Wednesday, December 7, 2011

Today's links

1--Anxious Greeks Emptying Their Bank Accounts, Der Speigel

Excerpt: Many Greeks are draining their savings accounts because they are out of work, face rising taxes or are afraid the country will be forced to leave the euro zone. By withdrawing money, they are forcing banks to scale back their lending -- and are inadvertently making the recession even worse.

the outflow of funds from Greek bank accounts has been accelerating rapidly. At the start of 2010, savings and time deposits held by private households in Greece totalled €237.7 billion -- by the end of 2011, they had fallen by €49 billion. Since then, the decline has been gaining momentum. Savings fell by a further €5.4 billion in September and by an estimated €8.5 billion in October -- the biggest monthly outflow of funds since the start of the debt crisis in late 2009.

The raid on bank accounts stems from deep uncertainty in Greek households which culminated in early November during the political turmoil that followed the announcement by then-Prime Minister Georgios Papandreou of a referendum on the second Greek bailout package....

The hemorrhaging of bank savings has had a disastrous impact on the economy. Many companies have had to tap into their reserves during the recession because banks have become more reluctant to lend. More Greek families are now living off their savings because they have lost their jobs or have had their salaries or pensions cut.

In August, unemployment reached 18.4 percent. Many Greeks now hoard their savings in their homes because they are worried the banking system may collapse.

2--Euro enters the last chance saloon, Telegraph

Excerpt: Ever since central banks agreed to provide additional liquidity support to Europe's stricken banks, stock markets have been surging in anticipation of an eventual, much wider ranging deal to save the euro. Are they right to do so?...

It is an article of faith in markets that once Germany gets the treaty changes it wants, once it can be satisfied that the rules are in place to keep national budgets on the straight and narrow, then it will drop its opposition to "mutualisation" of sovereign debt and agree to more significant ECB bond purchases.

Yet so far, talks seem to have concentrated almost entirely on putting in place an effective framework for controlling the fiscally ill-disciplined. It's being called "fiscal union", but as my colleague, Ambrose Evans-Pritchard, has already pointed out, this is not fiscal union at all, but merely a toughened-up version of the old stability and growth pact. It offers no prospect of support for countries that get themselves into difficulty, only punishment.

By attempting to address the long-term problem before the immediate one, Germany has chosen a curiously back-to-front approach to the crisis. Ah, say the markets, but that's how the Germans like it. They want the cart before the horse. Once the cart is in place, then they can start talking about the horse.

That's the assumption, but what if Ms Merkel means what she says? What if she actually believes that budget discipline and structural reform alone are enough to solve the eurozone's problems? Crazy though this might seem, that's the implication of the rhetoric.

3--S&P has no choice: Euroland risks bankruptcy on current policies, Telegraph

Excerpt: "Policymakers appear to have acted only in response to mounting market pressures, rather than pro-actively leading market expectations in a way that might have better supported and strengthened investor confidence. We take the view that the defensive and piecemeal nature of this response has helped expand the crisis of confidence in the eurozone."

Spot on.

IMF chief Christine Lagarde was equally dismissive of the Merkozy plan. "It’s not in itself sufficient and a lot more will be needed for the overall situation to be properly addressed and for confidence to return."

As S&P states, a credit crunch is taking hold, partly because of the EU’s pro-cyclical demands for higher capital ratios. Euroland’s incoherent mix of policies are pushing the eurozone into recession and therefore into deeper debt stress.

"As the European economy slows, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, eroding the revenue side of national budgets...

Euroland’s crisis is not about Greek pensions or Italian labour laws, but about a vast and catastrophically ill-designed edifice of interlocking bank debt and sovereign debt.

You cannot separate the two. The sovereigns are destroying banks, and the banks in turn are destroying sovereigns. The two disasters are feeding on each other. This will continue until there is a circuit-breaker, both to act as lender of last resort and to end the slump.

4--Buiter: no politically feasible route to sustained growth for many years to come, credit writedowns

Excerpt: Buiter wrote in a note yesterday:

There really is no politically feasible route back to sustained economic growth through monetary and/or demand stimulating policies for the EA, the UK, the US and Japan, for many years to come. As regards demand stimulus, expansionary fiscal policy will not be punished by the markets to the point of being self-defeating for all EA member states except for Germany (which will not do it on any significant scale for domestic political reasons). The US also may be technically able to use fiscal expansion to stimulate demand, but even if markets continue to be tolerant, political gridlock makes it impossible. Expansionary monetary policy is at the end of its rope in the US and Japan. The UK could cut the official policy rate by 50 bps and the ECB by 125 bps, and then they too are restricted to quantitative easing (QE), which I consider to be ineffective.

