26th Apr - Spanish Baby Steps

Two big ticket items: Spain downgraded and rumors from a good source, already denied by the ‘crats, about a plan to recapitalize the weak banks with the ESM. Hmmm…connecting the dots makes it obvious that the Spanish banks will be recapitalized so that they would survive the real estate disaster. If the banks were healthy, they could support the Spanish government for some time, with a little help from the ECB.

There are several new themes that I have not addressed much previously. The fall of the austerity cult and the return of banking inside the borders of the European nation states are very important developments. Political necessity made the fall of austerity a must, while the ECB support turned banking into a national business again.

This has several implications: it would make reinstituting capital controls easier, and also minimize the systemic risk. With nationally separated banking systems, the monetary policy is effectively becoming national again. Each central bank can decide what it will and specifically will not accept as collateral, while ECB can set top-level guidelines. This would allow running very easy monetary policy for Spain, and tighter policy for Germany. You could call this “capital controls light”, or "regional monetary policy". Some kind of name will soon have to be invented.

Two very important sections below: Spain and Financial Integration, given the above discussion. I am not sure if you understood anything I just wrote, but perhaps during the weekend I can sort my thoughts out. I am thinking of the end game scenarios here, so spare me a second. You can get update notifications by following MoreLiver on Twitter or Facebook. Contact me with any questions or suggestions.

 

News – Between The Hedges

Markets – Between The Hedges

Recap – Global Macro Trading

The Closer – alphaville / FT

TV: Bloomberg, CNBC, BBC

Debt crisis: live – The Telegraph

Europe Crisis Tracker – WSJ

Tracking Europe’s Debt Crisis – NYT

FX Options Analytics – Saxo Bank

EURO CRISIS: GENERAL

REPORT DENIED: European Leaders Are NOT Working On A Bank Bailout Plan – BI

German newspaper Sueddeutsche Zeitung alleges that high-level leaders in the European Central Bank and the eurozone have already begun discussions on a way to extend funding from the European bailout funds—in particular, the European Stability Mechanism—directly to illiquid banks.

Easy Money Policies Risk Creating a Housing Bubble in Germany – History Squared

Credit Suisse notes the Taylor rule (inflation and unemployment rate), indicates "peripheral Europe needs a policy rate of minus 6.5%, while Germany needs policy rates of 6%.

Harvard’s Rogoff Says Euro-Zone Structure Not Working – BB (mp3)

The EU cohesion record: how did the crisis contribute? – bruegel

First, there is still some way to go, as many EU countries still suffer from significant regional disparities. Second, the crisis has clearly worked against socio-economic cohesion, and this is more evident in some countries than in others.

Banking union or financial repression? Europe has yet to choose – voxeu.org

Nicolas Véron: In a bid to shore up the sorry state of Europe’s economies, there is now debate over the need for a European banking union to go with plans for a Eurozone fiscal union. This column welcomes such proposals but accepts they are still a long way off.

That was your eurozone lending retreat, from the BIS – alphaville / FT

Predictably they show a massive pullback in credit throughout the banking system with Europe and the eurozone leading the way.

EURO CRISIS: SPAIN

S&P Cuts Spain to BBB+, Outlook Negative (full text) – ZH

 

S&P Downgrades Spain Amid Growing Risks Over Government Debt – MarketBeat / WSJ

Spain’s Ratings Cut by S&P on Deficit, Bank Bailout Concern – BB

BBBasta — Spain cut to BBB+ – alphaville / FT

S&P late on Thursday night became the first agency to cut Spain’s sovereign credit rating from the As to the Bs. It’s a two-notch downgrade from A to BBB+. Outlook negative.

http://ftalphaville.ft.com/blog/2012/04/26/976681/bbbasta-spain-cut-to-bbb/

EURO CRISIS: OTHER PIIGS

When PSI is futile (but then again, Cyprus) – alphaville / FT

Here’s a nice, Portugal-themed chart from Gabriel Sterne of Exotix. Only 15 per cent of a eurozone sovereign’s debt not held by senior creditors or by banks whose public recapitalisation would cancel out their write-downs

Statement by the EC, ECB, and IMF on the Review Mission to Ireland – IMF

EURO CRISIS: AUSTERITY DEBATE

When did Austerity Become a 4 Letter Word? – TF Market Advisors

Suddenly, everywhere you look, “austerity” has become a 4 letter word. Clearly it wasn’t excessive spending that caused too much debt. Surely we didn’t hit a financial crisis in spite of excessive spending, nope, it is all the fault of austerity.

The Mess That Is Europe – The Big Picture

Excellent links and summaries of five recent articles in FT, Telegraph, NYT, BB, WSJ

The new Dutch disease – bruegel

the new Dutch disease is more significant from the perspective of the eurozone’s new fiscal architecture, which lays a very strong emphasis on meeting nominal targets

European Policy Shifting Toward Growth Before Key Elections – Credit Writedowns

The ever politically adept Merkel recognizes the push toward a growth pact but will not allow Germany to be out maneuvered. While the growth pact may be on the agenda, she will aim to drive its shape. This is the way this level of European politics works.

Austerity light? Maybe a shade lighter – MacroScope / Reuters

…there has been a distinct shift in the rhetoric. Even Angela Merkel is pushing for a more broadly-based minimum wage in Germany, which could be construed as a growth tactic.

The New Voodoo – Krugman / NYT
It’s true that there is “no guarantee” that Britain would be going better with less austerity; nothing is life is guaranteed. Hey, my cup of coffee might suddenly turn into a block of ice

Draghi and Merkel defend the Grand Plan – Humble Student of The Markets

The “good austerity” and structural reforms by Draghi and Merkel still continues. So unless anti-Europe leaders take power, the eurozone is unlikely to fall apart.

EURO CRISIS: FINANCIAL INTEGRATION

De-euroisation chartpalooza – alphaville / FT

ECB-EC conference on financial integration and stability – ECB (pdf)

Speech Mario Draghi: welcome remarks

Setback for financial integration in 2011 – ECB

Press release for the report below: Since 2007, and particularly following the intensification of the European sovereign bond market crisis during 2011, the financial integration in Europe has slowed down considerably.

Changes in bank financing patterns – ECB (pdf)

Financial integration in Europe – ECB (pdf)

OTHER

OPEC is pumping at near record levels to plug the Iran hole and meet domestic demand. Spare capacity is a concern. – Sober Look

Financial arms races – BIS (pdf)

Speech by Mr Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at the Institute for New Economic Thinking, Berlin, 14 April 2012.

The Midas Touch – Swiss style – Golem XIV

Comments the negative effects in Switzerland: The banks have already touched Democracy and as they have turned it in to a source of gold for themselves they have destroyed what democracy was supposed to be for the rest of us.

Swiss Politician Says "Too Many Germans in Switzerland", Seeks Stronger Immigration Controls; Word of the Day: "Backlash" – Mish’s

Also note that France and Southern Europe want Eurobonds. Northern Europe does not. Somehow there is supposed to be a fiscal union complete with numerous trade barriers and immigration controls on top eurobond disputes and nannyzone bickering that will not be resolved soon.

Global imbalances: The black hole – Free exchange / The Economist

Oil exporters's surplus dropped sharply along with the price of oil during the global recession. It has come roaring back, however, and is now higher than ever. The bad news is that oil exporters are mostly sitting on their wealth. What they do spend flows more to Asia and Europe than America: