Saturday, November 20, 2010

Weekend Links

1--Snapshot of a nationwide bankrun, FT.Alphaville

Excerpt: Bank of Ireland admitted last week that it had lost €10bn of corporate deposits – around 12 per cent of its deposit base – in a matter of weeks following September’s credit rating downgrades. On Wednesday, Irish Life & Permanent confirmed the trend, admitting to an 11 per cent fall in its customer deposits in August and September.

Even the relatively solid Bank of Ireland is now dependent on the ECB for a large chunk of its funding as interbank loans have dried up. Bank of Ireland told the market last week that its funding line from central banks had jumped from net €8bn at the end of June to about €20bn in the third quarter – a figure equal to 10 per cent of its total assets. At the end of June the bank had €25bn of collateral that could be used to tap the ECB for funds. By last week this had reduced by about half, leaving it with around €13bn of liquidity....

If the Irish government doesn’t sign up to a bailout package there will be further outflows which in turn will force the ECB to provide even more liquidity to the Irish banking sector.

2--Don't suspend the payroll tax, Mark Thoma, economist's view

Excerpt: I agree with the worries about Social Security financing -- for those who want to scale back or eliminate Social Security, this would be seen as an opportunity to starve Social Security of finances, create a crisis, then argue for cutbacks. But there are ways to do this that don't involve cutting the payroll tax per se, so the political optics are different, yet amount to the same thing. For example, continue collecting Social Security taxes as before, but give workers a temporary rebate that is clearly designated as independent of Social Security taxes. I'm sure there are better ways to do it, but the point is that we can help workers without putting Social Security at risk.

3--Roubini Maps Out Nightmare Scenario of Domino Debt Collapse in Europe, CNBC

Excerpt: We have too much private debt in the case of Ireland," according to Nouriel Roubini. But the nub of the crisis is this: "We have decided to socialize the private losses of the banking system. Now you have a huge increase in public debt—going from 7 percent to 100 percent of GDP. Soon it will be 120 percent."

"The next one in line is going to be Portugal.' [Roubini said] "Due to the severity of Portuguese debt problems, Portugal is going to lose market access—and that means they are going to require IMF support as well.

But the real nightmare domino is Spain. Roubini refers to the Spanish debt problems as "the elephant in the room".

"You can try to ring fence Spain. And you can essentially try to provide financing officially to Ireland, Portugal, and Greece for three years. Leave them out of the market. Maybe restructure their debt down the line."

"But if Spain falls off the cliff, there is not enough official money in this envelope of European resources to bail out Spain. Spain is too big to fail on one side—and also too big to be bailed out."

But, despite the paper shuffling of debt at the national level—and at the level of supranational entities—reality ultimately intervenes: "So at some point you need restructuring. At some point you need the creditors of the banks to take a hit —otherwise you put all this debt on the balance sheet of government. And then you break the back of government—and then government is insolvent."

4--The Topic of Depression Economics in a Nutshell, Bradford DeLong, Grasping reality with both hands

Excerpt: We conclude that the excess demand in financial markets right now on the part of investors is an excess demand for safety: for high quality AAA-rated assets for people that hold in their portfolios. Prices of risky financial assets are low—there is no excess demand for them. Prices of safe financial assets are high—there is an excess demand for them.

Thus businesses and households have cut back on their spending on currently-produced goods and services as they all have concluded: “We don’t have enough safe assets in our portfolios. We need to stop spending so much until we build up our holdings of safe assets to a higher level.” And the fact that they cannot do so because there is a shortage of safe assets in the economy is what is keeping us wedged in this current situation of high unemployment and low capacity utilization.

Where did this excess demand for safe assets come from?

It came as a consequence of the deregulation of finance and of the securitization of mortgages, from the housing bubble and the crash, from the fact that then it turned out that investment banks that had created brand new derivative securities based on mortgages had not originated-and-distributed them but had, to a remarkable and astonishing degree, originated and kept them. They were supposed to sell off all the pieces o real estate risk in small bundles to savers all over the world. They did not.

When it turned out that these mortgage-backed securities were actually a lot riskier than had been claimed, the natural response was to fear. For not only were those securities exceptionally risky, but all debts of any financial organization thought to be holding any significant amount of mortgage-backed securities became risky as well. Thus the economy-wide supply of safe assets fell massively just at the very point in time when increasing uncertainty and the coming recession made everyone wish to hold more safe assets in their portfolios.

So what do we do now?