Helicopter money (cash transfers to households funded permanently by the central bank) would be expansionary for the Periphery, the EA soft core, Japan, the US and probably also for the UK (depending on your view of how much slack there is in the UK economy). Helicopter money is, however, politically infeasible in the EA, Japan and the US. In the UK Mervyn King might have a go.

A recovery of global demand would help, but is not a policy instrument of the EA or anyone else. The exchange rate is not a separate instrument, but the reflection of relatively loose current and anticipated future monetary policy. Most exchange rate movements are inexplicable even ex-post. The exchange rate, to the extent that it is an instrument at all, is one only for the EA as a whole. The larger the area that is looking for a stimulus to demand (the industrial countries are just under 60 pct of world GDP at market exchange rates), the less effective any exchange rate depreciation is.

Supply side policies (privatisation and structural reform) will raise the level of potential output, and possibly even its growth rate, but are unlikely to give rise to spontaneous animal spirits capable of boosting fixed investment and household demand to utilise that potential.

For the rest, the fiscally unsustainable sovereigns have the choice of further fiscal tightening or default/restructuring. This is true currently in the EA periphery, the EA soft core and in the UK. It will soon be true also for the US and Japan.

5--UPDATE 1-United States ready to help Greece - VP Biden, Reuters

Excerpt: The United States will support Greece during these difficult times, U.S. Vice President Joe Biden said during a visit to Athens on Monday, in remarks that offered reassurance rather than concrete aid.

"I am here to tell you that we stand with you in solidarity as you meet some difficult requirements of the IMF and European Union," Biden told reporters before a meeting with Greek Prime Minister Lucas Papademos. "It is a difficult time for Greece and we stand ready to help in every way we can."

Biden travelled to Greece before a key EU summit on the debt crisis in Brussels on Friday, in what has been called a crucial week for the common currency.

Illustrating Washington's concern that the euro zone's troubles could sap the fragile U.S. recovery, U.S. Treasury Secretary Timothy Geithner will separately visit the euro zone this week to urge its leaders to act decisively to control the crisis.

6--Three-Month Dollar, Sterling And Euro Borrowing Costs Rise, WSJ

Excerpt: The cost of borrowing dollars, sterling and euros for three months in the London interbank market rose Tuesday as investors continue to worry about the euro-zone peripheral market and the potential knock-on effect on the European banking system.

Data from the British Bankers' Association showed the three-month dollar London Interbank Offered Rate, or Libor, rose to 0.53775% from 0.53390% Monday.

The spread between the three-month dollar Libor and overnight index swaps, a barometer of market stress, widened slightly to 43.87 basis points from 43.69 basis points Monday.

7--Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?, zero hedge

Excerpt: While much has been said about the vagaries in the European repo market elsewhere, the truth is that the intraday variations of assorted daily metrics thereof indicate three simple things: a scarcity of quality assets that can be pledged at various monetary institutions in exchange for cash or synthetic cash equivalents, a resulting lock up in interbank liquidity, and above all, a gradual freeze of the shadow banking system. As we have been demonstrating on a daily basis, we have experienced all three over the past several months, as the liquidity situation in Europe has gotten worse, morphing to lock ups in both repo and money markets. As a reminder, both repo and money markets (for a full list see here), are among the swing variables in shadow banking. And shadow banking is nothing more than a way to expand credit money while undergoing the three traditional banking "transformations" - those of maturity, liquidity and credit risk, although unlike traditional liabilities, these occur in the "shadow" or unregulated area of finance, interlocked between various institutions, which is why the Fed has historically expressed so much caution when it comes to discussing the latent threats in it.

Indicatively, of the $15.5 trillion in shadow US liabilities (by far the biggest such system in the world), $2.6 trillion are liabilities with money market mutual funds and just $1.2 trillion are repos. Indicatively, traditional plain vanilla bank liabilities amounted to $13.4 trillion as of Q2 (an updated for Q3 is imminent). As such, the focus on repo while useful, misses the forest for the trees, which is that not the repo market, but the entire shadow banking system in Europe is becoming unglued.

