Tuesday, May 8, 2012

1---Markets - Credit - The Tempest, macronomics

Excerpt:   Prime Minister Mariano Rajoy said most Spanish regions, the nation’s “whole financial sector” and most big companies can’t finance themselves on debt markets. (Bloomberg)

While discussing the implications of upcoming Moody's downgrade for 114 European banks and Basel III impacts for the European financial sector ("From Hektemoroi to Seisachtheia laws?") we implied: "We think upcoming downgrades means more collateral posting and more haircuts on collateral that can be pledged for funding at the ECB and dwindling "quality assets" therefore even lower German Bund Yields..." and as our Rcube friend mentioned in the same conversation:


"This year, it appears that Spain and/or Italy are going to be the culprits of a third summer of Eurozone distress."...

"It is also important because Bankia is by far the largest among the problem institutions. The size of its credit portfolio is nearly EUR200bn, of which 22% is to construction and developers (the bank has a net provisioning ratio of c 43% of problem loans in this sector). The Spanish media has also indicated that the government intends to inject public funds into the institution.

..."Banks still have a lot of bad assets to deal with, in part thanks to regulatory forbearance. The official stance of the new government in this respect is very straightforward. Its aim is to clean up some of the excessive leverage through new impairments. Supposedly, the cleaner balance sheets and lower leverage following this action would allow loans to flow to where there is demand. A clear strategy does not necessarily make it a good one. And some banks are even vocal about what's next (both Santander and CaixaBank have publicly stated that private loans will have to fall by around EUR300bn-400bn over the next few years).


We believe the private sector deleveraging poses significant challenges for the Spanish economy going forward. Going back to the surplus/deficit per sector, a private deleveraging process would need to be countered by higher public spending to compensate for the fall in GDP. This was the case in Japan in the early 90s but it is not plausible for Spain within the current EU configuration, where fiscal austerity is king. In this regard, note that the Spanish government has undertaken to reduce the budget deficit from around 8.2% in 2011 to 5.3% and 3% in 2012 and 2013, respectively (gaps of around EUR40bn and EUR55bn, respectively)....

LTRO was good news but will not promote lending growth - Cheuvreux (hence our "Money for Nothing" argument...):


"In a perfect world, the availability of an affordable (1% cost) source of medium-term (three years) funding would certainly promote lending to the private sector. There is sufficient empirical evidence to suggest, however, that neither low rates nor QE programmes foster lending to the private sector in highly leveraged economies. This has certainly been the case in Japan, the US and the UK where an enlarged monetary base did not lead to an increase in lending demand."  (Spain: Spreads in New Loans (%) - source Cheuvreux - Bank of Japan)

2---The euro alternative to Greek default and the drachma, Guardian

Excerpt:  The IMF now projects that 2012 will be Greece's fifth successive year of economic contraction, with 2013 being a year of stagnation. Even with growth projected to resume again in 2014, Greece's per capita income is still projected to be more than 8% lower than it was a decade earlier. Its unemployment rate, which is currently hovering near 20%, is still projected to be almost 15% in 2017. And its debt to GDP ratio is projected to be 137% in five years – far higher than it was at the onset of the crisis.


This is not a path to a healthy economy. And it's important to remember that the projections from the IMF and European Central Bank have consistently proven to be overly optimistic. Given this economic reality, it's difficult to see why the Greek people should go any further with such a disastrous policy.

The argument usually given is that there is no alternative. This is not true. Leaving the euro and bringing back the drachma is an alternative, however disruptive this may prove to be.

Leaving the euro would spark a financial and political crisis, but ultimately, this move would almost certainly leave Greece better-off than staying on its current deadend path. With a devalued currency, Greece would become much more attractive as a tourist destination. Its agricultural exports would be much more competitive in the European Union and elsewhere....

There is an alternative path that would be preferable to Greece leaving the euro: this would be the path where the ECB abandons its austerity path altogether. This would involve some sort of ECB guarantee for the debt of Greece and other heavily indebted countries, a relaxation of budget restrictions across the eurozone and, most importantly, a commitment to sustain a higher rate of inflation in Germany and other core eurozone countries. The latter is essential since it is the only way that Greece and other peripheral countries will be able to regain competitiveness if they stay in the euro.


3--Eurozone Banks deposit 805 billion with the ECB, marketwatch

Excerpt:   Banks' use of the European Central Bank's overnight lending and deposit facilities rose Thursday, data released Friday by the central bank showed.


Banks deposited EUR805.701 billion with the ECB Thursday, up slightly from Wednesday's EUR803.064 billion.

Meanwhile, banks borrowed EUR983 million from the ECB overnight Thursday, up from a relatively low EUR638 million Wednesday.

As the end of ECB's current reserve maintenance period is approaching, the amount of deposits is likely to rise further over the coming days. Banks typically aim to meet reserve requirements early in the period, meaning that deposits at the ECB tend to be higher as the period nears its conclusion. The current maintenance period ends May 8.

The amount of overnight deposits jumped sharply in recent months after the ECB pumped more than EUR1 trillion into the euro-zone banking system through its three-year loans in December and February

4--Regulators Seek Plan B on Money Funds, WSJ

Excerpt: Money funds, which invest in short-term, high-quality securities, are like banks in that they provide households and businesses with a place to park their cash. Unlike banks, however, money funds aren't subject to capital requirements or deposit insurance, which Federal Reserve and Treasury officials fear makes them susceptible to panics. When Lehman Brothers collapsed in 2008, it triggered losses in one called the Reserve Fund, which held Lehman debt, sparking a rush for the exit in money-market funds. The Treasury Department backstopped the industry as investors fled, but Congress has stripped the agency from using those powers again....

