The best of the past week, from my previous posts.Weekender specials coming up later today.
EURO CRISIS: GENERAL
Everywhere you turn, you will see exposure that
was never accounted for and is getting worse. Some Bundesbank official will
blabber on about not printing money and the market will become dizzy with fear.
The ECB’s bond portfolio turns into losses for the EU. The EFSF turns into
losses for the EU. Spain and Italy will need money from
the EU for their own problems. The EU is just Germany and France. They don’t have the money. Pandemonium ensues. Maybe it won’t be that
bad.
What is the long-term euro vision? – Hugo
Dixon / Reuters
The crisis has demonstrated that the current
system doesn’t work. But a headlong dive into a United States of Europe would be bad politics and bad economics. An alternative, more
attractive vision is to maintain the maximum degree of national sovereignty
consistent with a single currency. This is possible provided there are
liquidity backstops for solvent governments and banks; debt restructuring for
insolvent ones; and flexibility for all.
The future of the European Union: The choice – The Economist
A limited version of federalism is a less
miserable solution than the break-up of the euro
An ever-deeper democratic deficit – The Economist
The level of further integration necessary to
deal with the euro crisis will be hard to square with the increasing
cantankerousness of Europe’s voters
There is a very strong possibility that
exchange controls are established in both the strongest and the weakest
countries in Europe in less than a fortnight. If those two extremes establish capital
barriers, the other countries of Europe will be forced to take similar actions in a matter of months. Who will
blink first?
Barclays
notes investors simply do not trust banks, and Basel should take note.
The End Of The Euro: A Survivor’s Guide – Baseline
Scenario
Peter Boone
& Simon Johnson: Forget about a
rescue in the form of the G20, the G8, the G7, a new European Union Treasury,
the issue of Eurobonds, a large scale debt mutualisation scheme, or any other
bedtime story. We are each on our own.
Soviet collapse or Germanic reform?
Excellent
article on what the referendum results – and especially a ‘no’ would mean.
J.P.
Morgan’s funny comic and short text.
Southern Europe’s debtor states must pledge their gold reserves and national treasure
as collateral under a €2.3 trillion stabilisation plan gaining momentum in Germany.
Additional
comments by ZH
Forget full fiscal union. This crisis has
already stretched European solidarity, such as it was, to the breaking point…
In the medium term, Europe needs to drop its blithe commitment to “ever closer union” and adopt a
more discriminating approach. It needs as much union as required to make the
single currency viable, and no more.
“Europeans” need enough solidarity to forgive the
mistake that was the careless creation of the euro, avert our minds from the
undemocratic capture of centralized power that a concerted response to the
crisis requires, and keep taking a medicine that politicians we hardly know
would administer. That is a very, very tall order, but it is the order of the
day.
In essence, they say the crisis is likely to
deepen before forcing the hands of politicians in achieving what needs to be
done. They offer 4 current scenarios for Europe with an 80% probability of the Euro
staying together in its current form
Concrete Example of Potential Compromise in EMU – Marc
to Market
I have characterized my understanding of the
euro zone investment climate as three no's: No ECB backstop for
sovereigns. No joint bond. No euro zone break-up. That
implies a prolonged period of slow growth. It risks chronic political
instability.
Push Comes to Shove – Tim
Duy’s Fed Watch
Europe doesn't have a 5 to 10 year horizon. I am thinking they have
something closer to a 5 to 10 week horizon to get their act together.
Something big is going to happen in Europe this summer, and I think the odds of a tail-end outcome are increasing,
at both ends of the tail. Either Europe pulls together sooner than the
German timeline, or finally blows apart.
EURO CRISIS: GERMANY
Given the US and (almost
explicitly given its dominance) Germany are more currency issuer than user, default risk is not the main driver
of the CDS spread but currency devaluation (some might call it inflation) is
much more of a factor.
