4th May - Best of The Week

Here are the week’s best articles picked from my earlier posts. Main news was the unsuccessful EU meeting on bank capital requirements. The regular US open post coming up later and be sure to visit me during the weekend as well. Earlier on MoreLiver: Morning Briefings and Portugal & Spain to parity?. You can get update notifications by following ‘MoreLiver’ on Twitter or Facebook. Contact me with any questions or suggestions.

 

EURO CRISIS: GENERAL

European Crisis: Historical Parallels and Economic Lessons – Princeton

Big names in this Inaugural Conference (I listed this previously, but it is so good...)

FiveBooks Interviews: Barry Eichengreen on the Euro – The Browser

With hindsight, was the euro a good idea? Will it come through the present crisis intact or will any country decide to leave? And what happens if they do? All this and more answered by the economics professor

Five eurozone futures, from Fitch – alphaville / FT

From Fitch’s latest report on eurozone endgames, and their sovereign credit ratings implications

 

The European Debt Crisis Redux – EconoMonitor

Beyond the German favoured remedy of asphyxiating austerity to either cure or kill the patient, Europe is rapidly running out of ideas and time to deal with the issues. As the real economy stalls and debt problems continue, the most likely policy actions may come from the ECB – an interest rate cut to near zero and further liquidity support, perhaps even full-scale quantitative easing. Bailout funds may be channeled to recapitalize Spanish banks, as a means of helping Spain without resort to a full-blown bailout package. It is doubtful whether any of these steps will work.

France and the Netherlands Strike Back – Project Syndicate

Jean Pisani-Ferry: In France, the Netherlands, and elsewhere, many citizens view Europe as a threat to their way of life. Telling them that the euro is an unfinished construct that requires even more commitment is a hard call for politicians.

Making eurozonians, or not – alphaville / FT
All the chart does is track how ‘different’ countries are from each other in a range of monetary unions which never existed, or are long dead, compared to the eurozone. ‘Different’ means scores on a hundred or so factors taken from the World Economic Forum’s Global Competitiveness Index, from GDP per capita to judicial independence to available airline seat kilometres. The result speaks for itself.

Also: Just about anything makes more sense than the euro zone – Ezra Klein / WP

Original research note here (pdf)

Is it Time to Invest in Europe? – Youtube

Milken Institute 1h 13min video, for those on a busy schedule read this summary:

Hugh Hendry On Europe "You Can't Make Up How Bad It Is" – ZH

Presenting The Source Of The "US-Europe Decoupling" Confusion – ZH

Europe - You Are Here – ZH

Good charts by Morgan Stanley with short discussion

EURO CRISIS: ECB

European Money Up, Loans Down; Or Why The LTRO Is Still A Failure – ZH
Goldman Sachs: Lending to private, non-financial corporates declined by EUR5.5bn. Loans to households grew by EUR6.1bn (after last month’s flat reading), but remain well below the average monthly gains of EUR17bn over the series’ history. While it is still too early to fully assess the effectiveness of the ECB’s recent non-standard measures - with three months of data now available since the inaugural 3-year LTRO – there is no evidence, at least so far, that the liquidity provided led to any rebound in the lending dynamics to the real economy.

More on secret liquidity inside eurozone secret liquidity – alphaville / FT
For every 10 euros of the ECB’s now almost €1,200bn of ‘normal’ liquidity supplied to banks, picture one euro of Emergency Liquidity Assistance from national central banks. Now imagine there’s just under 10 cents within the ‘ELA’ euro which are even shadowier.

ECB Deposits Rise To Most Since Early March – ZH
UBS: the German banking system has become a bigger and bigger depositor over the period, while the Spanish and Italians have become very heavy borrowers...non-domestic ownership of Spanish and Italian government bonds has been declining rapidly in recent months. The euro is being deconstructed from within; facilitated no doubt unwillingly by the ECB.

The rise in the Eurozone money supply has not improved credit conditions – Sober Look

While M3 is increasing, but lending to private sector is decreasing.

A glimmer of hope for the austerity wasteland of South Europe? – The Telegraph

Mario Draghi's liquidity blitz is beginning to feed through into the EMU money supply. At last. This is the best news in months for Europe. As you can see from the charts below (from the ECB's new data), real M1 deposits are rising briskly again in the core.

The ECB lending to periphery governments via "backdoor SMP" – Sober Look

back in March some financial engineering took place that would make even an experienced Wall Street structurer jealous. The goal was to achieve a "backdoor SMP" in spite of the ECB's policy to put the SMP on hold. Let's take Italy as an example.

