Thursday, December 22, 2011

Today's links

1--European Stocks Pare Gains on ECB Loans, Bloomberg

Excerpt: European stocks fell, erasing earlier gains, as euro-area lenders sought more funds from the European Central Bank than economists had predicted. U.S. index futures declined while Asian shares rose.
SAP AG (SAP) lost 4.6 percent as Oracle Corp. reported sales and profit that missed analysts’ estimates, hurt by slower demand for databases, applications and computer servers. Carrefour SA (CA) slid 4.2 percent as retailers retreated.

The Stoxx Europe 600 Index dropped 0.5 percent to 237.36 at 12:53 p.m. in London. The gauge reversed an earlier rally of as much as 1.4 percent as the ECB provided more three-year loans to euro-area banks than economists had forecast in the central bank’s latest attempt to keep credit flowing to the economy during the sovereign-debt crisis.

The Frankfurt-based ECB awarded 489 billion euros ($640 billion) in 1,134-day loans, more than economists’ median estimate of 293 billion euros in a Bloomberg News survey. The ECB said 523 banks asked for the funds, which it will lend at the average of its benchmark rate over the term of the loans. They start tomorrow.

2--The ECB’s all you can eat cheap money buffet – a primer, FTAlphaville

Excerpt: A sharp decline in demand for yesterday’s one-week tender (EUR169bn vs. prior EUR291.6bn; the lowest take up since Aug 26) and a strong take up for a 1-day bridging facility to tide banks over from the one-week to the 3y facility (EUR141.9bn allotted) have further boosted expectations as regards the success of today’s operation....

Looking over the longer term, it is worth bearing in mind the uncertainty as to how much of today’s tender will be used to buy up peripheral debt. Aside from the considerable pressure European banks are already under to de-risk there is also the fact that much of today’s liquidity facility may well be devoted to meeting an imminent spike in bank debt refinancing (coming in at EUR282bn in the 1st 3 mths of 2012.

3--The BoE on the collateral crunch, FTAlphaville

Excerpt: Amidst the minutes, however, was one other interesting turn of events. The BoE committee expressed some concern over recent developments in unsecured lending markets. Namely the market’s utter vapourisation (our emphasis):

Neither banks’ lending rates nor reports from the Bank’s Agents suggested that the continuing tensions in financial markets had yet led to a further tightening in credit conditions for businesses and households. But, for some months, conditions had been difficult in bank term unsecured funding markets, with funding becoming more expensive and relatively little issuance in public markets. To some extent, banks had been able to compensate for this by issuing term secured debt, although it was likely that the resulting increase in asset encumbrance would impose a limit on this source of funding at some point. The longer higher funding costs and difficulties in accessing markets persisted, the more likely it would be that banks would restrict the availability of credit, or try to pass higher costs through to businesses and households by raising their lending rates.
What’s really interesting is that the Bank of England seems to imply that the trend towards a collateralised lending framework is not sustainable. Specifically, they explain, there is a natural limit to this type of funding due to asset encumbrance.

When institutions run out of repo-able assets the funding environment can change sharply and quickly, especially with respect to the general availability of credit in the market place.

Rates for normal households and businesses would simply soar.

No wonder the Bank of England has been busy making contingency plans.

4--LTRO use at €489.19bn, FT Alphaville

Excerpt: Here they are, the results of the ECB’s three-year long term refinancing operation (LTRO) allotment, via Reuters:


€489.19bn is definitely at the top end of analyst expectations, and proves that appetite for funding as well as carry-trades (we presume) is extremely high.

That, or there’s simply a lot of low-quality collateral out there which banks feel more comfortable transforming into liquidity via ECB funding operations.

5--Housing Analysis: Bull and Bear, calculated risk

Excerpt: First from Daniel Alpert at EconoMonitor: Today’s U.S. New Home Starts and Permits Numbers: “Who Knows What Evil Lurks? The Shadow Knows”
Visible existing home inventory is not down for the right reasons (which would include a tightening in the inventory of unoccupied vacant units). It is down because of the enormous backlog in the aggregate “shadow inventory” of homes that are either in foreclosure, or are heading in that direction. The shadow inventory has grown because of a systemic and/or conscious slowing of the foreclosure and liquidation process in a market challenged by loan documentation problems and the general reticence of lenders to push collateral into the for-sale market at prices that result in sizable losses.

