Two tables below the break, courtesy of Credit Suisse, detailing the ECB board’s easing predilections. Tabled story short, the increasing north/south divide that has accompanied the euro area’s drawn out crisis has lead to the balance of power shifting to the periphery. Or: doves in the ascendant. Interesting too that the Bundesbank might thus be pushing for ECB minutes to be released in order to quell those national interests.
Out of the 23 Governing Council members including 6 Executive Board members 13 are dovish or very dovish as we show in the table below, where we have assessed Governing Council members and their recent statements. The dovish cause of the periphery is further helped by the fact that three core representatives, both French nationals and the governor of the central bank of Belgium, have also been typically perceived to be in the more dovish camp. Increasingly the Bundesbank is thus becoming more marginalized which might explain the Bundesbank having consistently increased the volume of its verbal interventions throughout the crisis.
Here’s an essay published by the Bruegel think tank, penned by Ashoka Mody, currently a visiting professor at Princeton. He argues that if Europe wants to move forward in terms of integration, it first needs to stop. Click to read.
A hopeful outlook on the European economy has apparently become a non-contrarian view. This was bound to feel strange and does, but last week we highlighted the proliferating number of research notes citing reasons for relative optimism.
Matt King of Citigroup also spots these trends, but he tacks on a useful discussion of the potential (foreseeable) obstacles: Read more
About that banking union and the aspiration to “break the feedback loop between banks and sovereigns”…
From JP Morgan’s Alex White:
It has been clear for some time that this is not fully achievable in the near term, because of the extent of the institutional journey required (likely including the prospect of Treaty change). For the foreseeable future, Europe’s banks will be left with what Minister Schauble has explicitly referred to as a “timber-framed” Banking Union. This will emphasize that the heavy lifting has to be done at the national level, and will be based around the development of national resolution regimes.
Some charts from Pew’s latest survey of 8,000 people across eight EU countries, most of whom are increasingly *insert euphemism* with Europe:
Young Europeans in countries hit hardest by the Continent’s economic crisis are finding it difficult to move out of their parents’ home. Data shows that over 50 percent of those aged 25 to 34 in some countries have yet to move out.
That’s the subheading of a Spiegel Online article that caught our eye this week. It came with the attention grabbing headline: Read more
You know what doesn’t often conjure images of economic happiness? The 1970s, that’s what. And the argument coming from some quarters right now is that Europe, or at least its periphery, is heading back into such a period of stagnation and chronic inflation with unemployment leading the way. Read more
You really do wonder how long this trend can be allowed to continue. From Eurostat on Tuesday…
We have a banking union, kinda, sorta. After another marathon summit that stretched into the early hours of Thursday morning — with four hours apparently devoted to overcoming the differences between Paris and Berlin — a classic euro-fudge left everyone feeling relatively satisfied. From the FT:
While the compromise could permit all sides to declare political victory, it remains unclear whether the details effectively establish a two-tier regime or give the ECB ultimate responsibility for all banks.
Shocking. Read more
So, we’re going to the wire once again in the now traditional dance between Greece and the troika. As the FT reported on Thursday:
Eurozone leaders face a new round of brinkmanship over Greece’s €174bn bailout after international lenders failed to bridge differences on how to reduce Athens’ burgeoning debt levels, pushing the country perilously close to defaulting on a €5bn debt payment due next week.
More euro gloom.
From S&P ‘s Global Fixed Income research team on Tuesday, “Europe’s Sovereign Crisis Continues To Erode Credit Quality.” Read more
It seems odd — and it may well be short-lived — but the US is beginning to shape up as a rare bright spot in the world economy.* Or indeed almost the only bright spot in the world’s economy, except for the Gulf petro-states. That is, if you were to base such an assessment solely on Japan’s September export data, released on Monday.
Japan’s preliminary September trade data tell a story not dissimilar to China’s — exports to Europe are slowing (unsurprisingly) by a lot, down 26 per cent for the month, year-on-year. Read more
Call it can-kicking at the highest European level. Call it inevitable. Both statements are probably true.
Nevertheless, banking stock across Europe were racing higher on Thursday on the back of this: Read more
Nearly half of Asia’s larger companies are planning to make a significant acquisition in Europe over the next year, drawn by the availability of cheap assets amid the eurozone crisis, according to a survey by FTI Consulting, the FT reports. Some 45 per cent of Asian businesses quizzed in a poll of 800 companies around the world, all with at least 250 employees, said they were now looking to make strategic acquisitions in the region, as the eurozone’s problems have taken their toll on the valuation of businesses, particularly in the financial services sector. Lord Malloch-Brown, chairman of the European arm of FTI, said there was still unlikely to be a “rush to buy distressed Europe”, with continued nervousness among potential investors over the eurozone’s problems and timing and manner of any resolution of them. Reflecting those jitters, nearly a third of respondents in the FTI poll thought the euro would not survive 2012 intact.
Policy changes the ECB announced last week will help banks directly and governments indirectly. But the EU fell short on every element of a comprehensive deal. On Friday, investors reacted positively to what was sold to them as a “fiscal compact”. But once the implications of a separate treaty are understood, I fear disillusionment will set in. – Wolfgang Münchau.
