Thursday, December 8, 2011

Today's links

1--Goldman On Deleveraging And The Sovereign-Financial Feedback Loop, zero hedge

Excerpt: Goldman Sachs: The Feedback Loop Between Sovereigns And Financials

The spread differential between financials and non-financials is at all-time highs. Even so, we do not expect this relative spread premium to compress until the risk from the European sovereign crisis is safely behind us. Financials remain disproportionately exposed to the interaction of downside macro risk and the enormous pressure under which European sovereigns and banks are laboring....

It now seems clear that European policy efforts will not try to stabilize sovereign credit spreads at pre-crisis sovereign spread levels. In hindsight, the credit premium built into sovereign spreads were unrealistic....

And demands for austerity are more likely to grow as it becomes evident that the repricing of sovereign risk has a large permanent component, reflecting a paradigm shift in the pricing of sovereign risk as opposed to a temporary repricing of market stress. Sovereign spreads will likely emerge from the crisis both more elevated and more dispersed.

For banks, this means credit spreads are almost surely going to embed a persistent premium for sovereign risk....We also expect deleveraging pressures on banks to remain high. The magnitude of announced deleveraging plans of European banks already totals hundreds of billions. We expect the deleveraging trend to continue in 2012. This raises the risk of a potential credit crunch that would further weaken growth,...the number of distressed banks that are now on the ECB “life-support” has increased as the sovereign crisis intensifies. The health of these banks is likely to deteriorate over time, making the final cost more expensive the longer the ECB has to provide this support.

2--Consumer Credit Rises By $7.7 Billion In October, Although Revolving Is Just 4% Of Total And Government Lends Out 90%, zero hedge

Excerpt: At first blush today's consumer credit report was simply gorgeous: an increase of $7.7 billion total on expectations of $7 billion. Just what the Keynesian voodoo doctor ordered right? Wrong. The problem is that of the $7.7 billion, just $0.3 billion was the "good" kind of credit - revolving. Everything else was either auto or student loan, or non-revolving credit. And what is worse, when looking at the breakdown (on a non seasonally adjusted basis), the monthly increase which was $4.2 billion was primarily a function of the now traditional ceaseless government lending, which rose by $3.8 billion, or 90% of the total. As can be seen on chart 3, since the start of the depression, government lending has grown by 317%, while private credit has declined by 16%. Central planning: from the government, by the government, for the government. (chart)

3--Food Stamp Use on the Rise, WSJ

Excerpt: Food-stamp use jumped in the U.S. in September as 11 states tapped into the program for disaster assistance.

Food stamp rolls have risen 7.8% in the past year, the Department of Agriculture reported, though the pace of growth has slowed from the depths of the recession

The number of recipients in the food stamp program, formally known as the Supplemental Nutrition Assistance Program (SNAP), rose to 46.3 million, or 15% of the population, in part due to disaster assistance tied to the destruction and flooding caused by Hurricane Irene. Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Vermont and Virginia all received aid for disaster assistance. Use in New Jersey alone soared by nearly 33% in the wake of the storm.

4--MONEY MARKETS-Dollar demand reflects stress but take-up seen positive, Reuters

Excerpt: A larger-than-expected take-up of dollars at a European Central Bank tender on Wednesday reflected euro zone banks' funding stresses but the fact banks were using the facility was seen as a positive and could smooth the market into year-end.

Banks took more than $50 billion at a three-month operation , the first since the world's major central banks cut the cost of using dollar swap lines with the Federal Reserve last week to help institutions struggling with the fallout from the euro zone debt crisis.

That was well above the $10 billion median forecast in a Reuters poll of money market traders. Banks also took $1.6 billion in one-week funds....

Some 1.7 trillion euros of bank funding is due to roll over in the next three years, Morgan Stanley estimates. That includes 650-700 billion euros next year, most of it in the first half, the European Banking Association has said.

5--Warnings on euro zone get more serious, Business Standard

Excerpt: Rating agency Moody’s issued a report on Monday, warning that the probability of multiple countries in the euro area defaulting was “no longer negligible”. And, an increase in the likelihood of one or more members “leaving the euro area”....

It is becoming clear that investors are not only shunning government debt but also shying clear of the region’s banks, themselves large holders of sovereign debt, engendering a credit crunch that could be even more dangerous for Europe’s economy.