To help readers fully comprehend the dimensions of the shadow issue, I offer the following chart taken from the testimony of Laurie Goodman of Amherst Securities given to a congressional committee in September. (see chart)

Here is the chart for Laurie Goodman's testimony via Daniel Alpert. This shows some substantial shadow inventory (Goodman only included loans 12+ months delinquent or in foreclosure). However this isn't really "shadow" inventory because homes list for sale - that are 12+ months delinquent or in foreclosure - are not subtracted from the total. I don't think the situation is as grim as this chart suggests.

Alpert also presents a table from Goodman showing an estimate of supply and demand over the next several years (see Alpert's post). I think this is overly pessimistic. Most distressed homes are occupied, and when the occupants leave, most of them become renters. That doesn't increase the overall housing supply (many of the distressed home are bought by investor/landlords and rented - frequently to people who lost their homes in foreclosure).

6--3 Million Could Lose Jobless Pay in Impasse, NY Times

Excerpt: More than three million people stand to lose unemployment insurance benefits in the near future because of an impasse in Congress over how to extend the aid and how to offset the cost.

Jobless benefits have been overshadowed by debate on a payroll tax cut, but have become a huge sticking point in negotiations on a bill that deals with both issues.

Republicans would continue aid for some of the unemployed, but would sharply reduce the maximum duration of benefits and impose strict new requirements on people seeking or receiving aid.

Democrats said these changes made no sense at a time when 45 percent of jobless workers had been unemployed for more than half a year and the average duration of unemployment — 41 weeks — was higher than at any time in 60 years....

House Republicans said they wanted a full-year extension, with additional requirements to prevent abuse of the program. They would require most recipients of jobless benefits to search for work and to pursue G.E.D. certificates if they had not completed high school.

Representative Jim McDermott, Democrat of Washington, said the Republican proposals amounted to “the most drastic attack on the unemployment system” in 75 years.

House Republicans would also allow states to require drug testing as a condition of getting benefits. Democrats said such tests were an insult to the unemployed, because they implied that many were lazy drug abusers.

7--Santa brings lots of $$$, The Big Picture

Excerpt: Santa Clause came to town a few days early in the form of the ECB lending a greater than expected 489b euros to 523 European banks for three years. About 200b of this will be new money as the balance is being rolled from maturing loans. This is the ECB’s version of QE as new money is being injected into the balance sheet’s of banks and we’ll soon see what banks do with the money.

Again, this is a liquidity event and does nothing to change the debt and long term growth challenges that many countries in Europe have faced for a years. Santa will come back in Feb for an encore performance with another 3 yr offering. Maybe a sell on the news, the euro basis swap is wider by 4 bps after falling 24 bps over the previous 3 days. Spanish and Italian bonds are also lower after the sharp gains, mostly on the short end, over the past week.

In Asia, most markets rallied.....

8--The New International Economic Disorder, Project Syndicate

Excerpt: A new economic order is taking shape before our eyes, and it is one that includes accelerated convergence between the old Western powers and the emerging world’s major new players. But the forces driving this convergence have little to do with what generations of economists envisaged when they pointed out the inadequacy of the old order; and these forces’ implications may be equally unsettling....

Once they succeeded in overcoming a painful crisis-management phase, many of these countries accumulated previously unthinkable levels of international reserves as precautionary cushions. They extinguished billions in external indebtedness by generating and sustaining large current-account surpluses. And they increased the scale and scope of domestic financial intermediation in order to reduce their vulnerability to external storms.

These developments stood in stark contrast to what was happening in the West. There, unprecedented leverage, massive debt creation, and a seemingly infinite sense of credit entitlement prevailed. Financial excesses become the rule rather than the exception, facilitated by financial innovation and the erosion of lending standards and prudential regulation.

Suddenly, the world turned upside down: “rich” countries were running large deficits and, in some cases, tipping from net creditor status to net indebtedness, while “poor” countries were running surpluses and accumulating large stocks of external assets, including financial claims on Western economies.

Little did these countries know that their divergent paths would end up fueling large global imbalances, and eventually trigger a financial crisis that has shaken the prevailing international economic order to its foundations....

