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Sunday, May 20

20th May - Weekender: Euro Crisis

Weekend's linkfest on the European crisis. Greece and Spain dominate the discussion. ECB must be under tremendous pressure from the eurocrats. Follow ‘MoreLiver’ on Twitter or Facebook.  The JP Morgan post has been updated.
Previously posted:

Apocalypse Fairly SoonKrugman / NYT
Higher inflation targeting required: Both the central bankers and the Germans hate this idea, but it’s the only plausible way the euro might be saved. For the past two-and-a-half years, European leaders have responded to crisis with half-measures that buy time, yet they have made no use of that time. Now time has run out.

The Rise Of Nationalism Will End the Euro Before Summer’s EndGains Pains
The collapse is taking shape via three key developments: 1) The Rise of Nationalism 2) The shift to focusing on “growth”/ rejection of “austerity” 3) The end of the dominant political alliances.

Dr. Frankenstein’s Europe John Mauldin / The Big Picture
If and when Greece exits the euro, the ECB must be prepared to step in with massive funding of peripheral-country banks and sovereign debt. That is not within their charter today; but when the euro is at total risk, that is the only way to save it… At what point does it occur to the voters of a country that they are taking on more debt than they can bear? How much European solidarity is really there? Is there an unlimited amount of pain that can be tolerated? I rather think there is a limit; we just don’t know what it is, or even if we could ever conceivably get there.

"The Truth Gets Out Eventually"ZH
SocGen: What would bond yields in the US and the UK look like without these purchases? Probably like those in the eurozone periphery…The accounting shenanigans eurozone governments resorted to in order to meet the entry criteria have been found out. Or at least, current CDS prices correlate well with countries’ cumulative deficit manipulations in the run-up to monetary union

An Update on Euro Zone's Yield CurvesFront-Run The Delta
I don't expect the Euro to dissolve in the complete sense, however I expect one or several member-states to remove themselves from the system and reissue an IMF-backed currency.  That seems to be the way things are done in these types of situations, for instance Chile in 1982, Brazil in 1982, Argentina in 1982, Mexico in 1987, Russia in 1998, and Argentina again in 2001.  Each result was an IMF-backed debt restructuring and a decrease in the value of the USD.

Saxo Stress Indicators: First public editionSaxo Bank
Charts of what are most commonly used to measure financial stress.

Is Europe Ready for Banking Union?PIIE
1) banks must share risks as widely as possible 2) operating capability to restructure banks without having to rely on national authorities that have failed their supervisory duties 3) retail bank runs must be prevented.

An IMF Program for the Eurozonere-define
An external neutral arbiter such as the IMF can break the logjam. The failure to agree Europe-wide mechanisms for capitalising banks or providing funding guarantees to the banking system made sense for certain member states but was disastrous collectively. The harmful delay in the restructuring of Greek debt and EU leaders’ insistence on self-defeating harsh austerity measures also fall in the same category. The IMF must intervene to save the eurozone from itself.

Eurozone corporate spending has stalled, repeating the situation in the USSober Look
As the area banks stopped lending to corporations (which is not the case in the US), firms have tapped the bond markets… they have been accumulating this cash on their balance sheets - just as their US counterparts have done since 2009… That cash hording is resulting in recessionary levels of corporate spending, stifling economic growth.

Ireland And Portugal Resume Their Places Among Europe's Teetering DominosZH
Citi: With Ireland’s high government debt level and low potential growth, the risk of eventual government debt restructuring (PSI, Official Sector Involvement or both) also is likely to persist.

The Endgame for Greece and Europe?Pension Pulse
Roundup of articles

Mitterrand, Hollande, and France's Socialist Legacy: On the New President's AgendaForeign Affairs
Hollande is committed to preserving some of the key achievements of the Mitterrand years. And since the French left is going into the June legislative elections with strong, if not overwhelming, advantages, he will be able to do so.

