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Friday, March 30

30th Mar - Best of The Week

Here are the best articles from my ending week’s posts. The story is completely clear – Spain and Portugal are seen as the next targets for the Troika’s commandos. When the agreement on the EFSF/ESM ‘Death Star’ is finalized during the weekend, it will be gloves off. Most of this will be done behind the curtains for now. I think the eurocrats understand very well the Spain’s hopelessness, but they don’t want to draw the attention of media just yet – the public must be kept in the dark until the French and German elections are over. 

Then they will probably try the growsterity-play, as doing anything else would be admitting that they have previously been wrong. This playing and failing in austerity will not last for long – it will be done just to save faces and have more political currency to proceed to the next step:  spending the EFSF/ESM guarantees to firewall Spain and Portugal simultaneously. Another round of LTRO for Spain is probably out of the question – the collateral requirements would have to be lowered a lot. ECB probably thinks they have already done enough to satisfy the politicians, and now it is the politicians’ turn to take some damage.

To sum it up - the total bill hidden in the depths of creditor's balance sheets, ECB and TARGET2 is so huge, that no-one has the courage to just take the goddamn loss and move on. Thus it is allowed to grow even bigger and only the symptoms are admitted, while the disease that the euro is, is denied.

My talk in previous posts:
26th Mar - Death Star vs. Bank Runs: 3 key (hidden) drivers
27th Mar - Intervene, Unforeseen?: really hidden intervention?

A little something for the finance ministersalphaville / FT
The European Commission has published a short paper outlining three options for the eurozone rescue programme

In the Eye of the Stormeconomistmeg
Three time-buying muddle-through tools discussed: bailout programs, LTRO and firewall: The cycle of boom and bust is such that at some point the euro area will hit another economic and/or financial shock. But the troika’s current crisis-resolution approach of extend and pretend will have done nothing to position the Eurozone to survive such shocks any better in the future.

Europe performing as expectedMacro Business
Nice roundup of the big themes. The European crisis and the associated delusional rolls on.

Five Overlooked Euro Zone DevelopmentsCredit Writedowns
1) ECB gave permission for national central banks not to accept bank bonds from certain countries 2) ECB margin calls 3) budget deficits hidden by unpaid bills 4) bank deposits falling in certain countries 5) Portugal fiscally lot worse.

A three-headed beastFree exchange / The Economist (summary of the below paper)
The Euro’s Three CrisesBrookings (pdf)
There is a banking crisis – where banks are undercapitalized and have faced liquidity problems.  There is a sovereign debt crisis – where a number of countries have faced rising bond yields and challenges funding themselves.  Lastly, there is a growth crisis – with both a low overall level of growth in the euro area and an unequal distribution across countries.  Crucially, these crises connect to one another.

Europe holds back the fire for now Macro Business
Very nice roundup of the firewall, Merkel-Hollande, Eurosystem collateral policy change and Spain.

Hmmm… HollandJohn Mauldin / The Big Picture
This week, Grant is digging deep into the history and mystery of the European Union, taking us all the way back to the first inter-country treaty in April 1951 and then following the rather tortuous bureaucratic proceedings that led, by hook and by crook, to today’s increasingly problematic eurozone.

Goldman On Europe: "Risk Of 'Financial Fires' Is Spreading" ZH
Risk remains high, EFSF/ESM size not enough, seniority constraints and governance limitations. A sustained realignment of rate differentials unlikely. A Redemption Fund (just like euro bond, but without the paperwork) is likely next step.

Why Europe's Banks Trail in Deleveraging ProcessWSJ
Very nice article: US on Basel I and Europe on Basel II, US banking shaped by past crisis. Also takes a look at some future scenarios.

Jens Weidmann: Rebalancing EuropeBIS (pdf)
President of the Deutsche Bundesbank, 28-Mar: Normally, exchange rate movements are an important channel through which unsustainable current account positions are corrected –  eventually, deficit countries devalue, while surplus countries revalue their currencies. The reaction this triggers in imports and exports then helps to bring the current account closer to balance. In a monetary union, however, this is obviously no longer an option. Spain no longer has a peseta to devalue; Germany no longer has a deutsche mark to revalue. Other things must therefore give instead: prices, wages, employment and output.

Policies against a German CA surplusKantoos Economics
No, my opinion has always been that monetary policy needs to facilitate rebalancing, by allowing higher inflation so that German wages can grow faster, but without hurting the German economy. That would be the most effective, easiest and economically most sensible solution. And this is in quite a stark contrast to the official position of the German policy makers.

On Europe's 'Stealth' Money PrintingZH
Goldman: ELA, has, however, become now, in some countries at least, a permanent facility increasing the risk of delaying the needed adjustment process in the banking sector.

Has the ECB hit a limit?
 “Should the inflation outlook worsen, we would immediately take preventive steps”. This column argues that these are brave words given that the ECB has hit a limit in its ability to prevent an acceleration of inflation.

LTRO, interbank stress and banks’ stock prices: a conundrum?Bruegel
This result suggests that the ECB helped ensure the funding of banks but did not bail-out banks. As would be expected with refinancing operations, the ECB will only step into a loss after the value of the collateral and the value of equity is exhausted. Seen from this angle, the ECB helped the financial system’s stability but not the shareholders of banks.

