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Saturday, May 12

12th May - Weekender: Euro Crisis

Here is the huge reading package on the European mess for the weekend. Plenty of charts in this post - check the sections Greece and Spain below, and click the pics to view a larger version. Markets & Trading, Off-Topic and possibly Sell-Side Research posts coming up on Sunday. Follow ‘MoreLiver’ on Twitter or FacebookThe LTRO and JP Morgan posts have been updated.

The Momentum of LiesGolem XIV
The fog of burning acidic financial lies that have been rained down on us for  four solid years is finally meeting political reality and opposition. Suffering can be ignored and met with the police baton but it cannot be erased forever.

Waving the White FlagJohn Mauldin / The Big Picture
This week the German Bundesbank waved the white flag. The die is cast. For good or ill, Europe has embarked on a program that will require multiple trillions of euros of freshly minted money in order to maintain the eurozone. But the alternative, European leaders agree, is even worse… When Spain goes, it is just a matter of time before we lose Italy and then, yes, even France. The line must be drawn with Spain. And the only outfit with a balance sheet big enough that can also do it in a politically acceptable manner is the ECB, and the only way they can do it is with a printing press.

BizDaily: In the Balance: Eurozone contagion?BBC (mp3)
How far will the economic troubles of the eurozone affect the rest of the world? Are developing economies being hit by contagion from the Eurozone? Join Justin Rowlatt and guests: Elsie Kanza, Head of Africa at the World Economic Forum, Sanghamitra Bandyopadhyay an economist at the University of London, Andrew Norton who is the research director at the Overseas Development Institute, and Goolam Ballim, Chief Economist and Global Head of Research for the Standard Bank Group to discuss the fallout from Europe's economic troubles.

Germany and France: Kiss, Make Up, and Flip-FlopTestosterone Pit
Yields will be pushed down by the ECB, and inflation in Germany will drive real yields into negative territory: financial repression, another price Germans are asked to pay (Americans have been paying it ever since the Fed decided to bail out Wall Street). But Hollande couldn’t have asked for better timing. And he must be thinking, if the Bundesbank can flip-flop, why not Merkel?

Is Europe on a Cross of Gold?Project Syndicate
Increasingly, one hears predictions that the euro will go the way of the gold standard in the 1930’s...Yet I am reluctant to believe that things will turn out the same way this time. Four differences lead me to believe that maybe – just maybe – the euro will survive.

Wilmot: ‘Buy the panic’alphaville / FT
Jonathan Wilmot, chief global strategist at Credit Suisse, reckons that Europe is set to lead a rebound in global growth this year. He and his team are saying BUY Spanish and Italian bonds, and probably equities as well.

Euro-coupons: Mutualise the interest payments, not the
Eurobonds have been proposed as a solution to the crisis, but Germany is wary of guaranteeing the entire debt of EZ countries. This column suggests the more politically feasible Euro-coupon solution. EZ countries would issue bonds at market interest rates and transfers between countries would harmonise the effective interest rates.

The Capital requirements directive (CRD4)bruegel
…the EU is the only jurisdiction codifying Basel 3 in EU law for application and implementation in the national law of 30 states, whose banking system represent one-half of the world’s banking assets. Other jurisdictions leave this responsibility to the discretion of national supervisory authorities.

French banks say adieu to Asiaalphaville / FT
Or the massive deleveraging European banks are going through could just leave a giant sucking sound where financing used to be, and trade finance in Asia is a case in point. Morgan Stanley took a look at this last week, using a series of illustrative charts.

How the Latin Triangle Swallowed the EuroEconoMonitor
The Latin triangle, then, is a trap from which there is no easy escape. Once a country reaches point B, devaluation becomes costly, both politically and economically…(The model) offers little that is helpful for countries that need to extricate themselves from situations they should not have allowed themselves to get into in the first place.

In search of symmetry in the euro zone (Paul De Grauwe) – CEPS
... up to now it imposes a lot of pressure on the deficit countries but fails to impose a similar pressure on the surplus countries, with the effect that the eurozone is being kept in a deflationary straightjacket.

ECB: EU Economy Strikingly Similar to 1990s JapanThe Big Picture
The ECB appears to be understating the similarities between the weak growth outlook in Japan after its domestic asset bubbles popped in the early 1990s and that for the euro area in the present crisis. The performance of the Japanese economy 20 years ago was better than that of the euro area more recently.

Recession in Europe: E.U. Predicts Negative Growth in 2012TIME
…eurozone economy will contract by 0.3 percent in 2012 and grow by 1 percent next year. Its prediction for 2012 is far weaker than the one it gave last November, when it predicted growth of 0.5 percent.

Chart of the Day: Euro zone GDP by countryCredit Writedowns
For me, this fact definitely shapes how Europe responds to crisis. A problem in Spain, with an economy bigger than every US state except California, is of a different order of magnitude than a similar problem in Ireland. The policy response is bound to be different as a result.

Will Greece Snatch Defeat From the Jaws of Victory?Mish’s
Svriza's totals rise every day. By the time elections are held, any coalition might put them in the majority. It's conceivable Syriza would not even need a coalition. This explains the all-out push by eurocrats and Troika-sponsored clowns to stop another election.

