16th Feb - Weekender: Best of the Week

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

Follow ‘MoreLiver’ on Twitter or Facebook

EUROPE

German Economy Contracted More Than Forecast in 4Q – BB

German, French economies throw recovery into doubt – Reuters

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.

  ECB

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 Area – IMF

Exorcising eurozone ELA as we know it – alphaville / 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

Cyprus doesn’t want a radical rescue, thankyouverymuch – alphaville / 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 Connection – Mish’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 Cyprus – PIIE

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 genie – alphaville / 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 probes – euobserver

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

  ITALY

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)

ASIA
The Koizumi years: A macroeconomic puzzle – noahpinion
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 List – The 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.

CURRENCY WAR

What devaluation actually means – Buttonwood / 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 Special – HSBC (pdf)

Currency handbags at dawn – alphaville / FT

HSBC argue that examples of behaviour consistent with currency war are on the rise

Currency War? – David Kotok / The Big Picture

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.

ECONOMICS
International financial markets and bank funding in the euro area – BIS

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 Analysis – FED

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 targeting – bruegel

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 perspective – Free 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 Determinants – IMF

MARKETS
Nordea Risk Perception Index – Nordea (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 greedy – New Republic

Michael Lewis reviews the book Why I Left Goldman Sachs: A Wall Street Story

Beware of the bias – Buttonwood / The Economist

Investors may have developed too rosy a view of equity returns

The Ultimate Global Equity Valuation Matrix – ZH

January 2013: the month in charts – Thomson Reuters

What I’ll be watching in 2013 – mpettis

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

OFF-TOPIC

Coke Engineers Its Orange Juice—With an Algorithm – Businessweek

Before There Was Facebook: The Seeds Of Silicon Valley – co.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 Creativity – The Reformed Broker

One Persuasion Technique Everyone Should Know – Farnam 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 Yew – The 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 Empire – NYT

What Are Dogs Saying When They Bark? – SciAm

FINNISH

Piru vieköön, Jyrki Katainen – Esko 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 nettomaksaja – Perttu Hilman / IL blogit

Eurojuhlien aika ei ole vielä – Risto Pennanen / TalSa

Veronmaksajat ovat pelastaneet eurosijoittajat pahimmalta. Nyt pelastetut vaativat veronmaksajille kuria.

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

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 rahapolitiikkaa – tyhmyri

Saksako muka talousveturi? Ennemmin kasvurohmu – Jan 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.