21st Apr - Best of The Week

Here are the past week's best articles, picked from my earlier posts. Of special interest are the IMF links because of the weekend's meetings. The usual Weekender posts and the Weekly Support are coming up tomorrow. You can get update notifications by following MoreLiver on Twitter or Facebook. Contact me with any questions or suggestions! 

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.

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.

Austerity is not the problem in the eurozone – the euro is – The Telegraph

These are genuine problems. But they are problems created intrinsically by the euro and reflecting the banking crisis. Austerity alone is unlikely to be a sufficient answer. But it is a mistake to claim that austerity is the problem – no-austerity wouldn't be the answer, either.

The EU's Cure-All Cured Nothing: Why Germany's Medicine Is Killing Europe – The Atlantic

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.

Europe Needs to Drop its Resistance to Non-Bank Credit – PIIE

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.

Legal challenges may delay eurozone bail-out fund – euobserver

Complete 2012-2013 European Bond Issuance Calendar – ZH

Return of the Stability and Growth Pact – alphaville / FT
Citi: While it is possible that some institutional bias towards blaming peripheral countries for being responsible for the crisis will persist for some time, there appears to be a growing swell of support to investigate what should be done in the ‘surplus countries’ to avoid creating an excessively large gap that others would find impossible to reduce.

Why The Situation In Europe Is Only Getting Worse – BI

George Soros speech summary, I featured this in my Weekender posts, but you probably did not read it. Full pdf here

The bank-sovereign linkage in the Eurozone – Sober Look

The periphery banks are now inextricably tied to the path of their nation's sovereign debt. One of the things that made the Greek bond restructuring so difficult was the fact that the Greek sovereign bond write-down instantly made Greek banks insolvent. Greece had to use €50 billion of the EU financing just to recap the banking system. This issue has become acute in other Eurozone nations.

EURO CRISIS: CENTRAL BANKING

LTRO, bond purchases or both, which is it to be? – Macro Matters

I mean come on, who can justify 22.8% unemployment in a developed economy such as that of Spain? If fiscal transfers are not the answer, then monetary policy surely is. Just a thought.

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

Escalation in Euro Rift: Bundesbank Gets Sued – Testosterone Pit

“Target 2” and its predecessor “Target” used to be a mundane part of the European System of Central Banks (ESCB). Something technical people didn’t pay attention to… Now, the credits extended to the central banks of Greece, Ireland, Portugal, Spain, and Italy exceed €800 billion ($1.05 trillion), of which €635 billion is owed the German Bundesbank.

Eurosystem TARGET balance deviations call for cautious changing of the EU banking landscape – voxeu.org

Ossi Leppänen: Since the start of the crisis the Eurosystem balance sheet has grown from €1200 billion in June 2007 to around €2900 billion in March 2012. But this is spread unevenly among different central banks within the Eurozone, raising the thorny issue of intra-area (TARGET) balances. This column argues that these balances signal a need for change and restructuring in the Eurozone banking sector.

Eurosystem Oversight Report 2011 – ECB (pdf)

Press release – ECB

EURO CRISIS: SPAIN

The War for Spain – John Mauldin / The Big Picture

The War for Spain - Spain Goes “All In” - “We Are Not Greece” - The New Labor Force - A Little Blue Suede Shoe Trouble

A New Dispute over Euro Rescue Fund: Spain Wants Billions For its Banks – Spiegel

A number of euro zone countries and senior officials at the ECB would like to see the euro bailout fund changed so that it can provide direct aid to banks. This could help Spain, which has emerged in recent days as a new center of the euro crisis, but Germany is opposed.

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.

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.

Coming up with €163bn to keep the Spanish banking system afloat – Sober Look

Ray Dalio's Bridgewater Says Spain Is Worse Off Than It Was Before The LTRO – BI

Dalio and his team believe that funding gaps will soon force Spain, the EU, and/or the ECB to take extraordinary measures to save the country and its financial system from economic disaster.

LTROver – ZH
…consumer and residential delinquencies are flat, despite a surge in unemployment. I recommend taking this data with a giant grain of salt, given what one would normally expect. Markets are doing exactly that, which is why Spanish banks trade at less than tangible book value…

CHART OF THE DAY: The Run On Spain – BI

Deposits leaving the country, thus banks unable to buy sovereign debt and the Eurosystem is the only supporter of the Spanish financial system. Eurosystem will probably protect itself from losses by instituting bailouts and not allowing any private defaults.

A New Dispute over Euro Rescue Fund: Spain Wants Billions For its Banks – Spiegel

A number of euro zone countries and senior officials at the ECB would like to see the euro bailout fund changed so that it can provide direct aid to banks. This could help Spain, which has emerged in recent days as a new center of the euro crisis, but Germany is opposed.

EURO CRISIS: IMF FIREWALL

IMF still won't admit truth about the euro – The Telegraph

It is often said that travel broadens the mind. Not so for finance ministers gathering in Washington DC this week for the spring meeting of the International Monetary Fund and G20. For them, the agenda will seem wearily familiar.

Showdown in Washington: Emerging Nations Vie for Power at IMF – Spiegel

EU would like to see the IMF provide billions in additional funds to help relieve the debt crisis. However, a number of emerging economies are resisting the plans, accusing the West of abusing its power within the organization and creating a "North Atlantic Monetary Fund".

