Friday, January 6, 2012

Weekend links

1--Apartment Vacancy Rate falls to 5.2% in Q4, Lowest since 2001, CalculatedRisk

Excerpt: Reis reported that the apartment vacancy rate (82 markets) fell to 5.2% in Q4 from 5.6% in Q3. The vacancy rate was at 6.6% in Q4 2010 and peaked at 8.0% at the end of 2009.

From the WSJ: Apartment-Vacancy Rate Tumbles to 2001 Level

The nation's apartment-vacancy rate in the fourth quarter fell to its lowest level since late 2001 ... In the fourth quarter, the vacancy rate fell to 5.2% from 6.6% a year earlier and 5.6% at the end of the third quarter, according to Reis.

During the depths of the downturn, landlords had to offer incentives such as flat-screen TVs and months with no rent to attract tenants. But in the fourth quarter of 2011, landlords in 71 of the 82 of the markets that Reis follows were able to raise rents. ... Nationwide, landlords raised asking rents an average of 0.4% in the fourth quarter, to $1,064 a month. That's up from $1,026 in 2009.

But rent increases showed signs of moderating in some markets and, overall, they were less than Reis had expected.

2--ECB Cash Averts ‘Funding Crisis’ for Italy, Spain, Bloomberg

Excerpt: The European Central Bank’s unprecedented cash injection is easing borrowing costs for Italy, Spain and Belgium, compensating for the lack of a solution to the debt crisis and the risk of recession.

Two-year Italian yields (GBTPGR2) have dropped by 50 basis points and Belgian notes of the same maturity have declined by 22 basis points since Dec. 21, when the ECB supplied banks with 489 billion euros ($636 billion) of three-year loans. Short-dated Italian and Spanish debt outperformed AAA rated German and Dutch securities during that period.

“Short-term borrowing costs have come down significantly and that certainly helps to buy time,” said Jens Nordvig, managing director of currency research at Nomura Holdings Inc. in New York. “Six weeks ago, it looked as if there was going to be an imminent funding crisis, but that’s averted by the ECB’s money injection.”

The ECB, led by President Mario Draghi, cut its key interest rate (EURR002W) last month for the second time in a quarter and offered unlimited three-year cash at 1 percent to persuade banks, saddled with deteriorating assets including bonds from so-called peripheral Europe, to keep providing credit to the region. Some of that money is probably being invested in sovereign debt, said Fabrizio Fiorini, who helps oversee $8 billion as chief investment officer at Aletti Gestielle SGR SpA in Milan.


Danger Zone

The central bank has also bought bonds to curb rising yields. Italy’s 10-year borrowing cost topped 7 percent in November, the level that prompted Greece, Portugal and Ireland to seek bailouts, and has been stuck at about 6.9 percent this week....

“If you look at short-dated Italian or Spanish bonds, there is some evidence that the money from the ECB is being used to buy these bonds,” said Mohit Kumar, head of European fixed- income strategy at Deutsche Bank AG in London. “The ECB’s role is crucial in containing the crisis. It may have constraints it needs to think of, but it’s not without policy tools.”

3--Refunding Fears Take Toll on Europe, credit writedowns

Excerpt: One of the key factors behind the poor sentiment toward the euro, which was pressed to new 13 month lows in Europe today, is the challenge posed by the sovereign and bank refunding needed this year, while rating downgrades loom around the corner. Euro zone sovereigns have an estimated 800 bln euros of debt servicing and spending to fund this year, while the banks have a little bit more....

European banks face an estimated 300 bln euros of maturing senior debt and covered bonds in Q1, the highest quarterly amount here in 2012. This does not include the new capital that needs to be raised under the EBA findings

4--Ireland's house prices at lowest levels since 2000, The Guardian

Excerpt: Property prices in Dublin have plunged by 65% in five years

• Analysts predict 'over-correcting market' will dip again in 2012...

Property prices in Ireland are in freefall, according to housing analysts, whose latest figures show that prices in Dublin have collapsed by 65% in five years and by 60% across the country.

A house price index released by the largest residential sales group – the Sherry FitzGerald Group – found that the pace of deflation has sped up in Dublin, while prices across the country are now at levels last seen 11 years ago.

The group, which has been surveying a weighted basket of 1,500 properties since 1999, said residential property in Dublin was now worth 64.2% less than at the 2006 peak, with a national fall of 58.8%.