Spanish Bond Yields – Who is a “natural” buyer of 10 yearTF Market Advisors
I think the ECB will attempt to calm the markets, but the amount of money spent will be underwhelming at these levels, and the market reaction will be even more muted than prior ECB interventions. There are relatively few natural buyers of Spanish long dated bonds here.

Spain in the spotlightalphaville / FT
With that in mind, how relieved should we have been when Spanish banks borrowed from the ECB’s LTRO? The flotation device, that also tied sovereigns and their banks closer together, may have cost more than we thought.

The rain in SpainMacro Business
…there is simply no way that the private sector will be able to continue to make payments on the debts it has accumulated during the period of significantly higher income. This is a major unaddressed issue. This is why we continue to see a rise in bad and doubtful debts in the Spanish banking system which, under direction from the Government, banks continue to merge.

On Spain’s coming under the watchful eye of the Troika in 2012Credit Writedowns
The rumor roiling markets is that contingency is being made for Spain to access the Troika programs. The government has denied these rumors. But they persist nonetheless. And this is not the first time we have heard this.

The escalation of Spain's regional debtSober Look
Spain's central government is trying to pressure regional governments to contribute to the overall debt reduction. But the regions' local politicians are often not incentivized to comply. The tension between the regional and the national governments have been escalating.

Moody's takes actions on seven Portuguese banks; Outlook negativeMoody’s
Long discussion and analysis.

If you thought Greek bondholders were subordinatedalphaville / FT
Nomura’s Dimitris Drakopoulos and Lefteris Farmakis have penned a great “To PSI or not to PSI?” note about a Portuguese sovereign default.

Austerity – Mais, non. Spending – Nein. PSI – Tal Vez?TF Market Advisors
Now is the time.  Portugal 75% haircut.  Ireland 50%.  Spain 40% haircut (once they put all the Spanish guaranteed debt on balance sheet, they will need 40%).  Italy 25%.  Greece – just make EU and ECB eat the same dish they served to public sector.  Only IMF money is sacrosanct.  The ECB, EFSF, and EU can take losses like the rest of us.  The EU talks about “firewalls”, well, put up or shut up.  The ECB can print away the losses.

What’s behind door 2?alphaville / FT

EU – EFSF & ESM – A whole lot of nothingTF Market Advisors
Then the ESM, just like the EFSF (which may still need to issue €137 billion) will issue bonds whenever it needs money, and only use the “capital calls” in extreme circumstances.  This is actually far worse than having the money up front – as problematic as that may be, because this plan will shift virtually the entire burden to Germany and France if it ever gets used.

Interest rates: the market has it all wrongSaxo Bank
Steen Jakobsen’s piece (the site is down but I remember this looked interesting)

The Great Escape: Delivering in a Delevering WorldPIMCO
When interest rates cannot be dramatically lowered further or risk spreads significantly compressed, the momentum begins to shift, not necessarily suddenly, but gradually – yields moving mildly higher and spreads stabilizing or moving slightly wider. In such a mildly reflating world, unless you want to earn an inflation-adjusted return of minus 2%-3% as offered by Treasury bills, then you must take risk in some form.

Dallas Fed: Choosing the Road to ProsperityThe Big Picture
From the 2011 annual report: Why We Must End Too Big to Fail—Now

Banking Regulator Calls for End of ‘Too Big to Fail’DealBook / NYT
It’s a radical indictment of the nation’s financial system. The lead essay, which is endorsed by the president of the Dallas Fed, contends that despite the great crisis of 2008, a cartel of megabanks is still hindering the economic recovery and the institutions remain too big to fail.

The great Japan crash still not imminentalphaville / FT
Tetchiness about Japanese bonds seems to be reaching an all-time high lately. But JGBs are not, so far, playing along… The yen has, nonetheless, seen something of a weakening recently, thanks to the BoJ’s Valentine’s Day intervention.

A Random Walk Through the Data MinefieldsJohn Mauldin / The Big Picture
Sweden, the Socialist Mecca · What the US Needs Is a Good Swedish Socialist  ·Europe Short of Magic Wands” · What Will Be the US Unemployment Rate Prior to the Election? · Baby Needs a New Pair of Shoes

The Age of the Shadow Bank RunNYT
The modern bank run means a rush to withdraw from money market funds, the disappearance of reliable collateral for overnight loans between banks or the sudden pulling of short-term credit to a troubled financial institution. h/t Alea. Additional thoughts on author’s blog post

Things That Make You Go Hmmm...  – Grant Williams via The Trader
"Fiscally Credible" UK And Its Upcoming 100 Year Gilts and other commentary, full pdf-link

Book excerpt: “Backstage Wall Street”, by Josh Brownalphaville / FT
If you liked it, buy it on Amazon!

Has High-Frequency Trading Destabilized Markets?Minyanville
Aaron Brown’s latest, anything written by him is good. Google for him, and he’s also on

The balance sheet recession, charted alphaville / FT
Nomura’s Richard Koo has been banging on about the similarities between Japan’s balance sheet recession and the current financial malaise for a long while. His main point has always been that the financial system won’t recover unless corporates and households complete their deleveraging journey.

Summarizing The True Sad State Of The World In Two ChartsZH
public debt/GDP projections for several countries and income equality

Who Captured the Fed?Economix / NYT
Daron Acemogly and Simon Johnson (my favourite): In recent decades the Fed has given way completely, at the highest level and with disastrous consequences, when the bankers bring their influence to bear