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.
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.
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.
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.
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.
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.
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.
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.
Portugal and Ireland got it around these levels. When
the margins are hiked, selling becomes self-reinforcing.
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
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?
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.
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.
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.
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.
Two years after Europe bailed Greece out to protect the euro, the rescue has become a debacle that threatens to unravel the common currency.
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.
…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.
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:
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:
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
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
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.
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
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.