Commentary is very pessimistic. Basically the Spanish CDS hit an all-time-high last Friday, while the yields were more subdued because of SMP threat from the ECB - or even bond purchases from the EFSF. IMF and G20-meetings next week are the key - I stick to my views from last Thursday: My Theory: Good Cop on Spain, Bad Cop on... I have a strange feeling that the EURCHF might try to break the 1.20-level in the coming weeks, at least temporarily. Apparently there are five times more sell stop orders for the currency pair than there are central bank buy stop orders below the 1.20-level. A visit to 1.16, if only temporarily, would not be impossible. As the upside for the pair from the peg level is seen limited, initiating a short EUR long CHF position now would provide a good risk-reward trade.
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EURO CRISIS: GENERAL
A tale of two overhangs: The nexus of financial sector and sovereign credit risks – voxeu.org
The deadliest aspect of the Eurozone crisis is the tripwire linking the riskiness of banks and governments. This column provides evidence of the link and explains how it arose. It argues that given the near-chaos-like interaction, the zero risk weights on sovereign bonds should be revisited.
IMF chief Christine Lagarde will struggle to bag more funds for a 'firewall' – The Telegraph
Davos, the Swiss ski resort that every year plays host to the world’s rich and powerful, is rarely the scene of much levity.
Time to put the doomed euro out of its misery – The Telegraph
Europe can’t accept that the economics of the single currency condemn it to failure.
Germany needs to decide whether the half-century European project is worth 4 percent inflation or a bigger deficit. If it's not, then it's time for Europe to start planning for an amicable divorce.
…inflationary expectations are building in Germany, pressure that could undoubtedly derail an already strained European Union… Ironically, Germany’s dilemma is the same one that faced nations such as Greece, Spain and Ireland earlier this decade: the inability to influence its own monetary policy will stoke inflation, which in the case of the now debt-laden peripheral nations took the form of asset bubbles.
BOP imbalances are the SYMPTOM. The causal variable is ‘competitiveness.’ It is the competitiveness differences across the Zone. The Zone has gone wrong by making itself a slave to the currency instead of to true integration. Economies in the Zone sacrifice everything to hold the euro 'peg'. It makes no sense, especially since the euro peg is now the cause of their pain as it truly is.
Robert J. Samuelson: The problems are so deep and pervasive that there is no easy or obvious solution. Government debt and deficits in many countries are not sustainable, but the usual remedies of cutting spending and raising taxes — a.k.a. “austerity” — may make matters worse by deepening already severe recessions. Europe is caught in a trap that promises more political and social unrest.
Nouriel Roubini: The trouble is that the eurozone has an austerity strategy but no growth strategy. And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels. Moreover, the social and political backlash eventually will become overwhelming.
Amar Bhidé: Saving the euro, say the sages of the global economy, requires radical steps. But, rather than binding treaties, fiscal union, or homogeneity of membership, what is needed are mechanisms that recognize and accommodate differences, rather than attempt to impose uniformity from above.
Making the transition from a bank-dominated system to a more diverse one in which non-bank credit plays a bigger role is difficult. Issuing bonds or other fixed-income securities requires high standards of financial disclosure, which is resisted by the culture of many medium-sized companies or banks in a number of European countries. Legal and regulatory differences across borders inside the European Union also do not help because they contribute to fragmentation of some financial market segments.
Recent speech + a repost of his latest article. The euro has really broken down…the destruction of the common market and the European Union and how this will end in acrimonious recriminations with worse conflicts between European states than before.
EURO CRISIS: SPAIN (AND ITALY?)
The War for Spain - Spain Goes “All In” - “We Are Not Greece” - The New Labor Force - A Little Blue Suede Shoe Trouble
'Today the problem is solved," declared French President Nicolas Sarkozy just five weeks ago. "How happy I am a solution to the Greek crisis, which has weighed on the economic and financial situation in Europe and the world for months, has been found."
Spanish epiphany as depression deepens? – The Telegraph
Articles calling for Spain to withdraw from EMU – or at least exploring the idea – are no longer rare. They are appearing every day… How and when all this will end is anybody’s guess but I have suspected for a long time that Spain is the lynchpin of the system. The intellectual atmosphere has changed entirely. Politics must surely follow.
While ECB intervention could buy some more time for Spain in the short-term, it is extremely unlikely to fundamentally change Spain’s fiscal or economic trajectories. In the absence of economic growth, Spain will eventually be forced to request official financing, potentially as early as next year.