Ex-ECB Chief Trichet Unveils Bold Plan to Save EuroCNBC
Europe could strengthen its monetary union by giving European politicians the power to declare a sovereign state bankrupt and take over its fiscal policy

"Dear Angela, Dear Francois, Dear Mario" - From Citi, With No Love At AllZH
Citi: Our impression is that markets will need to act as the proverbial 'attack dog', forcing the issue on the political agenda. This would not be the first time that markets have had to bark to get a credible policy response… Moreover, every bark comes with a loss of credibility – a loss of faith in the institutional capacity of the European Union to address the fundamental imbalances.

Rumors, Denials, and Visions of Chaos in the EurozoneTestosterone Pit
While the G-8 leaders are schmoozing with President Obama during their slumber party at Camp David, and while the parallel NATO summit and its protests and rallies are wreaking havoc on the streets in Chicago, Europe is re-descending into rumor hell

Declaration From Group of Eight LeadersWSJ

EU Leaders Say Bloc Will Act as Needed to Fight CrisisBB

Van Rompuy Statement: Stay the course, pro-growth agenda in JuneCalculated Risk
It is important to remember that these guys are committed to the euro - and they will not give up easily.

JPM On Grexit, TARGET2, And The ECBZH
BNP Paribas calculated 500 billion. Nice...
JPM: The ECB can “shut off” the Target2 loans if it exercises its veto over ELA loans (requiring a two-thirds majority on the Governing Council), and if the Greek central bank respects that veto. But the Greek central bank would likely be faced with the need to impose very restrictive controls on Euro deposits to limit outflows if ELA loans to Greek banks cannot be made. If the Greek central bank is faced with the prospect of imposing capital controls, a collapse of the Greek banking system, or defying the ECB’s veto on ELA loans, what route would it take?

And Now Back To Europe, Which Is More Unfixed Than EverZH
Citi: There are many scenarios for a Greek exit;  almost all of them are likely to be EUR negative for an extended period. Some scenarios could be positive in equilibrium but the run-up to the new equilibrium could be nasty, brutal and long. The positive scenarios for the euro involve aggressive reduction of tail risk; none of these seem likely. It is unlikely that central banks busily substitute EUR for USD in their portfolios during periods of intense political uncertainty.

Greek exit becomes increasingly expensive over timeSober Look
…the number will easily exceed half a trillion euros. Greece will either convert these liabilities to drachmas or simply default on them - there is no other choice… As time goes by, Greek external liabilities will continue to grow, making it increasingly more expensive for the Eurozone to exit. And as expectations of an eventual exit increase, so does the run on the Greek banking system and further need for ELA.

Counting down Grexit: money printer preparing to print drachmaASA
I have already noted that the street consensus has shifted, now that the market believes Greek exit of the Eurozone (or Grexit) is the central case after the political chaos.

Greece: a question of tough loveEconomist’s Forum / FT
What is clear is that the situation is not going to be resolved without some level of reform but there is one big question which remains unanswered – does the EU want to protect the Greek population with short-term gains of conceded austerity measures or give them the opportunity for future prosperity by taking a bold but unpopular step?

Bet on Greek Bonds Paid Off for ‘Vulture Fund’NYT
When Greece announced on Tuesday that it had made a €436 million bond payment to the hold-out investors who rejected the country's historic debt revamping deal in March, the decision came as no surprise.

Run on banks in Spain is very realSober Look
As Spain's banking sector continues to deteriorate, rumors are beginning to spread of a possible run on banks with depositors withdrawing some billion euros from a single bank.

Spain: Double Barrel DisappointmentMarc to Market
Bad news from banks and regional finances.

Europe’s Depressing Prospects: Two Reasons Why Spain Will Leave the Eurompettis
For several years I have been saying that Spain would leave the euro and restructure its external debt.  I should say that I specify Spain because it is the country in which I was born and grew up, and so it is also the country I know best.  When I say Spain, however, I really mean all the peripheral European countries that, like Spain, are uncompetitive, have high debt levels, and suffer from low savings rates that had been forced down in the past decade to dangerous levels.

LCH Hikes Margin Requirements On Spanish Bonds ZH
Net result: the Spanish Banks which by now are by far the largest single group holder of Spanish bonds, has to post even more collateral beginning May 25. Only problem with that: it very well may not have the collateral. (With comments and charts from Nomura and UBS)