Tuesday, April 17, 2012

Today's links

1--Flood of foreclosures to hit the housing market, CNN

Excerpt: The golden age for foreclosure squatters may soon be coming to an end now that the $26 billion mortgage settlement has been approved.

The settlement, agreed to by the nation's five largest mortgage lenders, is expected to speed up the foreclosure process by providing stricter guidelines for the banks to follow when repossessing homes....

In some states, delinquent borrowers have been squatting in their homes much longer. In Florida, the average time was 861 days, and in New York it was 1,056 days -- close to three years.

"Perhaps a million foreclosures could have been pursued last year but weren't," said Rick Sharga, executive vice president for real estate investment company, Carrington Holdings.

But that's all about to change, he said. "We're going to see an increase in the speed of foreclosures and a higher number of foreclosure starts."

In fact, there are indications that the pace of foreclosures are already starting to pick up....While overall foreclosure activity was down during the first quarter, filings were up 10% in the 26 states where foreclosures must undergo court scrutiny, according to RealtyTrac. ...

"The dam may not burst in the next 30 to 45 days, but it will eventually burst, and everyone downstream should be prepared for that to happen -- both in terms of new foreclosure activity and new short sale activity," Moore said in a statement.

2--Why the Eurozone Crisis Is Getting Worse, Slate

Excerpt: Europe has an austerity strategy. It needs a growth strategy

Since last November, the European Central Bank, under its new president, Mario Draghi, has reduced its policy rates and undertaken two injections of more than 1 trillion euros of liquidity into the eurozone banking system. This led to a temporary reduction in the financial strains confronting the debt endangered countries on the eurozone’s periphery (Greece, Spain, Portugal, Italy, and Ireland), sharply lowered the risk of a liquidity run in the eurozone banking system, and cut financing costs for Italy and Spain from their unsustainable levels of last fall....

First, front-loaded fiscal austerity—however necessary—is accelerating the contraction, as higher taxes and lower government spending and transfer payments reduce disposable income and aggregate demand. Moreover, as the recession deepens, resulting in even wider fiscal deficits, another round of austerity will be needed. And now, thanks to the fiscal compact, even the eurozone’s core will be forced into front-loaded recessionary austerity.

Moreover, while ├╝ber-competitive Germany can withstand a euro at—or even stronger than—$1.30, for the eurozone’s periphery, where unit labor costs rose 30 percent to 40 percent during the last decade, the value of the exchange rate would have to fall to parity with the U.S. dollar to restore competitiveness and external balance. After all, with painful deleveraging—spending less and saving more to reduce debts—depressing domestic private and public demand, the only hope of restoring growth is an improvement in the trade balance, which requires a much weaker euro.

Meanwhile, the credit crunch in the eurozone periphery is intensifying: Thanks to the ECB long-term cheap loans, banks there don’t have a liquidity problem now, but they do have a massive capital shortage. Faced with the difficulty of meeting their 9percent capital-ratio requirement, they will achieve the target by selling assets and contracting credit —not exactly an ideal scenario for economic recovery.

3--Spain has accepted mission impossible, Financial Times via Grasping reality with both hands

Excerpt: Are the markets panicking because Spain may fail to hit its deficit targets, or are they panicking at the thought that Spain may succeed?… News coverage seems to suggest that the markets are panicking about the deficits themselves. I think this is wrong. The investors I know are worried that austerity may destroy the Spanish economy, and that it will drive Spain either out of the euro or into the arms of the European Stability Mechanism.

The orthodox view, held in Berlin, Brussels and in most national capitals (including, unfortunately, Madrid), is that you can never have too much austerity. Credibility is what matters. When you miss the target, you must overcompensate to hit it next time. The target is the goal – the only goal. This view does not square with the experience of the eurozone crisis, notably in Greece. It does not square with what we know from economic theory, or from economic history. And it does not square with the simple though unscientific observation that the periodic episodes of market panic about Spain have always tended to follow an austerity announcement….

European policy makers have a tendency to treat fiscal policy as a simple accounting exercise, omitting any dynamic effects...

Spain’s effort at deficit reduction is not just bad economics, it is physically impossible, so something else will have to give….

[A]s the recession gets worse, and Spanish unemployment rises towards 30 per cent, the pressure for Spain to turn to the ESM will grow. It will happen eventually. And even when that happens, it will not end the crisis in Spain. For that a eurozone-wide bank resolution system would also be necessary.

