Thursday, February 2, 2012

Today's links

1--Consumer Spending in U.S. Stalls as Americans Save, Bloomberg

Excerpt: Consumer spending stalled in December as Americans used a jump in incomes to restore depleted savings, indicating the biggest part of the economy will not be a driver of the expansion.

Purchases were little changed after rising 0.1 percent the prior month, Commerce Department figures showed today in Washington. The median estimate of 77 economists surveyed by Bloomberg News called for a 0.1 percent increase in sales. Incomes increased by the most in almost a year, pushing the savings rate to a four-month high.

Households, whose spending accounts for about 70 percent of the economy, may be unwilling to overextend their finances as home prices continue to fall. The weak end to the quarter raises the odds the world’s largest economy will cool after growing at the fastest pace in more than a year.

“You had a very modest shopping season, and you can apply that same adjective to the momentum heading into 2012,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets Corp. in New York, who correctly projected spending would be unchanged. “You’re still looking at very modest job growth, very modest wage increases, so without the use of credit and saving, the consumer is going to struggle to gain much momentum.”

2--Germany declares war on Greece, macrobusiness

Excerpt: From the FT:

1. Absolute priority to debt service

Greece has to legally commit itself to giving absolute priority to future debt service. This commitment has to be legally enshrined by the Greek Parliament. State revenues are to be used first and foremost for debt service, only any remaining revenue may be used to finance primary expenditure. This will reassure public and private creditors that the Hellenic Republic will honour its comittments after PSI and will positively influence market access. De facto elimination of the possibility of a default would make the threat of a non-disbursement of a GRC II tranche much more credible. If a future tranche is not disbursed, Greece can not threaten its lenders with a default, but will instead have to accept further cuts in primary expenditures as the only possible consequence of any non-disbursement.

2. Transfer of national budgetary sovereignty

Budget consolidation has to be put under a strict steering and control system. Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time. A budget commissioner has to be appointed by the Eurogroup with the task of ensuring budgetary control. He must have the power a) to implement a centralized reporting and surveillance system covering all major blocks of expenditure in the Greek budget, b) to veto decisions not in line with the budgetary targets set by the Troika and c) will be tasked to ensure compliance with the above mentioned rule to prioritize debt service.

3--Most banks tightening credit to Europe, Fed says, Reuters

Excerpt: More than two-thirds of banks in a Federal Reserve survey of senior loan officers said they had tightened credit to European financial firms in January, underscoring the continent's severe banking crisis.

The survey, published on Monday, also found U.S. banks snapping up business from their beleaguered European competitors, countering the notion that new regulations are hurting Wall Street's competitiveness.

"About half of the respondents who reported competing with European banks noted such an increase in business," the Fed said.

There was also "more widespread tightening of standards" to non-financial firms that have U.S. operations and significant exposure to European economies.

Policymakers worry that a freezing up of bank lending in Europe could spill over into the United States, potentially threatening a fragile economic recovery.

Still, the findings painted a more benign picture of U.S. credit markets: Domestic lending standards were largely unchanged this month and loan demand picked up somewhat.

"The uptick in credit demand is a welcome development for the recovery as it could be an indication that businesses and consumers alike are beginning to feel more confident," said Millan Mulraine, a strategist at TD Securities in Toronto.

4--Contraction in Eurozone's repo markets is driving M3 decline, sober look

Excerpt: Yesterday the ECB released its monetary aggregates measures for the Eurozone through Dec-2011. The following chart shows the absolute level of Eurozone's M3 aggregate, a broad measure of money stock. (Note that at times it is helpful to look at monetary indicators on an absolute basis rather than as percent changes as economists tend to do.) The upward trend in the money supply growth has reversed, mostly during the last quarter of 2011.

An obvious question here is whether this broad money supply decline is similar to the US during 2008-2010. One key component of M3 driving this contraction in money stock is the amount of repo (secured) lending. The Eurozone repo loan balances have declined materially in Q4 - an issue that is quite different from what had occurred in the US.

