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Sunday, July 29

29th Jul - Weekender: Euro Crisis

Past week's action was dominated first by euro pessimism and rising bond yields in the periphery - turned upside down on Thursday by ECB's bazooka hints. The "risk is back on"-attitude then took control for the rest of the week. I'll post Trading & Markets + View & Off-Topic-posts later today. I've also included links to Finnish articles for my local audience.

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Previously on MoreLiver’s:

Joke of the Day: Monetary policy for dummies: If this continues, the cake will be smaller even before anyone has tasted it. The deflation rat has a better appetite than the inflation mouse. Deflation rat also shits on everything it will not eat. – Tyhmyri

Quote of the Week: Since 1975 the countries now in the euro zone have given birth to just one company currently among the world’s 500 biggest (ironically it is from Spain: Inditex); by contrast California alone has created 26. – alphaville

Quote of the Week II: As I write this, it seems that news of Mario’s super human jawboning efforts have finally reached Angie’s ears and she’s quickly placed a call to whoever it is minding the fruit stall in her absence. Cue the Bundesbank, with headlines hitting the wires that their stance (Angie’s stance) has not changed and the concept of buying sovereign toilet paper (government bonds) is no better an idea today than it was the last time some central banker suggested it was and thus they do not support the concept. Hand slapped for Mario? These guys should really talk to one another more often.Ken Veksler / Saxo Bank

Buying the euro break-upIFR
Speculation that Finland could be the first country to exit the eurozone and reintroduce its own currency has been one of the factors touted as driving recent flow into short-dated Finnish paper.

War Of The Central Banks?Testosterone Pit
doing whatever it would take to save the euro wasn’t about Greece anymore. Its life support may get unplugged in September. Politicians have apparently given up…The fearless leaders were afraid of Spain, whose vital signs were deteriorating.

UBS: Now is the summer of our discontentLong Room / alphaville / FT (pdf)
Registration required. Lists possible surprises.

Europe needs a Rooseveltian break with fearCER
The markets will therefore continue to attack the euro – with occasional respites – until either a politically viable solution is found or the single currency collapses under the weight of its own contradictions. How to break this cycle without giving in to the tyranny of extremes? Eurozone leaders should create a fifteen-year political union, set to expire in 2029.

The structure of EU debt and bonus pop quiz!alphaville / FT
Also interesting is analysis of state guarantees as a percentage of GDP. While they are not part of government debt, they are contingent liabilities. Portugal’s levels had a particularly notable increase year-on-year.

The Euro and the MarkSupply Side Liberal
Although from an economic point of view splitting off Germany from the Eurozone (reintroducing the Mark) should be equivalent to splitting off all the countries but Germany from the Eurozone (introducing the Mediterano for all the other countries), thinking of the split into two different currencies in these two different ways hints at two different ways to handle the transition.

ESM armed with a banking license - the ultimate bailout "bazooka"Sober Look
The danger of course is that after this buildup, the "bazooka" and other expectations from the Eurozone may not materialize.

Europe: another round of failureNew Economics
A solution to the ongoing crisis looks increasingly beyond the powers of the eurozone's creaking authorities… Finland is a plausible candidate for its own euro-exit. Elsewhere, the balance of costs and benefits turns against membership. Disintegration looms large.

Mysterious low euro volalphaville / FT
Nomura: Against this background, it is surprising that FX vol is sitting at historically low levels across G10

Analysis: Draghi raises market hopes ECB may not want to meetReuters
Mario Draghi has set a high bar by declaring that his European Central Bank will do whatever it takes within its mandate to preserve the euro.

Bundesbank narrows ECB crisis-fighting optionsReuters
Germany's powerful Bundesbank pushed back on Friday against European Central Bank President Mario Draghi's pledge to do whatever is necessary to protect the euro zone from collapse, but markets rallied on a report of imminent policy action.

Schauble Just Says Nein Again: German FinMin Denies Rumors Of ECB Bond BuyingZH

Schäuble Rejects ECB Help for Spain; Full Bailout Still ComingMish’s
Schäuble is saying the right things. For starters, ECB backdoor bailouts of Spain are likely against the German constitution. Even if they weren't, why should German taxpayers accept the risk of any of these leveraged proposals that have been circulated, and recirculated?

Winning over Bubaalphaville / FT
If Draghi is serious about undoing the distortions in yields (hence, policy transmission) caused by fear of “convertibility”, or is considering further rate cuts, surely the ECB needs to be supporting rates in Germany, being wary of a negative yield trap. And for that the Bundesbank will be needed.