Germany: eurozone would survive Greek exiteuobserver
German finance minister Wolfgang Schauble has said the eurozone would survive if Greece left it, with the single currency structures more robust than two years ago.

Germany Begins Quantifying The Cost Of A Greek Exit (And Discovers Contingent Liabilities Are All Too Real)ZH
According to an analysis released hours ago in Wirtschafts Woche,
Germany "would only absorb losses of 76.6 billion euros in Germany

Cashin On Greek TheaterZH
Former defense minister, accused of taking bribes, has made a deal with the prosecutors. Other PASOK politicians are nervous…

Greece Next Next StepsZH
UBS and BoA event calendars and discussion.

For Greece, Life Wouldn’t End After Leaving the EuroMarketBeat / WSJ
The numbers add up not to a solution but to a protracted decline. The new leaders of the Greek government must decide what road to follow. On one side there is austerity. On the other, leaving the euro.

Banks prepare for the return of the drachma Reuters
Planning behind the scenes has been underway since Europe's debt crisis erupted in Greece in 2009, said U.S.-based Hartmut Grossman of ICS Risk Advisors who works with Wall Street banks.

If Greece goes...Free exchange / The Economist
…it will be hard to provide meaningful and swift reassurances to markets and bank creditors that a Greek exit would be a one-off. The need would be for a display of financial firepower, a demonstration that cash is readily and flexibly available to the next countries in line. The ECB's liquidity operations aside, that has been beyond Europe’s policymakers to date.

Brown Brothers’ Chandler Says Greece Will Remain in EUBB (mp3)

A one-word explanation on why the eurozone cannot inflate its way out of trouble: Spain!Yannis Varoufakis: This could be achieved very simply by having the various cajas taken over, and recapitalised, by the EFSF (with the EBA appointing new boards of directors). Just take the Spanish government out of the ‘banking game’. That way, the link that keeps reproducing the zombification-reinforcement mechanism linking banks and member-states ends immediately.

Spain's Pain Endures, Bank Reform 4.0Marc to Market
There still is a reasonable chance that the EU agrees to trigger a clause in the fiscal agreements that allow countries that are on track with reforms, to be given another year to reach deficit targets. Spain is a likely candidate, even if there is some additional conditionality associated.

Domestically held Spanish debt makes any possibility of restructuring unthinkableSober Look
Don’t forget, as the Greek PSI clearly demonstrated, that in the unfortunate case of a restructuring in Spain, the higher the holdings of domestic bonds by the domestic banks, the higher the need for recapitalisation funds, and therefore the higher the required haircut of that restructuring in order to hit the final debt reduction target.

A mainly CoCo Spanish banks planalphaville / FT
They raise an interesting point about Spain’s Deposit Guarantee Fund — which is financed by the banks themselves. ‘How much DGF is going to need this year is uncertain but in principle it must provide 80% of the loss to the banks under the asset protection scheme,’ Nomura add. Don’t think too hard about how that particular arrangement might come undone.

ECB talks money (and the lack thereof)Macro Business
Good overview of the ECB’s monthly report: The rate of credit growth in the private sector continues its downwards trend.

ECB: “A stronger and stricter fiscal framework is required”Credit Writedowns
Translation: when the Lisbon Treaty is reformed, we suggest adding teeth to the fiscal compact in the form of oversight and penalties for fiscal free riders under the threat of expulsion from the euro zone. This is the policy response that is coming – and what is meant in Germany by ‘fiscal union’.

(Current ECB) Monetary policy is no panacea for EuropeMacro Matters
Firstly if Sweden and specifically the Riksbank is the role model for the ECB (which it most certainly is) then low and stable inflation, with a strict single inflation targeting mandate is certainly NOT what ECB policymakers should be focused on right now.

Tracking Eurozone government cash at the ECBSober Look
These governments are now draining their cash reserves quite rapidly. Depending on market conditions later in the year, the ECB may need to do another round of long-term funding to allow the governments to replenish their reserves. The banks in some of the nations have simply become nothing more than conduits between the ECB and the governments.

Cypriot banks and some sneaky ELA [updated with Portugal]alphaville / FT
FT Alphaville has been very curious about the €18bn of mystery Emergency Liquidity Assistance which showed up in the ECB’s financial report at the end of April, but until now we weren’t sure where the cash had ended up.

The TARGET2-Securities Framework AgreementBIS (pdf)
Mario Draghi, President of the European Central Bank, at the event marking the first signatures to the T2S Framework Agreement, Frankfurt am Main, 8 May 2012.

The TARGET2-Securities Framework AgreementBIS (pdf)
Peter Praet, Member of the Executive Board of the European Central Bank, at the event marking the first signatures to the T2S Framework Agreement, Frankfurt am Main, 8 May 2012.

The TARGET2-Securities Framework AgreementBIS (pdf)
Mr Ignazio Visco, Governor of the Baml of Italy, at the event marking the first signatures to the T2S Framework Agreement, Frankfurt am Main, 8 May 2012.

Speech Peter Praet: Managing financial crises: the role of the ECBECB

RBS’s Sinche Says Bundesbank Is More Open to InflationBB (mp3)