"Investors are telling us loud and clear that any of the SEC's concepts—floating the funds, requiring capital buffers, or imposing asset freezes—will drive them out of money-market funds and essentially kill the product," said Karrie McMillan, general counsel for the Investment Company Institute, an industry trade group at the forefront of the fight...

Top Fed and Treasury officials have urged the SEC to not back down despite the pressure from the industry and lawmakers, increasing their calls for the agency to act. They have pointed out that money-market funds remain vulnerable but regulators no longer have the tools they did in 2008.


"Additional steps to increase the resiliency of money-market funds are important for the overall stability of our financial system," Fed Chairman Ben Bernanke said in a speech last month. Fed governor Daniel Tarullo said last week that Ms. Schapiro "is right to call for additional measures."

5--European Banks Stash Their Cash, WSJ

Excerpt:   Some of Europe's biggest banks are increasingly hoarding their cash at central banks, anxious the continent's crisis could intensify and leave them with bigger problems.


At the end of March, 10 of Europe's biggest banks had parked a total of nearly $1.2 trillion of cash at central banks around the world, according to an analysis by The Wall Street Journal of bank disclosures. The total is $128 billion higher, or a 12% jump, since December and up 66% from the end of 2010.

After a three-month thaw earlier this year, bank-funding markets are showing signs of another freeze. European banks that deposit their money at central banks rather than lend it to customers or use it for other purposes are ensuring they have ready access to funds if they encounter trouble refinancing their debts or if other emergencies prompt customers to withdraw large amounts of money, such as credit-rating downgrades.

Much of the $440 billion increase by the 10 European banks since September is a byproduct of the $1 trillion of cheap three-year loans that the European Central Bank doled out to hundreds of banks in recent months. Such loans were intended to defuse a looming liquidity crisis as banks struggled to borrow money. Central bankers and policy makers also hoped the infusion would coax banks to start lending more and buy their governments' bonds, in turn helping to ease economic and financial problems in Europe.


In the first three months of the year, investors applauded the ECB's loan program, and European banks raced back to the bond markets, issuing an average of about €86 billion each month, according to data provider Dealogic.


That flood evaporated with the resurgence of euro-zone anxiety this spring. In April, European banks sold a total of about €24 billion of bonds, according to Dealogic. Aside from last December's anemic €12.8 billion total, April's bond issuance was the smallest amount in more than a year.

The trend is especially stark among Spanish and Italian banks. After churning out a total of nearly €9 billion worth of unsecured bonds in the first quarter, Italian lenders didn't manage to sell any in April, according to Dealogic. In Spain, banks sold just €18 million of such bonds in April, after issuing nearly about €8 billion in the first three months of the year.

It isn't just bond investors that have grown wary of lending to some European banks. Fellow banks have tightened their purse strings, too. Spanish banks saw the amount of interbank loans drop about €51 billion in March, while Italian banks lost €29 billion of such funds, according to analysts at RBC Capital Markets.

"The contraction is worryingly large, and highlights the speed with which interbank flows can affect a banking system's liquidity position," the RBC analysts wrote in a May 2 research note.....Lloyds has warned that such a downgrade could trigger the withdrawal of billions in customer funds. Moody's Investors Service is weighing possible ratings cuts for banks across Europe.


"Given the overall rating exercise that the ratings agencies, especially Moody's, are doing on all the banks in the EU, we thought it was prudent to leave the [borrowed funds] at the ECB," Mr. Horta-Osorio said. He said Lloyds Bank will re-evaluate once Moody's has announced the results of its ratings review

6--Europe edges closer to the endgame, credit writedowns

Excerpt:  The euro zone is unworkable in its present form because it is predicated on harmonised national fiscal and economic policies that are supposed to obviate the flexibility that a sovereign national currency affords. That harmonisation has never existed for the euro member states nor do I believe it ever will. And that means that the euro zone will always be beset by crises during economic downturns. Why?


Member states within the euro zone cannot run independent monetary policy. They cannot depreciate a national currency. They cannot depend on a central bank backstop. Nor can they run sufficiently countercyclical fiscal policy to deal with a large downturn. These are the policy tools that euro zone members have given up to benefit from the single currency due to a perceived free rider problem when the Maastricht Treaty was formulated. Without some kind of a countervailing supranational fiscal agent or sovereign risk pooling, this arrangement invariably means some sort of crisis will arise when the unharmonised economies of the euro zone result in large enough current account imbalances. Put simply, the euro zone is made for crisis. It is designed to fail.

Some of the designers knew this. They wanted the euro for political reasons and were willing to allow it to come to form in its present incomplete form. Their contention at the time was that the euro zone would develop the necessary institutions to prevent crisis before any crisis occurred – or at least before any crisis became existential. This contention has proved false as we are now in that existential crisis.

7--Class warfare, credit writedowns

Excerpt:  ...it is not surprising that Marx stated the central battle of class warfare at the time in terms of the working day:


"The capitalist maintains his rights as a purchaser when he tries to make the working-day as long as possible, and to make, whenever possible, two working-days out of one. On the other hand…the laborer maintains his right as seller when he wishes to reduce the working-day to one of definite normal duration. There is here, therefore, an antinomy, right against right, both equally bearing the seal of the law of exchanges. Between equal rights force decides. Hence is it that in the history of capitalist production, the determination of what is a working-day, presents itself as the result of a struggle, a struggle between collective capital, i.e., the class of capitalists, and collective labour, i.e., the working-class. – Marx, Das Kapital
























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