Wednesday, June 6, 2012

Today's links

1--Is Canada facing a housing bubble? , Sober Look

Canadian home prices have been growing quite rapidly, particularly as compared to the US. Some may argue that this is justified because Canada's unemployment rate is lower. 8.1% in the US vs. 7.4% in Canada. Is that enough to justify such a divergence in housing prices, particularly when the GDP growth rates in the two countries is fairly similar?

Canadians have also been growing household debt levels. The chart below, though a bit dated, includes mortgage debt (total debt as percentage of net worth).

Economists are becoming concerned.

Edmonton Journal: - ...OECD economist Peter Jarrett ... described the housing market as the “biggest story in Canada.” Home prices, which corrected about 10% during the recession, have surged again, “making household balance sheets look increasingly fragile, he said.

Given the global economic backdrop, and in particular the sharp correction in energy prices to which Canada is highly exposed, the risks of a Canadian housing correction are rising. Watch the BBC video below to get a feel for the situation on the ground.

2--US banks moving away from wholesale funding, sober look

Since the financial crisis, US banks have been rapidly reducing their reliance on wholesale funding. Large time deposits (CDs) went from 21% of the total bank liabilities prior to Lehman to around 13% today (chart below).

Banks are not marketing these accounts as aggressively as the used to (not offering very attractive rates on CDs as they did in the past) and there is also less customer demand. People are uneasy about locking up their money for six months to earn less than a quarter of a percent. And not many customers want to lock their money up for a longer period. Plus those who have more that $250K on deposit need to worry about bank credit risk on a CD that is locked up for a longer period..

In addition, banks are reducing their reliance on other "non-deposit" funding - such as borrowing from other banks, commercial paper issuance, etc. The chart below shows the total percentage of bank liabilities that would be considered wholesale funding. (charts)

3--Macro outline of causes and effects of and predictions for the global financial crisis, credit writedowns

The global economy is in an economic depression. This post is a brief outline in bullet points of my macro view of that depression and the global financial crisis which caused it. I highlight causes, effects and predictions. My goal here is to help me crystallize what the real issues are and how they are likely to play out. I think framing the problem in macro terms could be a very useful exercise. Please chime in with your comments and criticisms.

In my view, the still ongoing financial crisis has five root causes:

1.Excess credit growth and private indebtedness in advanced economies
2.Combining of financial deregulation with desupervision (and decriminalisation)
3.Tight coupling and undercapitalisation in the global economy and financial system
4.Flawed institutional architecture for common currency in Europe
5.Inevitable policy errors given the number of fault lines

4--For eurozone, life does not equal hope, IFR

The two current arguments for enthusiasm about asset and risk markets seem to be these: that policy forbearance and the European Central Bank can keep the eurozone intact until someone thinks of something, and; that coordinated central bank and fiscal policy will rescue the global economy anyway.

Both are untrue but, like most untruths, both contain interesting elements of truth....
Rescue does not revive risk

That does not mean that risky assets are attractive here. Europe’s solvent nations and the ECB may well keep things ticking over but while they do, the fundamental condition of the euro zone and global economy will continue to deteriorate.

Attempts to cut the knot between banks and their sovereign backers only underline the fact that one state must be replaced with another, in this case Spain and Greece have to be fully subsumed into a eurozone fiscal union, a process which will be long, difficult and no sure thing. Bank lending will be impaired, investment delayed and jobs lost. This implies that things will be considerably worse economically at the point at which some solution is reached. In other words, your risk isn’t just that something will force the euro zone to dissolve, but that world growth will melt while we wait.

This is not simply a eurozone issue; conditions are weakening most everywhere, from the US to India to China. The jobs figures in the US last week were poor, US factories show signs of slowing and Chinese manufacturing is sliding rapidly towards contraction.

The inevitable riposte to this is that authorities will respond with liquidity, cash and stimulus. Governments and central banks are indeed eager to avoid a negative feedback loop, and we can expect more quantitative easing or extraordinary measures in coming months from the Federal Reserve, Bank of Japan, Bank of England and assorted others....

It’s time to really start attacking the debt problem, not by skimping and repaying but by writing it off and starting all over again, no matter whose nose is bloodied in the process.