What explains this? Two simple words, which form the foundation of modern finance - "risk" and "confidence", and in Europe both are virtually nil. Seen in this light, the unwind of the shadow system explains much: the inability of Germany to place bunds, the parking of cash with the ECB, the freezing of repo, the plunge in the currency basis swaps, the withdrawal of money markets, the blow out of various secured-unsecured lending indicators, etc. All of these fundamentally say the same thing: there is too much risk and not enough confidence, to rely on the abstraction that is shadow risk/maturity/and liquidity transformation. All this is easily comprehended. What is slightly more nuanced, is the activity of the ECB and especially the Bundesbank in the last few weeks, whereby as Perry Mehrling of Ineteconomics demonstrates, we may be experiencing the attempt by the last safe European central bank - Buba - to disintermediate itself from the slow motion trainwreck that is the European shadow banking (first) and then traditional banking collapse (second and last). Because as Lehman showed, it took the lock up of money markets - that stalwart of shadow liabilities - to push the system over the edge, and require a multi-trillion bailout from the true lender of last resort. The same thing is happening now in Europe. And the Bundesbank increasingly appears to want none of it.

8--EU To Seize Control Over National Economies With Stroke of a Pen, Infowars

Excerpt: Forget the millions of Europeans affected, the EU won’t even bother to put its attempt to seize control over member state economies to a vote amongst its own parliamentary cronies, preferring instead to change the Lisbon Treaty under powers Eurocrats granted themselves.

Having repeatedly staged national referendums until they got the vote they wanted, the Lisbon Treaty was passed with a provision, the obscure ‘passerelle’ clause, Art. 126 (14) via protocol 12, that bestowed upon Brussels the power to change its terms without any kind of vote whatsoever – popular or parliamentary.

“This decision does not require ratification at national level. This procedure could therefore lead to rapid and significant changes,” according to a confidential text issued by EU President Herman Van Rompuy.

This means that any effort to change the treaty in order to create a “fiscal union,” or in other words, impose centralized control over every member state’s economy from Brussels, would simply be accomplished with the stroke of a pen and would not involve votes from any national parliament or any MEP.

This would then empower the European Commission, “to impose austerity measures on eurozone countries that are being bailed out, usurping the functions of government in countries such as Greece, Ireland, or Portugal,” reports the Guardian.

It’s all part of the technocrats’ agenda to seize “intrusive control of national budgetary policies.”

9--Demand for ECB cash dips, Euribor rates up after S&P, Reuters

Excerpt: Euro zone banks cut their

intake of European Central Bank funding for the first time in

over a month on Tuesday, as a warning from S&P that may

downgrade almost the entire euro zone helped nudge up key

bank-to-bank lending rates.

Interbank lending markets -- usually the starting point for

lending to the wider economy -- have become increasingly

paralysed over the last month as the euro zone debt crisis has

made banks ever more reluctant to lend to their peers.

The fears have forced banks to make greater use of the ECB's

limit-free loans in recent weeks but Tuesday saw them trim their

intake to 252.1 billion euros from 265.5 billion last week and

fraction below expectations of traders polled by Reuters.

It came after rating agency Standard & Poor's warned late on

Monday that it may carry out an unprecedented mass downgrade of

euro zone countries if EU leaders fail to deliver a convincing

agreement on how to solve the region's debt crisis in a summit

on Friday....

There is a growing pack of banks now locked out of open

funding markets and reliant on the ECB.

Overnight deposits remained extremely elevated at 328

billion euros on Tuesday, close to the highest since June 2010,

when banks were stocking up funds to prepare to pay back the

first of three huge ECB one year loans.

ECB President Mario Draghi said last Thursday the central

bank was aware of the difficulties facing banks and that it

would ensure price stability against threats in either

direction, also warning the economic outlook had worsened.

10--Analysis: Merkel, Sarkozy master plan has no new ideas, Reuters

Excerpt: The grand plan outlined by France and Germany on Monday for European treaty change breaks no new ground in terms of ideas -- all the proposals already exist in various legal acts, the only problem is they have never been observed in practice.

If there is one difference it is that France and Germany, the political and economic motors of the euro zone, now want to assemble all the separate pieces of legislation into a single EU treaty. But otherwise, there is little change.

"This is just their lowest common denominator and nothing like the comprehensive package for economic and fiscal union that is required to convince the markets that Europe is serious about tackling its long-term debt issues," said Guy Verhofstadt, a former Belgian prime minister and the head of the Liberal and Democrats group in the European Parliament

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