Separate surveys by two property websites also found large declines in 2011's asking prices: said sale prices were down 50% since 2006, while its rival website reported an 8% drop in the last quarter alone, calling it the largest ever quarterly fall in house prices in Ireland.

"There is no doubt the market is over-correcting," said Marian Finnegan, chief economist at the Sherry FitzGerald Group, with house prices now making it cheaper to buy than to rent. "The pace of deflation picked up in the last 12 months, which illustrates a market that is in over-correction or in freefall," said Finnegan. She said the biggest reason for the freefall was the lack of mortgage finance available from Ireland's bailed-out banks.

5--UniCredit shares tumble, sector nervous, Reuters

Excerpt: An upbeat assessment by the Chief Executive of UniCredit (CRDI.MI) of its heavily discounted 7.5 billion euro ($9.68 billion) rights issue failed to stem a second day of steep losses that unsettled investors in other European banks.

Italy's largest bank by assets has lost almost 30 percent of its market value since setting the terms of a capital increase meant to shore up its ravaged balance sheet.

Its shares were at their lowest since the bank was created from the merger of several Italian lenders in 1998, dragging down the broader European banking index .SX7P.

"Bank recapitalizations are the main worry on investors' minds all over Europe. All banking stocks are suffering," a Milan-based trader said.

Under tough new European banking regulations aimed at bolstering capital, UniCredit needs to raise 8 billion euros, a smaller capital shortfall only than Spain's Santander...

"We expect the share to be under significant pressure over the next few weeks, with a likely convergence towards the theoretical ex-rights price (3.41 euros), reflecting the very poor timing of this long overdue deal," said Natixis, which cut UniCredit to reduce from neutral on Thursday.

Unicredit plans to offer new shares at a 69 percent discount -- much larger than that used by its peers in recent rights issues....


The two-day crash in UniCredit's shares unsettled investors in other banks, who fretted that more lenders would need to follow its example to meet tougher requirements by the end of June. The European banking stock index .SX7P fell 1.6 percent, with Italian banks among the biggest losers.

Deutsche Bank (DBKGn.DE) shares dropped 4 percent as traders cited talk that Germany's biggest lender needs to raise cash.

The European Banking Authority (EBA) has told Deutsche it needs to find 3.2 billion euros to reach a core capital level of 9 percent by the end of June, which the bank has said it can do organically. Two people familiar with Deutsche Bank's finances told Reuters it has no plans at the moment to issue new shares.

Banks need to tell the regulator their plans by January 20.

Declining profits in investment banking and higher loan losses will make it tougher for banks to fill the shortfall organically, analysts said.

Italy's Il Messaggero daily said on Thursday that the Bank of Italy had forwarded a letter from the EBA to the four Italian banks who need to boost their capital asking them to submit their recapitalization plans to the central bank by the established January 20 deadline.

The EBA's request to mark to market government bond holdings has met with strong criticism in Italy, whose banks own large amounts of the country's public debt....

UniCredit is one of 20 specialist primary dealers with exclusive rights to buy Italian debt at auctions. Italy plans to sell some 450 billion euros in new debt this year.

Analysts say the ECB has indirectly supported Italy's primary issuance through its purchases of Italian bonds on the secondary market. Primary dealers buying new debt at auction can keep their holdings stable by selling part of them to the ECB.

6--Europe at the Brink, WSJ video via economic populist

7--Gaming the system: Fed wants to expand "HARP to non-GSE loans", Reuters

Excerpt:....Among the recommendations: allow Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) to refinance loans that they have not guaranteed....

The Fed estimates expanding their authority could allow an additional 1 million to 2.5 million borrowers to refinance loans into lower interest rates through the government's Home Affordable Refinance Program. So far, only about 925,000 mortgages have been refinanced through the program.

Although the GSEs would take on added credit risk by expanding HARP to non-GSE loans, the broader benefits might offset some of the costs, the Fed said.

Some of the Fed's proposals, including a shift in the way the firms handle mortgages that go into default, could be put in place with the consent of the regulator, without congressional action.

"It is particularly telling that the white paper calls for regulators to evaluate their options on a more macro level rather than simply base evaluations on short term gains or losses," Senate Banking Committee Chairman Tim Johnson said in a statement.

The Fed said one factor causing tighter credit is the tendency of Fannie Mae and Freddie Mac to return mortgages to lenders if they see any defects. While that has limited the GSEs' need to draw on Treasury aid, it has also discouraged lenders from originating new mortgages, the Fed said.

