1--Greece warns on euro exit if bailout not signed, BBC
Excerpt: Greece may have to leave the eurozone if it fails to secure its latest bailout from the EU, IMF and banks, a government spokesperson has warned.
"The bailout agreement needs to be signed otherwise we will be out of the markets, out of the euro," spokesman Pantelis Kapsis told Skai TV.
The government is struggling with public opposition to new austerity measures, demanded by lenders.
Analysts suggest the warning is designed to win support for the moves.
The Greek Prime Minister, former central banker Lucas Papdemos, is due to address the nation in the next few days to try to win support for new spending cuts and structural reforms.
The latest 130bn-euro bailout ($169.5bn, £108.7bn) was agreed in principle by EU leaders in October, conditional on Greece adopting further measures to cut its deficit and restructure its economy....
New measures are expected to include a further reduction in pensions, public sector job cuts and cuts to social programmes and healthcare costs along with labour market changes and privatisations.
2--MONEY MARKETS-Excess cash keeps Euribor rates on downward path, Reuters
Excerpt: Key euro zone bank-to-bank lending rates continued their downward march on Friday, pushed lower by a funding glut after banks took almost half a trillion euros at the European Central Bank's first-ever
injection of three-year liquidity.
Euro zone banks received 489 billion euros last week in the
first of two opportunities to access the longer-term money --
operations the ECB hopes will encourage banks to unclog lending
to each other and then onto customers in spite of the region's
But despite being awash with liquidity, banks still lack
trust in each other and prefer to deposit their money at the
ECB's overnight facility rather than lend to each other.
Latest figures show banks deposited 446 billion euros at the
central bank, just shy of the 452 billion record reached earlier
this week. Emergency overnight borrowing spiked to 17.307
billion euros, the highest since June 2009.
3--Euro zone manufacturing downturn extends to 5th month: PMI, Reuters
Excerpt: Euro zone manufacturing activity declined for a fifth consecutive month in December, although at a slightly slower rate than November's 28-month record low, a survey showed on Monday, suggesting the decline would continue in the early months of 2012.
Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) rose slightly in December to 46.9 from November's 46.4, but marked its fifth month below the 50 mark that divides growth from contraction. It was unchanged from an earlier preliminary reading.
Survey compiler Markit said levels of production and new orders fell in all of the euro zone countries covered by the survey for the second month running.
"Despite the rate of decline easing slightly in December, production appears to have been collapsing across the single currency area at a quarterly rate of approximately 1.5 percent in the final quarter of 2011," said Chris Williamson, chief economist at Markit.
"The survey also points to a strong likelihood of further declines in the first quarter of the new year, with producers cutting back headcounts, inventories and purchasing."
The euro zone economy is already stuck in a recession that will last until the second quarter of 2012, Reuters polls of economists suggested last month. They forecast the economy will probably see no growth this year.
Business and consumer confidence in the currency bloc has been eroded by a weakening global economy and by euro zone policymakers' failure to make progress on resolving the euro zone debt crisis. Austerity measures imposed to try and cut high debt levels in the currency bloc risk further undermining euro zone economies this year, analysts say.
The new orders component of the December PMI survey also picked up slightly, to 43.5 in December from 42.4 the previous month, but it remained weak and Markit warned of a persistent and worrying divergence in order levels and output.
"Worryingly, new orders are falling at a far faster rate than manufacturers have been cutting output, meaning firms have been reliant on orders placed earlier in the year to sustain current production levels," said Williamson.
"This is particularly evident in Germany, and suggests that operating capacity will be slashed in coming months unless demand revives."
The manufacturing jobs market was virtually stagnant in December compared with November. The euro zone unemployment rate edged up to 10.3 percent in October, a figure that encompasses very high levels of joblessness in peripheral countries such as Spain and Greece...
4--Austerity Reigns Over Euro Zone as Crisis Deepens, NY Times
Excerpt: Saying that Europe was facing its “harshest test in decades,” Chancellor Angela Merkel of Germany warned on New Year’s Eve that “next year will no doubt be more difficult than 2011” — a marked change in tone from a year ago, when she praised Germans for “mastering the crisis as no other nation.”