Bundesbank tries to spoil the party, as usual – ignore themThe Big Picture
The Bundesbank and other similar comments by German politicians was predictable. However, forget the Bundesbank – they only have 2 out of 23 votes on the ECB and, indeed, will be outvoted.
The decision by the German Constitutional Court remains a far more serious issue.

Draghi Said to Hold Talks With Weidmann on Bond Purchases BB
Having secured the backing of governments in Spain, France and Germany, Draghi is now seeking to win over ECB policy makers for a multi-pronged approach to reduce bond yields

What Draghi Didn’t DoKrugman / NYT
Europe also needs sufficiently high inflation over the next few years to make it possible for Spain etc. to regain competitiveness without devastating deflation. So have market expectations of inflation risen from their unworkably low levels of recent months? No.

The ECB: Whatever It Takes to Preserve the EuroEconoMonitor
The concern about moral hazard applies as much to the current defensive strategy (buying up excess bonds after the event; that is ‘debt monetisation’) as it does to the proposed preventative strategy (that is ‘deficit monetisation’). When the debt crisis is brought under control, monetary and fiscal policy coordination can then be re-assessed.   The policy paradigm discussed above has general application whether or not individual periphery countries stay inside the Eurozone, or leave it.

Is the ECB Ready and Able to Cross the Rubicon?naked capitalism
What does “whatever it takes” really mean? It’s a paradox. To make his “whatever it takes” pledge credible, Mr. Draghi has to go well beyond the traditional boundaries of economic and central banking orthodoxy. But in going well beyond these boundaries, does Mr. Draghi risk creating another crisis of confidence in the euro?

Spain discusses state bailout; ECB seen writing off Greek debtReuters
Spain has at last conceded it may need a state bailout and policymakers are considering writing down Greek debt to their central banks, European officials said on Friday, as markets anticipated radical new action to pull the continent out of its debt maelstrom.

For Italy, It Is Game Theory OverZH
Bank of America’s excellent piece, full pdf here.

Italian Euro Exit: why it might come in 2-3 years and why it will help the Eurozone and ItalyTestosterone Pit
We think that Italy, as opposed to Argentina in 2001 and Spain today, would survive a euro exit without big problems…If Italy, however, does not leave the euro zone, both Italy and Germany run the risk of long-lasting balance sheet recession, in which both consumers and firms try to reduce debt and consume less, Germans in the fear of future German liabilities via the ESM, Italians in response to more and more austerity measures. Hence an Italian Euro exit would really help the euro zone.

Ray Dalio Issues Stark Warning: Spanish Collateral Is Running Out ZH
The attempt to manage the imbalances among the Euroland economies is an extremely dangerous highwire act, and to the extent that monetary policies diverge to serve individual countries' needs, the further capital flows will likely go in the opposite direction.

IMF Executive Board Concludes 2012 Article IV Consultation with SpainIMF
Full report here

Spain Needs to Deliver on Reforms to Stabilize EconomyIMF
Key goals: make the economy more competitive to boost growth, clean up the financial sector, put public finances on a sustainable footing - Labor reforms should aim to put more people back to work -     IMF will monitor financial assistance to Spain's banks

Greek euro exit: near-term risk, medium-term likelyUBS
Global Risk Watch latest edition: see a 20-25% of probability that Greece will leave the euro in 2012, and a greater than 50% probability that it will leave within the next 12 months (link omitted)

Miten pienen euromaan valtiontalous tuhotaan – sen voi tehdä kreikkalaisittain tai irlantilaisittainTyhmyri

VM julkisti sensuroidun version Espanjan vakuussopimuksestaHS

Kreikan eroaminen eurosta toisi Suomelle 5,4 miljardin menetyksetHS

Tulkinta siitä miksi Urpilainen ei halua euron säilyvänHenri Myllyniemi / US Puheenvuoro

Ferrolangasta: mitä euroalueen jättiveloille voidaan tehdä?Henri Myllyniemi / US Puheenvuoro

Eurosta eroamisen seurauksetKalle Pahajoki / US Puheenvuoro

EKP laulamassa korot suohonHenri Myllyniemi / US Puheenvuoro

Kalevan kysely: Kaksi kolmesta suomalaisesta pitäisi euronIL

Suuri verokeskusteluPauli Vahtera / IL

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