5--Do unemployment benefits help the economy? Chad Stone, off the charts

Excerpt: A new report commissioned by the Department of Labor during the Bush Administration reinforces CBO’s conclusion. It found that in the depths of the recession, federal emergency unemployment benefits — which will expire November 30 unless Congress renews them — boosted employment by about 750,000 jobs. (Regular, state-funded unemployment benefits boosted employment by an additional 1 million jobs.)

CBO ranks assistance for unemployed workers as the most effective policy for generating economic growth and creating jobs among the 11 spending and tax measures it evaluated recently. Mark Zandi, Chief Economist of Moody’s Analytics, estimates that each dollar of unemployment benefits generates about $1.60 in new economic activity in the first year. Only an increase in food stamp benefits, which Zandi estimates generates roughly $1.70 of GDP for each dollar of cost, has greater bang for the buck.

The economy still needs a boost and, as Federal Reserve Chairman Ben Bernanke said in his speech today, “a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve.” If Congress wants to respond seriously to Bernanke’s plea, it can start by renewing for another year the program providing emergency unemployment benefits.

6--Decoding Bernanke, David Wessel, Wall Street Journal

Excerpt: (Bernanke) “The Federal Reserve is nonpartisan and does not make recommendations regarding specific tax and spending programs. However, in general terms, a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve.”

Wessel--“I really don’t want to get into a partisan slugfest over taxes and spending, but Congress and the White House would make the Fed’s job a heckuva lot easier if it did some short-term fiscal stimulus packaged with credible deficit-reduction that would take effect later when the economy is stronger. Please.”

Bernanke--“Much of the decline over the summer in the foreign-exchange value of the dollar reflected an unwinding of the increase in the dollar’s value in the spring associated with the European sovereign debt crisis. The dollar’s role as a safe haven during periods of market stress stems in no small part from the underlying strength and stability that the U.S. economy has exhibited over the years. Fully aware of the important role that the dollar plays in the international monetary and financial system, the [Federal Open Market] Committee believes that the best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States.”

Wessel--“The dollar’s fall earlier this year reflects a sigh of relief from global investors that Europe wasn’t falling apart — at least not then. We’re lucky that when global investors get nervous, they prefer the dollar to any other currency — and we really don’t want to lose that edge. When we cut interest rates or buy billions in bonds, the dollar will fall, of course. That’s textbook economics. But we know the dollar isn’t just any ol’ currency and the best way to maintain the dollar’s premier status is to get the U.S. economy growing again, and that’s what I’m trying to do.”

7--Ireland is losing the propaganda war, Guardian

Excerpt: "I think it's devastating genuinely. I know we can talk about the loss of sovereignty, but this is the culmination of two years of complete lack of direction of leadership and it's terrible to think that if it had been approached with these qualities we might not have had to be dragged kicking and screaming into this rescue.

"If you look back in history and the whole idea of the Republic was building support through mobilising the so-called men of no property.

"And to me the biggest irony is that we wasted it all gambling on property. That greed around property, there is a very sad symmetry here. From a country that fought land wars to a country that has been destroyed by landlords worse than the 19th century, destroyed by land owners and speculators."

8--A series of very black holes, FT.Alpahaville

Excerpt: One of the more alarming features of this most recent crisis has been a spool of revelations of slow-motion deposit flight from Bank of Ireland and Allied Irish Banks. This has implications for funding and reliance on the ECB, via consequences for collateral. But it also suggests depositors fear that something dark indeed is lurking within the portions of BoI and AIB’s non-Nama (ie. non-guaranteed) loan portfolios.

And it’s certainly a very black hole to travel down.

The overall context for an unexpected rise in further bank losses is an unexpected further fall in once-frothy commercial property prices – a peak-to-trough decline of up to 55 per cent already having been seen.

And as far as the worst case from here is concerned, interesting to note that analysts from Barclays Capital and Goldman both saw that decline extend to around 60 to 70 per cent by the end of next year at worst, in notes on Irish bank recapitalisation published on Friday.

9--Poland, Slovakia Need Deficit Reduction Similar to Ireland's, OECD Says, Bloomberg

Excerpt: Poland and Slovakia need to cut their budget deficits by as much as Ireland, which may seek an international bailout, to ensure sustainable debt levels, the Organization for Economic Cooperation and Development said.

The OECD put the two eastern European Union members in a group of countries with the second-highest fiscal consolidation needs among its 33 members in a report released today. The report compared so-called underlying primary balance, which exclude debt payments and strip out the effects of recession and one-time items, as a percentage of gross domestic product.

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