Her blunt message was echoed in Italy, France and Greece, the epicenter of the debt crisis, where Prime Minister Lucas Papademos asked for resolve in seeing reforms through, “so that the sacrifices we have made up to now won’t be in vain.”
While the economic picture in the United States has brightened recently with more upbeat employment figures, Europe remains mired in a slump. Most economists are forecasting a recession for 2012, which will heighten the pressure governments and financial institutions across the Continent are seeing....
Despite criticism from many economists, though, most European governments are sticking to austerity plans, rejecting the Keynesian approach of economic stimulus favored by Washington after the financial crisis in 2008, in a bid to show investors they are serious about fiscal discipline.
This cycle was evident on Friday, when Spain surprised observers by announcing a larger-than-expected budget gap for 2011 even as the new conservative government there laid out plans to increase property and income taxes in 2012.
Indeed, even in the country where the crisis began, Greece, the cycle of spending cuts, tax increases and contraction has not resulted in a course correction, and the same path now lies in store for much larger economies like those of Italy and Spain.
“Every government in Europe with the exception of Germany is bending over backwards to prove to the market that they won’t hesitate to do what it takes,” said Charles Wyplosz, a professor of economics at the Graduate Institute of Geneva. “We’re going straight into a wall with this kind of policy. It’s sheer madness.”
Rather than the austerity measures now being imposed, Mr. Wyplosz said he would like to see governments halt the recent tax increases and spending reductions, and instead cut consumption taxes in a bid to encourage consumer spending. More belt-tightening, he said, increases the likelihood that Europe will see a “lost decade” of economic torpor like Japan faced in the 1990s....
The Continent’s economic outlook will take center stage on Jan. 9, when Mrs. Merkel and President Nicolas Sarkozy of France will discuss a new fiscal treaty intended to impose stringent budget requirements on European Union nations. Then on Jan. 30, European Union leaders will gather in Brussels to discuss ways to spur growth....
The first test for the Continent will come this Thursday, when France is expected to raise as much as 8 billion euros. On Jan. 12, Spain plans to auction 3 billion euros worth of euro debt, followed by Italy the next day with 9 billion euros. Along with governments tapping the market, European banks are also expected to keep borrowing heavily as loans come due.
In the first quarter of 2012, about 215 billion euros worth of euro zone bank debt must be rolled over, according to Julian Callow, chief European economist at Barclays.
Over all, Mr. Callow said, “the big picture is one of very restricted visibility. The choice is whether you get a mild or more severe recession.”
Despite a move by the European Central Bank on Dec. 21 to provide 489 billion euros in cheap, long-term credit to European banks, the central bank remains reluctant to take more aggressive steps to become the lender of the last resort as the Federal Reserve did in the wake of the financial crisis in the United States in 2008.
5--Ambrose Evans-Pritchard: 2012 could be the year Germany lets the euro die, Telegraph
Excerpt: So we enter Year IV of the Long Slump, the cruellest yet though not the most acute.
There will be no Chinese credit explosion this time, no real help from post-bubble India or over-stretched Brazil.
It will be a global downturn on all fronts, aborting what remains of recovery even before industrial output in the OECD bloc has regained its pre-Lehman peak.
The second wave will hit with youth unemployment already at 45pc in Greece and 49pc in Spain; and with the US labour participation rate already at depression levels of 64pc.
We will hear more about Italy's Red Brigades, Greece's Sect of Revolutionaries, and America's militia groups, and how democracies respond. Proto-fascism in Hungary is our warning.
China's surgical soft-landing will slip control, like Fed tightening in 1929 and 2007, or Japan's squeeze in 1990. Once construction has run amok, bears will have their way....
The second leg of our Kondratieff Winter comes at an awful moment for Euroland, just as the North-South split turns deadly.
The European Central Bank has guaranteed trouble by letting M3 money contract. Fiscal tightening into the downward slide will make matters worse. A credit crunch as banks shrink loan books by €1 trillion to meet capital ratios will do the rest. All policy levers are set on deep recession, and deep recession is what Europe will get....