Billions of euros are flooding out of the continent’s banking system through the bond and money markets. According to data compiled for the Financial Times newspaper by Dealogic, European banks have sold $413 billion worth of bonds this year, equivalent to just two-thirds of the $654 bn due to be returned to investors in 2011 as the debts mature. The resulting $241-bn funding gap is the first time European lenders have collectively been unable to replace their maturing debt with new bonds for at least the past five years."

6--UPDATE 1-ECB funding to Italy banks up sharply in Nov, Reuters

Excerpt: Funding from the European Central Bank to Italian banks rose sharply to 153.2 billion euros last month, from 111.3 billion euros at the end of October, data from the Bank of Italy showed on Wednesday.

Bank of Italy data showed private sector deposits with domestic banks shrank 0.6 percent annually in October, resuming a falling trend after a broadly flat reading in the previous two months.

Before that, deposits had declined every month between November 2010 and July 2011.

Loans to the private sector rose 4.2 percent, largely in line with September.

The data showed bonds issued by banks continued to grow in October at a stable 5.5 percent annual rate.

With wholesale funding markets effectively shut, Italian lenders have been able to rely on their retail clients to continue placing bonds, but rising yields on Italian government bonds have boosted funding costs.

7--ECB Confirms Shadow Banking System In Europe In Tatters, zero hedge

Excerpt: The European Central Bank may announce a range of measures tomorrow to stimulate bank lending, said three euro-area officials with knowledge of policy makers’ deliberations.

Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy, said the officials, who spoke on condition of anonymity because the discussions are private. Two said an interest rate cut is likely, with only the size of the reduction to be determined for the monthly decision tomorrow.

And here is what the market wanted NOT to hear:

The ECB is focusing on getting banks lending again rather than increasing its government bond purchases to fight Europe’s debt crisis...Policy makers may seek to broaden the pool of eligible collateral for ECB loans by loosening rules governing the use of asset-backed securities, the officials said. They may also increase the amount of uncovered bank bonds that can constitute a lender’s collateral portfolio from the current 10 percent limit, they said.

The ECB is already lending banks as much money as they want against eligible collateral for periods of up to a year. It is likely to add two-year loans to its arsenal, two officials said.

8--FT: "We cannot afford another half-baked solution", calculated risk

Excerpt: A few excerpts from a Financial Times editorial: We cannot afford another half-baked solution (ht Pat)

... there are but hours to save the euro ... The world cannot afford another half-baked solution. ... What [Merkel and Sarkozy] laid out was little more than a stability plan on steroids, based on a misdiagnosis of the crisis that divides the eurozone into nations that are fiscally virtuous and those deemed to be profligate “sinners”.

A politically sustainable plan needs ... the hope of rebalancing within the eurozone, not just an endless vista of austerity.

In the short run, some fiscal agreements combined with ECB intervention will help. And it looks like the ECB will take more action tomorrow, from Bloomberg: ECB to Consider More Measures to Stimulate Bank Lending

The European Central Bank may announce a range of measures tomorrow to stimulate bank lending ...

Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy ... an interest rate cut is likely ...

But that isn't enough. Some time soon, private investors will have to be enticed to buy sovereign bonds - and somehow the eurozone has to be rebalanced. "An endless vista of austerity" will not survive the polling booths for long.

9-- If one EU bail-out fund flops, create two, Telegraph

Excerpt: If you think that running together Europe’s old rescue fund (EFSF) with the new one (ESM) to double firepower to €880bn is a reassuring move – as some analysts apparently do – you should have your head examined.

The idea of combining the two is an admission that attempts to leverage the fund to €1 trillion plus have essentially failed. The clever ruse by German finance minister Wolfgang Schauble to circumvent the €211bn limit on guarantees imposed by the Bundestag has run into investor scorn.

That Bundestag ceiling remains – and those of us who watched the debate know how emotional it was – so how on earth can Germany’s share be bumped up in this fashion to over €400bn? No wonder a "senior German official" has rubbished the plan today in irate language.

A blizzard of silly proposals has hit the wires this week as a legion of ministers, diplomats, commissars, high secretaries, and fellow travellers all lobby and conspire to create "momentum" behind pet themes. In the meantime, nothing workable is actually on the table before the "summit-to-save-the-euro" on Friday.

Be careful. Do not be distracted by Byzantine absurdities. And don’t listen to anybody who uses the term fiscal union. There is no such proposal. All we have so far is a Stability Pact with extra lipstick

No comments:

Post a Comment