Rather than exhibiting enlightened leadership, Western policymakers have consistently lagged realities on the ground, with a bewildering mixture of denial, misdiagnosis, and bickering undermining their responses. Rather than proceeding in an orderly manner, today's global changes are being driven by the disorderly forces of de-leveraging emanating from a Europe in deep financial crisis and an America seemingly unable to restore sustained high rates of GDP growth and job creation.

Multilateral institutions, particularly the IMF, have responded by pumping an unfathomable amount of financing into Europe. But, instead of reversing the disorderly deleveraging and encouraging new private investments, this official financing has merely shifted liabilities from the private sector to the public sector.

9--Instant View: ECB allots 489 billion euros at 3-year tender, Reuters

Excerpt: Banks lunged at the European Central Bank's first ever offer of three-year loans on Wednesday, taking nearly 490 billion euros, well above the 310 billion forecast in a Reuters poll....

The big figure was welcomed initially but huge demand for ECB loans is not exactly a massive positive and really just reflects the huge squeeze European banks are feeling at present.

"Certainly this will help ease liquidity, as will last month's coordinated central bank action on dollar swaps, but it also highlights the gravity of the situation in the eurozone - so don't expect sustained euro gains.

"The market will once again be left to conclude that EU officials are addressing the symptoms but not the cause of the current debt crisis."


"It's helpful. It's more than a sticking plaster, although it's by no means the solution longer term. The solution to the sovereign is essential to deal with the solvency and liquidity issues around banks in the longer term....

"Today's allotment of three-year loans is equivalent to almost one and a half times Spain and Italy's combined sovereign bond issuance in 2012. However, we doubt whether the money will be used extensively to fund purchases of peripheral debt, given concerns about mark-to-market risks and possible reputation risks."


"The take-up was a massive 489 billion euros, much higher than the expected 300 billion euros. Liquidity on the banking system has now increased considerably.

"In a nutshell, the three-year auction can been considered as successful in terms of adding liquidity to the banking sector. We believe most of the take up has come from EMU periphery's banks which have more problems with long-term fundings. However, given the large number of banks participating at today's auctions, we cannot rule out some core countries' banks have started to put on some carry positions."


"The result was well above the consensus expectation of around EUR 300 billion.

"It could also allow banks to engage in a carry trade, in which they would use the ECB funds to purchase higher yielding government bonds.

"This seems to partly explain the unexpectedly strong demand for recent Spanish bond auctions, as well as the sharp decline in Italian and Spanish bond yields over the past few days. Looking forward, the next three-year LTRO will be allotted by the ECB on 29 February 2012. Since banks have high refinancing needs in the first quarter of next year, demand for this LTRO might be strong as well."


"This is good. It's a positive number, at the top end of expectations. You have to regard it as a positive result. This is at least a solid 240 billion euros (net) increase for banks. But it is still short of covering all of the banks' financing for next year. So, it could ease fears of a credit crunch somewhat."

10-- The Phony Payroll Tax Battle, Dean Baker, counterpunch

Excerpt: The economy badly needs stimulus. The collapse of the housing bubble caused us to lose more than $1.2 trillion in annual demand. Residential construction collapsed when the bubble burst, falling by more than 4 percentage points of GDP, which translates into approximately $600 billion a year in lost annual demand.

The collapse of the bubble also led to the destruction of close to $8 trillion of bubble-generated housing equity. The wealth effect of this equity on consumption generated close to $500 billion in annual consumption demand. This also was lost when the bubble burst.

In addition, the collapse of a bubble in non-residential real estate cost another $100 billion or so in annual demand. Finally, the lost tax revenue from the collapse of the housing market and the resulting fallout have forced cuts of close to $150 billion a year on state and local governments.

In total, the economy has lost close to $1.3 trillion in annual demand as a result of the collapse of the housing bubble. This explains the economy’s weak growth and high unemployment. There is no simple way to replace this demand....

Finally, there is zero reason that this tax cut should be tied to Social Security in any way. As it stands, the trust fund is held harmless because the lost tax revenue is reimbursed from general revenue. But why even raise this as a potential issue for Social Security, why not just give everyone a tax cut equal to 2 percent of their wages up to $110,000? The only reason to tie the tax cut to Social Security is if the intention is to raise issues about the Social Security tax at some future point.

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