25th May - Best of The Week

Here are the "best" article links from my ending week's blog posts. Not surprisingly, it is mostly about Europe. Follow ‘MoreLiver’ on Twitter or Facebook.

EURO CRISIS: GENERAL

Apocalypse Fairly Soon – Krugman / NYT

Higher inflation targeting required: Both the central bankers and the Germans hate this idea, but it’s the only plausible way the euro might be saved. For the past two-and-a-half years, European leaders have responded to crisis with half-measures that buy time, yet they have made no use of that time. Now time has run out.

Dr. Frankenstein’s Europe – John Mauldin / The Big Picture

If and when Greece exits the euro, the ECB must be prepared to step in with massive funding of peripheral-country banks and sovereign debt. That is not within their charter today; but when the euro is at total risk, that is the only way to save it… At what point does it occur to the voters of a country that they are taking on more debt than they can bear? How much European solidarity is really there? Is there an unlimited amount of pain that can be tolerated? I rather think there is a limit; we just don’t know what it is, or even if we could ever conceivably get there.

"Dear Angela, Dear Francois, Dear Mario" - From Citi, With No Love At All – ZH

Citi: Our impression is that markets will need to act as the proverbial 'attack dog', forcing the issue on the political agenda. This would not be the first time that markets have had to bark to get a credible policy response… Moreover, every bark comes with a loss of credibility – a loss of faith in the institutional capacity of the European Union to address the fundamental imbalances.

Europe: Waiting for the Next Shoe to Drop – CFR

Willem H. Buiter, chief economist for Citigroup, discusses the financial crises affecting the Euro zone. The above is the link for player, download mp3 here or read the transcript here.

Foreign Affairs Report: The Future of the Eurozone – Foreign Affairs

Huge collection of articles – recommended, read this later.

European Crisis: Your 1 Minute Update – ZH

Quick roundup by each country, mostly by Citi.

Contagion? What Contagion? – EconoMonitor

The “epidemics” of today are partly different. On the one hand, just like the plague, they spread “by linkages”

Can This Really Be Europe We Are Talking About? – EconoMonitor

So I ask myself, is this Europe we are talking about here, or is this some kind of dream I am having? Is this where all those high minded ideals of a European Community have lead us, to a Greece where the young people get locked in, like in the old days of the USSR, or locked out as in the days before Schengen. 

Cembalest On Germany: "You Can Ignore Economics, But It Will Not Ignore You" – ZH

JPMorgan: If Germany would want to stop the crisis (for now) the price would be one trillion euros, and if Germany pays half of it, its debt/GDP would rise above 100%.

What is the long-term euro vision? – Hugo Dixon / Reuters

The crisis has demonstrated that the current system doesn’t work. But a headlong dive into a United States of Europe would be bad politics and bad economics. An alternative, more attractive vision is to maintain the maximum degree of national sovereignty consistent with a single currency. This is possible provided there are liquidity backstops for solvent governments and banks; debt restructuring for insolvent ones; and flexibility for all.

The not-so-creeping process of de-euroisation – alphaville / FT
The de-euroisation continues and is, in Italy at least, getting faster… these charts show foreigners running away from Italian liabilities in March at their fastest pace ever, and illustrate just how quickly the LTRO sheen has faded.

The Euro Awaits Its Verdict – Project Syndicate

Simon Johnson, Peter Boone: These countries may eventually decide to leave. And, even if they don’t make that choice, fear of such exits can easily become self-fulfilling. The euro system was designed to deliver prosperity and stability for all. It has clearly failed for some countries, and it may fail for many. Severe mismanagement by European politicians has caused damage that will last for decades.

The Other Euro Flaw – ZH
UBS: The first was the absence of a fiscal transfer union… The second flaw of the Euro as a monetary union, which has received less media attention, is the absence of an integrated banking system backed by a credible lender of last resort (with the power of seignorage)

Implementing Basel III in the European Union: A Deeply Flawed Compromise – PIIE

1) EU banks are under-capitalized 2) Cross-country differences in the size of too-big-to-fail banks call for cross-country differences in minimum capital standards 3) The minimal capital ratios in Basel III are way too low 4) The quality of bank capital matters, along with the quantity 5) Unpersuasive arguments about the effect of higher bank capital requirements on economic growth and the single market

EU Summit Dinner Menu: Indigestion – Credit Writedowns

The scope for compromise that seems most realistic is 1) allowing countries extra time to reach fiscal targets, 2) expanded EIB and project bonds for infrastructure/public investment, 3) provide easier access to cohesion funds and 4) EMU-wide guarantee for savings deposits. The last point seems to be a bit of a stretch… The bottom line is that today’s informal EU summit is not the real thing. It is out of the late June summit that a new effort will likely emerge.

