Monday, December 5, 2011

Today's links

1--Fed may give loans to IMF to help euro zone: paper, Reuters

Excerpt: The Federal Reserve, along with the 17 euro zone national central banks, may help provide the International Monetary Fund with funds that could be used to aid debt-ridden states, a German newspaper said.

Die Welt cited sources close to the negotiations as saying the euro zone central banks could pay at least 100 billion euros ($134.2 billion) into a special fund that could be used for programs for nations struggling to control their debts.

"Also other central banks, for example the U.S. Federal Reserve, are apparently prepared to finance a part of the costs," the paper said in an advance copy of an article to appear on Monday.

Treasury Secretary Timothy Geithner may discuss the idea in the coming weeks when he visits Europe, the paper said.

Officials had said on Saturday that talks on the size of loans from euro zone central banks were starting at a technical level after finance ministers from the currency union gave the go-ahead to explore the idea.

The idea is for the IMF to be able to match the new firepower of the euro zone bailout fund, which is being leveraged.

2--Keeping an eye on the banks, The Streetlight blog

Excerpt: From the FT: Return of the credit crunch: caught in the grip

Banks are the traditional suppliers of credit – to governments whose debt they hoover up; to rivals through interbank lending; to companies, from sole traders to corporate behemoths; and to individuals. Banks provide the oil needed to run the economic machine; without that lubrication the machine seizes up. But to carry out that role, the banks themselves need money. And that is where the whole model is breaking down.

...As fears over the integrity of the eurozone have deepened, European banks have found it expensive, difficult or in some cases impossible to raise funding in the bond markets. So far they have covered barely two-thirds of the amount of outstanding funding that falls due in 2011. For most banks, the bond markets have been closed for months.

...The few banks that have plenty of money are holding on to it, or depositing it with super-safe institutions such as the US Federal Reserve or the ECB. That means the third key mechanism for bank funding – interbank lending – is also drying up.

...The nervousness surrounding many European banks is rooted in fears about losses they face, particularly on their sovereign debt holdings. Bankers recognise the concerns but complain that the effect is being compounded by regulators’ insistence that the banks should meet tough new capital ratios. The European Banking Authority, which oversees bank regulators across the continent, has identified a total €106bn ($143bn) gap at 70 banks that it stress-tested for their exposure to eurozone sovereign debt. Rather than raise fresh capital in turbulent equity markets to bridge that gap, many are opting instead to shrink their balance sheets and comply with the capital ratios that way.

3-- Germany open to ESM changes if budget rules tightened, Reeuters

Excerpt: Reuters) - Germany is prepared to soften language in the euro zone's permanent bailout mechanism compelling bondholders to accept losses in exchange for much stricter budget rules, four sources have told Reuters.

The shift would not completely remove the possibility of private bondholders having to accept losses in the future, but it would align the statutes of the European Stability Mechanism more closely with IMF rules, creating a more-level playing field for private buyers of euro zone sovereign debt.

The hope is that will reassure private bondholders that they are not being singled out for losses by European policymakers, bolstering their confidence in buying euro zone bonds - and potentially helping Italy and other under-pressure borrowers.

Following the insistence earlier this year that private bondholders should share the cost of a second Greek bailout, investors had feared that a precedent had been set which could be repeated any time another euro zone sovereign ran into trouble.

4--Hedge funds on red alert for bank leverage squeeze, Reuters

Excerpt: Hedge funds are steering clear of the big bets they are famous for, rattled by worries that the lenders who bankroll their most lucrative plays will soon turn the taps off.

With memories of sudden margin calls at the height of the 2008 crisis still fresh, many managers are scrutinizing banking relationships and preparing for the likelihood of tighter, more expensive access to credit as several major banks face up to their own funding troubles.

"This is a dynamic we're all very familiar with because it happened a great deal in 2008 and 2009," Benjamin Keefe, investment advisory director at Gamma Finance, said.

"That will have a knock-on effect either in terms of forcing hedge funds to exercise a gate to stop investors redeeming or to sell their more liquid assets to meet recalled leverage lines."

Europe's spreading sovereign debt crisis has virtually frozen lending markets for banks in recent weeks, prompting the world's major central banks to take joint action to provide cheap dollar funding for starved European banks....

The banks that can't access long-term capital or can't access it at a competitive rate basically have an unsustainable model because they are pricing the business at a lot less than their cost," one executive in prime broking -- desks which lend money to funds and provide back-office services -- said.

Worries that banks' own funding positions are in difficulty have returned to the forefront of managers' minds, with the cost of insuring against default for some banks -- a closely watched measure of counterparty risk -- jumping recently....

Anticipating a possible squeeze in bank lending, managers are taking steps to reduce their borrowing, so they can avoid a catastrophic bout of firesales if conditions continue to slide.

During the 2008 crisis, managers with big borrowings were forced to sell assets into tumbling markets after banks beset with their own leverage woes retrenched.

"We have seen no moves by prime brokers regarding cost of leveraging or access to leveraging (but) as the wholesale markets seize up and the banks' ratings continue to decline, you have to say it must at some point start becoming an issue for the hedge fund community," one hedge fund manager said.

