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Friday, July 13

13th Jul - Best of The Week

Here are the cherry-picked treats from my ending week’s posts since the last Best of The Week

Euro break-up: Let Germany lead the northern core and France the rest The Telegraph
The respected economist and Telegraph columnist summarises the argument for an orderly break-up of the eurozone if a struggling member was forced to leave that won him the Wolfson Economics prize.

An incomplete step towards a Banking UnionDaniel Gros /
The EZ crisis – born as a debt crisis (Greece) – has grown up into a banking crisis (Ireland, Cyprus, Spain, …). This column argues that Spain is symptomatic of larger banking problems, so the EU Summit decisions on banking union are welcome and critical to any long-term solution. Yet someone must pay for Spanish bank losses. Spanish politics is shielding Spanish creditors, European politics is shielding EZ taxpayers, so the Spanish government will pay – and in doing so may go the way of Ireland. This crisis is far from over.

Are Current Account Imbalances to blame for the euro disaster Economonitor
…the combination of a current account deficit plus a budget surplus meant that Goldilocks was going to get murdered by the necessary balancing item—an unprecedented sustained private sector deficit… Any EMU nation can be blown up by its banks even while running a current account surplus.

Is it Worth Fixing – Could Finland Be Next? Nouriel Roubini / EconoMonitor
For the time being, the forces formally supporting a “Fixit” are in the minority, but there is now significant internal debate on the pros and cons of membership.

Neither Grexit, Nor Spexit, It’s Fixit or Fexit A Fistful of Euros
Huge post from Edward Hugh: discusses ESM, what the summit really meant, and what options are left for the euro area.

Dummies Guide To Europe's Ever-Increasing Jumble Of Acronyms ZH
Acronym dictionary from Goldman Sachs.

Monthly Bulletin, July 2012 ECB (pdf)

Step-By-Step: How To Fix EuropeMark Grant / ZH
1. Europe has to stop lying and start telling the truth in the first instance.

Big banks: From Greek bailout to Hamlet's castleeuobserver
A lobby group for the world's biggest banks, the International Institute of Finance became a key EU player when it negotiated the debt cut accompanying Greece's second bailout. Their world of rented castles and sopranos shows the losses were bearable.

Of baby steps and EBA bank recaps alphaville / FT
the general and very realistic uncertainty in European banking, which is exacerbated by the aggregate nature of this report. We have no new insight and fears about what may lie-beneath still linger.

The Eurogroup provides a reality checkre-define
a good reality check for those who may have got carried away after the better than expected (only because expectations were managed so low) results from the European Council meeting in June.

The Eurogroup provides a reality checkre-define
a good reality check for those who may have got carried away after the better than expected (only because expectations were managed so low) results from the European Council meeting in June.

Are all euro summits the same? Market perceptions before and afterbruegel
First, it is true that government bond yields mostly revert to their level five days before the summit after 5 days. In particular in Italy and Spain, no systematic improvement is visible in any of the five summits…We also observe that the pattern of yield developments is rather heterogeneous on the five summits.

The bail-in Spainalphaville / FT
draft memorandum of understanding for Spain’s bailout…Featuring bank bail-ins for subordinated debt, notably

Spanish Financial Sector MOU - AnalysisTF Market Advisors

As Spain's 2012 funding requirements increase, it may need other buyersSober Look
Spanish periodic government auctions have been quite small in recent months - about €2bn each…Spain will need to step these up dramatically  (double or triple the amount) in order to raise the funds it needs for the rest of the year…And who is going to buy this incremental debt?

Spain and the New ModelMarc to Market

Lying LIBOR Banks, Spanish MOU, & EarningsTF Market Advisors

this is incredibly counterproductive. The Spanish economy is imploding. Without the ability to offset these cuts with a very aggressive monetary policy, the multiplier on this austerity will be substantial…The aim is to demonstrate a willingness to suffer great enough to convince Germany you're worth sharing risks with.

Spain gives austerity another shot. But why? Wonkblog / WP
Longer article summarizing other pieces, with the same main points as the ones above.

The Spanish Hangover (Apr 2012) CEPS (pdf)
Nice longer report on what went wrong by good authors.

The Good and Bad of Spain's Bank Bailout! re-define
The memorandum fails to understand or acknowledge the link between the macroeconomic policies being pursued by Spain, for example on cutting its fiscal deficit, and the stability of the financial sector. In fact, many of the new austerity measures adopted by Spain will undermine the objectives of its bank bailout program. It also fails on take note of the social and political realities. Crucially, it makes no reference whatsoever to the direct injection of equity by the European crisis funds, now or in the future.

Is Spain Going the Way of Greece? naked capitalism
The logical path, and the one the Troika is pushing, would be to wipe out equity and haircut sub debt and if need be, the next senior layer of bondholders. But depositors were pressured into buying preference shares and subordinated debt. Reuters reported that62% of bank subordinated debt investors are depositors at the same institution.