However, the recommendations also pit the Fed against Fannie Mae and Freddie Mac's regulator in a debate over what is more important: stemming losses at the GSEs or the overarching goal of restoring health in housing markets.

"Some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery," the Fed's paper said.

8--Recess Appointments: Why Now?, economist's view

Excerpt: On the news today that Obama will make a recess appointment to Richard Cordray to Head CFPB, Yves Smith says:

Obama to Make Recess Appointment of Richard Cordray to Head Consumer Financial Protection Bureau: ...This move raises the obvious question: why didn’t Obama make a recess appointment of Elizabeth Warren...? ...

I'd guess the administration would argue that the GOP hadn't yet crossed over some threshold of intransigence, this was part of a more general reelection strategy (plans to make three recess appointments to the NLRB were also announced), the political opportunity wasn't right, or something like that. But it's a good question -- why now instead of then (a question that can also be asked about Peter Diamond's nomination to the Federal reserve Board of Governors)? What it says to me is all that matters is Obama's reelection (see, for example, the pivot to deficit reduction) -- when the timing's right for that, things will happen -- but don't keep your fingers crossed otherwise. If you are unemployed and struggling, the president will try to help if it also helps him get reelected, but helping because it's the right thing to do? Not likely.

9--"The Decline of the Public Good", Robert Reich, economist's view

Excerpt: Total public spending on education, infrastructure, and basic research has dropped from 12 percent of GDP in the 1970s to less than 3 percent by 2011. ... We’re losing public goods available to all, supported by the tax payments of all and especially the better off. ...

10--The Fed’s Advice on the Housing Crisis, NY Times (pure spin from the "paper of record")

Excerpt: The Federal Reserve tried Wednesday to stir interest among policy makers in the problems afflicting the housing market, sending a white paper to Congress outlining suggestions for easing those problems.

The paper makes two basic points:

1. There are no silver bullets.

2. It certainly would be helpful if Fannie Mae and Freddie Mac, which are controlled by the government, gave the health of the housing market greater priority than their own short-term financial condition.

The Fed is concerned that the collapse of mortgage lending during the financial crisis is hardening into “a potentially long-term downshift in the supply of mortgage credit.” One reason for this, the paper says, is that Fannie and Freddie, which provide the money for most mortgage loans, are scaring lenders by aggressively seeking refunds on defaulted loans.

The policy helps Fannie and Freddie “maximize their profits on old business and thus limits draws on the U.S. Treasury, but at the same time, it discourages lenders from originating new mortgages,” the paper says.

In a similar vein, the paper says that Fannie and Freddie — known as government-sponsored enterprises, or G.S.E.’s — have pushed to resell foreclosed properties even when converting properties into rental units makes more sense. The paper calculates that for two-fifths of the properties owned by Fannie Mae, renting could actually reduce its losses....

The Federal Housing Finance Agency, which has guardianship of Fannie and Freddie, has said repeatedly that it is required by law to minimize their losses, which are borne by taxpayers and already exceed $150 billion. The paper suggests this mandate could be interpreted more broadly, as “some actions that cause greater losses to be sustained by the G.S.E.’s in the near term might be in the interest of taxpayers” in the long term. It does not take the other road of calling for Congress to change the law.

Indeed, the overall tone of the paper is cautious, playing down, for example, the potential benefits of principal reductions for owners whose mortgage debts exceed the value of their homes. In this sense, it falls solidly in line with the conventional wisdom in Washington that policy makers lack the power to lift the housing market from its deep depression.

11--The Terrible Tale of the TARP Two Years Later, Dean Baker,

Excerpt: Two years ago, the top honchos at the Fed, Treasury and the Wall Street banks were running around like Chicken Little warning that the world was about to end. This fear mongering, together with a big assist from the elite media (i.e. NPR, the Washington Post, the Wall Street Journal, etc.), earned the banks their $700 billion TARP blank check bailout. This money, along with even more valuable loans and loan guarantees from the Fed and FDIC, enabled them to survive the crisis they had created. As a result, the big banks are bigger and more profitable than ever.

Now, the same crew that tapped our pockets two years ago is eagerly pitching the line that their bailout was good for us. It may be the case the history books are written by the winners, but that doesn't prevent the rest of us from telling the truth.

Let's step back to where we were two years ago. The huge investment bank Bear Stearns had collapsed. So had Fannie Mae and Freddie Mac, the mortgage giants. Lehman Brothers, the fourth largest investment bank, had also gone down. AIG, the country's largest insurer, had been put on life support by the government.

