Interesting week - ESM, fiscal treaty, LTRO and the coming Greek solution, whatever it will be, have stabilized the euro crisis for a moment. The firewall seems to leave Portugal outside its protection, even though it should be protected by these measures.
The ECB's policy not to participate in Greek haircut, and the ESM text that private sector participation i.e. haircuts in the future are not ruled out, have left a gap in the firewall, either intentionally or accidentally. Markets guessed this even before the ESM treaty was public and that's why Portugal's yields have surged.
If you are only a moderately bad country (some worries about debt sustainability and only moderately high yields), you will get bailed out and/or supported. If you are a really bad country and belong to European political periphery (e.g. Portugal), you will be told to 'get a haircut and get a real job'. Unlike Greece, Portugal will be allowed to stay in the club, as at least they have tried. Greece will either leave or be made to leave.
 |
| MarkIt PMI's improving |
Elsewhere, the US macro has been good at least on the surface (if not that good beneath), and PMI's have shown improvement globally. Given the approaching LTRO at the end of the month, I see little reason for another round of speculative action against the peripherial bonds. On the other hand, I do not see much room for the mood to improve from current levels, so this is probably the perfect time to go risk-off again: the news and fear of positive policy measures cannot get any better than what we have now (?)
Also check:
Press Digest select articles from The Economist, The Telegraph, Der Spiegel
Weekly Support weekly summaries and previews
Best of The Week the best links from my ending week's posts
Back to School roundup of research papers for thus inclined.
Calendar and Facebook: rolling linkfest have been updated. You can follow me on Twitter or Facebook and email me for suggestions and requests. I also have an automated publication based on feeds I follow at paper.li
- MoreLiver
EURO CRISIS: GENERAL
How Euro Brinkmanship Is Beginning To Succeed – PIIE
A more valid criticism of the fiscal treaty is that it fails to address the biggest current obstacle to a lasting stabilization of euro area crisis—the construction of a large and credible financial “firewall” to prevent contagion from the periphery to the core of Europe. The new ESM treaty holds the key to this issue, though inexplicably the text is not yet available. EU leaders are reserving judgment on the central issue of the ESM—its size—until the next EU Summit in March.
A more valid criticism of the fiscal treaty is that it fails to address the biggest current obstacle to a lasting stabilization of euro area crisis—the construction of a large and credible financial “firewall” to prevent contagion from the periphery to the core of Europe. The new ESM treaty holds the key to this issue, though inexplicably the text is not yet available. EU leaders are reserving judgment on the central issue of the ESM—its size—until the next EU Summit in March.
The preferred, puzzling, ESM – alphaville / FT
“(12) In accordance with IMF practice, in exceptional cases an adequate and proportionate form of private sector involvement shall be considered in cases where stability support is provided accompanied by conditionality in the form of a macro-economic adjustment programme.”
(ESM) looks like a marginal plus if you're invested in the bonds of euro-zone countries that are already receiving official help… But if you're a creditor of a country that is wobbly but not yet frozen out of the markets (like Belgium, Spain or Italy), it is less obviously good news.
EU commission plans new spin on financial tax – euobserver.com
The EU commission is revising its impact assessment of a proposed financial transactions tax (FTT), which included a worst-case scenario leading to job losses. The responsible commissioner now says original projections were "misused" and the overall impact will be positive.
Austerity under Attack – Daniel Gros / Project Syndicate
It would be dangerous for the eurozone’s highly indebted countries to abandon austerity now. Any country that enters a period of heightened risk aversion with a large debt overhang faces only bad choices. Implementing credible austerity plans constitutes the lesser evil, even if this aggravates the cyclical downturn in the short run.
Unsecured EU bank paper is expected to have zero recovery – Sober Look
This spread indicates that senior unsecured bank bonds are substantially lower credit risk than the bank subordinated paper. Such differentiation makes sense in the context of corporate debt markets, but Barclays Capital argues that it's utter nonsense when it comes to the EU banking sector.
Imagine no recoveries in bank senior debt – alphaville / FT
Barclays: We believe investors should assume a low (possibly 0%) recovery rate on most senior unsecured bank bonds… In aggregate, we estimate that approximately €4.5tn of European bank assets have been encumbered by central bank borrowings and covered bond issuance
EURO CRISIS: PIIGS
Since December, Premier Mario Monti of Italy has taken several steps that appear to have improved market confidence in the country’s ability to repay its debt, thereby raising hopes that Italy can recover from its financial and economic crisis.
Will Italy be able cut its debt and abide by the new EU fiscal rules? This column presents a simulation of the evolution of the Italian debt-to-GDP ratio. It finds that Italy’s borrowing and saving plans are sustainable – even at today’s high interest rates.