TARGET2: Not why Germans should fear a euro breakup – voxeu.org

Karl Whelan: In recent years, instability in many European countries has led to large transfers of money into Germany. This in turn has led the Bundesbank to build up large credits with other central banks in Europe – via the TARGET2 system. Does this represent a risk to Germany in the event of a breakup of the euro? This column argues that Germany will have far bigger things to worry about.

EURO CRISIS: BANKS

Why the World Should Care about the European Debate on Bank Capital Requirements – PIIE
The European Union’s finance ministers are furiously debating a piece of legislation known as CRD4/CRR (the acronyms stand for the fourth Capital Requirements Directive and the Capital Requirements Regulation). The measure is intended to implement the Basel III accord on bank capital, leverage, liquidity and risk management, which was adopted at the global level by the Basel Committee on Banking Supervision in late 2010.

“A Trillion Here, A Trillion There...” – Why 90% Of The European Bank Sector’s Market Cap Is Vaporware* – ZH

UBS: The QIS states that the June 2011 shortfall of common equity to a 7% common equity tier 1 ratio for major banks globally was €486 billion. We can estimate from this that the shortfall to a 10% common equity tier 1 is €1.02 trillion. Some years hence and before the mitigation that banks will undertake aggressively, but nevertheless, a trillion is a striking number.

Killing VaR – alphaville / FT

A number of weaknesses have been identified with using value-at-risk (VaR) for determining regulatory capital requirements, including its inability to capture “tail risk”. For this reason, the Committee has considered alternative risk metrics, in particular expected shortfall (ES). ES measures the riskiness of a position by considering both the size and the likelihood of losses above a certain confidence level. In other words, it is the expected value of those losses beyond a given confidence level.

‘Basel III bunfight: Is this the beginning of the end? – alphaville / FT

The finger is largely being pointed at the UK’s Chancellor George Osborne. Note that the UK has a large financial sector and yet he wants his banks to hold even more capital than Basel III would dictate…This fracturing of capital regulation means that there has to be some risk that the Basel consensus will end.

The consequences of financial disintegration – bruegel

The recent ECB report on "Financial Integration in Europe" has exposed in detail the deterioration in European financial market integration caused by the crisis. Banks located in the weakest countries find it more and more difficult to access liquidity, and this translates into segmented funding conditions for the private sector as a whole and forces the ECB to play an ever bigger role as financial intermediary of last resort in lieu of a structurally malfunctioning interbank market.

Better than Basel – Project Syndicate

Stefano Micossi: The problem is that the Basel capital rules – whether Basel I, II, or III – are of no help in separating the weak banks from the sound ones. Indeed, more often than not, the banks that failed or had to be rescued in the wake of the 2008 financial crisis had solvency ratios higher than those of banks that remained standing without assistance.

EURO CRISIS: PIIGS

Don't Forget Portugal – ZH
Morgan Stanley sees a second bail-out by September with a bail-in to follow

Spain's Latest Bad-Bank, Non-Bank, Shell-Game Proposal; Can One-Winged Pigs Fly? – Mish’s

If banks have sufficient loan-loss reserves then why don't they simply take the losses now? If they can raise capital now, then why don't they? If they cannot raise capital now, how will will they be able to do so in the process of moving the assets to a non-bank bank?

What Should Europe Do? – Tim Duy’s Fed Watch

If capital is relatively mobile, it would be difficult to prevent a loan in Spain from making its way to Germany, so I am not sure the ECB can produce a differential monetary policy.  Second, it is not clear that easing lending conditions in the periphery would encourage additional spending.  I don't think it will be all that easy to reverse the process of private sector deleveraging in the periphery simply by easing lending conditions. 

4 Ways the Euro Could Fail – TIME

All courses of action appear to lead to an eventual financial crisis of some sort. But moderate progrowth policies are the best bet to minimize the damage

CENTRAL BANKS

Tuesday Never Comes – PIMCO

Bill Gross: The current acceleration of credit via central bank policies will likely produce a positive rate of real economic growth this year for most developed countries, but the structural distortions brought about by zero bound interest rates will limit that growth and induce serious risks in future years. 

The Weekly T Report: BJ and the Bear – TF Market Advisors

So what, when, where, and how will the CB’s and governments intervene?

After the bonfire of the verities – Martin Wolf / FT

What is the future of central banks? It will be busy, because they are now expected to deliver both monetary and financial stability. It will be controversial, because the decisions they make have a huge impact on the distribution of income, people’s access to finance, the way the financial system operates and even the solvency of governments