5--Nomura on European bank deleveraging and US loans, FT Alphaville

Excerpt: Nomura has a new report showing that US loan growth is having a good quarter thus far, even after accounting for the normal seasonal boost, but what caught our eye was the excellent series of charts on the activities of foreign bank subsidiaries in the US.

We already know that a combination of forces (meeting capital ratios, the withdrawal of traditional sources of wholesale funding) has European banks looking to unload, or allow to run off, a sizable amount of their USD-based holdings, and to constrain lending. A previous Nomura note estimated that these banks have about $1.8 trillion in US assets.

The process has begun for some securities, but we haven’t actually observed a lending crunch just yet (chart)

But the report also has a useful overview of how these subsidiaries are funded — mostly by bank borrowings and time deposits such as CDs…So almost entirely wholesale funding, and it’s been fleeing quickly, which anybody following US money market funds has known for some time.

To get even more specific and shift to the asset side, Nomura estimates that 48 per cent of all US bank loans held by foreign banks — a category that includes commercial and industrial loans, securities purchases and holdings, and an “other” category that includes loans to other financial institutions — belong to European bank subsidiaries. This amounts to roughly 5 per cent of the total US loan market.

Nomura writes that you can expect the share of commercial loans, and especially the role of these subsidiaries in syndicated lending, to decline and for US banks to try to fill the gap.

We’d also wondered about the extent to which European banks would be dumping their holdings of dollar-denominated asset-backed securities. Turns out these subsidiaries hold about 5 per cent each of total US bank holdings in both agency debt and private-label MBS. But they hold 17 per cent, or about $113bn, of securities in a category that Nomura labels “All other”. We’re not sure what’s in there and Nomura doesn’t say, but it’s reasonable to guess that it includes a lot of CDOs and other Level 3 assets. In other words, a lot of crap with high risk weightings that would be useful to get rid of in pursuit of higher capital ratios.

Perversely, though, the fact that European bank subsidiaries still have unrealised loss on many these securities might lead them to constrain lending or pursue more creative means of deleveraging before selling these off (to avoid booking the loss)…

6--Fiskalunion is worst of all worlds for Europe, Telegraph

Excerpt: Be careful of the German term 'Fiskalunion', the next phase of Europe’s misadventure. What Chancellor Angela Merkel means is increased powers to police the budgets of EMU sinner states.

She means prior vetting of fiscal plans. She means automatic fines, cuts in EU development funds, and loss of EU voting rights for alleged violators, all justiciable before the European Court.

The correct term is 'Stability Union', as the Chancellor calls it at home. It certainly entails unprecedented intrusion into the internal affairs of sovereign states, but in one direction only: discipline, without transforming help.

The Greeks have had a taste of this with EU commissars lodged in each ministry under the occupation terms of their loan package, and it may come back to bite Germany itself one day as the economic cycle plays its trick.

Nor is the idea going down well in France, where Leftist MP Jean-Marie Le Guen compared President Nicolas Sarkozy’s kowtowing to the Iron Chancellor with Daladier’s capitulation at Munich in 1938, and where Le Front National’s Marie Le Pen is running near 20pc in the polls with calls to “let the euro die a natural death.”...

None of Mrs Merkel’s proposals - whether enshrined in EU treaties or not - offer any meaningful solution to the crisis at hand. They continue to ignore the cancer in the EMU system: the corrosive 30pc currency misalignment between North and South, and the German-Dutch trade surplus.

Her plan clings to the Wagnerian myth that Club Med fiscal extravagance is the cause of all the trouble, though Spain had a budget surplus of 2pc of GDP five years ago and never broke the Stability Pact - unlike Germany - and Italy has long had a primary surplus.

But you can bang your head against a wall trying to convince the Puritans that their morality tale is bad science, or that enforced contraction in the South without offsetting expansion in the North can only push Italy, Spain, Portugal, and Greece deeper into suffocating debt deflation and ultimately lead to a 1930s black hole for everybody. The Puritans want pain. Only suffering cleanses.

It is an inescapable truism that monetary union must balance internally over time, either by trade or by capital flows. If the German bloc cuts off capital for the South - the “sudden stop” of 2009-2011 - then the same German bloc must accept a lower trade surplus....

"The sovereignty of the German state is inviolate and anchored in perpetuity by the Basic Law. It may not be abandoned by the legislature,” said chief justice Andreas Vosskuhle at the time

7--ECB Deposits Hit New High, WSJ

Excerpt: Euro-zone banks' overnight deposits with the European Central Bank hit yet another fresh 2011 high Friday ahead of a week that many observers regard as key to solving the euro zone's sovereign-debt crisis.

Banks deposited €332.705 billion ($445.49 billion) with the ECB, the ECB said Monday, hitting a 2011 record for the third day in a row. The deposits were up from €313.763 billion Thursday, hitting a level last seen in June 2010 while edging closer to the all-time high.

