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Saturday, February 16

16th Feb - Weekender: Best of the Week

Picks from my posts since the previous 'Best of'.

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German Economy Contracted More Than Forecast in 4QBB
German, French economies throw recovery into doubtReuters
Europe's two largest economies, Germany and France, both shrunk markedly in the last three months of 2012, suggesting the euro zone has slipped deeper into recession and throwing a first quarter recovery for the bloc into doubt.

What chance a direct shot from the ECB?alphaville / FT
Little or none seems to be the answer…I wrote on Monday about the ECB’s options for expanding its balance sheet but skimmed over the idea of direct FX intervention on the presumption it just wasn’t going to happen and the ECB would push via less obvious channels. As I was (justifiably) rebuked, the aim here is to make quick amends.

A Banking Union for the Euro AreaIMF
Exorcising eurozone ELA as we know italphaville / FT
IMF: Centralizing all LOLR functions at the ECB would in the steady state eliminate bank-sovereign linkages present in the current ELA scheme

Cyprus doesn’t want a radical rescue, thankyouverymuchalphaville / FT
A radical new option for the financial rescue of Cyprus would force losses on uninsured depositors in Cypriot banks, as well as investors in the country’s sovereign bonds, according to a confidential memorandum prepared ahead of Monday’s meeting of eurozone finance ministers.

Cyprus "Radical Rescue" Proposal Proves Greece Not Unique; Sovereign Haircuts Detailed in "Secret" EU Plans; Russian ConnectionMish’s

Cyprus deal to include bail-in?TradingFloor
Steen Jakobsen: The EU needs to bail out Cyprus but talks have been surprisingly difficult as the European ministers continues to play to their domestic audiences. In the worst case, i.e: further hair-cuts for investors, this could be start of something negative.

Why the Irish Bank Deal Matters—Especially for CyprusPIIE
The Irish deal with the ECB and other European central banks to relieve the huge Irish debt burden resulting from the bank bailout four years ago has arrived even faster than predicted here. This is good news. The Irish government can now avoid the €3.1 billion promissory note payment due at the end of March and save some much needed cash. Moreover, the agreement illustrates the political flexibility of the euro area in designing financial support for a member trying to get out from under the tough terms of its rescue by the IMF.

The domestic-law geniealphaville / FT
The finance minister of eurozone country X declares (as Vassos Shiarly of Cyprus did on Monday) that its bonds/its banks’ bonds/their depositors simply cannot be written down. Why? Eurozone country X’s constitution and laws just don’t allow it! Well, on the contrary.

Two EU countries shut down money laundering probeseuobserver
Austria and Finland have said their companies did no wrong in a case of suspected Russia-EU money laundering. But victims of the crime disagree.

Cyprus a “Laundry Machine for Dirty Russian Money”GFI
Russia Hemorrhages at Least US$211.5 Bln in Illicit Financial Outflows from 1994-2011, Illegal Inflows of Capital Estimated at US$552.9 Billion; Driving Underground Economy, Crime, Tax Evasion. US$764.3 Billion in Total Illicit Flows (Inflows + Outflows) Measured. Russia’s Underground Economy Averages 46% of GDP, 35% in 2011; Weak Governance and Endemic Tax Evasion Lead to Increasing Outflows

Italian elections – what if Berlusconi wins?Nordea (pdf)
Italian general elections, due 24-25 February, are nearing and hence we take the opportunity to sum up our views and add a scenario, where Berlusconi unexpectedly wins the lower house. The election is most likely to produce a favorable outcome in the sense that a reform-minded government can be formed. However, from a market point of view, risks are clearly skewed towards a negative surprise and hence this note will focus on what could go wrong and how markets will react before and after the elections. (summary)

The Koizumi years: A macroeconomic puzzlenoahpinion
During the years of 2000-07,
Japan grew quite quickly when measured properly (as GDP/working age population), substantially faster than the United States after accounting for demographics. However, during this entire time, it was stuck deep in a liquidity trap, and undergoing austerity by both government and banks.