Nomura: Were the market to price-in an imminent
break-up of the EUR, in our view Bund yields could go negative out to 5yrs,
while for the 10yr sector we would expect yields to move far below 1%. Given
the value of the embedded FX option in the Bund, we think it is not impossible
that yields will approach the cycle low in 10yr JGB yields in 2003 of 44bp…
The riddle of German self-interest By Martin Wolf – Steve Collins / Twitlonger
How, I wonder, do Germany’s policy makers imagine they will halt the eurozone’s doom loop? I have
two hypotheses. The first is that they believe they will not. They expect that
life for some of the vulnerable economies will become so miserable that they
will leave voluntarily… second hypothesis is that the Germans really think
these policies could work.
The Monster Has Awakened – Mark
Grant / ZH
The game has changed. It will no longer be push
and shove and muddle through but convictions and ideology that are in stark
opposition so that surprises and inflamed statements will become the order of
the day and not the exception. If it is to be either Germany for the Germans or Germany for the citizens of Athens, make no mistake in
your thinking
EURO CRISIS: ECB / EUROSYSTEM
/ TARGET2
German taxpayers face re-denomination loss from
TARGET2 – Sober
Look
…what would actually happen with these claims
should a periphery nation exit. The exit would simply result in a
re-denomination of some claims. There is no other way to do this. As loans to
Greek banks become drachma denominated, so will the claim on the Bank of Greece (BoG), with the
central bank separating from the Eurosystem. The Eurosystem was never designed
for an exit of a central bank, so this process would need to be cobbled
together on the fly - sort of the way the Greek restructuring was done. The
"exercise" may potentially set up a process for other nations exiting
the EMU.
The first
rule of ELA is you don’t talk about ELA.
On the ECB’s attempts to ring-fence its balance sheet – alphaville
/ FT
Standard Chartered: ECB President Draghi recently hinted that managing risks was his utmost priority, further differentiating the ECB from other major central banks (Japan, US, UK), which have shown less reluctance about conducting broad-based quantitative easing (QE).
Standard Chartered: ECB President Draghi recently hinted that managing risks was his utmost priority, further differentiating the ECB from other major central banks (Japan, US, UK), which have shown less reluctance about conducting broad-based quantitative easing (QE).
Press release ECB publishes TARGET Annual Report 2011 – ECB
“the system functioned smoothly and registered
a higher turnover" full pdf
EURO CRISIS: SPAIN
only three
ways Spain can regain competitiveness sufficiently to
raise savings and reverse the current account: The core countries increase
spending, Spanish austerity or Spain leaves euro.
Bankia going GUBU … but what about the rest? – alphaville
/ FT
Is Bankia, Spain’s fourth largest
bank, so unique? Nomura:
only BBVA, Santander and Sabadell (based on the buffer
provided by the asset protection scheme) would avoid needing to strengthen
capital.
Spanish Bonds – Austerity, Spending, and Reality – TF
Market Advisors
The first step is to do an honest assessment of
the real debt burden of Spain… Once the actual debt
and real obligations of Spain are known, they need
to restructure the debt. If austerity doesn’t work, and spending has limited
value, debt restructuring is the only way to get the debt under control and
allow the policies of spending and austerity to work over time.
Is Spain in a normal recession or in a
downward spiral? If in spiral, is the problem a) political economy b)
fundamental credit contraction and aggregate demand or c) both plus multiple
equilibria?: The real euro pessimists are
the multiple equilibria people. Germany and Austria also have multiple
equilibria, but those equilibria are not so far apart. For Greece the multiple
equilibria are extreme — “Balkans nation,” or “European nation”?
The 5-year CDS is now implying 44% probability
of default in the next 5 years, assuming a 50 cent on the euro recovery (the
probability drops for the same spread if the expected recovery is lower).
ECB Calls Spain's Bluff... Or Does
It? – ZH
FT: A Spanish plan to recapitalise Bankia, the troubled lender, by indirectly tapping the ECB for cash, was bluntly rejected as unacceptable by the ECB, European officials said.
FT: A Spanish plan to recapitalise Bankia, the troubled lender, by indirectly tapping the ECB for cash, was bluntly rejected as unacceptable by the ECB, European officials said.
