European money supply decrease, credit crunch and the deposit runs from the periphery to the core.
The Germans are caught in a dilemma. On the one hand, Germany is the last country in Europe that could afford general austerity in troubled states and the resulting decline in demand. On the other hand, it cannot simply tolerate Greek-style indifference to fiscal prudence
Euroland’s Hidden Balance-of-Payments Crisis – The Daily Capitalist
Deutsche Bank’s research: Below the surface of the euro area‘s public debt and banking crisis lies a balance-of-payments crisis caused by a misalignment of internal real exchange rates… With representatives of debtor countries holding a majority of votes in the ECB’s Governing Council, a policy of easy money and exchange rate depreciation that leads to overheating in the creditor countries seems most likely.
European Hope Versus Global Growth Risk, Goldman Quantifies Anxiety – ZH
Goldman Sachs has an interesting two-factor model for asset classes: ‘Europe’ and ‘Growth’
Goldman Sachs has an interesting two-factor model for asset classes: ‘Europe’ and ‘Growth’
What will happen if the euro collapses? For many people, the answer is unmitigated disaster. But this column argues that to identify the euro, the EU, and Europe as one, as many politicians like to do, is totally misleading. A possible demise of the euro and the EU can be seen as a chance for the evolution of a better future Europe.
EURO CRISIS: SUMMITS & TREATIES
Current plan: print money indefinitely, violate the EU Treaty, ignore solvency issues, continue to buy time. In May (after the French election) that will be the main subject because this EU Summit served as an appetizer for the final show down when Greece and probably Portugal will ask for a holiday from the EU. Then maybe we see the full endorsement of the Germans for a Euro bond once its fantasy of prosperity through austerity is dashed on the rocks reality.
Of course, Merkel would never say outright that she wants the crisis to persist so she can press forward on European integration and reform. But, effectively, that what’s going on. Yes, Merkel insists again and again that the steps she’s taking are aimed at rebuilding confidence in the monetary union. But her actions have always spoken otherwise.
"New Treaty, Same Old Flaws" – Economist’s View
But the agreement shows that we have learned very little from the previous experience. We insist on maintaining a system that does not work and that only provides a distraction to other economic policy issues that, if we try hard enough, we might be able to solve.
Takes from Nomura’s research note: LTROs are increasingly punitive and lead to subordination of senior unsecured bank debt… If the size is bigger than this, perhaps in the range of €500bn or greater, the effect on bank balance sheets in Europe will be distinctly negative in our view, and would make future wholesale and term funding from private sector sources significantly more difficult.
The point is that moves of 125 bps aren’t that uncommon and aren’t a clear sign that LTRO is working. What is clear is that the markets are thin, easily manipulated, or scared into big moves, but once the catalyst for that move is gone (ECB gets tired of buying, nothing from Grand Plan works, or LTRO is about prefunding debt not buying more bonds) the market has returned to focusing on deteriorating fundamentals.
The TARGET2 imbalances reference guide – Sober Look
The concern around TARGET2 imbalances is that central banks owe a great deal of money to each other via the ECB and should a nation drop out of the Eurozone, these liabilities may not be met. The ECB may then have to take a large loss. A mechanism for a nation's exit from the euro area was never developed. With a link to a very important paper for the end game.
Contraction in Eurozone's repo markets is driving M3 decline – Sober Look
An obvious question here is whether this broad money supply decline is similar to the US during 2008-2010. One key component of M3 driving this contraction in money stock is the amount of repo (secured) lending. The Eurozone repo loan balances have declined materially in Q4 - an issue that is quite different from what had occurred in the US.
ECB will not take losses from involuntary restructurings – governments will. After the “austerity leads to growth”-idiocy, there is a danger of policy overshoot – stimulating too much.
Breaking up is hard to do — but here goes, anyway – alphaville / FT
Guide for breakup from someone who actually warned about the current crisis in 2009. Interesting hints: non-exiters should print a new currency to limit a large inflow of “old” money from the exiting country.
Guide for breakup from someone who actually warned about the current crisis in 2009. Interesting hints: non-exiters should print a new currency to limit a large inflow of “old” money from the exiting country.
Morgan Stanley’s most mysterious footnote — Part 1 – alphaville / FT
MS’s Q4 footnote says net exposure to Italy from $4.9bn to $1.5bn. What happened? They got Italy to to place collateral and or pay up their open losses? (sovereigns usually do not post collateral). Problem is, paying the open losses or placing collateral weakens Italy’s debt metrics and now others might want to want to have the same treatment…
Greek Bond Math (Assuming the Deal Goes Through) ; Merkel Faces Backlash Over Deal; Political Zugzwang – Mish’s
Greek bond deal does not make anyone better off, Merkel in a position where any move will make her (or euro’s) future darker, nonsense from the political hack Delors.
OTHER
The US Weekly Kickstart from Goldman Sachs believes that corporate margins are to drop, thus earnings have probably peaked.
The Transparency Trap – John Mauldin via The Big Picture
This week we take a brief pause in our series on the choices facing the developed world to look at some items that are catching my attention. We will get back to the US next week, as somehow I think we will not solve our problems between now and next Friday, and there will be plenty left for us to talk about. So today we look at the “shift” in Fed policy, and at the balance sheets of central banks, US GDP, Portugal and the ECB, the LTRO policy, and yes, there’s even a tidbit on Greece.
On austerity and political suicide – alphaville / FT
The conventional wisdom, which holds that large reductions of budget deficits are the kiss of death for the governments implementing them, isn’t backed up by very much empirical evidence.
Summers: “Inside Job had essentially all its facts wrong” – Felix Salmon / Reuters
In mid-2009, I went on a search for apologies, from the people who laid the intellectual and regulatory foundations for the financial crisis. I wondered whether and when Larry Summers, in particular, would apologize for what he did at Treasury, and I was heartened when Bill Clinton came out and said that, with hindsight, he was wrong about derivatives regulation.
Why People Become Investment Bankers – theibanker.com
Most of those motivations can be grouped into a handful of categories (see diagram above for examples). They also explain why so many bankers agree to work unusually long hours, put up with abnormally high levels of stress and sacrifice personal and leisure time.
Banking Wasn’t Meant to Be Like This – Credit Writedowns
It is too early to forecast whether banks or governments will emerge victorious from today’s crisis. As economies polarize between debtors and creditors, planning is shifting out of public hands into those of bankers. The easiest way for them to keep this power is to block a true central bank or strong public sector from interfering with their monopoly of credit creation. The counter is for central banks and governments to act as they were intended to, by providing a public option for credit creation.
OECD Statistics Explorer and Some Other Cool S**t – Chart Porn
It has interactive choropleth maps, motion scatter plots, profile plots, time graphs, and cool histogram tools – and all of them have excellent filters and fine tuning controls, can be viewed over time, are smoothly animated and you’re allowed to load your own data. But wait! There’s more! MUCH more!