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:
GENERAL
Apocalypse Fairly Soon – Krugman
/ 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 End
– Gains 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.
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 Curves – Front-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 edition – Saxo
Bank
Charts of
what are most commonly used to measure financial stress.
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 Eurozone – re-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.
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.
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.
Roundup of
articles
THE “LEADERS”
Mitterrand, Hollande, and France's Socialist Legacy:
On the New President's Agenda – Foreign
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
Euro – CNBC
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 All – ZH
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
Eurozone – Testosterone
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 Leaders – WSJ
EU Leaders Say Bloc Will Act as Needed to Fight
Crisis – BB
Van Rompuy Statement: Stay the course, pro-growth
agenda in June – Calculated
Risk
It is important to remember that these guys are
committed to the euro - and they will not give up easily.
GREECE
 |
| 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?
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
time – Sober
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 drachma – ASA
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.
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.
SPAIN
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.
Bad news
from banks and regional finances.
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)