Germany will not be able to fudge EMU any longer. It must either immolate itself, accepting a debt union and internal inflation to save a currency it never wanted and doesn't love; or opt instead to uphold fiscal sovereignty and the essence of its own democracy, and let the Project die.
The shrewd, equivocating, ice-cold Chancellor will quietly oust arch-europhile Wolfgang Schauble and let the Project die, always pretending otherwise.
6--State and local governments were able to put off hard choices, Washington's blog
Excerpt: State and local governments were able to put off hard choices for another year, as Washington DC handed out hundreds of billions in pork. California will have a $19 billion budget deficit; Illinois will have a $17 billion budget deficit; New Jersey will have a $10.5 billion budget deficit; New York will have a $9 billion budget deficit. A US Congress filled with Tea Party newcomers will refuse to bailout these spendthrift states. Substantial government employee layoffs are a lock.
State and local governments have laid off 535,000 workers since 2008. With borrowed Federal government stimulus handouts evaporating into thin air during 2011 – 2012, this total will reach 800,000 by the end of the next year. The U.S. Postal Service will do their part by cutting 28,000 jobs in 2012, even though they need to cut 100,000. States and municipalities based their budgets on the revenues produced by the fake debt driven housing boom from 2003 – 2007. The tax revenue dried up, but the union jobs added are a gift that keeps on costing taxpayers billions. States and localities can’t print, so layoffs will continue. ...
There are approximately 48.5 million homes with mortgages in the United States and 10.7 million of them have negative equity. Another 2.4 million have less than 5% equity. Considering it costs more than 5% in closing costs to sell a house that means 27% of home occupiers with a mortgage are trapped like rats in a cage. With 2.2 million foreclosures still in the pipeline and a looming recession, home prices will continue to fall another 10% to 20% over the next two years and one third of all home occupiers will be underwater. That sounds like a recipe for 10% to 15% stock market gains.
Quantitative easing has benefited only Wall Street bankers and the 1% wealthiest Americans. The $1.4 trillion of toxic mortgage backed securities on The Fed’s balance sheet are worth less than $700 billion. How will they unload this toxic waste? The Treasuries they have bought drop in value as interest rates rise. Quantitative easing’s Catch 22 is that it can never be unwound without destroying the Fed and the US economy.
Bennie and his Inkjets did a bang up job in 2011. He was able to expand his balance sheet from $2.47 trillion to $2.95 trillion in twelve short months. According to Ben and his Federal Reserve friends, increasing your balance sheet by $480 billion isn’t really printing money out of thin air and handing it to their Wall Street owners for free, so they can prop up the stock market and enrich their executives. Ben is now leveraged 57 to 1. He should move to Europe, where this level of leverage is commonplace. In comparison, Lehman Brothers and Bear Stearns were leveraged 40 to 1 when they went belly up
7--As Good as It Gets?, NY Times
Excerpt: The economy was weak in 2011, but it ended better than it started, with growth up from its lows and unemployment down from its highs. The question now is whether that progress will continue into 2012. We wish we could say yes, but unless policy makers are incredibly lucky or remarkably adept — certainly not the description that comes to mind when thinking of, say, Congress — the answer is no.
When data is released later this month, economists expect growth of around 3 percent for the last quarter of 2011, compared with 1.2 percent on average in the first three quarters. But there is little in the latest growth spurt to signal a self-reinforcing recovery going forward....
The way to revive sustainable growth is with more government aid to help create jobs, support demand and prevent foreclosures. As things stand now, however, Washington will provide less help, not more, in 2012. Republican lawmakers refuse to acknowledge that government cutbacks at a time of economic weakness will only make the economy weaker. And too many Democrats, who should know better, have for too long been reluctant to challenge them.
The drag from premature cuts is significant. Waning stimulus spending subtracted an estimated half a percentage point from growth in 2011; this year, cutbacks will very likely cost the economy a full percentage point of growth. That means the best-case economic projection is for a new year of anemic expansion and high joblessness — muddling along with growth of about 2 percent, which is too weak to push unemployment much below its current 8.6 percent.