I can see only two outcomes for Spain. The crisis will end either in a catastrophic Spanish withdrawal from the eurozone, or in a variant of a fiscal union that includes a joint eurozone backstop to the financial sector. If the Spanish government pursues the strategy it has announced to the bitter end, the first outcome will become vastly more probable.

4--Rising Yields Put Spotlight Back on Spain, WSJ

Excerpt: The spotlight in the continuing European sovereign debt crisis is now on Spain, where market doubts has pushed the yield on Spanish government debt above 6% for the first time since December...

In his print column today, Krugman adds: “The Continent needs more expansionary monetary policies, in the form of a willingness — an announced willingness — on the part of the European Central Bank to accept somewhat higher inflation; it needs more expansionary fiscal policies, in the form of budgets in Germany that offset austerity in Spain and other troubled nations around the Continent’s periphery, rather than reinforcing it. Even with such policies, the peripheral nations would face years of hard times. But at least there would be some hope of recovery.”

And on Voxeu, Cinzia Alcidi and Daniel Gros argue that this isn’t, at root, a fiscal problem anyhow. Rather, Spanish house prices and wages are still too high: “All in all, it appears that Spain has not yet fully adjusted to the collapse of its enormous housing bubble, which propelled its economy on an unsustainable path until 2008. House prices have to fall further, the construction sector has to shrink further, and the reallocation of labor towards exportables is slowed down by a labor market that prevents wages from falling quickly enough.”

5--IFR Comment: France will be in the spotlight if ECB doesn't change script, IFR

Excerpt: Spain is now at the epicentre of the eurozone debt crisis. Contagion risk has meant that other countries have been forced to tag along for the ride. If liquidity-based solutions remain a top policy option, then the ECB needs to change the way in which it utilises its balance sheet to allow the extraction of sovereign risk from the market on a permanent basis.

Without a change in stance from the ECB the crisis is likely to go from bad to worse…with more of an impact on the core countries, especially France.

A crisis that is still about too much risk: The eurozone sovereign/financial crisis should always be looked at through the lens of a more general theme and this is one of a market moving from excessive risk-taking toward being more risk-conscious. How far the pendulum has swung is uncertain but we suspect that we have not reached the point at which the market has moved to the opposite extreme.

The market’s unwillingness to hold risk is most evident by central banks and policy makers opening up their own balance sheets to mop up the excess and prevent indigestion. Whether this takes the form of MBS/Treasury purchases by the Fed, gilt purchases by the BoE or the SMP/LTRO from the ECB, the other side of the coin from liquidity is the removal of risk from the hands of the market.

ECB existing liquidity solutions ineffective: When it comes to effectiveness of liquidity measures the eurozone is far behind in trying to get the supply/demand risk equation to balance. The Fed and BoE have chosen to remove risk from the market on a permanent basis while showing a willingness to step in while the ECB’s 3-year LTRO method still leaves banks vulnerable as they have to make up for any reduction in value of pledged collateral.

Banks that loaded up on sovereign debt of Spain and Italy (likely domestic banks) will be under pressure to pledge additional collateral and/or substitute existing collateral. The LTRO is not an effective liquidity solution unless yields on sovereign debt stay low. The other alternatives to official support are 1) more intervention from the ECB via the SMP and 2) the EFSF starting to intervene in the primary/secondary markets....

By explicitly making the use of its balance sheet conditional the ECB can also make sure that there is compliance by politicians to keep up their end of the bargain on fiscal/structural reforms.

Without action from the ECB it is likely that the situation for both Spain and Italy will go from bad to worse.

6--Why Spain Won’t Regain Market Confidence, economist meg

Excerpt: No matter what the Spanish government does, investors are spooked, and this is unlikely to change over the next year unless Spain shows signs of being on a path towards sustainable growth.

How likely is it Spain will show signs of a return to sustainable growth any time soon? Not very. Spain’s unemployment rate hit nearly 23% in the final quarter of 2011 (youth unemployment exceeded 50% for the first time in January). The latest purchasing manager’s index (PMI) for Spain for March showed the worst result in 11 months at 44.5 (a reading lower than 50 indicates a contraction compared with the previous month). Worryingly, there was a substantial reduction in new orders, an indication that Spain’s PMI score will continue to deteriorate in the future. The Spanish property market has not found a floor yet, and will continue to undermine the quality of household and bank balance sheets. The government is implementing aggressive austerity measures and structural reforms, both of which significantly undermine growth in the short-term. When Spain releases flash GDP figures for the first quarter of 2012 on April 30th, do not expect the result to calm the markets. Furthermore, worse than expected GDP figures are likely to significantly undermine Spain’s progress on hitting its budget deficit targets. There is very little chance Spain will manage to reduce its overall deficit to 5.3% of GDP this year or 3% of GDP in 2013.

