19th May - Best of The Week

Here are the week's best picked from my earlier blog posts. My summary of the week would be: Greece is gone, Spain is going and we're waiting for a response from the ECB, while everyone is risk-off. Follow ‘MoreLiver’ on Twitter and Facebook and spread the word. 

EURO CRISIS: GENERAL

The Momentum of Lies – Golem 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 Flag – John 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.

As European Austerity Ends, So Could the Euro – View / BB
Peter Boone & Simon Johnson: For European politicians, the most important task now is to cover their tracks and blame others. Inflation is confusing. It also is an unfair tax on savers and a transfer of wealth to borrowers (assuming that interest rates can be held down or otherwise controlled, probably through nonmarket means). The ECB will now be under great pressure to take actions that create inflation. This may bring the end of the euro.

Eurodämmerung – Krugman / NYT

Greek euro exit, very possibly next month. Germany guarantees the other PIIGS or euro ends. Months, not years.

Shades of Weimar? Only the ECB Can Save Europe – John Mauldin

The Germans have accepted the notion that the only institution with the wherewithal to save the eurozone is the European Central Bank, and the only way possible for the ECB to do it is by printing euros. Trillions and trillions of euros.

A change in EZ policies is coming – Kiron Sarkar / The Big Picture

As a first step, EZ banks (including German) need to be sorted out… The ECB is really the only credible player around… a framework to introduce Euro bonds… The EZ only moves at times of crisis and boy is one coming unless they move pretty soon.

The Weekly T Report: For Once the Focus Wasn’t on Europe – TF Market Advisors

Greece will get some concessions from the Troika.  It is in no one’s interest to rush their exit.  Depending on how big the concessions are this could buy Greece anywhere from a few months to a year or more of time to make a final decision on the Euro.

The Axis of Weeble is Definitely Wobbling – TF Market Advisors

Shorting Germany, preferably bunds, is my favorite way to play this (with French bonds a close second). I think the next leg if it occurs wipes out the myth of Germany as “safe haven”. If Greece goes, losses to the Troika will be real and any attempt to paint over them will be too obvious.

Merkel and Hollande: you say growth, I say austerity, let’s call the whole thing off – alphaville / FT

While the relationship has had an inauspicious start, the signs are that it will go well, at least initially. Both leaders find themselves under pressure at home, but they need each other.

How Europe’s banking crises threaten the eurozone – Felix Salmon / Reuters

The Eurozone was never designed to cope with millions of Spaniards moving their money out of the country, behaving like middle-class Venezuelans with offshore accounts in Miami. And it also was never designed to cope with capital controls. But increasingly, it looks like we’re going to end up with one or the other. Or both.

EURO CRISIS: ECB

ELA stumble du jour – alphaville / FT

€18bn mystery ELA. Luc Coene, Belgium’s central bank governor may have turned snitch on Portugal: “Of course in countries like an Ireland, Greece, Portugal, you can’t get out in the short time and it will take a little longer.” Portugal? I never mentioned Portugal.

I know, I know, M2 isn’t exactly the right indicator – Marginal Revolution

M2 money supply growth rates are plunging in Greece (down -16.8% y/y through February), Spain (down -4.7%), and Portugal (-3.8% through January). It is up only 1.3% through February in Italy.

Shifting ECB liquidity to ELA, Greek bank recap edition – alphaville / FT

The really important point to end on is that as soon as the EFSF bonds are transferred over (hopefully Wednesday’s misconstrued mess will focus a few bureaucratic minds), these Greek banks can go back to pledging the EFSF collateral at normal ECB ops. The brief spell in ELA ends. Incidentally, these brief switches in and out of ELA have also taken place in Irish banks and in Dexia when collateral requirements shifted against banks a few times, only to shift back later. World didn’t end then.

Not a Greek Problem – Krugman / NYT
We need a conversion experience here, not in Athens, but in Berlin and Frankfurt. Otherwise, the game is almost over.

Hume on hold? Consequences of not abolishing EZ national central banks – voxeu.org

The EZ crisis reveals critical flaws in the Eurozone’s design. This column argues that failing to abolish national central banks left the door open for national interests to interfere with the natural workings of the financial system and Hume’s adjustment mechanism. This flaw – and the omission of a European Banking Authority with real teeth – will come back to haunt Europe in the months and years to come.