At this point, Merrill Lynch, Morgan Stanley, and Goldman Sachs, the three remaining independent investment banks, all faced runs that would quickly sink them absent government intervention. Citigroup and Bank of America, two of the three largest commercial banks, were also almost certainly insolvent. Many other banks also faced insolvency, especially if they took big losses on their loans to other institutions that were about to go bankrupt.

This was when the Wall Street boys made their mad rush for the public trough. They enlisted everyone that mattered in the effort, including Treasury Secretary Henry Paulson, Federal Reserve Board Chairman Ben Bernanke, and Timothy Geithner, then the head of the New York Federal Reserve Bank.

The line was that the economy would collapse if Congress did not immediately rescue the banks. They were prepared to make up anything to save the banks in their hour of need. Bernanke was probably caught in the biggest fabrication when he told Congress that the commercial paper market was shutting down.

If true, this would have been disastrous, since most major companies rely on selling commercial paper to meet their payroll and other routine expenses. If this market shut down, it would mean that even healthy businesses could not pay their workers and suppliers, which would quickly cause the whole economy to grind to a halt.

Bernanke did not bother to inform Congress and the public that he had the ability to single-handedly support the commercial paper market. He waited until the weekend after Congress approved the TARP to announce that he would establish a special Fed lending facility to buy commercial paper.

In reality, the Fed almost certainly had the ability to keep the economy going by sustaining the system of payments even if the chain of bank collapses was allowed to run its course. In the 80s Latin American debt crisis, the Fed had an emergency plan to seize the money center banks, and keep them operating, if a default by a major Latin American country pushed them into insolvency.

By the time of the Lehman crisis the financial markets had been severely stressed for over a year. The first major bank collapse had occurred more than 6 months earlier. It would have required a degree of unbelievable incompetence and/or irresponsibility for the Fed not to have devised a similar emergency plan to keep the systems of payments operating in a worst case scenario.

Furthermore, even if the Fed had been as incompetent as many claim, it would not have taken long for it to improvise a system whereby certain payments would be prioritized and the system of payments would again be up and running. The notion that we would be sitting in a 21st century economy and reduced to barter payments was an invention of the bank lobby to get the taxpayers' money.

The first Great Depression was the result of a decade of failed policies, not a single bad mistake at its onset. There was absolutely nothing that we could have done back in September-October of 2008 that would have required that we experience a decade of double-digit unemployment. The specter of a "second great depression" is a fairy tale invented by the bank lobby to make the rest of feel good about having given them our money.

We are also supposed to feel good that the vast majority of the TARP money was repaid. This is another effort to prey on the public's ignorance. Had it not been for the bailout, most of the major center banks would have been wiped out. This would have destroyed the fortunes of their shareholders, many of their creditors, and their top executives. This would have been a massive redistribution to the rest of society -- their loss is our gain.

It is important to remember that the economy would be no less productive following the demise of these Wall Street giants. The only economic fact that would have been different is that the Wall Street crew would have lost claims to hundreds of billions of dollars of the economy's output each year and trillions of dollars of wealth. That money would instead be available for the rest of society. The fact that they have lost the claim to wealth from their stock and bond holdings makes all the rest of us richer once the economy is again operating near normal levels of output.

Instead, we have the same Wall Street crew calling the shots, doing business pretty much as they always did. The rest of us are sitting here dealing with wreckage of their recklessness: 9.6 percent unemployment and the loss of much of the middle class's savings in their homes and their retirement accounts. And the lackeys of the Wall Street crew are telling us that we should be thankful that we didn't have a second Great Depression. Maybe we don't have the power to keep the bankers from picking our pockets, but we don't have to believe their lies.

12--More on shadow inventory, seeking alpha

Excerpt: But the underlying weakness was highlighted by "CoreLogic Reports Shadow Inventory as of October 2011 Still at January 2009 Levels."

As of October 2011, shadow inventory remained at 1.6 million units, or five-months' supply and represented half of the 3 million properties currently seriously delinquent, in foreclosure or in REO.

Of the 1.6 million properties currently in the shadow inventory (Figures 1 and 2), 770,000 units are seriously delinquent (2.5-months' supply), 430,000 are in some stage of foreclosure (1.4-months' supply) and 370,000 are already in REO (1.2-months' supply).

Florida, California and Illinois account for more than a third of the shadow inventory. The top six states, which would also include New York, Texas and New Jersey, account for half of the shadow inventory.