Christine Lagarde: Emerging Market Nations Will Get More Power in the IMF – TIME

…sees no alternative to the strict austerity policies being imposed on many peripheral European countries, says the double dip recessions in Italy and Ireland just announced come as no surprise, and notes that IMF reforms will shift 6% of current quotas to dynamic emerging and developing countries.

IMF: eurozone at centre of coming storm – euobserver

Lagarde said she has already received pledges of over €240 billion out of its €300 billion goal - most of which would come from the eurozone countries themselves, the rest being committed by non-euro states such as Japan, Sweden, Denmark, Norway and Switzerland. The US has so far not put up any cash on top of its regular contribution.

On the Swiss, the IMF and the G-20 – Bruce Krasting

The side deals on the Swiss IMF participation should be interesting. What would the Swiss get in exchange for a giant check? One thing that will be up for discussion is the SNB’s currency peg. A month ago, the IMF blasted the SNB over the peg. My guess is that the criticism goes away if the Swiss write a check for $25 large. What a system…

Provisional Agenda for the Twenty-Fifth Meeting – IMF

25th meeting of the IMF Committee in Washington, D.C. on April 21, 2012.

IMF REPORTS

World Economic Outlook: Growth Resuming, Dangers Remain – IMF

The threat of a sharp global slowdown eased with improved activity in the United States and better policies in the euro area. Weak recovery will likely resume in the major advanced economies, and activity will remain relatively solid in most emerging and developing economies. However, recent improvements are very fragile. Policymakers must calibrate policies to support growth in the near term and must implement fundamental changes to achieve healthy growth in the medium term.

Mediocre Growth, High Risks, and The Long Road Ahead – iMFdirect

IMF predicts modest growth as Europe starts to exit recession – WP

Fiscal Monitor: Balancing Fiscal Policy Risks – IMF

Though past efforts with fiscal consolidation are beginning to bear fruit, debt ratios in many advanced economies are at historic levels and rising, borrowing requirements remain very large, financial markets continue to be in a state of alert, and downside risks to the global economy predominate. In this uncertain environment, fiscal policy must find the right balance between exploiting short-term space to support the fragile recovery and rebuilding longer-term space by advancing fiscal consolidation.

Global Financial Stability Report: The Quest for Lasting Stability – IMF
The April 2012 Global Financial Stability Report assesses changes in risks to financial stability over the past six months, focusing on sovereign vulnerabilities, risks stemming from private sector deleveraging, and assessing the continued resilience of emerging markets. The report probes the implications of recent reforms in the financial system for market perception of safe assets, and investigates the growing public and private costs of increased longevity risk from aging populations.

Global Financial Stability: What’s Still To Be Done? – iMFdirect

The quest for lasting financial stability is still fraught with risks. The latest Global Financial Stability Report has two key messages: policy actions have brought gains to global financial stability since our September report; but current policy efforts are not enough to achieve lasting stability, both in Europe and some other advanced economies, in particular the United States and Japan.

Global Financial Stability: What’s Still To Be Done? – iMFdirect

IMF: Cuts in European bank lending to drag growth – The Telegraph

IMF to CEE: risks of a credit freeze – beyondbrics / FT

IMF fears $3.8 trillion forced asset sale by eurozone banks – The Telegraph

An escalation of the eurozone debt crisis could force European banks to sell assets worth up to $3.8 trillion by the end of 2013 with damaging consequences for the global economy

OTHER

Artemis on Hedging the Wrong Tail Risk – HistorySquared

Another quick summary of the report. I know you haven't read this. I have posted about this three times now - someone even emailed the report to me today. Just read this quick summary, and perhaps you would then want to read the whole doc.

The buck shrinks here – Free exchange / The Economist

a central bank is somehow unable to provide adequate stimulus when interest rates can't be reduced any more…Yglesias: Higher inflation in the future is more or less equivalent to a negative interest rate...But boosting inflation or randomly invalidating currency are bizarre and unpalatable proposals for the economic and political elite. Scrapping cash, on the other hand, is simple and elegant, which is why it will happen some day soon.

This correlated world – alphaville / FT

HSBC has a big study out ‘on risk on, risk off’. Two heat maps from it: the first is a typical correlation matrix across a range of assets in the world before Lehman collapsed. The second is post-Lehman.

Stock Correlations Coming Back to Life – MarketBeat / WSJ
The risk on/risk off trading that dominated markets last year may be poised for a comeback.

Disclosure, transparency, and market discipline – voxeu.org

Faith in market discipline has been shattered by the financial crisis. This column argues that the failure of market discipline has different roots. It points to a lack of transparency and efficiency, particularly when it is needed most. In order to rectify this, however, it is not enough to merely increase the provision and disclosure of information. Instead, transparency depends on how that information is interpreted and used.

FiveBooks Interview: Niall Ferguson on Intellectual Influences – The Browser

The historian tells us about the diverse influences on his work, from Keynes and Tolstoy to an Austrian satirist, and explains why he sees the world as a complex place on the edge of chaos

John Maynard Keynes: Star Investor? – CXO

Keynes beat the markets

Fractal Finance: A Rogue Mathematician’s Search for Answers – The Triple Helix

On Mandelbrot