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| Austerity is Growth! War is Peace (from Krugman) |
The LTRO-induced holiday from the Euro Crisis is still going on, but the recent upward march of the Spanish 10-year bond yield is making many nervous – today the yield was 5.4%, and in 2012 the range has been 5.75%-4.83%. Even though the yield is still within this year’s range, I find it worrisome that the move has been determined.
Markets are probably betting that the ECB will not be supporting the bond market with SMP – and even if it were, it would only hurt private sector investors in an eventual haircut. When I wrote my views down past weekend, I forgot to mention that obviously the US bond yields set an effective floor for the European periphery’s bond yields. A 20 basis point jump in US yield could easily translate into a 40 basis point jump in Spanish yield.
So we know that SMP is not going to save the day. We also know that LTRO limits have been reached and LTRO III would hardly make a difference. Sure, the peripheral banks issue more 5-year crap guaranteed by their governments, which the ECB would then accept as LTRO collateral. But…there is variation margin on LTRO debt and thus eventual margin calls to the banks. The banks are already over-extended and the research desks have noticed that even the Nordic banks are subject to risks from a shutdown of the wholesale markets due to their high loan-to-deposit numbers.
So we know that SMP is not going to save the day. We also know that LTRO limits have been reached and LTRO III would hardly make a difference. Sure, the peripheral banks issue more 5-year crap guaranteed by their governments, which the ECB would then accept as LTRO collateral. But…there is variation margin on LTRO debt and thus eventual margin calls to the banks. The banks are already over-extended and the research desks have noticed that even the Nordic banks are subject to risks from a shutdown of the wholesale markets due to their high loan-to-deposit numbers.
I stick to my previous views, but also believe that even the eurocrats must understand that LTRO III would only make things more difficult and not solve the problem. So, the main scenario is still muddle-through, until everyone is broke.
In the articles today, fiscal devaluation is doomed, European housing markets still dropping and Citigroup's Buiter butchered the markets with his interview. I’m on Twitter, Facebook, email, paper.li - ask me anything or offer me a project. But no evil stuff!
News – Between The Hedges
Markets – Between The Hedges
Recap – Global Macro Trading
The Closer – alphaville / FT
Debt crisis: live – The Telegraph
Europe Crisis Tracker – WSJ
EURO CRISIS
ECB old boys speak their minds – MacroScope / Reuters
It is often said that once people leave an organisation, they find it easier to speak their minds.
'Fiscal Devaluation' and Fiscal Consolidation: The VAT in Troubled Times – NBER
the idea, prominent in troubled Eurozone countries, of a ‘fiscal devaluation:’ shifting from social contributions to the VAT as a way to mimic a nominal devaluation. Empirical evidence is presented which suggests that in Eurozone countries this may indeed improve the trade balance quite sizably in the short-run, though, as theory predicts, the effects eventually disappear.
A Few Quick Reminders Why NOTHING Has Been Fixed In Europe (And Why LTRO 3 Is Not Coming) – ZH
Charts from Barclays. Banks running out of collateral and high loan-to-deposit ratios (meaning deposit withdrawals could easily push the banks into liquidity problems). Even Nordic banks are exposed.
Charts from Barclays. Banks running out of collateral and high loan-to-deposit ratios (meaning deposit withdrawals could easily push the banks into liquidity problems). Even Nordic banks are exposed.
European Housing Still Slumping – ZH
Goldman Sachs: There is a wide divergence in housing price developments across Europe. The decline in nominal house prices has been exceptionally large in Ireland, but the degree of house price weakness in Spain may be understated by the headline series.
Spanish bond yields ready to breakout higher? – TF Market Advisors
I’m sure the ECB is thinking about wading in, and for me, yields need to get well above 5.5% before I get more concerned, but the acceleration today in the move is concerning.
Spain is not going to be fixed by changes in government. There are wide ranging problems that need to be addressed, and the market is starting to focus.
European Sovereign Debt Shows First Weakness In 3 Months – ZH
Citi's Willem Buiter, in a scathing Bloomberg Radio interview that pulled no punches with regard to US and European fiscal and monetary policy, noted Spain is 'at greater risk than ever before' of debt restructuring. (see below)
ASSET CLASS VIEWS
Goldman Sachs: We Prefer Stocks Over Bonds – MarketBeat / WSJ
Pimco: We’re Bullish On US Dollar – WSJ
Treja Vu: Albert Edwards Expects New Lows On Bond Yields, Equity Rally Turning To Dust, "Just As It Did In 2011" – ZH
SocGen: Many are thinking that if we have seen the all-time lows on bond yields investors will be forced into equities. We already can observe leading indicators rolling downwards in exactly the same way as they did in 2011… Expect new lows on bond yields by Q3 and this equity rally to turn to dust – just as it did in 2011.
SocGen: Many are thinking that if we have seen the all-time lows on bond yields investors will be forced into equities. We already can observe leading indicators rolling downwards in exactly the same way as they did in 2011… Expect new lows on bond yields by Q3 and this equity rally to turn to dust – just as it did in 2011.
SocGen’s Rosborough Says Greenback to Remain Unchanged – BB (mp3)
OTHER
Tail Risk Hedging 101: Credit – ZH
Puts and Calls on credit risk - known as Payers and Receivers…have been actively quoted since 2006 but the last 2-3 years has seen their popularity increase as a 'cheap' way to protect (or take on) credit risk - most specifically tail risk scenarios. Morgan Stanley recently published another useful primer on these instruments.
Puts and Calls on credit risk - known as Payers and Receivers…have been actively quoted since 2006 but the last 2-3 years has seen their popularity increase as a 'cheap' way to protect (or take on) credit risk - most specifically tail risk scenarios. Morgan Stanley recently published another useful primer on these instruments.
OFF-TOPIC
The Family Hour: An Oral History of The Sopranos – Vanity Fair
Sopranos insiders talk about their years as a family, the trauma when someone got whacked, and making their peace with the finale.
How Does the Brain Secrete Morality? – reason.com