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Friday, March 9

9th Mar - Best of the Week

Here are my ending week's best links, collected to one post. There are three big issues remaining in the euro crisis: living with LTRO, TARGET2 imbalances and the sorry state of the PIIGS. These have to be solved, euro or no euro. Tackling the recession and the current account imbalances inside the EZ are advanced topics - maybe there is no solution, except at least a partial introduction of national currencies.

The LullMark Grant / ZH
LTRO, Greece, Portugal and possibly Spain, France, IMF & Europe.

Lombard Street Research, a London-based consultancy, has produced a report on the costs and benefits of euro membership (or exit) for the Netherlands

Homeric Similes And Spanish DebtA Fistful of Euros
But the great risk they are taking in doing this is raising the acknowledged debt level, up towards the “high risk area” of around 100% of GDP. When you add all the debt up we are already in the high 80% range, and two more years of “normal” deficit plus more funding for the financial sector should take it through the psychological barrier. Naturally investors are noticing this, and Prime Minister Mariano Rajoy’s “gaffes”, and at the end of last week the Spanish ten year bond spread with the Bund equivalent went above the Italian one for the first time since last summer.

Monetary blanks in the Eurozonealphaville / FT
Nomura: additional liquidity in Europe is currently translating into additional government bond buying rather than real-world lending. For recovery to take hold, Koo says, capital rules would either have to be relaxed or public funds would have to be injected into banks. Lacking that sort of action, liquidity will otherwise continue to head into government bond markets. In fact, as long as private borrowers remain scarce, Koo believes government bond yields will continue to stay compressed.

TARGET2: A Channel for Europe’s Capital FlightPIMCO
The large TARGET 2 positions developing among national central banks in the eurozone reflect capital flight from the periphery to the core and de facto introduce transfer and burden sharing elements of a common fiscal policy. Monetary policy ends up substituting for fiscal policy without going through the same democratic channels that governments’ expenditure and taxation decisions entail. Taxpayers in the eurozone are contingently liable for eventual losses incurred by the Eurosystem’s monetary policy operations.

Weidmann’s ECB agitation more dangerous than WeberBreakingviews / Reuters
Weidmann is worried that collateral which the ECB is accepting from banks in return for its massive liquidity injections isn’t sufficiently good – and that strong national central banks, such as his, could be on the hook for losses.

Vampire Squids, Zombie Banks, and Caminhada Banco Mortos Peter Tchir / ZH
These seem to be the 4 largest banks in Portugual and any other large presence seems to be subsidiaries of Spanish banks. So the total market cap of these 4 institutions is €4.2 billion market cap and total assets of €233 billion. These banks are likely getting the lion’s share of the €48 billion of ECB money.  That would imply 20% of their funding is coming from ECB programs?  That doesn’t include LTRO.

ECB liquidity is not a free lunch Gavyn Davies / FT
Some observers point to the danger of a zombie banking system, kept alive artificially as a wing of the central bank. And, in a much-publicised “private” letter to Mario Draghi in February, Jens Weidmann, Bundesbank president, expressed concerns that the latest two LTROs will expose the ECB to potential losses which will undermine its capital base.

What is the ECB endgame?Marginal Revolution
How long would it take for de facto bank nationalization to lower the economic growth rate?  How long would it take before re-privatization is an option? By the way people, we’re exploring the best case options here, they did avert disaster in December!  For now.

Getting one’s head around TARGET2alphaville / FT
JP Morgan’s research note

Rift Grows Between Germany's Bundesbank and ECBSpiegel
There are growing divisions among European Central Bank leadership about how to handle the euro crisis, not to mention between the ECB and the Bundesbank, Germany's central bank. While ECB head Mario Draghi is pleased with his recent decision to flood the markets with cheap money, Bundesbank President Jens Weidmann warns of the dangers.