8--Fed Views, FRBSF
Excerpt: The European bank crisis has increased interbank lending stress, as indicated by the spread between three-month LIBOR and the three-month overnight index swap rate. However, the spread is still much lower than it was at the height of the 2008–09 crisis. The fear is that a disorderly outcome to the European debt crisis could push this spread higher. Such acute financial distress could derail the ongoing U.S. recovery....
•Incoming data have generally been better than expected over the past month, suggesting that the U.S. economy continues to grow at a moderate rate. Factors that held growth back in the first part of the year, such as the supply chain disruptions that followed the Japanese earthquake and tsunami in March, have largely dissipated. However, the rapidly evolving European debt crisis represents a significant downside risk to the U.S. growth outlook.
•The labor market is slowly improving. Nonfarm payroll employment expanded moderately in November, posting a gain of 120,000 jobs, according to the U.S. Bureau of Labor Statistics (BLS). In addition, the number of jobs added in September was revised up to 210,000 from 158,000, and in October to 100,000 from 80,000. In November, the private sector added 140,000 jobs, with employment rising in a number of service-providing industries. In contrast, public-sector employment continued to contract.
•The BLS survey of households also showed an improving labor market. The unemployment rate receded in November, falling 0.4 percentage points to 8.6%. The decline reflected both increased hiring and an exit of workers from the labor force. The civilian labor force participation rate fell 0.2 percentage point to 64%.
•Consumer spending has been relatively strong in recent months. Real personal consumption expenditures grew 2% in October from a year earlier, following a 2.2% increase in September. Sales of autos and light trucks continued to improve in October and November, averaging an annualized 13.4 million units per month. October retail sales were solid as well, up 0.5% from September.
•Consumer confidence rebounded from its recent trough at the end of the summer, which should help support future consumption growth. The Conference Board Consumer Confidence Index rose to 56 in November from 40 in October. The University of Michigan index of consumer sentiment increased in both November and December.
However, downside risks to consumption growth are evident. Initial estimates of wages and salaries were revised down for the second and third quarters of 2011. Lower household income could restrain consumer spending in the near future.
9--EURO GOVT-Longer Italian yields rise before auction, Reuters
Excerpt:... with 10-year secondary market yields still locked above 7 percent, funding costs remain close to levels seen as unsustainable with Italy facing around 100 billion euros in bond redemptions and coupon payments between January and April.
"A concern is that the rising yield trend for 10-year BTPs remains in place," said Credit Agricole rate strategist Peter Chatwell....
Longer-dated Italian government bond yields edged higher on Thursday with markets in a cautious mood before an auction of the country's bonds.
Italy, at the sharp end of the euro zone debt crisis, will sell up to 8.5 billion euros of bonds, which settle in the new year.
The auction -- the first long-term debt sale since the European Central Bank's near half trillion euro three-year funding operation last week -- includes new tranches of three- and 10-year benchmarks.
Yields are expected to fall from recent record highs with the ECB cash easing market pressure at least for now , despite few signs it is being used to buy higher-yielding peripheral debt.
"What (demand) there is will be entirely dealers, perhaps a few domestic investors," a trader said.
"But in terms of euro or global investors, we're not seeing much evidence of anyone showing much interest."
10--US child poverty rate soars to 20 percent, WSWS
Excerpt: One in five US children lives in poverty, according to a new report. As families suffer under the weight of joblessness, low wages and the housing crisis, it is the youngest members of American society who are most affected. The latest “Kids Count” report from the Annie E. Casey Foundation shows that child poverty grew in 38 of 50 US states over the past decade.
Laura Speer of the Casey Foundation, a non-profit child advocacy group, commented on the report’s publication: “The recent recession has wiped out many of the economic gains for children that occurred in the late 1990s.” She added, “Nearly 8 million children lived with at least one parent who was actively seeking employment but was unemployed in 2010,” double the number in 2007.
As child poverty is widely regarded as a barometer of a society’s well-being, the report’s findings are an indictment of conditions in the US in which the chasm between the super-rich and the vast majority of the population continues to widen. With proposed budget cuts at both the state and federal level, the conditions confronting America’s children and youth will indubitably worsen in the coming period.