EURO CRISIS: SPAIN

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.

It’s Time to Stop Using Chewing Gum And Chicken Wire In Spain – EconoMonitor

Edward Hugh: According to reports now widely circulating the Spanish press (in Spanish only), the EU is pushing Spain hard to accept EU aid on completion of an independent external evaluation of the problems in the banking sector that is to be conduced by Blackrock Solutions and Oliver Wyman.

Domestically held Spanish debt makes any possibility of restructuring unthinkable – Sober 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.

Bank of Spain's latest balance sheet figures point to further deterioration – Sober Look

Is Spain In Danger Of An Imminent LCH Margin Hike? – ZH

Portugal and Ireland got it around these levels. When the margins are hiked, selling becomes self-reinforcing.

Spain: A Lack Of Accountability – The Daily Capitalist

Like failure, accountability is an essential principle for the survival of a free-market capitalist system. It is quite dangerous for the political class to continue to hide its mistakes at the public’s expense. If markets are not forgiving when trust is gone, the people, as Greece reminds us, are even less so.

EURO CRISIS: GREECE

JPMorgan Estimates Immediate Losses From Greek Exit Could Reach 400 Billion – ZH

The main direct losses correspond to the €240bn of Greek debt in official hands (EU/IMF), to €130bn of Eurosystem’s exposure to Greece via TARGET2 and a potential loss of around €25bn for European banks. This is the cross-border claims (i.e. not matched by local liabilities) that European banks (mostly French) have on Greece’s public and non-bank private sector. These immediate losses add up to €400bn. This is a big amount but let's assume that, as several people suggested this week, these immediate/direct losses are manageable. What are the indirect consequences of a Greek exit for the rest? The wildcard is obviously contagion to Spain or Italy?

Default now or default later? – Wolfgang Münchau / FT

By following the EU-IMF programme, Greece will end up with 10 years of depression, an inevitable euro exit and a possible breakdown of democracy. The best option, in my view, would be a strategy to achieve a primary balance by 2013 and then to default on all outstanding foreign debt, public and private.

How Europe can force Greece to exit the euro – Felix Salmon / Reuters

Felix argues that it is easier for Greece to just default on everything, including IMF loans – but because of its banking system it could not remain in euro.

Greece, euro exit and the drummer in the band – Reuters

A year ago, it was nearly impossible to get a diplomat in Brussels to talk about the possibility of Greece leaving the euro zone. Now, it's the opening to most conversations.

FAQ: Why is Greece in such trouble? And can it be fixed? – Ezra Klein / WP

Of course, it’s possible that Germany and the rest of Europe will try to find a way to accommodate Greece, rather than letting the euro implode. But right now there’s a standoff, and it’s not at all clear who’s going to blink first — or if anyone will blink at all.

How a Radical Greek Rescue Plan Fell Short – WSJ
Two years after Europe bailed Greece out to protect the euro, the rescue has become a debacle that threatens to unravel the common currency.

Greece, Versailles, and the Future of EMU – Marc to Market

There is plenty of room for compromises and there is a great deal of posturing, which is part of the brinkmanship tactics. New EIB funds, structural funds are available (and already earmarked for Greece) can be deployed. There is some flexibility with the timing of budget goals. It is preferable to the alternative of Greece leaving.

What Happens If Greece Leaves? – The Big Picture

…almost one-third of Greek bank deposits have left the country.  This will surely accelerate as the risk of these euro deposits becoming Drachmas increases…Spanish bank deposits have only recently begun to decrease.  Italian bank deposits are holding steady.

Paul Krugman is right about Greek exports – Pragcap

But is he also right about the potential collapse of the Euro?  If Greece leaves and begins to see economic improvement I think rumors will shortly begin about the other periphery countries also leaving.  First Portugal, then Ireland, then Spain, then Italy.

Your handy one-table guide to the cost of Grexit – alphaville / FT

French state 66.4bn, German state 89.8bn. 50% lower value of bonds, losses for French banks 19.8bn, German banks 4.5bn.

Greece on brink of collapse – The Telegraph

Europe’s financial crisis lurched into a perilous new phase as dire predictions emerged of a collapse in Greece’s economy, with a run on its banks bringing an inevitable end to its membership of the euro.

