Interesting
week, after the first round of the French elections, Dutch government fell and Spain looks ready for a bailout program.
Major television channel in Finland played a document on the TARGET2
imbalances, and the people have woken up to the euro crisis, realizing that
even a ‘core’ surplus country is exposed to the crisis fallout. UK’s economy is again in a recession
while the macro numbers from US and continental Europe have also proved disappointing. IMF’s
fund raising caused no visible market movement. ECB released its annual report
and financial integration reports, and some of the major trends now are:
1)
Austerity is dead – no-one wants to do it anymore,
the voters simply won’t allow it. What policy choices this leaves on the table,
if internal devaluation is not allowed?
2)
European
nation state is rising, and the age
of integration has taken a step back. This is visible both at a national level
and in European politics.
3)
Fragmented banking systems, back inside national borders
because of the ECB’s actions
4)
Spain is about to fail, and the choice is either to save
the banks, the sovereign or partially both. If the banks are recapitalized,
they could support the sovereign for some time. If the sovereign is saved, it
could recapitalize the banks. Or both could be dealt with simultaneously. But
who picks up the bill? EFSF is not licensed to recapitalize banks (at least not
yet), and a haircut and CDS trigger on the Spanish sovereign debt is not good
PR. IMF would not touch Spain before a reasonable haircut.
5)
The ending has not been chosen, and thus we still live the “muddle-through”-scenario
a. Fiscal union
b.
Breakup
c. Capital controls
More of my own writings from this week can be found in
26th Apr - Spanish Baby Steps
25th Apr - Germany losing friends left and right
24th Apr - You Better Read This
Anyway,
here are the most interesting articles from the past week. The usual weekend
posts coming up later. The usual weekend posts coming up later. You can get
update notifications by following MoreLiver on Twitter or Facebook. Contact me with any questions or
suggestions.
EURO CRISIS
As Paul Donovan of UBS said, Europe could be in a 5-year rolling
crisis, or as Wolfgang Münchau said, 9 years of strikes. Here, I also
believe that the crisis will continue until either a break-up of the Eurozone,
or a fiscal union. The end result is clear, one way or another. It
is the path that is not certain.
How Much Bigger Can TARGET2 Imbalances Grow? Goldman Answers: "A
Lot" – ZH
Goldman
Sachs: The ECB’s two 3-year LTROs should
have, all else equal, reduced the capital flight from periphery to core to the
extent that fears of an immediate liquidity crisis of the banking sector in the
periphery were a major driving force behind these flows. There is little evidence,
so far at least, for this. In any case, we think it is reasonable to assume
that genuine concerns about the solvency of peripheral banks are also playing a
role here and these concerns are unlikely to go away any time soon…
Rank by correlation, European edition – alphaville
/ FT
As markets ponder France’s post-election future, and the Dutch deal with the collapse of their government, some analysts are wondering which countries even qualify as being in the “core” of Europe.
As markets ponder France’s post-election future, and the Dutch deal with the collapse of their government, some analysts are wondering which countries even qualify as being in the “core” of Europe.
The euro was a blood sacrifice to the
Eurocrats' fanaticism. But Europe's democracy may save us from Europe's single currency
Firewalls: A bigger IMF war chest – Free
exchange / The Economist
What the euro zone lacks is the institutional
wherewithal to break a deadly paralysis. Its key institutions are stuck.
The road back to competitiveness begins with
southern European wages falling relative to German wages. Germans are terrified
of inflation, so that leaves one option: southern European wages fall
dramatically while German wages stay steady. There are two ways for wages to
fall: (1) Everybody takes a partial pay cut, or (2) Some people take a 100% pay-cut
by losing their jobs.
Preliminary international banking statistics at
end-December 2011 –
BIS
Large
movements in the latest data are highlighted in the Statistical commentary
EURO CRISIS: AUSTERITY
REALPOLITIK
The Coming European Growth Pact – Credit
Writedowns
These
events mark the beginning of the push back against German-led austerity, but it
is even bigger as the IMF’s call for the ECB to cut rates illustrated
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.
Excellent
links and summaries of five recent articles in FT, Telegraph, NYT, BB, WSJ
Blogs review: new facts and arguments in the austerity debate – bruegel
The euro zone strategy to cut deficits has come
under increasing strain from slowing economies, gyrating financial markets and
electoral setbacks. Last year, we wrote a review on expansionary fiscal
contraction that underscored the differing views between European policymakers
and the vast majority of academics; especially after an IMF study deconstructed
earlier studies on the growth impact of fiscal contractions. We come back to
this issue, not only because it is again the hot topic of the day, but also to
take stock of some of the new arguments that have been put forward in this
debate.
Democracy Could Destroy the Euro – TIME
Upcoming elections in France and elsewhere will
likely show massive popular resistance to the austerity policies needed to save
the common European currency
Political upheaval all round? – alphaville
/ FT
What was supposedly agreed in Europe on Friday just ain’t gonna
happen…only three countries have actually ratified the new fiscal pact: Portugual, Greece, and Slovenia. So… perhaps fines will be narrowly escaped?
The T Report – The Day Austerity Died – TF
Market Advisors
The reality is that spending won’t solve anything.
It will grow debt faster than the spending can improve the economy… It
is no co-incidence that more and more sovereign debt is being funded by
institutions in that country. It is specifically to make leaving the Euro
easier.
EURO CRISIS: PIIGS
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
Credit
Suisse, UniCredit views: We remain cautious,
but increasingly on Italy rather than Spain at current levels – the news flow
from Spain is likely to be negative – the economic backdrop is ugly, the
regions will be difficult to get under control, and much remains to be done to
sort out the banking sector…Italy has remained relatively under the radar
during the Easter weakness but has considerable supply requirements which it is
less clear the domestics will be able to support.
Greece to Seize Money
From Suspected Tax Evaders' Accounts, with Charges and Trials Later; More
Capital Flight Coming Up – Mish’s
Expect to see a further plunge in money kept at
Greek banks. Also expect capital flight of another kind: human capital. With
this kind of crackdown, anyone capable of leaving would be wise to leave Greece immediately.
EURO CRISIS: ECB
Presentation of the ECB Annual Report 2011 – ECB
Speech
Vítor Constâncio to the Committee on Economic and Monetary Affairs of the
European Parliament – ECB
Annual Report 2011 – ECB (pdf)
In Monetary Union, the risk that the Eurosystem
central banks (that is, the ECB and the euro area NCBs) face relates to the
conduct of monetary policy operations itself, not to the associated TARGET2
balances.
Press Release: Results of the Apr-2012 bank lending survey for the euro
area – ECB
For the first time, detailed data series for
the aggregate euro area results as well as the country-level results in terms
of net percentages and/or the diffusion index for 11 euro area countries have
now been made available (link
to docs)
Preliminary international banking statistics at
end-December 2011 –
BIS
Large
movements in the latest data are highlighted in the Statistical commentary
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)
OTHER
Seven questions about global
markets – alphaville
/ FT
Excellent
‘whys’ from JP Morgan
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.
Things That Make You Go Hmmm – ZH
IMF Roundtable on Global Economy – Charlie Rose
Lagarde +
others, 55 minutes
Shadow banking:
thoughts for a possible policy agenda – Bank
of England (pdf)
10-point
policy plan to address the risks to financial stability posed by shadow
banking. Speech given by Paul Tucker, Deputy Governor Financial Stability,
Member of the Monetary Policy Committee and Member of the Financial Policy
Committee