Goldman Pops The "Deus GrEx Machina" Balloon – ZH

Goldman Sachs: the ECB cannot deal with concerns about bank solvency and/or deposit currency redenomination. That requires a pan-Euro area guarantee of the Euro value of bank deposits by the fiscal authorities.

The weight of the eurozone PMIs – alphaville / FT

Hey, Germany: You Got a Bailout, Too – View / BB

Before Germany’s banks pulled back their funds, they stood to lose a ton of money if Greece left the euro. Now any losses will be shared with the taxpayers of the entire euro area -- particularly France, whose banks still have a lot of outstanding loans to Greece. Perhaps this is what some German officials mean when they say that the euro area is better prepared for a Greek exit.

EURO CRISIS: ECB (see also the next section)

Presenting The Complete Fed/ECB Response Menu – ZH

JPM’s short lists of the potential policy responses from the ECB and the FED

  

An ECB perspective on key issues of the crisis – ECB

Jörg Asmussen, Member of the Executive Board of the ECB 24 May 2012

A route for Europe – ECB

Mario Draghi, President of the ECB 24 May 2012

EURO CRISIS: GREECE

JPM On Grexit, TARGET2, And The ECB – ZH

JPM: The ECB can “shut off” the Target2 loans if it exercises its veto over ELA loans (requiring a two-thirds majority on the Governing Council), and if the Greek central bank respects that veto. But the Greek central bank would likely be faced with the need to impose very restrictive controls on Euro deposits to limit outflows if ELA loans to Greek banks cannot be made. If the Greek central bank is faced with the prospect of imposing capital controls, a collapse of the Greek banking system, or defying the ECB’s veto on ELA loans, what route would it take?

And Now Back To Europe, Which Is More Unfixed Than Ever – ZH

Citi: There are many scenarios for a Greek exit;  almost all of them are likely to be EUR negative for an extended period. Some scenarios could be positive in equilibrium but the run-up to the new equilibrium could be nasty, brutal and long. The positive scenarios for the euro involve aggressive reduction of tail risk; none of these seem likely. It is unlikely that central banks busily substitute EUR for USD in their portfolios during periods of intense political uncertainty.

Greek exit becomes increasingly expensive over time – Sober Look

…the number will easily exceed half a trillion euros. Greece will either convert these liabilities to drachmas or simply default on them - there is no other choice… As time goes by, Greek external liabilities will continue to grow, making it increasingly more expensive for the Eurozone to exit. And as expectations of an eventual exit increase, so does the run on the Greek banking system and further need for ELA.

Are concerns over a Greek Euro exit overdone? – The Big Picture

However, a Greek exit will force the ECB to act. Citi estimates that the ECB will have to provide some E800bn in liquidity to mitigate a run on EZ banks in the event of a Greek exit. In addition, the ECB will lower interest rates, buy Spanish and Italian bonds (quite possibly other country bonds) in size and introduce QE, etc, etc, something which is necessary…I remain of the view that Greece is far too much of a problem and it’s ability to continue to create problems is way above it’s perceived threat. In addition, we all know that the Greeks will never comply – not a great precedent to the Irish, Portuguese Spanish and Italians. As a result, I feel that an exit by Greece in the next 12 months is a 75% certainty.

On Grexit, war, lies, the future of Europe – Grant Williams via The Trader

The only options now left for Europe are either for the ECB to assume the debts of Greece (and, once that were done, most likely Portugal, Ire- land, Italy, Spain and, one day, possibly even France), guarantee them and print the trillions of euros necessary to underwrite them or, should that prove unpalatable to the German elector- ate elected heads of the continent, allow Greece to leave and risk the contagion that such a prec- edent would set—contagion which would mean the printing of trillions of euros needed in order to compensate for the massive imbalances in the Target2 payment system and stop the entire European banking system from imploding. (Full pdf)

Forget 'GREXIT'; Meet 'GEURO' – ZH

Deutsche Bank on parallel currency in Greece.