Getting richer by getting poorer -- How far does JPY have to fall?ZH
Steven Englander / Citi

Japan Will Win the Currency War, but at What Cost?WSJ
This is the first step on the road to Japan’s recovery. It is a prime minister carefully observing the policies of the Federal Reserve and doing what
Japan has always done best — duplicate and improve upon.

China’s Hollow Reform Wish ListThe Diplomat
China's State Council is usually described as the nation's equivalent of a cabinet.  But when it comes to economic reform, its role often seems closer to that of the New York Times editorial board – a font of sensible liberal ideas that are unlikely to be implemented.

What devaluation actually meansButtonwood / The Economist
Other governments don't seem to mind as long as the yen doesn't fall too fast and the Japanese don't say they are trying to weaken their currency. Or as Chris Turner, the head of FX strategy at ING, put it: It's fine to devalue, just don't talk about it

Who Will Win The Currency Wars?Asia Confidential / ZH

Macro Currency Strategy: Currency War SpecialHSBC (pdf)
Currency handbags at dawn alphaville / FT
HSBC argue that examples of behaviour consistent with currency war are on the rise

Since November, one of the major (G4) currencies, Japan, has dramatically changed policy.  Furthermore, Japan has directed its change in a way that causes another G4 currency, the euro, to strengthen.  This action and ensuing reaction has triggered energetic discussion of a possible currency war. Will we see one?  Maybe.  Are the currency moves we are seeing volatile and abrupt enough to ignite one?  Yes.

International financial markets and bank funding in the euro areaBIS
Euro area funding markets were severely disrupted by adverse feedback effects between the weaknesses of sovereigns and banks…funding structures that seem stable in normal times can turn highly unstable during episodes of financial market stress. This applies in particular to financing obtained from foreign sources, which may be especially sensitive to shocks in recipient countries. Moreover, the strong link between sovereigns and banks has underscored the importance of fiscal prudence and, in the European case, the need for greater financial integration in the euro area.

Capital Controls: A Normative AnalysisFED
Our results suggest that restricting international capital flows through the use of these taxes can be beneficial for individual countries, although it would limit cross-border pooling of risk…possibility of costly "capital control wars" and thus to significant gains from international policy coordination.

Blogs review: The Monetary Regime and the drawbacks of NGDP targetingbruegel
After qualifying the idea as “powerful” and raising expectations of a possible future adoption, the Bank of England governor-designate Mark Carney reversed course and said that he was “far from convinced” by the idea in front of the Treasury select committee yesterday. While he didn’t lay out precisely the intellectual reasons for that change of heart, we’ve tried to put together some of the reasons put forward against NGDP targeting.

Keeping bubbles in perspectiveFree exchange / The Economist
Mr Stein's most recent speech focused on the problem of credit-market overheating…There is no question that the central bank approach to financial stability in the decades prior to the crisis was underdeveloped and unsatisfying. But while I hope Mr Stein continues to push forward this discussion, I think it's critical to keep the "bubble question" in perspective.

Global House Price Fluctuations: Synchronization and DeterminantsIMF

Nordea Risk Perception IndexNordea (pdf)
Stretched pricing finally perceived as overdone – gradual reversal taking effect, supported by ECB-President Draghi. Surges in vol markets lifted Nordea Risk Perception Index above 80, but recent downward correction made it only temporary. FX, equity and credit markets keeps up NRPI in late 70’s. Monetary stimulus and substantial weakening of JPY make USDJPY ATM vol term structure to stick out. Markets set to take a breather before Italian elections and LTRO II redemptions. Exploit recent moves in vol markets to position for markets being kept fairly at bay.

