Wednesday, October 12, 2011

Today's links

1--Greece to get loan, Trichet sees systemic crisis, Reuters

Excerpt: After a weeks-long review of the country's finances, inspectors from the European Union, IMF and European Central Bank said an 8 billion euros loan tranche should be paid in early November. But they warned Greece had made only patchy progress in meeting the terms of a bailout agreed in May last year.

"The success of the program continues to depend on mobilizing adequate financing from private sector involvement and the official sector," the troika said in a statement.

It said additional measures were likely to be needed to meet debt targets in 2013 and 2014 and a privatization drive and structural reforms were falling short. Decisive implementation of existing plans should allow next year's debt goals to be met, it said.

The money will only buy Greece and its euro zone partners a small window of time.

Germany and France, the leading powers in the 17-nation euro zone, have promised to propose a comprehensive strategy to fight the debt crisis at an EU summit delayed until October 23....


Trichet called for a clear decision on recapitalising banks, saying there was no time to lose.

Commercial banks have become increasingly wary of lending to each other, more often turning to the ECB for funding and deposits.

Overnight deposits at the 17-country bloc's central bank shot up to 269 billion euros on Tuesday, the highest since June 2010, indicating eroding trust between banks.

The leaders of Germany and France gave investors hope on Sunday night by promising a plan soon to recapitalise Europe's banks.

However, investors remain cautious due to the lack of detail about the plan, and the risk that a solution may be derailed by an event such as political deadlock in Slovakia, the one euro country that has yet to approve the EFSF expansion.

"The banking sector in Europe needs recapitalisation, that is part of our message," Trichet said.

"Decisions have to be taken and taken very rapidly, I expect this decision to be taken as rapidly as possible."

Turning to the role of the European bailout fund, the European Financial Stability Facility (EFSF), he said it could play an important role.

"Supervisors must coordinate efforts to strengthen bank capital, including having recourse to backstop facilities, and also taking into account the need for a transparent and consistent valuation of sovereign exposures," he said.

"The possibility for the EFSF to lend to governments in order to recapitalise banks -- including, if necessary, in non-programme countries -- could be of benefit here," he said.

But while calling for the fund to be "as flexible as possible", he rejected using the ECB to leverage it, adding that governments had all the means necessary to leverage it without involving the central bank.

2--Slovak euro fund vote hits snag, seen passing soon, Reuters

Excerpt: A Slovak ruling party said it would abstain on Tuesday from a vote on expanding the euro zone's EFSF rescue fund, forcing the government to turn to opposition parties to push through a deal agreed by the currency bloc to contain the Greek debt crisis.

The prospect of further delays to the ratification of EFSF expansion, which has already been approved by the other 16 euro zone countries, hit markets already under pressure from signs that the crisis is spilling beyond Greece's borders.

Even as Slovakia wrangles over giving a green light to the July agreement, euro zone leaders are scrambling to give the 440 billion euro safety net greater clout to staunch contagion that has begun to seep into the rest of the currency area.

3--(Recession in the EU?) It boils down to banks, New York Times

Excerpt: All indications are that Europe is already in a double-dip recession. Already two months ago, the Markit Eurozone Manufacturing Purchasing Managers Index, which measures activity across Europe in services and manufacturing, had fallen to 50.4, the lowest since September 2009. The divider between expansion and contraction is 50, so Europe was still expanding. But last Wednesday, Markit data indicated that the situation has since deteriorated; the latest data showed a drop in private sector activity in the euro zone for the first time since July 2009.

Moreover, the data are poor in the core of the euro zone as well as in the periphery, with Germany and France’s economies stalling as well. The sovereign debt crisis and the fiscal consolidation implemented to deal with it have taken their toll.

None of the current signals indicate the situation will improve without policy support. Business confidence has dropped markedly. For example, the widely followed Ifo Business Climate Index in Germany showed deteriorating business expectations in September. The ZEW investor sentiment index from the Center for European Economic Research showed similar pessimism among investors. Fiscal policy is tightening in Italy, Greece, Spain, Ireland and Portugal. And the European Central Bank has shown a reluctance to use monetary stimulus to offset fiscal tightening by either lowering interest rates or offering liquidity support to indebted European sovereigns.
For me, the most worrying signs, however, come from the European banking sector. Contagion from the sovereign debt crisis has infected Europe’s banks, which hold large amounts of sovereign debt. French banks like Société Générale, Crédit Agricole and BNP Paribas have had difficulties in the wholesale lending markets while governments in Belgium and France were forced to support the Belgian-French bank Dexia last week. The situation is tantamount to a wholesale lending bank run.

One would not be overstating the case in drawing parallels to the fateful events in 1931 that spread from the Austrian bank Credit Anstalt to the rest of the European banking system and into the U.S., creating bank runs and depression. Until the banks take substantially more credit write-downs and recapitalize, this crisis will continue and get worse.

4--Expect Neither ‘Sustainable’ nor ‘Comprehensive’ From Euro Area Leaders, The Wilder View

Excerpt: On Sunday, Merkel and Sarkozy promised a “sustainable and comprehensive” solution to the euro debt crisis ahead of the November 3-4 G20 meeting. Along with this rather grand announcement are absolutely no details on their plan. However, Van Rompuy today pushed back the European Summit, which convenes now on October 23, to ‘finalise our comprehensive strategy on the Euro area sovereign debt criris’. Perhaps a real plan is in the works. I think not.

