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Friday, October 12

12th Oct - Weekender: Best of The Week

The best article links from my ending week’s posts. Spain's downgrade, Liikanen's report on reforming banking and IMF's confession that austerity is not working.

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The IMF and the euro crisis: Less cash, more impactThe Economist
The IMF needs to change tack if Spain asks for a bail-out

Poll: Is the Objection to Using the ESM’s Bailout Money to Purchase Bad Loans Appropriate?CFA Institute
72% Yes. Each of the objecting nations sees the ESM as a negotiating lever to ensure that troubled eurozone nations implement conservative fiscal policies and that their troubled banks rebuild the sanctity of their capital structures. In other words, bailout monies are only to be used as a final option once all other measures are exhausted.

The Bump In The NightMark Grant / ZH
We have no solution for Cyprus, no answer for Spain and no plan for Greece as the IMF has made two things quite clear. Number one is that they will not give Greece any more money and number two is that they expect Europe to take the unavoidable financial hit and that it will not be them that is going to get left holding the proverbial bag.

S&P Will Downgrade France And Italy Next, CDS ImpliesZH

What might debunk OMT euphoria?Economistmeg
Excellent list and discussion of possible future bad news.

OMT is so 2013alphaville / FT
The market has been waiting for Spain to request its very own Enhanced Conditions Credit Line for quite a while now. It’s the road to OMT. And for a (very) little while just last week while it appeared we were only a weekend away. But it’s now looking increasingly like we are not gonna get to see any OMT buying at all in 2012. Sad.

An overlooked currency war in EuropeDaniel Gros /
Switzerland has pegged its currency to the euro at a level that helps it sustain a 12% current-account surplus and one of the lowest unemployment rates in Europe. This column argues that the Swiss peg involves currency manipulation that is, as far as Europe is concerned, the same order of magnitude as China’s intervention. It has had a significant impact on the euro exchange rate and a non-negligible effect on the EZ economy.

Sherlock Holmes (herein played by Buchheit) says: debt reprofilingalphaville / FT
Buchheit (who helped mastermind the Greek restructuring at Cleary Gottlieb) and Gulati on the options now facing the eurozone’s sovereign debtors and those holding the purse strings.

Target2 chart du jouralphaville / FT
Spanish TARGET2 balance decreased for the first time since the crisis began.

S&P downgrades Spain alphaville / FT
Spain Dissed by S&P Marc to Market
Spanish aid request a step closerNordea
While everybody was waiting for Moody’s decision on the Spanish rating, Standard & Poor’s was the one firing the next bullet. Still, the S&P 2-notch downgrade to BBB- just left Spain within investment grade, albeit with a negative outlook.

The Eurozone's commitment to supporting Spanish banks questioned by S&P, othersSober Look
The good news is that Spanish banks' borrowings from the ECB fell in September, following the ECB's commitment to do "whatever is necessary" to make sure Spain (and others) stay in the Eurozone - reducing the redenomination risk. Nevertheless the latest data from the nation's banking sector still shows declines in lending and losses associated with rising bad loan balances.

The case for structural reforms of banking after the crisisBIS (pdf)
Erkki Liikanen, Governor of the Bank of Finland and Chairman of the High-level Expert Group on the structure of the EU banking sector, at the European Commission, Brussels, 2 October 2012.

The Liikanen report - is size the elephant in the room?bruegel
A more fundamental point is that it is not clear that legal separation reduces governments’ incentives to bail-out troubled banks and lowers systemic risk instead of shifting it to other parts of the banking sector. The reasons for saving troubled banks go beyond protecting insured depositors…From an economists’ point of view the question then becomes, should you prefer structural regulation (i.e. quantity regulation) or price regulation through higher capital requirements or high taxes for big banks.

The Liikanen review: Into the ringThe Economist
A European report recommends yet another way to ring-fence banks

IMF Sees Heightened Risks Sapping Slower Global RecoveryIMF
IMF revises forecast down, global growth projected at 3.3 percent this year. World trade slumps, hurting emerging markets, developing countries. Prospects could improve if clouds over euro area, U.S. “fiscal cliff” are lifted

World Economic Outlook: Coping with High Debt and Sluggish GrowthIMF

IMF Sees ‘Alarmingly High’ Risk of Deeper Global SlumpBloomberg

IMF cuts global growth forecast; prods Europe, U.S.Reuters
The IMF cut its global growth forecast on Tuesday for the second time since April and warned U.S. and European policymakers that failure to fix their economic ills would prolong the slump. 

Prepare for probable disappointment, IMFalphaville / FT
The assumptions behind IMF’s growth forecasts are risky.

The IMF game changeralphaville / FT
IMF has played bad cop to the global economy for generations now, enforcing austerity, conditionality and accountability wherever it goes. And, for the most part, it’s the emerging world that’s suffered most. Recanting on some of these closely held beliefs, especially now that the bitter medicine is predominantly being applied to the developed world, is awkward to say the least.