Good news is also unlikely to come from the Spanish banking sector over the next year. Even if Spanish banks manage to meet the new Tier I core capital ratio requirements in mid-2012, the Spanish banking sector remains a black hole and a source of huge uncertainty for investors. As unemployment continues to rise and property prices continue to fall in Spain, mortgage defaults will crystallise. Spanish banks will undoubtedly require further recapitalization, but it is hard to guess the timing or magnitude....

Bailout imminent?

If Spain is unable to regain market confidence, will it be pushed into a bailout programme? Not immediately, but this does seem inevitable. The good news as far as Spain is concerned is that the country has already pre-funded half of its debt rollovers for 2012. Even if Spain faces unsustainable borrowing costs, it will not actually run out of cash this year.

Furthermore, the ECB will not stand idly by while Spain is forced into a bailout programme. At the very least, the ECB will step up its Spanish bond purchases through the securities markets programme (SMP). While additional long-term refinancing operations (LTROs) are unlikely so soon after the three-year LTROs were offered, the ECB may take further steps to prop up the ailing Spanish banking system.

While ECB intervention could buy some more time for Spain in the short-term, it is extremely unlikely to fundamentally change Spain’s fiscal or economic trajectories. In the absence of economic growth, Spain will eventually be forced to request official financing, potentially as early as next year.

7-- Consumers Gloomier on Current Conditions, WSJ

Excerpt: Consumers are feeling less upbeat about the economy. A subindex of the Thomson Reuters/University of Michigan Consumer Sentiment Index that gauges consumers’ feelings about current economic conditions fell to 80.6 in its preliminary April reading, down from 86 in March. With gas prices high and the pace of economic growth still tepid, consumers are growing more concerned about their finances.(See chart)

8--Market's momentum begins to wane, pragmatic capitalism

Excerpt: Over the past two weeks even more evidence has emerged that the “sweet spot” the market has been enjoying in the last few months is coming to an end....

The market started to decline from its peak level when the latest FOMC minutes hinted that an imminent implementation of QE3 was not on the table. The problem is that there was always an inherent contradiction between celebrating the advent of a sustainable recovery, while, at the same time, expecting the initiation QE3. This didn’t make much sense. If the U.S. economy were truly in a sustainable recovery, QE3 would not be necessary. In itself, the hope for a new quantitative easing program indicated that investors really believed, as we did, that the economic recovery was almost completely dependent on massive doses of liquidity, and incapable of going forward on its own...

The U.S. economy has also benefitted from the inability of seasonal adjustment factors to account for an unusually warm winter and the distortions introduced by the fact that the worst of the 2008-2009 recession occurred in about the same months. Since this made the economy appear to be much stronger than it actually was, the payback is likely over the next few months.

The economy is also facing the now well-known “fiscal cliff” beginning in January 2013. This includes expiration of the Bush tax cuts, the payroll tax cuts, emergency unemployment benefits and the sequester established in last summer’s debt limit agreement. Various estimates have indicated that the hit to GDP can be as high as 4%.

The European sovereign debt crisis also entered a “sweet spot” following the start of the ECB’s Long Term Repurchase Operation (LTRO) and the Eurozone settlement with Greece that stopped the immediate liquidity crisis and took it out of the headlines without actually curing then insolvency issue. The LTRO provided about 1 trillion Euros to bail out troubled European banks in return for the debtor nations’ promise of austerity. However, the continued worsening of the economic outlook in the EU’s debtor economies has once again led to soaring bond interest rates, particularly in Spain.

9--Treasury 10-Year Yield Below 2 Percent on Debt-Crisis Concern, SF Gate

Excerpt: Treasury 10-year note yields dropped below 2 percent for a second day amid mounting speculation the European sovereign-debt crisis is intensifying, increasing investor appetite for the safest assets.

Yields on the benchmark note touched the lowest level in more than five weeks even as a report showed retail sales in the U.S. rose more than forecast in March. Spanish bond yields reached a four-month high before debt auctions this week. A separate report showed manufacturing in the New York region expanded in April at the slowest pace in five months.

"It's all about what's going on in Europe, as the concerns just won't go away, which is supporting Treasuries," said Larry Milstein, managing director in New York of government- and agency-debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. "Spain is in the cross hairs as the market is getting closer to the answer of the ultimate question -- whether there will be contagion or not. Right now, everyone is cautious."

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