The shadow inventory is approximately four times higher than its low point (380,000 properties) at the peak of the housing bubble in mid-2006. A healthy housing market should have less than one-month's supply of shadow inventory, which would be an easily absorbed stock of distressed assets with little or no discernable impact on house prices, unless the inventory was geographically concentrated.

Despite 3 million distressed sales since January 2009, a period when home prices were declining at their fastest rate, the shadow inventory in October 2011 is at the same level as January 2009.

13--More on shadow inventory, Dr Housing Bubble

Excerpt: There is an interesting trend that continues to be a hallmark of the shadow inventory. It has barely moved since January of 2009. While overall visible MLS housing inventory peaked in 2007 it has been continuously falling since that time. Yet the shadow inventory remains inflated in spite of 3,000,000+ distressed properties being sold since January of 2009. Now why is that? This is something that we will get into later in the article. A handful of states, six to be exact, make up half of the current shadow inventory. Since current sales are dominated by lower priced homes you are seeing most of the housing action occurring in the distressed side of the inventory equation. However as the housing market flails forward, there is a backroom acknowledgment that until the shadow inventory clears out, there will be no healthy housing market.

The above chart comes from the Calculated Risk Blog and highlights inventory from two different sources. The trend overall is very clear. Total visible housing inventory peaked in 2007 and has fallen steadily since that time. Now you would think that because of this movement prices would have stabilized but to the contrary. A large volume of sales has occurred with distressed properties since that time. The market is largely being driven by shadow inventory which slowly migrates into the visible inventory space...

Yet shadow inventory remains stubbornly high because more distressed housing is coming onto the books at banks as the economy continues to waddle along. This is why behind the scenes the shadow inventory figures are still extremely high...

14--(From the archives, 2010) Number of the Week: 107 Months to Clear Banks’ Housing Backlog, Mark Whitehouse, Wall Street Journal

Excerpt: "Banks’ vast pile of foreclosed homes doesn’t appear to be diminishing. That’s a troubling sign for the future of the housing market.

Back in April, this column tallied up all the foreclosed homes sitting in banks’ inventory, as well as the "shadow" inventory of homes in the foreclosure process or on which owners had missed at least two mortgage payments. At the time, we reported that at the current rate of sales, it would take 103 months to unload it all.

Over the past six months, that number has actually risen. Banks managed to pare down the shadow inventory, but largely by taking possession of foreclosed homes. As of September, they owned nearly 994,000 foreclosed homes, up 21% from a year earlier. The shadow inventory stood at 5.2 million homes, down 7% from a year earlier. Grand total: 107 months of inventory.

The numbers aren’t exactly comparable to the April analysis, as the providers of data have changed. The inventory data now come from RealtyTrac, the shadow inventory data from LPS Applied Analytics, and the sales data from Core Logic. But no matter how you slice it, the housing market faces almost nine years of foreclosure hangover…..

The mountain of foreclosed homes casts a long shadow."

15--U.S. Gasoline Use Sinks 14% to Seven-Year Low, MasterCard Says, Bloomberg

Excerpt: U.S. gasoline demand sank 14 percent from the prior week to the lowest level in more than seven years of records, according to MasterCard Inc. (MA)

Drivers bought 8.16 million barrels a day of gasoline in the week ended Dec. 30, down from 9.46 million the week before, according to MasterCard’s SpendingPulse report. MasterCard’s data goes back to July 2004.

Fuel use fell below a year earlier for the 18th consecutive time last week, slipping 3 percent from 2010 levels. Fuel demand over the previous four weeks was 3.4 percent below a year earlier, the 41st consecutive decline in that measure.

“We observed a noticeable week-to-week drop in gasoline consumption as many drivers were off the roads due to the holidays,” John Gamel, a gasoline analyst and director of economic analysis for SpendingPulse, said in the report. The week began on Christmas Eve.

All seven geographical regions, as defined by MasterCard, saw demand slide by double digits last week.

16--U.S. Stocks Fall After Earnings Forecasts, Bloomberg

Excerpt: U.S. stocks fell, following a two-day advance for the Standard & Poor’s 500 Index, as disappointing profit forecasts from American retailers (S5RETL) and concerns over Europe’s debt crisis offset improving jobs data.

17--The return of mass poverty to Europe, WSWS

Excerpt: Almost one in four people in the European Union was threatened with poverty or social deprivation in 2010. This is the conclusion of an official report by the European Commission presented in December. According to the report, 115 million people, or 23 percent of the EU population, were designated as poor or socially deprived. The main causes are unemployment, old age and low wages, with more than 8 percent of all employees in Europe now belonging to the “working poor.”