G10 Weekly: Severe headwinds facing the Swedish economyNordea
In this week’s edition of G10 weekly we elaborate on the severe headwinds facing the Swedish economy. We also address the process of global deleverage, which appears to be far from over.

Perspectives Oct 2012: A new monetary eraPictet

Q3 earnings won’t be good, but might not matter muchalphaville / FT

Stock Market TroublesThe Short Side of Long
When I look at the current condition of US stocks, it definitely reminds me of previous cyclical bull market tops just as the business cycle expansion was coming to an end. Be it overbought prices, narrowing breadth participation, tightening credit spreads, extremely prolonged complacent volatility,  overly bullish sentiment readings without a bear in sight or the fact that the Long Bond refuses to sell off - it all links to the economic fundamentals deteriorating rather rapidly.

Nordea Risk Perception PublicationNordea (pdf)
Sideways trading across financial asset classes as markets continue to acknowledge 1) European politicians becoming more vigorous and 2) central banks showing their ammo * The tendency with seeping vols is clearly reflected in Nordea Risk Perception Index * Movements however still muted and correlations are high between asset classes * Going forward, vols can easily loose further ground on the back of ECB and continued weak economic data that keeps markets in tight trading ranges * With only the past year in mind, risk sentiment can quickly shift and timing may be apt for entering tail risk hedges at current historic cheap levels

Investing in credit markets, with matricesalphaville / FT

When Career Risk ReignsJohn Mauldin / The Big Picture
A tour of recent research, which shows that correlations among a wide variety of asset classes are increasing. It comes as no surprise to serious investors that it is getting ever more difficult to construct a diversified portfolio.

Currencies: The weak shall inherit the earthThe Economist
New government priorities and an enthusiasm for unconventional monetary policy are changing the way the currency markets work

Implementation of capital standards: assessment reports published by Basel CommitteeBIS
Three reports assessing the rules that will implement Basel III in the European Union, Japan and the United States.

Triparty repo and the clearing bank risks Sober Look
Repo markets have functioned well for decades. However this recent paper published by the NY Fed (below) outlined potential systemic risks in the tri-party markets that became apparent in 2008. The concerns are not with the repo market itself or the lenders/borrowers under the contract, but with the clearing banks that facilitate triparty repo transactions.

Repo transactions and shadow bankingSober Look
We continue to get questions about the repo markets and the structure of repo transactions. The attached paper from the Financial Stability Board provides a good overview of repo and securities lending markets (including rehypothecation practices).

Magnus, on spending our way out of the Mumpsalphaville / FT
According to George Magnus of
UBS, most of the western world has now been struck by the latter. And — contrary to popular belief — the disease is underpinned not by western profligacy, but possibly the very opposite phenomenon. Too much thrift.

Global Economy Course materialsNYU Stern Economics
Required MBA course now online. Full course contents, including the textbook (pdf)

Professor Woodford and the FedGavyn Davies / FT
Professor Michael Woodford of Columbia University is an extremely renowned macro-economist, and rightly so, but only recently has he occupied a central place in market thinking. Since his paper on US monetary policy at Jackson Hole, and the favourable remarks which Ben Bernanke made about him, everyone is trying to understand what his influence on the Fed might eventually mean.

Don’t call it money printing, rubiks cube editionalphaville / FT
HSBC had joined the cohorts of the “don’t call QE money-printing” brigade.  We thought this was a great positive for the mainstream analyst community. Moreover, we thought their explanation was really good.

Rubiks Revolutionsalphaville / FT
This post is a continuation, in which we apply the analogy to the crisis so far.

Keynesian Investing: Changing Facts, Changing MindsThe Psy-Fi Blog
John Maynard Keynes’ remarkable investment record as the effective Chief Investment Officer of Kings College Cambridge over a period of a quarter of a century.  It’s a fascinating insight into the evolution of one individual from underperforming, overconfident, macro-based and behaviorally biased to an outperforming, realistic, stockpicking rationalist. 

What makes you "click" with someone else?Bakadesuyo

Would You Want to See Everything Your Doctor Writes About You?The Atlantic
We might not like everything we read, but a new trial found that giving patients easier access to our exam notes gets us more involved in effective care.

In the New World of SpiesThe New York Review of Books
To put it differently, the members of the Russian elite may no longer aspire to launch international Communist revolution, as they did in the 1930s. But they do aspire to change the Western norms and behavior that they see as standing in their way: they want to make Americans and European less interested in human rights, more accepting of corruption, and perhaps more amenable to Russian investment and Russian oligarchs.

Creative blocks aeon
The very laws of physics imply that artificial intelligence must be possible. What's holding us up?