...picked from my ending week's post. Come back later for my usual Weekender-posts.
Previously on MoreLiver’s:
Fri: EU Open
Thu: US Open
My views & comments:
EUROPE: END GAME
I have contended for some time that Europe is faced with two choices: Disaster A, which is the break-up of the eurozone, or Disaster B, which is the creation of a fiscal union, which keeps the euro more or less intact. Over the last few months I have come to realize that there is indeed a third option, which now looks increasingly possible. This is rather sad, as the third option is just an even worse Disaster C.
Banks, companies and investors are preparing themselves for a collapse of the euro. Cross-border bank lending is falling, asset managers are shunning Europe and money is flowing into German real estate and bonds. The euro remains stable against the dollar because America has debt problems too. But unlike the euro, the dollar's structure isn't in doubt.
If the euro zone can't manage more cooperation than the gold bloc did—in particular, by permitting a monetary boom in the surplus economies of the core and avoiding the temptation to extract the greatest concessions possible from those peripheral economies on their heels—then it would be surprising if the end of the one didn't strongly resemble the end of the other.
In fact, he argues, if even one country left — whether a troubled country like Greece or rich country like Finland — that would trigger a chain reaction that would eventually split the whole euro zone: “The exit of any single country from the EMU, at the present time when large imbalances have been accumulated, would likely lead to a bank run, which would cause the EMU payments system to break down and with it the EMU itself.” (the article is here, also full pdf)
Nouriel Roubini: Germany and the ECB are now relying on the hope that large-scale liquidity will buy time to allow the adjustments needed to restore growth and debt sustainability in the eurozone periphery. But, if a eurozone breakup can only be postponed, delaying the inevitable would merely make the endgame worse – much worse.
If there’s a rough trend in the data, it’s for small and mostly non-Eurozone countries to issue under English law, perhaps in search of the credibility or good signal of such a framework. But for the rest of them, its sovereign debt and we’re not even supposed to discuss default and they’ve pinky-promised that they’ll pay it back. But legally, they could rewrite the terms in the morning.
I think the big banks are hoarding and waiting. Each hopes not to fall first. Those who do fall will be picked clean by those still standing. This is what the bail out money is being used for…
The similarities between banks and countries in a monetary union are striking…Eurozone countries are trying to stop an evolving liquidity and solvency crisis without resorting to all-out liquidity support, while at the same time limiting transfers and ruling out further integration as a way to improve control over policy and budgets. This is close to trying to regulate countries in the way we regulate banks.
The inflation obsession is leaving the central bank more involved in the economy and more politically overextended than it would be if it focused on maintaining stable growth in demand.
Chancellor Angela Merkel wants Europe to move toward an ever closer union in a bid to solve the euro crisis. But she is already pushing at the limits of what is possible under the constitution. The debate about holding a referendum on transferring power to Brussels is gathering momentum in Germany.
UBS recently organised a call with Professor Franz Mayer of the University of Bielefeld, to explain what the German constitutional court might be thinking on whether the European Stabilisation Mechanism is in keeping with German law. (link to the full UBS doc)
Is The Italian Elephant About To Break Loose Again? – Fistful of Euros
While the situation inside his country appears to be deteriorating, Mario Monti has been doing the rounds of European capitals in an attempt to drum up support. While in Helsinki he raised an eyebrow or two when he warned that without a serious plan to bring down interest rates disaffection with the euro in his country could easily grow to dangerous proportions. Crying wolf, or a piece of insider information? Probably a bit of both.
What ails the bond markets, and makes them unable to do their job of price-clearing in the present moment, is now beyond any fiscal backstop’s ability to fix – even one monetarily enhanced. The fix, like the problem, either reaches monetary-scale or there will eventually be a sequence of painful write-downs as the fiscal transfer of choice.
A macrolook: I want to argue that the failure of the economy to accelerate and below-target inflation, combined with more negative than positive warning signals, argue for additional Fed easing in September. That, however, has been the case for months, and during that period Bernanke has not moved the Fed to that easing…On net, I think the outcome of the September FOMC meeting remains a toss-up.
We’re less sure that this means QE is unlikely. The possibility remains that Europe will again flare up once vacation is over, and the risks from the fiscal cliff are unchanged. With inflation seemingly having rolled over in recent months with the decline in commodity prices, the argument can be easily made that the Fed is currently undershooting its inflation target while (as is all too plain) continuing to also dramatically miss on the unemployment side of its mandate.
Readings from the financial market indicate the likelihood of a sustained deflation is currently about 15 percent, or a bit less. That's up from earlier in the year, but not nearly as high as in 2010.
25 pages from 6-Aug (requires FT alphaville Long Room registration)
RBC and Goldman second-guessing the investors.
Part 1 (avoiding losses) here
S&P index analysis
How can it be that the Vix index is trading at five-year lows when expectations are anything but bullish?
We investigate the prediction of excess returns and fundamentals by financial ratios, which include dividend-price ratios, earnings-price ratios, and book-to-market ratios, by decomposing financial ratios into a cyclical component and a stochastic trend component. We find both components predict excess returns and fundamentals.
Why is the global economy hamstrung by heavy debts and weak banks? Or put another way, why doesn’t deleveraging happen, and the weight of debt reduce, and why doesn’t the economy expand so the weak banks can once more become robust and healthy ones? Short answer, it’s the demand side stupid!
The first complete dataset of sovereign restructuring cases, covering the six decades from 1950–2010; it includes 186 debt exchanges with foreign banks and bondholders, and 447 bilateral debt agreements with the Paris Club. We present new stylized facts on the outcome and process of debt restructurings, including on the size of haircuts, creditor participation, and legal aspects. In addition, the paper summarizes the relevant empirical literature, analyzes recent restructuring episodes, and discusses ongoing debates on crisis resolution mechanisms, credit default swaps, and the role of collective action clauses.
Once again the recovery has been derailed and the outlook remains subdued * Many roadblocks to be passed before euro crisis tapers off * Tight financial and fiscal conditions keep euro area in recession * High uncertainty to keep US growth below trend despite better fundamentals * China has room to manoeuvre, policy stimulus to lift growth by year-end * Policymakers digging deeper in toolboxes – central banks to ease further
Aug (34 slides) – Danske Bank (pdf)
Aug (19 pages) – Danske Bank (pdf)
Full schedule and list of papers to be presented. Click the titles on the pdf for the full papers (directory here)