Why Do Banks Get Away With Murder?The Daily Beast
Big banks have copped to heinous crimes that have cost citizens billions of dollars. And it just keeps happening. Daniel Gross on why the madness never ends—and no one goes to jail.
The Trouble with Wall Street The shocking news that Goldman Sachs is greedyNew Republic
Michael Lewis reviews the book Why I Left Goldman Sachs: A Wall Street Story

Beware of the biasButtonwood / The Economist
Investors may have developed too rosy a view of equity returns

The Ultimate Global Equity Valuation MatrixZH

January 2013: the month in chartsThomson Reuters

What I’ll be watching in 2013mpettis
1) how quickly growth adjusts 2) how quickly new debt emerges 3) financial scandals 4) bank activities 5) inflation 6) prices of hard commodities 7) trade numbers 8) Spanish bond market 9) Target2 10) Japan

Coke Engineers Its Orange Juice—With an AlgorithmBusinessweek

Before There Was Facebook: The Seeds Of Silicon Valleyco.create
PBS documentary American Experience: Silicon Valley captures the origin of the Northern California technology hub through the eyes of its first startup, Fairchild Semiconductor, and the advent of the microchip and the modern-day entrepreneurial culture.

John Cleese: How to Stamp Out CreativityThe Reformed Broker

One Persuasion Technique Everyone Should KnowFarnam Street
The answer is: the ‘But You Are Free’ technique. This simple approach is all about reaffirming people’s freedom to choose. When you ask someone to do something, you add on the sentiment that they are free to choose.

The Worldview of Lee Kuan YewThe Diplomat
Singapore's Lee Kuan Yew has been called the “Kissinger of the orient.” As he turns 90 this year, he presents an interesting perspective on geopolitics.

For a Global Life, Bloomberg Builds His Own British EmpireNYT

What Are Dogs Saying When They Bark?SciAm

Piru vieköön, Jyrki KatainenEsko Seppänen / US Puheenvuoro
Tämä kirjoitus on tehty sinun ylioptimististen lausuntojesi perusteella ja takia. Minä toimin 13 vuotta europarlamentin budjettivaliokunnassa ja seurasin tarkasti kahdet aikaisemmat EU:n budjettikehysneuvottelut. Niiden kokemusten perusteella en luota hitusenkaan vertaa sinun arvioosi Suomen osasta eilisessä ”sovussa”.

Suomi, pohjolan ylpeä nettomaksajaPerttu Hilman / IL blogit

Eurojuhlien aika ei ole vieläRisto Pennanen / TalSa
Veronmaksajat ovat pelastaneet eurosijoittajat pahimmalta. Nyt pelastetut vaativat veronmaksajille kuria.

Vaihtotaseen epätasapaino ja Target2 ovat toistensa kuvaajia – vai ei vaihtotaseella ole euroaikana merkitystätyhmyri

Saiko Bryssel tarjouksen, josta ei voi kieltäytyä?Jan Hurri / TalSa
Kyproksen "pelastaminen" voi olla europäättäjille yhtä kuin tarjous, josta ei voi kieltäytyä. Mafiaelokuvassa uhkaava tarjous kuuluisi: te pelastatte Kyproksen tai sitten itkette ja pelastatte. Oikea valinta ei ole sen helpompi: europäättäjät joko pelastavat rahanpesijöitä tai sitten he syövät sanojaan – ja ottavat riskin pääomapaniikista.

Suhteellisuuden tajua muutoksista päätettäessä EK
EK:n ja SRV Yhtiöt Oyj:n hallituksien puheenjohtaja Ilpo Kokkila peräänkuuluttaa suhteellisuuden tajua välttämättömien muutosten edessä. Suomessa on kyse aika pienistä asioista verrattuna Euroopan kriisimaihin, joissa joudutaan todella rankkoihin operaatioihin.

EK:n puheenjohtaja, vuorineuvos Ilpo Kokkila kritisoi Euroalueella harrastettua rahapolitiikkaatyhmyri

Saksako muka talousveturi? Ennemmin kasvurohmuJan Hurri / TalSa
Euromaat saavat yhteensä aikaan saman verran teollisuustuotantoa kuin euroajan alussa pian 15 vuotta sitten. Tilastojen takaa paljastuu talouden raju jako euroajan voittajiin ja häviäjiin. Saksan ja parin muun vahvan maan teollisuus kasvoi sen minkä Ranska ja muut heikot menettivät. Euro ei auttanutkaan taloutta yhdentymään niin kuin piti. Kävi päinvastoin.