What Happens If Greek Payments Stop: Thought Experiment On "The Day After" – ZH
Goldman Sachs: There is no automatic relationship that could force the ECB to stop the flow of liquidity to Greek banks at that point. Rather, the ECB will have to take a set of key decisions:

The Endgame in Greece—How a Bank Run Can Be Part of the Solution – PIIE

Utilizing the threat of bank runs does take euro area brinkmanship to a dangerous new level. Euro area leaders should think carefully about proceeding down this road. It should only be contemplated if euro area leaders are willing to proceed to pan-euro area bank deposit insurance and other dramatic integration measures to avoid the spread of contagion and bank runs to other member states. If they are prepared to do so, they can call Alexis Tsipras’ bluff by fomenting a bank run in Greece before the new elections are held.

This Is The Greek ELA Borrowing Capacity – ZH
JPMorgan: Greek banks have a maximum of €130bn of remaining loan collateral which allows for a maximum of €65bn of additional borrowing from Bank of Greece’s ELA. This corresponds to around 40% of Greek bank deposits which stood at €170bn as of the end of March

Exodus, chapter 1 – The Economist

Two years after the crisis began, a Greek exit could still cause havoc

In the Picture: Greek exit? – The World / FT

Collection of FT articles. Must-read.

Euro area official sector exposures to Greece in excess of EUR 290bn Total; EUR 84bn Germany, EUR 63bn France, EUR 55bn Italy, EUR 37bn Spain – Mish’s

Includes calculations with adjusted capital keys.

OTHER

Dylan Grice on sovereign comeuppance – alphaville / FT

SocGen: Maybe all the Anglo-Saxon central banks have done is create the illusion that our sovereigns are more solvent than they are, and that our budget constraints are really a safe distance away. But I don’t think they are. And I think the truth gets out eventually.

The growth of the shadow economy, charted – alphaville / FT

When the economy is tanking the shadow economy benefits. That’s the theory and a new study into the rise of the grey economy

Jeffrey Gundlach, Bond Savant – Businessweek

Since DoubleLine first took investor money in April 2010, it has amassed $34 billion in assets. Even as it quadrupled in size last year, DoubleLine’s $22 billion Total Return Bond Fund (DBLTX) outperformed 99 percent of its rivals. The firm takes in $80 million to $100 million in new client dollars every day.

Winning Methods of the Market Wizard - Jack Schwager – Youtube

1 hour video.

Don’t Fight the Last War: Lessons from the Battlefields of Risk Management – Credit Writedowns

Dealing with the unexpected - Stability breeds instability - Correlated mistakes - One-dimensional thinking - The all important question

CFA Conference: James Montier – Above The Markets

Quick lecture notes. GMO’s asset allocator, previously SocGen’s co-head of global strategy. The focus: bad models. bad policies, bad incentives and bad behavior. EDIT: just found the video

FiveBooks Interviews: Simon Johnson on Why Economic History Matters – The Browser

History contains all sorts of useful warnings and lessons. And, says the former IMF chief economist, today's economic policymakers would do well to heed them

Chinese data: it gets worse – beyondbrics / FT

I'll take grey hair over algorithms any day – Saxo Bank

Steen Jakobsen: During the ERM crisis in 1992 I was a still a relatively young trader and had the good fortune to witness some of the best risk takers in the world - the Susquehanna group – who had a joint venture with my employer, the Chase Manhattan Bank. I learned more during that ERM crisis in 1992 than I have in the rest of career.

Do not trust the FRA-OIS spread! – alphaville / FT

If you’ve looked at the eurozone FRA-OIS spread recently and wondered why it is so weirdly stable given that Grexit fears are hitting new extremes, there may be a very clear and technical explanation. One that could, as it turns out, be masking weightier problems in the money markets.

*RoRo and the carry trade’s fight back – alphaville / FT

There have been rumours of the so-called carry trade’s demise knocking about for a little while now, but HSBC think it is staging a quiet comeback and taking a chunk out of RoRo’s (Risk on/Risk off) importance in the FX markets.

Three Charts On Why This Time Is 'Not' Different For Stocks – ZH

Notes From Ira Sohn Conference Presentations 2012 – market folly

Fed's operation twist is distorting the treasury market – Sober Look

The question now is whether these yields will reverse direction once Operation Twist ends this summer. Given the global economic backdrop, the Fed will likely not want to end the program, but the central bank will soon run out of two-year treasuries to sell. The next step will be sterilized purchases.