In the back of my mind, I have 5 necessary conditions that must be satisfied in order to achieve a ‘comprehensive and sustainable’ policy response to the Euro area debt crisis. None of these conditions will be satisfied in full, critical conditions not even partially (namely 3. and 4. below). I can only conclude that any response/strategy negotiated at the October Summit will be neither ‘comprehensive’ nor ‘sustainable’...

•Element 1. There’s too much debt, and it must be written down. Banks are exposed to insolvent governments and defaults from a decade of leverage built in the private sector (Spain, Ireland, and Portugal). Europe is at just the initial stages of this process...

•Element 2. Near-term liquidity needs to be provided to those sovereigns/banks that are solvent but face funding pressures. The ECB has addressed the funding pressure for the near term and is likely to continue to do so...

•Element 3. A move toward more fiscal interconnectedness should be more decisively established, including a fiscal ‘lender of last resort’. This function may be performed by ECB, but presumably a fiscal institution should act in this role...

5--This time was different, and could have been more different still, Economist

Excerpt: America avoided a Great Depression this time around because countercyclical policy was substantially better than it was in the 1930s. But America finds itself struggling to attain a rapid recovery because policy has run into constraints that pop up again and again in the historical record. It's difficult to maintain political support for countercyclical policy having first underestimated the severity of the crisis. It's difficult to maintain public support for interventions to get financial markets moving again. It's difficult to maintain political support for orderly debt restructuring, and so on. I think Mr Klein's assessment in this regard is generally correct; there were things elected Washington could have done better, but it was always going to be tough to keep the political system working in the right direction over a sustained period of time.

The fact that he gets all this right, however, makes his treatment of the Federal Reserve's response all the more disappointing. After all, if political systems struggle to fight these kinds of crises, that means it is critical that the independent, technocratic institution charged with facilitating macroeconomic stability do its job well. The Fed has performed well relative to its actions in the 1930s, but that's a pretty low bar to clear. For its shortcomings relative to what ought to have been done, Mr Klein lets the Fed off with little more than a slap of the wrist....

To successfully touch off sustained inflation, for instance, the Fed would have to eliminate enough cyclical unemployment to begin pushing wages up. Given most estimates of the extent of structural unemployment, that implies an unemployment rate at least 2 percentage points below the current level. Hurrah for lower debt burdens, but isn't a 2 percentage-point reduction in the unemployment rate the big story here? Mr Klein quotes Larry Summers essentially making this point in saying:

In the model I understand inflation is mostly driven by demand, and when you increase demand, you increase inflation. And if you don’t increase demand, you don’t increase inflation. But if you’ve solved demand, you’ve solved your problem....

Just as the conduct of monetary policy was the crucial difference in the magnitude of the Depression and that of the Great Recession, the conduct of monetary policy has been the crucial difference between the present, disappointing recovery and one in which a long-period of cyclical unemployment is not a prominent feature. Not the only difference, but certainly the biggest.

6--The World Close to Stall Speed, Econbrowser

Excerpt: Or at least on the basis of the OECD's Composite Leading Indicators for August 2011 (see dismal charts)

These indicators merely confirm the need for additional stimulus. Moves to eliminate regulations, reduce the corporate tax rate, and pass free trade agreements [1] might provide growth at some time in the future, but are unlikely to provide succor to the economy in the short term. (Allowing the payroll tax reductions to lapse is contractionary, and current opponents at some time in the recent past were supporters of this tax reduction.)

7--Bank woes push up Euribor rates and demand for ECB funds, Reuters

Excerpt: Key euro-priced bank-to-bank
lending rates and demand for ECB funding rose on Tuesday as
growing concerns about European banks' ability to handle the
euro zone's sovereign debt crisis outweighed an incoming wave of
central bank liquidity support.

In response to intensifying euro zone troubles, the European
Central Bank last week reinstated some of its most potent
crisis-fighting tools, including 1-year liquidity injections.

The moves are expected to keep euro money market heavily
oversupplied with liquidity for the foreseeable future and
thereby maintain downward pressure on interbank lending rates.

Banking sector tensions continued to outweigh the prospect
of new ECB support on Tuesday, however.

Three-month Euribor rates , traditionally the
main gauge of unsecured interbank euro lending and a mix of
interest rate expectations and banks' appetite for lending, rose
to 1.570 percent from 1.567 percent.

Money markets are already well overstocked with ECB funding.
Excess market liquidity topped 210 billion euros on Tuesday,
according to Reuters calculations, the highest level since the
end of June last year.

At the same time, and underscoring the nervousness that has
paralysed the interbank market, banks also parked 270 billion
euros at the ECB....

Uncertainty created by the debt crisis engulfing much of
southern Europe has increased banks' reluctance to lend to each
other and prompted many banks to stock up on ECB euro funding.

At the ECB's latest offering of weekly loans, a combined 166
banks took 205 billion euros, up from just under 200 billion the
same amount took last week. 59 billion euros was also taken in a
separate handout of 1-month loans, up from 54 billion last

The deepening crisis has forced the ECB back into emergency
mode. It is set to reintroduce ultra-long 1-year funding, plus
one of 13-months and has also extended limit-free funding in all
its lending operations until the middle of next year.

The central bank is also buying sovereign bonds again,
including the debt of Italy and Spain.

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