Since repo has become the only form of interbank lending in the Eurozone, this is clearly an indication of deteriorating credit conditions. With the ECB providing longer term financing not available in the interbank repo markets, it is often quite attractive or even necessary for many financial institutions to shift their collateral into an ECB facility (ECB secured loans are not included in the monetary aggregates). LTRO term lending for example provides far more funding stability than rolling short-term interbank repo loans. The ECB has also been considerably more lenient with collateral than the current repo markets. The rapid rise in the ECB's balance sheet (EUR 2.7 trillion) "soaked up" a great deal of the collateral out of the repo markets, dampening growth in interbank credit.

The unprecedented accommodation provided by the ECB is not yet helping to expand the broad money supply. The banking system has shifted a substantial portion of its eligible collateral from the repo markets to the ECB who is providing longer term stable funding. Only once the dependence on the ECB is reduced and the interbank funding markets begin to heal, will we see a stabilization in M3 growth..see charts

5--The Austerity Debacle, Paul Krugman, NY Times

Excerpt: Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. ...

Nor is Britain unique. Italy is also doing worse..., and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.

And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years. ...

Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”

Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.

Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.
And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

6--Core Euro Area Banks Still Very Exposed to Contagion from a Greek Exit, Economonitor

Excerpt: Perhaps this aggressive proposal by Germany is one of the unintended consequences of the ECB’s three year long term refinancing operation (LTRO). If eurozone banks have as much access to cheap, three-year ECB funding as their collateral allows, perhaps Germany and the troika have decided that eurozone banks can survive a Greek default.

Perhaps naively so, I look at the BIS statistics and see quite clearly that the Germans and the troika would be wrong as regards the Eurozone banks being able to sustain contagion effects of a Greek default and/or exit. Exposure levels remain too high as a share of equity.

Better put: if I look at key core bank exposure, German, French, Dutch, and Belgian, to the Periphery economies as a share of total equity, these banks could go bankrupt if a Greek exit/default spreads to broad Periphery exposure. (see chart)

Belgian banks especially are in the the red, with total periphery exposure being valued at just over 2X equity. This means that if the Belgian banks were jointly forced to write down all periphery holdings to 49% of what they are holding on their books – according to the IMF 39% of European banks hold their sovereign exposure to maturity, where sovereign exposure is a subset of the BIS data above – their equity would be completely wiped out and technically insolvent. French and German banks are in slightly better shape, but still exposed at holdings of 1.4X and 1.1X equity, respectively.

Banks have improved solvency ratios, as Q3 2010 periphery holdings as a % of equity were higher:
Belgium 291%

Unless the German, French, Dutch, and Belgian governments are planning to inject equity into their banking systems – they haven’t announced such a grand plan to date – banks remain overly exposed to periphery asset valuations. Thus, I can only conclude the following: the Germans and the troika either (1) have a plan to quickly recapitalize the banks across Europe, or (2) could be making a huge mistake

7--Greece plans orderly exit of the Eurozone, Examiner

Excerpt: Greece plans an orderly exit out of the Eurozone according to two sources close to Mr. Papademos, Greek Prime Minister, who spoke on condition of anonymity earlier today.

The sources confirmed that plans are ready to return to a legacy currency given the current circumstances and that such exit would be dealt with, quote “in as orderly a fashion as possible” unquote.

The plan does not come as a surprise but the timing may be surprising to most members and investors while negotiations about a severe haircut with the IIF are still ongoing.

Last year’s announcement by Mr. Papandreou, former Prime Minister, that a referendum would be held to decide whether or not to stay in the Eurozone may have set the precedent for developing a plan that apparently will be set in motion.

The stalemate in negotiations about the depth of the haircut on some of the outstanding Greek sovereign debt, said to be capped at 65-70% while Greece is looking for more concessions, may have set things in motion as the ultimate alternative.

8--The State of the Union address, WSWS

Excerpt: Having built up the infrastructure of a police state over years of the “war on terror” and attacks on basic democratic rights, the financial aristocracy intends to use it for its most fundamental class purpose: defending its wealth and privileges against the American working class....