Argentina Is On The Greek Side, But Why Is The IMF Holding It Hostage? – ZH

JPMorgan’s charts on Argentina before and after their exit – things did turn out for the better.

Secret Central Bank Aid Props Up Greek Banks – FT / CNBC

By scouring ECB and national central bank statements analysts, have since pieced together more details. Analysts at Barclays, for instance, reckon Greece is now using €96 billion in ELA, with Ireland accounting for another €41 billion and Cyprus €4 billion. If correct, total ELA in use has exceeded €140 billion — more than 10 per cent of the amount lent to eurozone banks in standard monetary policy operations.

Eurozone exposures charted – alphaville / FT

Nomura’s latest risk estimates for other eurozone countries

Depressing eurozone summary du jour – alphaville / FT

UBS: The risk is if Target II ceases to function. This, it should be noted, would have to be a deliberate action by central banks. However, there is a (distant) precedent in the USA.

Some euros are more equal than others – John Kay

The issue is not whether the euro coins in your pocket carry an Athenian owl or German imperial eagle. The issue is the status of bank deposits and loans, residential mortgages and commercial contracts, as well as wages and prices. The drain of funds from Greek banks is an indication that ordinary people are now thinking in these terms.

War-Gaming Greek Euro Exit Shows Hazards in 46-Hour Weekend – BB

That’s how much time the country’s leaders would probably have to enact any departure from the single currency while global markets are largely closed, from the end of trading in New York on a Friday to Monday’s market opening in Wellington, New Zealand, based on a synthesis of euro-exit scenarios from 21 economists, analysts and academics.

Germany holds a gun to Greece's head – The Telegraph

Pressure on Greece increased dramatically on Wednesday night after Germany's central bank called for a suspension of financial support to Athens and eurozone finance ministries agreed to draft contingency plans for a Greek exit from the euro.

From the FT’s Long Room – registration required

Nomura: Preparing for a Greek Eurozone Exit (Part I)

Nomura: Preparing for a Greek Eurozone Exit (Part II)

Nordea: Greece – The €nd?

EURO CRISIS: SPAIN
LCH Hikes Margin Requirements On Spanish Bonds – ZH

Net result: the Spanish Banks which by now are by far the largest single group holder of Spanish bonds, has to post even more collateral beginning May 25. Only problem with that: it very well may not have the collateral. (With comments and charts from Nomura and UBS)

The Elephant In The Room: European Capital (Out)flows And Another €215 Billion In Spanish Deposit Flight – ZH
Citi’s excellent piece: …capital flight will stop only once there is decisive policy intervention. The longer investors have to wait for this, the more decisive it will need to be. Even a Euro area-wide deposit guarantee scheme might struggle to be credible if investors fear the incentives for redenomination are strong enough.

Spain 'Discovers' 28 Billion In Debt – ZH
Instead of the expected EUR8 billion of 'regional refinancing' expected for 2012, it turns out there is EUR36 billion and as Reuters notes "the difference is due to bilateral loans from Spanish banks to the regions worth 28 billion euros that were not made public previously"

OTHER

Dalio's World – Barron’s

Ray Dalio, fabled hedge-fund manager, says the U.S. has done a "beautiful" job delevering, but sees a 30% chance Europe will stumble badly.

Saxo Stress Indicators: First public edition – Saxo Bank

Charts of what are most commonly used to measure financial stress.

OECD Economic Outlook May 2012 – OECD

Global economy recovering, but major risks remain. (Euro area flat in 2012, growth elsewhere) Webcast of press conference, handout, presentation, full document (252 pages, only online view)

Central Bank Policy Remains Key – TF Market Advisors

Beware the quant models – alphaville / FT

SocGen: our Sentiment Indicator almost dropped to almost zero one week ago, and has failed to pick up. The extent and consistency of this move suggest taking this signal seriously, and staying away from long risk positions for the moment.

Valuation & Risk On/Off – Dr Ed’s Blog

There must be a huge Risk On/Off track switch out there. Whenever it is flipped on, the S&P 500’s P/E moves higher along with commodity prices and most foreign currencies. When it is in the off position, money stops steaming down the fast track. Instead, it gets diverted into safe assets like the government bonds of the US, Germany, and Sweden.