Is Jens Weidmann Right About Bundesbank Target2 Risks?Credit Writedowns
The most likely resolution of Target imbalances in the case of a full Euro breakup would be a pooling of assets held by Target2 debtors to be handed over to Target2 creditors to settle the balance. This may leave the Bundesbank holding a set of peripheral-originated assets that may be worth less that face value but this scenario would result in losses to the Bundesbank that would be far short of the current value of its Target2 credit.

Morning BriefingBNY Mellon 
Jen Weidmann's recent publically expressed opposition to the ECB's loosening of collateral rules might reveal a deeper concern.

TARGET imbalances: Financing the capital-account reversal in
While the fall in Germany’s current-account surplus may have alleviated the Eurozone’s imbalances, another has arisen. German exporters and banks are no longer Europe’s financiers but Germany is instead now filling this financing gap through so-called TARGET claims – the system for central bank settlements within the Eurosystem. At stake is not just academic curiosity but the financial architecture of the Eurozone.

Wall Street’s weekend LTRO conversation: Stealth sovereign bailouts ZH
SocGen, Citigroup views

European Banks Now Face Huge Margin Calls As ECB Collateral CrumblesZH
as of last Friday the ECB has started to make very sizable margin calls on its credit-extensions to counterparties… increase in margin calls can only further exacerbate the stigma attached to LTRO-facing banks

LTRO – Scratching The SurfaceTF Market Advisors
If the collateral a bank has posted declines in value, the banks would have to post additional collateral.  This is a big deal.  Somehow the world seems to have an image that banks can borrow 3 year money at 1%, pledge an asset against it, and let the carry take effect with no other consequences.  That is far from the truth if variation margins are being used.

LTRO subordination of senior unsecured debt in the Euro bank funding marketZH
According to Barclays, average encumbrance across banks has risen dramatically to around 21% of assets. German banks, which are actually less encumbered than in 2005, and those in Finland, which are roughly around the same levels, are the lone exceptions in the eurozone… This suggests that there could be on-going pressures on banks to reduce wholesale funding reliance via balance sheet shrinkage – the very thing that the LTRO was designed to prevent.

Ex-ECB's Stark Says ECB's Balance Sheet "Gigantic", Collateral Quality "Shocking"ZH
Former ECB executive board member Juergen Stark adds: the structure of the balance sheet is a cause for concern because increasingly short-term debt claims are being replaced by long-term ones and this will make it more difficult for the bank to reverse its loose monetary policy.

It's a matter of time before luck runs out for the US TreasurySober Look
In 2011 the US Treasury saw increased investments by both foreign and domestic buyers of its paper. Much of that success however has been due to special circumstances and is not necessarily repeatable going forward.

Oil Price Outlook - "Nothing To Spare", Crude Could Reach $200ZH
Erste’s 2012 outlook and full report on scribd (82 pages)

Taming the liquidity tideEconomist’s Forum / FT
The task force echoes a growing consensus that such acts are not protectionism, but correctionism. According to the new welfare economics of capital controls, unstable capital flows to emerging markets can be viewed as negative externalities on recipient countries.

Global imbalances: Gross mismanagementFree exchange / The Economist
A focus on the net figures—the extent to which assets offset liabilities—ignores that different people might be holding the liabilities and the assets. The government can nonetheless step in and use the one to pay off the other, but it isn't going to do that unless a crisis is already underway.

February 2012: The Month in ChartsAlpha Now / Thomson Reuters
Very good charts.

“Everyone knows that the Spanish are lying about the figures”The Big Picture
Long overview of multiple topics.

Unintended ConsequencesJohn Mauldin / The Big Picture
Peter Sands, the head of Standard Chartered (a British commercial bank), warns that the new money runs the risk of “laying the seeds for the next crisis.” He wonders what happens in three years’ time when all that debt needs to be refinanced. That seems a reasonable question, as finding a spare €1 trillion will not be a lot easier in three years.

To predict, go with your gutWonkblog /WP
Individuals who have higher trust in their feelings can predict the outcomes of future events better than individuals with lower trust in their feelings.

Charlie Munger on the psychology of human misjudgmentRBCPA (pdf)
20-page speech at Harvard University from June 1995