The negative carry universealphaville / FT
The battle is no longer about liquidity but about preventing the negative carry universe from impairing bank profitability forever.

UBS tackles the negative yield puzzle alphaville / FT
If the nominal yield cannot fall then the only way the real rate can decline is through increasing inflation, as expressed by the Fisher equation. In fact, increasing inflation expectations are just as good, as long as they become entrenched; however this is where we are falling short.

The Puzzling Pre-FOMC Announcement “Drift”FED NY
Our findings suggest that the pre-FOMC announcement drift may be key to understanding the equity premium puzzle since 1994. However, at this point, the drift remains a puzzle.

Monetary policy: QE sera, sera Free exchange / The Economist
In the bitterest of ironies, Mr Bernanke is giving America a Japanese recovery. He is doing so, seemingly, because pushing inflation temporarily above an arbitrary target is an unthinkable prospect, even though doing so would almost certainly, by his own convincing argument, have a huge impact on America's enormously costly unemployment problem.

The (Other) Deleveraging IMF
Deleveraging has two components--shrinking of balance sheets due to increased haircuts/shedding of assets, and the reduction in the interconnectedness of the financial system. We focus on the second aspect and show that post-Lehman there has been a significant decline in the interconnectedness in the pledged collateral market between banks and nonbanks.

Sovereign Debt and Default: A History (Mar 2012)CoBank (pdf)
In the end the losses are taken, one way or another. And life goes on. Things are written off, some people fail, some people survive. But life goes on.

What’s In A Name?Bill Gross / PIMCO
Not only banks and insurance companies but sovereign nations as well cannot all be counted on to guarantee a return of principal, let alone a return on investment. An authentic debt crisis – which the world is now experiencing – can only be ultimately cured in two ways: 1) default on it, or 2) print more money in order to inflate it away.

Q2 Earnings Trends – Some Worrisome DevelopmentsPragCap
The key point is that earnings growth is slowing substantially, margins have likely peaked, and without a boom in investment or a surge in government spending the risk lies to the downside (via Zacks)

Earnings Season Preview: +9.7% 2012 EPS Growth Still Too HighZH
UBS views.

Profit Growth? Not This Earnings Season MarketBeat / WSJ
Analysts currently expect second-quarter earnings growth for S&P 500 companies to come in at a negative 2.1% rate

Internal adjustment of the real exchange rate: Does it work?
The forefathers of Europe’s single currency argued that rather than devalue their currencies to restore competitiveness, countries could devalue ‘internally’. Against the current of bad press, this column presents a novel way of recording competitiveness and argues that Ireland, Spain, Latvia, and Lithuania have all managed these adjustments – but not without paying a huge toll in jobs lost.

Why Capital's Defeat of Labor Means Fat Profit Margins Are Here to StayMinyanville
The end of the age of consumption and the decreasing need for labor are intertwined, and we have just begun to come to grips with this.

Clueless: Meet the Overprecise PunditsThe Psy-Fi Blog
Most short-term opinions on markets or any system that includes human beings as part of the machinery are generally worthless in a financial sense.

The Rules, Part XXXIIIThe Aleph Blog
When politicians don't have answers, they blame speculators, financiers (Wall Street), or foreigners.  They do anything to take the spotlight off their culpability or ineptitude.

Things That Make You Go Hmmm Grant Williams / ZH
Another excellent 28-page magazine-like roundup and commentary. Better than “The Economist”.

China, beyond the hard/soft landing debateHumble Student
…while the world focuses on the China hard vs. soft landing debate, I am thinking about the longer path for Chinese growth. They will slow down. When the next downturn hits, we could see a classic negative GDP growth recession.

Financial repression the new buzzwordSaxo Bank
Steen Jakobsen: No form of repression works! Look for massive outflow from the Eurozone to the non-Eurozone countries. Sweden is the new Switzerland. Look for equities to be gradually more loved as dividends offer better returns than repressive government bonds.....and look for a summer of discontent, before the low is seen.

Negative Interest Rates and the Currency War Marc to Market
Some observers have suggested this is a new front in the currency wars. While recognizing the competition between countries, this formulation seems to be an over-generalization. There seems to be at least three different reasons that have driven rates so low.

The most important charts in the worldBI
we reached out to some of the world's most influential analysts, economists, hedge-funders and traders and asked them a simple question: what charts are you always keeping your eye on?

The Century Of The Self
Part 1: The Happiness MachinesThe Big Picture
Part 2: The Engineering of ConsentThe Big Picture
Part 3: The Policeman Inside Our HeadsThe Big Picture
Part 4: Sipping WineThe Big Picture
To many in both politics and business, the triumph of the self is the ultimate expression of democracy, where power has finally moved to the people. Certainly the people may feel they are in charge, but are they really? The Century of the Self tells the untold and sometimes controversial story of the growth of the mass-consumer society in Britain and the United States. How was the all-consuming self created, by whom, and in whose interests? (episodes 60 mins.)