Economic Bulletin Jan-2012 – Bank of Italy (pdf)
Greek Leaders (All 3 Coalition Parties) Oppose New Austerity Measures; Words of the Day: "Hardball", Followed by "Meeting Cancelled" and the Always Popular "Meeting May be Scheduled Later in the Week" – Mish’s
The unlikely bull market – Pragmatic Capitalism
Absolute Return Partners’ market letter. Mostly Spain and Italy
The Euro Zone/Troika wants a commitment from ALL the Greek political parties that they will abide by the terms of any new fiscal programme agreed with the Troika – indeed they want a letter signed by all the parties confirming this. Even if they get such a commitment, we all know that Greece will not deliver…In any event, the Euro Zone/ECB will have to stop any threat of contagion by defending Portugal, or else the game is up for the Euro Zone/Euro, as contagion effects spread like wildfire.
Trouble in the shipping industry, many of these firms have secured their financing from Greek and other European banks… $500 billion in shipping loans on their books and face nearly $100 billion in losses to restructure them.
Greek Wrangling Bodes Ill for Lisbon – WSJ
As Meeting on Athens Deal Is Postponed, Tough Terms for Creditors Fray Nerves on Portugal's Debt
As Meeting on Athens Deal Is Postponed, Tough Terms for Creditors Fray Nerves on Portugal's Debt
OTHER
If The SEC Really Wanted To Get Tough On Securities Fraud It Would Have Added Some Minor Inconveniences To Its Multi-Hundred-Million-Dollar Fines – Dealbreaker
The liquidity trap, monetary policy, and inflation expectations – Kantoos
Traditional view: in liquidity trap monetary policy is powerless, modern view: creating inflation expectations can overcome the trap. Which way it is?
Traditionally after a regime change, Chinese authorities don't want to implement anything drastic. China's new leadership will therefore be moving slowly on monetary easing. JPMorgan expects a gradual reduction in the reserve requirement ratios (RRR) and a stabilization later this year.
Real Returns – mebanefaber.com
The best, middle, and worst case scenarios for the main asset classes of sixteen countries from 1900-2011.
Squaring an Intractable Market Puzzle – The Source / WSJ
Stocks rally because 1) eurocrisis is about to end 2) US improving 3) central bankers and fiscal authorities are doing the right things. If this is so, why are the bond yields so low?
Stocks rally because 1) eurocrisis is about to end 2) US improving 3) central bankers and fiscal authorities are doing the right things. If this is so, why are the bond yields so low?
DIVERSION: GREED
The Wall Street Gene – WSJ
What makes a top trader? Researchers point to dopamine
What makes a top trader? Researchers point to dopamine
The nature of humanity: What’s a man? – The Economist
Studies of brain genetics are starting to reveal what makes humans human
Drug addiction 'may be hereditary' – Daily Mail
Drug addicts and non-addicted siblings 'share brain abnormality' which makes self-control difficult
The Problem with the Profit Motive in Finance – Harvard Business Review
If you let the financial services industry do exactly what it wants, the financial services industry will eventually get itself — and by extension the economy — into staggering amounts of trouble. If you force it to behave, it might just thrive.
DIVERSION: OTHER
How many zombies do you know? Using indirect survey methods to measure alien attacks and outbreaks of the undead – Andrew Gelman & George A Romero (pdf)
Zombification is a serious public-health and public-safety concern (Romero, 1968, 1978) but is difficult to study using traditional survey methods. Zombies are believed to have very low rates of telephone usage and in any case may be reluctant to identify themselves as such to a researcher. Face-to-face surveying involves too much risk.
Lunch with the FT: Kenneth Rogoff – FT
Improbably, for a future Harvard professor, he was also a high school dropout. “A lot of my last years of high school, I essentially missed,” he says. “I just played chess, I did nothing else.”
Cronenberg Interview – Los Angeles Review of Books
It’s dangerous to be an artist. That’s what we talk about in Naked Lunch — and it’s dangerous on many different levels. Politically it can be dangerous, but psychologically it can be quite dangerous too. You make yourself very vulnerable.
The end of lone-wolf capitalism – WP
For all of our supposed no-nonsense pragmatism, Americans are romantics, and one of the things we love most is the idea of the lone-wolf capitalist: the intrepid, solitary genius who toils in a lab or workshop or office, and suddenly comes up with some startling invention or new way of doing business.
For all of our supposed no-nonsense pragmatism, Americans are romantics, and one of the things we love most is the idea of the lone-wolf capitalist: the intrepid, solitary genius who toils in a lab or workshop or office, and suddenly comes up with some startling invention or new way of doing business.
Economics, a space opera – alphaville / FT
Economists are failing to account for mass technological innovations when making forecasts and constructing models. Agree/disagree?
Book Bits For Saturday – The Capital Spectator
Why Apple Should Start Making a 3D Printer Right Now – The Atlantic
Hobbyists and tinkerers are testing out the future with a technology that you're probably going to have sooner than you think.