Uncertainty about Spain Worries Euro Zone – Spiegel
The markets appeared to have forgotten about the euro crisis for a few weeks, but now uncertainty is returning, with yields rising again on Spanish and Italian government bonds. The effects of the ECB's massive cash injection are wearing off, and Spain's banks have already reportedly run out of the cheap cash they got from the central bank.
The Spanish sovereign-banking loop – Open Europe
The unlimited ECB lending and the LTRO has only exacerbated this cycle and there is a strong correlation between increased reliance on ECB funding and the sovereign-bank loop – Spanish bank borrowing from the ECB jumped by €75bn in March, an increase of 50%.
…in the short term, Italy's bonds will dominate the supply (particularly bills), putting some upward pressure on short term Italian yields. But in the long run the market believes that Spain presents a materially greater risk than Italy.
Mark Grant On The Dangerous Road Ahead – ZH
We have just been presented with one very red flag signaling the seriousness of the issues in both Italy and Spain. Spain just announced that its banks borrowed $415 billion from the LTRO funding while net borrowing stood at almost $300 billion and accounted for 63% of the net borrowing at the ECB. For Italy the number is $354 billion in LTRO borrowing and they are not that far behind Spain in needing aid.
We have just been presented with one very red flag signaling the seriousness of the issues in both Italy and Spain. Spain just announced that its banks borrowed $415 billion from the LTRO funding while net borrowing stood at almost $300 billion and accounted for 63% of the net borrowing at the ECB. For Italy the number is $354 billion in LTRO borrowing and they are not that far behind Spain in needing aid.
Massive Jump in Bank of Spain Borrowing from ECB: Bank of Spain Balance Sheet Shows Spain Deep in Trouble, LTRO is Essentially Useless – Mish’s
With links to central bank balance sheets
*Spainaly under pressure – Macrobusiness
Nice comparison of Italy and Spain, LTRO losses and ECB’s margin calls for more collateral.
Spanish Minister Asks ECB to Buy Bonds as Crisis Deepens – BB
While Executive Board member Benoit Coeure signaled on April 11 the bank may start buying Spanish bonds, his Dutch colleague Klaas Knot said yesterday that the ECB is “very far” from reactivating a policy that failed to stop a selloff in Spanish bonds in November…Average net borrowings from the ECB by Spanish banks climbed to 227.6 billion euros last month from 152.4 billion euros in February
EURO CRISIS: ECB
Only a matter of time before ECB is forced into massive quantitative easing – The Telegraph
Since fiscal expansionism is out of the question, the only possible hope for salvation – within the euro that is – lies with the ECB. It may require the whole of the eurozone to move seriously into recession before the ECB acts
ECB Seen Favoring Bond Buying Over Bank Loans – BB
Of 22 economists polled this week, 17 predicted the ECB will be forced to resume the Securities Markets Program (ECBCSMP), while only one forecast it will offer another batch of three-year cash. Nine said the central bank may consider shorter maturity loans of one or two years.
ING’s piece: bulk of the LTRO2 proceeds were taken down by Italian (26%) and Spanish (36% of the total) and the latter is even more dramatic given the considerably smaller size of Spanish banking assets relative to Italy. The hollowing out of the Spanish banking system, via encumbrance (ECB liquidity now accounts for 8.6% of all Spanish banking assets), is a very high number - on par with Greek, Irish, and Portuguese levels around 10%.
OTHER
Tentative Schedule of Events (Spring meeting) – IMF
Next week’s schedule – good for announcement / leak watchers
Moody's Updates Timetable for Bank Rating Reviews – Moody’s
Rating reviews of European banks postponed to early May. Why? They say they want to see the IMF and G20 meeting and election results – or are they just postponing the bad news on purpose?
The Weekly – Volatility is BACK! – TF Market Advisors
JPM’s trades, US economy, China and Europe and Outlook
Swiss National Bank ‘Out of Their Tiny Little Minds’ – WSJ
Trading below the floor could trigger between EUR20 billion and EUR40 billion in stop-loss orders, according to one trader at a large European bank. Sources told Dow Jones the SNB spent more than EUR1 billion to try and hold CHF1.20 last week and the SNB had another EUR9 billion in standing orders to keep it there. Based on the amount of stop-loss orders alone, the SNB would need a lot more firepower to defend the floor.
Stardate April 13, CIO sector, JP Morgan reporting VaR – alphaville / FT
Can you believe that VaR (value-at-risk) at JPMorgan’s investment bank was less than VaR at its much talked-about chief investment office (CIO) in the first quarter?
Can you believe that VaR (value-at-risk) at JPMorgan’s investment bank was less than VaR at its much talked-about chief investment office (CIO) in the first quarter?