The deposit level has been elevated since early August, as banks favor using the ECB as a haven for excess cash rather than lending it to each other, as they remain reluctant to do so on concerns about counterparties' exposure to risky euro-zone sovereign debt.

Meanwhile, banks borrowed €8.64 billion from the ECB's overnight lending facility Thursday, which charges a punitive 2% interest rate. The level is higher than the €4.638 billion borrowed Wednesday and the highest level of borrowing at the overnight facility since March 1, when banks borrowed €15.104 billion from the facility.

When the interbank market works properly, banks use the lending facility to borrow just a few hundred million euros overnight. But many banks are currently forced to turn to the ECB for their short-term funding needs as the debt and banking crisis continues to erode banks' confidence in one another.

8--IMF Could Set up Euro Aid Fund with EU Help, Der Speigel

Excerpt: European governments are considering boosting the funding of the International Monetary Fund to enable it to tackle the debt crisis more effectively, German newspaper Die Welt reported on Monday.


Citing unnamed sources close to the negotiations, the newspaper reported that the 17 national central banks of the euro zone would pay "a three digit billion sum" into a special fund which would fund programs for crisis-hit nations.

Die Welt also said that other central banks such as the US Federal Reserve were prepared to finance part of the costs. US Treasury Secretary Timothy Geithner is scheduled to travel to Europe this week to meet politicians and central bankers.

The plan could be on the agenda of talks between Chancellor Angela Merkel and French President Nicolas Sarkozy in Paris on Monday.

The two leaders are meeting to discuss plans for a change in the European treaties to force euro nations to maintain budget discipline, and to agree a common position ahead of what is being billed as a make-or-break EU summit for the euro on Thursday and Friday....

The paper said the US was pressuring the Europeans to channel funds to the IMF to beef up its capacity to handle the euro crisis. The size of the fund injection had not been decided yet but could amount to €200 billion, which would be available in addition to the €440 billion provided by the euro bailout fund, the European Financial Stability Facility.

But the special IMF fund could end up even higher than €200 billion, Die Welt reported. "If Italy were to be financed over three years, we're talking about quite different sums," said one person familiar with the matter, according to the newspaper.

9--Analysis: Earnings outlook may be deteriorating rapidly, Reuters

Excerpt: Earnings season is just over a month away, but the early signals are not comforting.

Companies cutting forecasts outpace those raising estimates by the greatest ratio in 10 years, and some sectors, such as materials, have seen a dramatic fall in expectations for the soon-to-be ended fourth quarter, according to Thomson Reuters data.

It is a stark reminder that even as U.S. economic data has improved in recent weeks, the euro zone debt crisis and concerns about slowing growth in China still cast a long shadow.

Estimates for fourth-quarter S&P earnings growth have tumbled over the past two months as global macroeconomic headwinds prompted analysts to slash forecasts.

The S&P is now seen posting earnings growth of 10 percent in the fourth quarter, down from a forecast for 15 percent growth on October 3.

"With all the uncertainties out there - from geopolitical issues to the risk that we could be headed towards another recession - this suggests the economy is barely keeping its altitude above the tree line right now," said Michael Mullaney, a portfolio

10--Bank restructuring, VOX EU

Excerpt: An important step was already taken in October when policymakers finally admitted their dark little secret that many Eurozone banks are too weak to function. The numbers that have been floated since then show that, once again, policymakers are bent on solving yesterday’s problem, not tomorrow’s (Acharya et al. 2011). Debt restructuring will hurt many banks – some of them may even fail. Proper policy planning should aim at restructuring banks sufficiently enough for them to be able to absorb the forthcoming blow or, in some cases, to take them over.

It is a tragedy that, in Europe as in Japan 20 years ago, the bank lobbies have effectively captured their governments. Following the subprime crisis, they have managed to stunt serious reforms and to keep hiding their losses. At the start of the sovereign debt crisis, they have convinced governments to pour resources into ailing countries – under crippling conditions – in order to avoid debt defaults. When that strategy predictably failed, they have negotiated PSI arrangements that greatly limit their losses, while failing to provide countries with the relief needed to recover market access. They push for Eurobonds that will protect significant portions of their assets at taxpayers’ expense. Now they threaten governments with a “lending strike” as they argue that deleveraging will lead to a credit crunch. It is about time for governments to call the large banks’ bluff and moot plans to take them over if they are unable to function as banks.

11--Richard Alford: The Lender of Last Resort, the Fed and the ECB, naked capitalism

Excerpt: Europe is in the midst of a financial crisis and the ECB is being called upon to act as an LOLR (Lender of last resort) and support the prices of the debt of various peripheral countries. It may be wise, or not, for the ECB to buy the sovereign debt of the peripheral countries. It might be consider part of monetary policy or unconventional monetary policy, but given history and the definition of the LOLR it is hardly an LOLR function. An unlimited commitment to monetize the sovereign paper would imply that the ECB has surrendered any ability to control either quantity of reserves in the system or manipulate short-term interest rates. In short, its ability to execute monetary policy will have been abandoned. It would in effect become an off-budget financing arm of a non-existent and at the same time dysfunctional pan-Europe Finance Ministry.

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