Single parents, immigrants and young people are worst affected. Among young people, unemployment is more than twice as high as among adults. Some 21.4 percent of all young people in the EU had no work in September 2011. Spain leads all other EU countries with a youth unemployment rate of 48 percent. In Greece, Italy, Ireland, Lithuania, Latvia and Slovakia youth unemployment is between 25 percent and 45 percent.

In countries such as Germany, the Netherlands and Austria, youth unemployment rates are lower only because training takes longer and many unemployed young people are “parked” in all sorts of schemes that exclude them from the official statistics. But even in these countries the chance of getting a decent-paying job is diminishing. Some 50 percent of all new employment contracts in the EU are temporary work contracts. For workers aged 20 to 24, the proportion is 60 percent.

The growth of poverty and social deprivation is not simply a result of the economic crisis, but rather the result of a deliberate policy on the part of European governments and the European Union. In spite of these alarming statistics, the authorities continue to slash social spending, increase the retirement age, eliminate public-sector jobs and expand the low-wage sector—all measures that expand and deepen poverty. With the decision at the last EU summit to include a “debt brake” in the constitutions of all EU member states, governments have deprived themselves of virtually any possibility of alleviating the social crisis through fiscal measures....

The claim that the austerity measures are being used to shore up national treasuries is a blatant lie. Public finances are insolvent because they have been plundered by the same financial elite that now benefits from the austerity measures. Taxes on profits, property and high incomes have been repeatedly reduced. Many Eastern European countries, where poverty is particularly high, have introduced a flat tax of less than 20 percent. Three years ago, trillions in public funds were transferred to the vaults of the banks to cover their speculative losses.....

In the course of the last twenty years the financial elite has lost all restraint and declared war on the working class. If democratic elections stand in its way, it sweeps them aside—as in Greece and Italy, where technocratic governments were installed that are responsible solely to the banks. Nor does the financial oligarchy shy away from the violent suppression of social resistance, as exemplified by the forcible eviction of Occupy protesters across the US and internationally.

18--European Banks Face More Pressure to Shed Government Debt, WSJ

Excerpt: As euro-zone nations prepare to refinance $1.3 trillion of debt in 2012, the Institute of International Finance — a global banking trade group — today painted a grim picture of their prospects.

Several struggling European nations face mounting budget troubles at the same time European banks face pressure to cut their holdings of government bonds. Among the trouble spots identified in the IIF’s staff report:

–Greece, where economic conditions have deteriorated in recent months, will likely miss its deficit target — requiring it to negotiate more budget adjustments through 2014. “Given the reform fatigue evident in Greek society, it is not clear that harsher adjustment measures can be implemented,” the IIF says. “It is therefore likely that the financing needs of Greece will be much larger than envisaged, putting pressure on official and private sector creditors to somehow fill the gap.”

–Portugal, which has “experienced serious fiscal slippages,” is trying to meet a deficit target of 4.5% of GDP. Doing so would require a fiscal contraction valued at 6.1% of GDP, in a year in which growth is expected to drop by 3%. “This represents a very demanding objective and lack of progress could heighten market concern.”

–Spain, with $200 billion of sovereign debt maturing in 2012, “has also experienced fiscal slippages.” GDP is expected to decline in the first quarter, after also contracting in the fourth quarter of 2011. Meeting a deficit target of 4.4% in 2012 (after possibly exceeding 8% in 2011) “would mean a larger fiscal consolidation during a renewed recession.”

–Italy, while pursuing severe austerity measures to eliminate its budget deficit by next year, must finance more than €440 billion ($563 billion) of debt this year. The country “continues to test investor sentiment. So far, market sentiment remains skeptical” with 10-year Italian bond yields hovering around 7% despite purchases by the European Central Bank.

All of that comes as governments and banks face the threat of ratings downgrades. Banks, which have long held about a third of outstanding European Union government bonds, “have been incentivized by supervisory actions and market scrutiny to reduce their holdings of sovereign debt, particularly of weak euro-area countries,” the IIF says. Even after European banks dumped bonds from some of the above countries (Greece, Portugal, Italy and Spain), the banks’ exposures to government debt remained at about €2.6 trillion, or 7.5% of total assets. By comparison, U.S. Treasury debt represents about 1.25% of total U.S. bank assets.

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