5--EU, Germany exploring Spanish rescue, no request yet, IFR

Germany and European Union officials are urgently exploring ways to rescue Spain’s debt-stricken banks although Madrid has not yet requested assistance and is resisting being placed under international supervision, European sources said on Wednesday.

Spain, the eurozone’s fourth biggest economy, said on Tuesday it was effectively losing access to credit markets due to prohibitive borrowing costs and appealed to European partners to help revive its banks.

The European Central Bank dashed investors’ hopes of an easing of monetary policy or another flood of cheap liquidity for banks despite saying that the euro zone money market has again become “dysfunctional”. The ECB left interest rates on hold at 1 percent at its monthly meeting.

The move raised pressure on EU political leaders to outline a solution to the bloc’s festering debt crisis at a summit later this month....

A series of reforms to Spain’s financial system have failed to persuade investors that huge losses from a 2008 property market crash have been fully addressed, and doubts about the cost of a final rescue have deepened the eurozone debt crisis.

Finance chiefs of the Group of Seven major economies, afraid of a possible run on Spanish banks, held urgent but inconclusive talks on the European situation on Tuesday.

“The market’s expectation regarding further policy action globally is picking up,” said Ian Stannard, an executive director at Morgan Stanley.

Underlining the dangers to the entire 17-nation zone of inaction, Moody’s Investors Service cut the credit ratings of several German and Austrian banks, citing the greater risk of further shocks stemming from the region’s debt crisis. Germany is the single currency’s strongest economy.

6--.A fate worse than the End of Days, IFR

While a Greek exit from the eurozone would be a horror for markets everywhere, the uncertainty over the continent’s future is the real problem...That Europe and the US are in poor shape is nothing new. What is different this time is that Asian economies, especially the growth behemoths of India and China, are slowing quickly. The region is no longer a haven from the world’s troubles, but is instead rapidly becoming part of the problem.

The rapid slowdown in the Asian capital markets is a reflection of this fact. Asian governments still have the firepower, in the form of fiscal surpluses and large foreign reserve holdings, to launch huge stimulus programs. But like quantitative easing in the US, a second round of stimulus programs may have diminishing returns.

Everyone knows the world economy is in a fragile state – but that is not the most worrying thing. The bigger worry is the uncertainty. A Greek exit – or even a eurozone collapse – will be unpleasant but will, ultimately, be manageable. Continued uncertainty is not.

While doomsday scenarios are easy to dream up, the End of Days is not yet upon us, for that would mean an end to this crisis is in sight.

7--Banks Don't Bank on Their Euro Peers, WSJ

If banks don't trust each other, why should an investor?

That was a troubling question for U.S. banks back in 2007 and 2008 as the financial crisis got under way and banks reduced exposures to one another. And it is again pertinent as Europe founders.

Fourth-quarter 2011 global-banking data from the Bank for International Settlements showed that interbank lending fell $637 billion in the fourth quarter of 2011. Of this, nearly 60% was due to a falloff in cross-border claims on banks in the euro zone.

"It was the largest contraction in cross-border claims on euro-area banks, in both absolute and relative terms, since the fourth quarter of 2008," the BIS noted. What's more, the reduction wasn't just related to troubled European countries like Greece and Portugal or even Spain and Italy. Cross-border claims on banks in Germany fell 8.7% and in France by 4.2%.

Granted, conditions likely improved in the first quarter as the European Central Bank lent €1 trillion ($1.24 trillion) to banks, alleviating funding concerns. But the effect has proved short-lived, and European fears have flared anew.

That likely has banks again cutting exposures to one another. While a natural form of self-protection, such moves also are implicit votes of no-confidence in counterparties. That serves as a reminder for investors to continue doubting claims by European banks that they have sufficient capital.

With many of Europe's biggest banks trading at less than half their book value—Germany's Deutsche Bank, DB +4.67%for example, is about 45%, France's BNP Paribas is at 43% and Italy's UniCredit is at 25%, according to FactSet Research—investors have decided that bank assets are likely overstated or their liabilities understated.

The BIS figures show that banks themselves may be of a similar mind.

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