In 2009, 20 percent of US children—about 14.7 million—were poor, up from 17 percent in 2000. This means that about 2.5 million more children were living in poverty in 2009 than in 2000. This contrasts to the period from 1994 to 2000, when the child poverty rate fell by nearly 30 percent...
The highest rates of child poverty were seen among African-Americans (36 percent), American Indian and Alaskan Natives (35 percent), and Hispanics (31 percent). Asian Americans were the only group to see a drop in child poverty over the past decade.
The official 2009 poverty line was $21,756 for a family of two adults and two children, an abysmally low level of income....
In 2009, nearly half of all children under the age of three—some 6 million infants and toddlers—were living in low-income families. Poverty poses the greatest risk to children in this formative age group. According to the “Kids Count,” report, “Children’s brains are developing rapidly, and the quality of their early relationships and environments can have lasting effects on their later development.”...
Children of low-income and poor families see their most basic needs unmet. Parents who are either unemployed or working for poverty wages struggle to provide food, decent housing, medical care and childcare. Developmental tools such as books, toys and enriching activities are often in short supply. The strain of economic uncertainty also leads to increased levels of stress, which can be manifested in depression and anxiety for parents and children alike, as well as increased risk of substance abuse and domestic violence.
Poor children are also more likely to live in families with no health insurance coverage...
The implementation of the Obama-sponsored health care overhaul will force individuals and families to purchase insurance or pay a fine, but will not control what the insurance industry can charge for premiums.
And as millions more families seek assistance through the SNAP food stamp program, Medicaid and the Temporary Assistance for Needy Families, they will see services and availability slashed as states wrestle with growing budget deficits and the Obama administration and Congress push ahead with trillion-dollar deficit reduction plans.
11--Lehman' repo 105 explained, WSJ
Excerpt: 5 minute video
12--Top 5 Economic Charts of 2011, WSJ
Excerpt: ("Must see" charts)
13--Treasurys End Year Below 2% for First Time Since '77, WSJ
Excerpt: Treasury bonds ended this year on a high note Friday, wrapping up the best year since the 2008 global financial crisis and beating U.S. stocks and corporate bonds.
The benchmark 10-year yield, a key rate the U.S. government pays to borrow from capital markets, ended the year below 2% for the first time since at least 1977. The yield, which moves inversely to the bond's price, tumbled by about 1.45 percentage points for the year, the biggest calendar-year decline since 2008 when the collapses of Lehman Brothers and Bear Stearns generated some of the biggest flight-to-safety demand on Treasury bonds on record.
The Treasury market became a go-to safe harbor this year on a global flight away from the euro zone's sovereign-debt crisis. The Federal Reserve's strong buying in long-dated bonds to stimulate the economy added to the market's strength, pushing yields to historic lows across the board....
Treasury bonds have handed investors a return of 9.66% through Thursday on the back of 5.87% gain in 2010, according to data from Barclays. The bond market was headed for the biggest calendar-year return since the 13.7% recorded in 2008...
The 10-year note's price was 5/32 higher to yield 1.876% as of 2 p.m. Eastern time in New York, down sharply from 3.3% at the end of last year.
The 30-year bond was 7/32 higher to yield 2.896%. The two-year note was 1/32 higher to yield 0.243%. Bond prices move inversely to their prices.
14--Insane Levels of Leverage by the Too Big to Fail Banks – Not Deadbeat Borrowers – Caused the Financial Crisis, Washington's blog
Excerpt: The Cause of the Financial Crisis: Fraudulent Creation of 3,000 Times Leverage On House Prices by the Big Banks
We’ve repeatedly noted that fraud by the big banks – more than anything done by the little guy – caused the financial crisis.
And we’ve repeatedly noted that excessive leverage helped cause the Great Depression and the current crisis.
Reader McFid – who has been a breach of fiduciary duty expert since 2003 – sent me the following article (edited slightly) which provides a new angle on both themes.
This article disabuses the notion that “deadbeat borrowers” caused the financial crisis. And offers an answer to the question that still lurks in the mind of every American; whether black, white, native American, asian or Hispanic; whether educated or not; whether English, Spanish, or Mandarin speaking.
