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Saturday, June 22

22nd Jun - Weekender: The World

China's 'crisis', European summits on who, how and when takes the banking losses, and the Fed Watch updated.

Previously on MoreLiver’s:

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Brussels blog round-up for 15 – 21 JuneEuropp / LSE
Obama in Germany, Merkel’s manifesto, and a fiery letter from Cyprus

Charlemagne: Blaming the refereeThe Economist
Europe’s leaders are turning against the European Commission

Five reasons the euro-optimists are wrongWonkblog / WP
Myth 1) The European economy is about to recover 2) Markets are regaining confidence in Europe 3) The ECB provides a safety net for the euro 4) Europe’s economic recession will not undermine its politics 5) Everything will change after the German elections

Mistrust stops euro zone banks lending to peers across blocReuters
Euro zone banks are refusing to lend to peers in other countries in the common currency bloc, signaling a worrying fall in confidence that appears to have worsened since the Cyprus bailout earlier this year, data analyzed by Reuters showed.
Mervyn King: A Governor looks back - and forwardBIS (pdf)
Speech by Mr Mervyn King, Governor of the Bank of England, at the Lord Mayor's Banquet for Bankers and Merchants of the City of London, London, 19 June 2013.

The ECB's OMT and the German Constitutional CourtEconbrowser

Germany versus the EuroProject Syndicate
Marcel Fratzscher: The German Constitutional Court's recent hearing to consider the legality of the ECB's outright monetary transactions program was peculiar, for the scheme is the most successful monetary-policy measure of recent decades – not just in Europe, but anywhere. Why do so many Germans want to kill what has saved the common currency?

How Germany Won the Euro Crisis - And Why Its Gains Could Be FleetingForeign Affairs
Although the common wisdom is that Germany's success is the hard-won reward for strict economic management, the country owes much of its good fortune to the eurozone crisis. Immigrants and investors’ cash are flowing into the country from the rest of Europe, in order to escape the dire conditions that Merkel and EU technocrats helped create through their hard-line focus on austerity, structural reforms, and price stability.

The Rise of the Fearmongers: Germany's New Euroskeptic EliteSpiegel
Many Germans believe it is time to abandon the euro. They're part of a growing movement spurred by influential populists from the worlds of business and academia. Their arguments stoke fear but offer no clear alternatives.

Press release – 21 June Council MeetingConsilium (pdf)
Country-specific recommendations, excessive deficit procedures, approved the extension of loan maturities for Ireland and Portugal, and agreed a package of measures to combat VAT fraud

Excessive deficit procedureConcilium (pdf)
Council extends deadlines for Spain, France, Netherlands, Poland, Portugal and Slovenia

Country-specific recommendations on economic and fiscal policiesConcilium (pdf)
The Council approved, under this year's European Semester, draft recommendations to 23 member states on the economic policies set out in their national reform programmes, as well as draft opinions on each member state's fiscal policies, as presented in their stability/convergence programmes.

Council extends maturities of EFSM loans to Ireland, PortugalConsilium (pdf)

ESM direct bank recapitalisation instrumentConcilium (pdf)
Main features of the operational framework and way forward

EU to decide who pays when banks failReuters
The EUsought on Friday to forge rules to force losses on large savers of failed banks, a taboo that was broken in this year's bailout for Cyprus.

Flash Comment: Euro area: Direct bank recapitalizationDanske Bank (pdf)
The Eurogroup took an important step towards breaking the vicious link between sovereigns and banks yesterday when it agreed on ESM direct bank recapitalisation

Eurozone compromiseOpen Europe
Compromise on using ESM to directly recapitalise banks a stopgap at best?

Banking Union: Eurogroup approves ‘decaf rescue’ for banksPresseurop

Why the ESM direct bank recap deal is not done yetBruegel

EU fails to agree on bank bailout rulesFT

Europe unable to break impasse on who pays when banks failReuters
Europe failed to agree on how to share the cost of bank collapses on Saturday, as Germany resisted attempts by France to water down rules designed to spare taxpayers in future crises.

Another shameful day for Europe as EMU creditor states betray SouthThe Telegraph
Ambrose Evans-Pritchard: So much for the denials. The Cyprus "template" for banking crises is to be eurozone policy for other countries after all.

The Last Mystery of the Financial CrisisThe Rolling Stone
Matt Taibbi: It's long been suspected that ratings agencies like Moody's and Standard & Poor's helped trigger the meltdown. A new trove of embarrassing documents shows how they did it

Federal Reserve and implications of its latest moves, see my Special: Fed Watch.

China’s banks: The Shibor shockThe Economist

China Poses Global Growth Risk as Li Squeezes CreditBB
Premier Li Keqiang’s three-month-old government is allowing the tightest squeeze on credit in at least a decade to wean the nation off a cash binge that threatened to destabilize the world’s second-largest economy.

Minsky Moment Alarm Sounded in China by SocGen: Cutting ResearchBB
Credit growth in the world’s most populous country has outstripped economic expansion for five quarters, raising the question of where the money has gone, SocGen economist Yao Wei wrote in two recent reports. In the first quarter, for example, bank loans, shadow banking credit and corporate bonds together accelerated more than 20 percent year-over-year, while gross domestic product grew less than half that much. The gap has been widening since early 2012. Yao says the answer to where the money is going is a growing “debt snowball” which doesn’t contribute to economic activity. The result is both companies and the public sector face burgeoning interest expenses.

China credit crunch: Q&Abeyondbrics / FT
Money rates falling after the People’s Bank of China, the central bank, reportedly dribbled funds into the banking system. But, with the central bank keeping quiet about its intentions, analysts expect the authorities to retain a firm grip on the market. So what is going on?

Chinese finance: undercover operationsbeyondbrics / FT
It is still unclear precisely what happened in China’s financial markets on Friday, where money market rates fell relieving an intense cash squeeze. The People’s Bank of China reportedly injected funds into some banks. But who, why and how much is something of a mystery.

Tyler Cowen and Alphaville on ChinaFree exchange / The Economist
But is that really China's predicament? China runs a current-account surplus of $217 billion and holds $3.4 trillion of foreign-exchange reserves. A somewhat weaker yuan would pose few dangers and bring a number of benefits. Given this, can it really be true that the cash crunch of the past two weeks reflects China's sudden need to mount a punishing, high-interest-rate defence of its currency?

Charting China’s Cash CrunchWSJ
Is China's current cash crunch the Lehman Brothers collapse with Chinese characteristics? The answer is no, but it does highlight increasing stress in China’s financial sector.

All About the Maos: Charting China’s Cash CrunchWSJ
Is China's current cash crunch the Lehman Brothers collapse with Chinese characteristics? The answer is no, but it does highlight increasing stress in China’s financial sector. China Real Time provides an illustrated guide.

China’s credit crunch – playing with fireNordea
The current liquidity squeeze in China is intended by Beijing as a measure to curb credit risk. We expect them to maintain a hawkish stance and the credit crunch will persist for some time.