And sure enough, that’s precisely what’s happening. Analysts, strategists, and commentators across Europe are asking: ‘Where is the fiscal union?’ Read more
Angela Merkel has called for European Union treaty change to introduce as quickly as possible a legally-binding set of rules for the eurozone’s fiscal union, the FT reports. Looking very sombre in a black suit and not deviating from her written text, the German Chancellor said in a speech to the Bundestag, the German parliament, the eurozone was not facing a debt crisis, but a crisis of confidence that would take years to resolve. Ms Merkel confirmed that she and Nicolas Sarkozy, the French president, would present a reform plan together in Paris on Monday which would be aimed at creating a “stability union” of the 17 eurozone countries, with stricter budget discipline rules, and tougher sanctions, with stricter surveillance of national budgets. Ms Merkel stressed it was vital to have those rules made legally binding and as automatic as possible. “We are not just talking about a stability union,” she said. “We are beginning to create one.” Ms Merkel’s call for greater fiscal union echoed a speech by Mr Sakozy on Thursday night. He said that eurozone countries must be subject to tougher central control over their budgets to stem the sovereign debt crisis.
This week’s market upheaval in Europe has made it difficult to increase the firepower of the eurozone’s €440bn rescue fund to the €1,000bn that the bloc’s leaders had hoped for, the fund’s chief executive said on Thursday, reports the FT. Investors have fled from bonds issued by highly indebted countries. Luring them back by offering insurance on losses – the centrepiece of a plan agreed in Brussels on October 26 – would now probably use up more of the fund’s resources, Klaus Regling, head of the European financial stability facility, said. His concerns underline Europe’s difficulties in putting in place mechanisms to contain the sovereign debt crisis and, if necessary, help Italy cope with soaring refinancing costs. “The political turmoil that we saw in the last 10 days probably reduces the potential for leverage,” Mr Regling told reporters. “It was always ambitious to have that number, but I’m not ruling it out.”
Unfortunately, Nomura’s analysis of the EFSF’s shortcoming is both more convincing and more extensive. Here are some choice extracts, with our emphasis: Read more
The revamped EFSF risks becoming the wiggle side chair of financial engineering, lauded for its creativity but rarely used for its intended purpose.
On Monday, Nomura strategists released a useful note explaining the two new aspects of the EFSF — the special purpose investment vehicle (SPIV) and the credit insurance option — along with their pros and cons. The cons list is longer and, in aggregate, suggests that in spite of its aesthetic values, the revamped EFSF is riddled with too many contradictions to do much to help Italy and/or Spain. Read more
US equities could be in line for a secular bull market as soon as next year, but European stocks should be handled with care.
That is a synopsis of the latest thinking from Citi. For more details read on: Read more
Here’s something to ponder for the commute home, via Deutsche Bank:
One topic of conversation with investors is why realized volatility has been similar to levels during 2010 (the onset of the European sovereign crisis), whereas investor’s perceptions of the current crisis (as well as option implied volatility) suggest the crisis is closer to 2008/09 in scale and severity. Figure 7 makes it clear that current realized volatility (based on a standard “close-to-close” measure), is broadly in line with 2010 and early 2008 volatility spikes. Read more
Jefferies really wants you to know that its net position is “insignificant”.
In a statement released on Friday the broker took the rare step of disclosing not only the size of its dealings with peripheral Europe, but the shape, too. Read more
Can we really know anything about US banks exposure to Europe?
A familiar epistemological question, which is being asked again in the wake of MF Global’s demise and Jefferies’ circuit-breaking slide. Read more
Greek Deputy PM Evangelos Venizelos’
bombshell statement upon arrival from Cannes on Thursday morning: Read more
European leaders threatened to cut off an already overdue tranche of €8bn in international aid to Greece as they piled pressure on Athens over its plan to hold a referendum on the eurozone’s latest rescue plan for the debt-crippled country, reports the FT. José Manuel Barroso, European Commission president, delivered the warning by telephone to George Papandreou hours before the Greek premier was due in Cannes for a showdown meeting with French president Nicolas Sarkozy, German chancellor Angela Merkel and other key leaders, a senior European official said. Meanwhile, Silvio Berlusconi has been scrambling to pass long-delayed economic reforms before the G20 summit begins on Thursday, adds the FT.
European leaders are racing to save the latest rescue plan for the eurozone after financial markets reeled on Tuesday on fears that Greece’s proposal to hold a referendum on its second bail-out package could lead to a disorderly default by Athens, reports the FT. Reacting with scarcely disguised anger to Athens’ unexpected move, Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, France’s president, summoned George Papandreou, Greek prime minister, to emergency talks in Cannes on Wednesday with Christine Lagarde, managing director of the International Monetary Fund, and the heads of the leading European institutions, to buttress the eurozone’s position on the eve of the G20 summit of world economies.
RBC Capital Markets has busted out the PowerPoint to depict the two ways EFSF could achieve the “several fold” leverage pledged last week by European leaders in Brussels. They may come in handy as you prepare to jet off to this week’s G20 summit in Cannes. (FYI: Unfortunately, no response yet from Paul Allen about our proposal to host a FT Alphaville party on his yacht.)
First, the EFSF as monoline idea (click to expand). Read more
And now for something completely different.
In his latest note to clients, Nomura’s Bob Janjuah goes all technical: Read more
Eurozone leaders will attempt to reduce Greece’s outstanding debt to 120 per cent of gross domestic product by the end of the decade, but were struggling on Wednesday night to pin down details of the private sector’s contribution, needed for a comprehensive deal, reports the FT. Meanwhile, Brussels was heading for a long night as draft statements circulated and Silvio Berlusconi tried to convince other EU leaders that Italy had a plan to solve its liquidity problems, writes FT Alphaville. The French Government said that Nicolas Sarkozy would speak to Hu Jintao in the morning. The FT’s live blog will have the latest.