...Moreover, Obama again made clear that whatever tax change is made, it would be part of a bipartisan deal to be enacted after the election, that would include cuts in corporate taxes along with new attacks on key social programs, including Medicare, Medicaid and Social Security.

Obama’s State of the Union address highlights once again the essential unanimity within the political establishment over the most important aspects of policy. The differences between Obama and his Republican opponents are not over whether, but how to slash the jobs and living standards of American workers.

The Democrats and Republicans also differ over the role of the unions, with the Democrats placing greater reliance on the services of union executives to suppress working class opposition...

To “level the global playing field” means creating in the United States the same super-exploitative conditions that American manufacturers enjoy in China, India, Mexico or elsewhere—where workers toil for low wages, without benefits or health and safety protection, and frequently under the gun of police-state regimes.

9--Robo-Reality: Final Foreclosures Fall as Pipeline Swells, CNBC

Excerpt: The number of new foreclosures in 2011 dropped nearly 40 percent, according to year-end numbers just released by Lender Processing Services; there is, however, little cause for celebration.

The fall is largely due to moratoria and process reviews stemming from the so-called “robo-signing” foreclosure paperwork scandal.

Mortgage delinquency rates were largely unchanged from last year, which means all that distress will be pushed forward to 2012 and beyond.

To give you an idea of just how much the “robo” scandal is toying with the numbers, LPS compared states that require foreclosures to go through the courts versus states that don’t (judicial versus non-judicial) and found the following:

50 percent of loans in foreclosure in judicial states have not made a payment in two years, as opposed to 28 percent in non-judicial states.

- Foreclosure sale rates in non-judicial states are about four times those in judicial states.

"Nationally, foreclosure pipelines remain at historic highs, but they are clearing at very different rates depending upon state procedures," says Herb Blecher of LPS Applied Analytics.
With the nation essentially split between judicial and non-judicial foreclosure states, it’s safe to say the foreclosure crisis will linger longer than anyone expected, especially with negotiations for a settlement between big banks and state attorneys general hitting yet another roadblock.

California Attorney General Kamala Harris rejected the latest proposal this week, calling it inadequate.

“Our state has been clear about what any multistate settlement must contain: transparency, relief going to the most distressed homeowners, and meaningful enforcement that ensures accountability. At this point, this deal does not suffice for California,” she wrote in a statement.

Bank sources say that without California the value of the settlement would drop by billions and banks would still have major liability for foreclosure fraud. About one fifth of the nation's foreclosures are in California.

10--LTRO smackdown, ft.alphaville

Excerpt: It’s still the case that Italy’s largest bank by assets isn’t even issuing covered bonds to the market, but retaining them for use in ECB liquidity operations. (Lloyds itself has issued one covered bond this year and is preparing a UK RMBS deal.) Though that’s precisely the point here: UniCredit, like swathes of eurozone banks, can pay off existing unsecured creditors without fire-selling assets – instead it can package them off to the ECB even with haircut and margin risk. Funding needs for this year and next are increasingly in place, etc. Like we said, it’s an enormous change to European banks’ viability.

Our question really is not whether the LTROs were a liquidity game-changer but what comes next, especially if banks are mostly using the cash to pay off their own creditors but not for extending to the real economy. (Nor for extending to their governments, much: compared to ECB’s €489bn LTRO in December, Italian banks bought €4bn of sovereign debt during the month, JPMorgan’s Flows & Liquidity analysts noted on Friday.)

Buried in the ECB’s release on December’s monetary developments, for example, Societe Generale analysts noted the biggest-ever monthly decline in loans to the non-financial sector: (eyepopping chart)

Which is exactly why we thought way back in December that the ECB changing its rules on accepting “credit claims” (typically, bank loans) was a huge move. But it’s going to be amazing if the ECB can manage this kind of deleveraging prospect and avoid some kind of additional QE, like its peers in the US and UK in 2009.

No comments:

Post a Comment