Taking a big step back, and looking at it like a business process: “How could so many Americans ALL have made the same ill-advised mortgage borrowing decisions?” The answer lies in what did they ALL have in common…
It was all about leverageWhat is leverage?
Leverage is a way to control more of something when you can’t pay for it in full. We do it all the time; when we buy a car — except few of us actually buy the car, we finance it or lease it. We also do it when we buy a house — except almost no one pays cash for a house, we finance the purchase with a loan; it’s secured by a mortgage on the property.
100 times leverage:
By the same calculation ZERO down mortgages were suffice it to say, 100 times leverage, it’s actually more but that’s a discussion for later. Repeat after me, no money down mortgages equal 100 times leverage.
Who controlled and approved EVERY leverage decision?
Leverage Approval #1 by:
TBTF Banks (ultimately) approved every one of these loans and bundled thousands of others like them initially into mortgage backed securities (MBS).
Leverage Approval #2 by: [the key, little known fact]
In the past, TBTF Banks used to sell them off (remember that word) to investors like mutual funds, insurance companies and pension plans. In the 2000′s TBTF banks issued almost $17 Trillion of MBS, but did not sell all of them OFF to 3rd parties. They held massive amounts of them to turbo-juice their bonus checks in a 2nd set of books (legally) in OFF balance sheet, special purpose entities. As a refresher Enron did the same type of thing. In the decades, make that for over 60 years before the 2000′s TBTF banks’ leverage was around 12 times; however when they concealed trillions worth of MBS — their leverage increased to over 30 times. Remember 5 times leverage? It was based on how much the house was worth right? And when TBTF banks add more leverage on top of the borrower’s leverage we don’t just add it — we ______? You guessed it — we multiply it.
3,000 times leverage on house prices:
100 times leverage on the borrowers side times 30 times leverage on the TBTF banks’ side is 3,000 times leverage ON house prices....
Is it just a random coincidence that almost $17 Trillion of Mortgage Securitieswere created by TBTF banks from 2001 to 2008?
15--MONEY MARKETS-Banks to keep parking cash with the ECB next year, Reuters
Excerpt: Euro zone banks will continue to park their cash with the ECB in 2012 rather than lend it as recent cash injections offer little hope of thawing frozen interbank markets.
Most of the euros that banks borrowed from the European Central Bank at a three-year tender last week ended up back with the ECB in the form of deposits, which hit a record high of 452 billion euros this week.
Analysts see deposits at the ECB staying high in 2012.
Banks are waiting for the new year before deciding what to do with the money, but analysts say they are unlikely to lend to other banks or to the real economy as long as the sovereign crisis shows no sign of abating.
They will instead use the money to pay back their debt as bond markets have all but dried up for them. They also have to cover holes left by retail clients moving their savings out of the sector due to fears that sovereigns may take private lenders down with them if the crisis intensifies.
Against that backdrop, the ECB will probably keep flooding the system with liquidity -- it plans another three-year auction in February -- with any funds in excess of the banks' funding needs likely to end up back with the ECB for rainy days.
"I expect (banks) to keep the money in deposits ... because they fear they can run short of liquidity and that they cannot face a bond redemption, (while) deposits are shrinking so they need higher liquidity buffers," ING rate strategist Alessandro Giansanti said....
CROSSING THE RUBICON
Even unlimited ECB liquidity may not prevent a deterioration in conditions for banks in 2012.
Banks need collateral to borrow money from the ECB. Although this requirement is quite loose and may be eased further if needed, there is a fear in the market that smaller banks on the euro zone's periphery may eventually run out of eligible collateral, some analysts say.
With ratings agencies threatening to downgrade government debt next year and the possibility other bank-owned assets will lose value as well, banks' collateral may earn them an ever decreasing amount of funds as ECB loans roll over.
The ECB would then have to find other tools if it wished to offer protection to the banking system.
Many economists argue that quantitative easing - a tool which the ECB has said will not use because it goes against its inflation targeting mandate - would be the most effective way to restore confidence in government debt markets and the euro zone banking sector.
"It's only when they start printing money that they have passed the Rubicon," said Michael Derks, chief strategist at FXPro. "They now need to be very close to that