ECB's Refusal To Play Ball Means Spain Has To Foot A
€350 Billion Bailout Bill Alone – ZH
J.P. Morgan: the sort of burden sharing that the Spanish government wants is not on offer. It could be argued that the government is delaying asking for EFSF/ESM help in the hope that the rest of the region will change its stance. Certainly a Greek exit would likely catalyse the kinds of changes that the Spanish government wants. But, it is not clear that Greece will exit anytime soon. Spain probably doesn’t have the luxury of waiting.
J.P. Morgan: the sort of burden sharing that the Spanish government wants is not on offer. It could be argued that the government is delaying asking for EFSF/ESM help in the hope that the rest of the region will change its stance. Certainly a Greek exit would likely catalyse the kinds of changes that the Spanish government wants. But, it is not clear that Greece will exit anytime soon. Spain probably doesn’t have the luxury of waiting.
Spain’s long climb to
the liquidity hospital [updated] – alphaville
/ FT
J.P. Morgan: bailout package (EFSF recaps banks) to be negotiated, possibly SMP used to suppress yields during that time.
J.P. Morgan: bailout package (EFSF recaps banks) to be negotiated, possibly SMP used to suppress yields during that time.
If the potential costs to Spain of a euro exit are
piling up, wouldn’t that make it less likely to exit — and therefore increase
its credibility in the eyes of investors? Not really, says Pettis.
Strategic Briefing: Will Spain Leave The Euro? – The
Capital Spectator
Summaries
and links to recent articles.
Is it too late to save Spanish banks? – Saxo
Bank
The Spanish banking system will be the “make or
break” event to decide the existence of the euro… a joint effort from Europe
and IMF will be needed to solve the estimated Euro 150-300bn shortfall in the
Spanish banking sector…there is one important reason why a broad rescue would
make sense in the long-run. The fact that Spain’s property market is
highly regarded among Northern Europeans could mean that demand will increase
dramatically if prices depreciate too far.
EURO CRISIS: GREECE
Four Euro Divorces But No Funeral (Yet) – ZH
JPMorgan’s
excellent charts together with asset class views for 4 scenarios
The costs of a Greek exit: Cutting up rough – The Economist
All in all, the Greek government owes the
governments and institutions of the euro area over €290 billion, about 3% of
euro-wide GDP, say economists at Barclays Capital. After an exit most of this would
probably never be repaid…. But could a Greek exit really be contained at its
borders?
OTHER
What's needed to trigger the Fed? – Danske
Bank (pdf)
Martin Wolf: Lunch with the FT: Paul Krugman – FT
The nationalisation of markets: The rise of the
financial-political complex – The Economist
Each step taken by the authorities over the
past five years has been designed to prop up the economy and save the financial
system. But the cumulative effect has been the creeping nationalisation of
markets.
Regulatory Capital: Size And How You Use It
Both Matter – TF
Market Advisors
After JPM’s surprise loss this month, the
debate over the proper regulatory framework and capital requirements will reach
a fever pitch. That is great, but maybe it is also time to step back and
think about what capital is supposed to do, and with that as a guideline, think
of rules that make sense.
Is Insider Trading Part of the Fabric? – NYT
Ted Parmigiani, an analyst at the former Lehman
Brothers, spent two and a half years giving the S.E.C. information about what
he contended was insider trading at the firm. But the S.E.C. ultimately decided
against filing a case.
Wall Street Food Chain – Bill
Gross / PIMCO
Soaring debt/GDP ratios in previously sacrosanct AAA
countries have made low cost funding increasingly a function of central banks
as opposed to private market investors. Both the lower quality and lower yields
of such previously sacrosanct debt represent a potential breaking point in our
now 40-year-old global monetary system.
The Global Industrial Sector: Have Profit Margins Peaked? – PIMCO
Factors driving profit margin expansion in
the industrial sector include globalization, EM capital expenditures, a focus
on profitability and global labour arbitrage. Potential headwinds include a
slowdown in global growth drivers, rising labour rates and global deleveraging.