Are you a Russian company with deposits in Cypriot banks?
Do you feel safe?
Do you read newspapers? Read more
Are you a Russian company with deposits in Cypriot banks?
Do you feel safe?
Do you read newspapers? Read more
We just had to highlight this excellent cut-out-and-keep guide, from today’s print FT, to the tussle over banking union, fiscal union, and debt mutualisation:
The IMF’s latest global growth forecasts are, unsurprisingly, lower than their last set of forecasts. Which were in turn lower than their previous set of forecasts. And that’s as far as we want to go back, thankyouverymuch. And even with the reduced forecasts, there are caveats. Big, ugly caveats… Read more
The economics team at RBS summarise the announcement from the EU summit last week that surprised to the upside, while putting it in context:
We expect a successful resolution to this crisis through a series of small steps, with sovereignty pooled and houses put in order before the strong finally embrace the weak, because one big bazooka solution will take the pressure off in the periphery and therefore prove politically unpalatable in core. Read more
Calculating the benefit to Germany from eurozone membership has been attempted numerous times, and proven rather hard to pin down. But what about the opposite? The costs to the country of a euro break-up? Given the importance of Germany’s support to the survival of the euro project, this is a big question, with a tonne of political baggage attached.
The German ministry of finance has done just such an analysis, according to Der Spiegel, and found that the costs of such a break-up and the re-introduction of the D-Mark would lead to an up to 10 per cent fall in GDP in the first year. Unemployment would surge to its record high of over 5m. Read more
Here’s an innovative way of looking at the Eurozone crisis. Not so much the periphery states being reckless, but some states taking advantage of what should have always been seen as a collective pool of wealth.
We’re talking a tragedy of the commons. Read more
If this chart of exports is anything to go by, it’s hard to see how the US would become unwell:
Have you ever ridden a bike to work in a major metropolitan city? If so, you’ll understand the importance of predictability. It’s best to stick to the cycle lanes, signal when turning, obey traffic signals, and not stop or swerve suddenly.
FT Alphaville wonders how many European politicians commute to the office this way. It would seem to be a good lesson on how predictability leads to positive outcomes and the importance of deciding which direction to go and then sticking to it. Read more
The investment environment right now, especially in Europe, reminds me of the old arcade game of Frogger where the player had to direct their frog safely across a busy motorway and a river full of crocodiles. Despite the normal dangers, success usually required a series of forward and backward moves and sometimes several in quick succession. Sometimes however, the dangers ahead appear so overwhelming that one could easily sit on the side of the road for long periods – much like many investors now.
The little guy always gets ignored, as these charts from Nomura’s Jens Nordvig and Dimitris Drakopoulos show:
Maybe all the Anglo-Saxon central banks have done is create the illusion that our sovereigns are more solvent than they are, and that our budget constraints are really a safe distance away. But I don’t think they are. And I think the truth gets out eventually. The Enrons, the Allied Capitals, the Bernie Madoffs … they all get their comeuppance.
That’s from SocGen’s Dylan Grice, who seems more than a little bit annoyed by government’s abilities to fiddle with the amounts they can borrow (their budget constraints). Read more
At present the lights are being turned down in the markets but the good fund manager, like the good pianist, will be the one who can play in the dark.
That’s Crispin Odey getting seriously gloomy and abstract in his latest note to clients. Read more
The Greek fall-out continues with Spanish 10-year yields hitting 6.5 per cent, their highest level in almost six months:
Italian business confidence has taken a serous hit, falling to its lowest level in two years in April.
According to the wires: Read more
Now that austerity-related political risk has reared its unhappy head in the eurozone, it’s worth pondering yet again the fiscal goals that the area aspires — well, sort of — to reach.
Last December, we posted some charts of Eurostat data (via MacroBusiness & Naked Capitalism) highlighting which eurozone countries would have exceeded the limits set in the new European Fiscal Compact – an offense that will be punishable by fines when* the treaty is adopted: Read more
European officials are insisting any new Greek bail-out programme specifically earmark funds to pay off remaining holders of Greek debt, giving lenders the freedom to withhold aid to Athens without risking a messy default that could reignite panic in financial markets, says the FT, citing senior European officials. Under a Franco-German plan is likely to be included in a new Greek rescue, eurozone officials would create an escrow account to accept new bail-out funding instead of paying it all directly to Athens as in the past. The new fund would then ensure bondholders are paid off, while additional cash to run the Greek government could still be withheld if Athens did not live up to tough new reform demands. The report says the plan has backing from the European Commission in Brussels as well as several other eurozone countries. The WSJ says Greek politicians agreed to cut 15,000 public sector jobs by the end of this year, but the unity government has not been able to agree on wage cuts, although it cites two senior government officials as saying agreement to cut the minimum wage by 20 per cent was close.
China is considering how to get “more deeply involved” in resolving Europe’s debt crisis by co-operating more closely with European rescue funds, Wen Jiabao, Chinese premier, said on Thursday. China “is investigating and evaluating concrete ways in which it can, via the IMF, get more deeply involved in solving the European debt problem through [European Stability Mechanism/European Financial Stability Facility] channels,” Mr Wen said in a joint press conference with German Chancellor Angela Merkel in Beijing. The FT reports that the comments have revived hopes that China, which holds by far the world’s largest foreign exchange reserves, could add some of this $3.2tn cash pile to existing and future European bail-out funds.
Global bank bonds are enjoying their strongest monthly rally in nearly three years after the European Central Bank injected €489bn into the eurozone’s banking system, averting a liquidity crunch that could have undermined efforts to boost economic growth, the FT reports. The total return for the bonds of European financial companies is 3.5 per cent so far in January and it is about 3 per cent for US financial debt, both on track for the biggest monthly return since July 2009, according to indices from Barclays Capital. The bank bond rally highlights how the LTRO has helped lift investor sentiment in Europe and beyond after a difficult second half to 2011, when European banks struggled to raise funds in the wholesale market. More than 500 banks across Europe bid for €489bn in three-year loans from the ECB in December. A second tranche of the LTRO is due in February. The recovery in the bank bond market has been mirrored in the equity market, with European and US banks bouncing off their start-of-the-year levels.
David Cameron has delivered a firm rebuke to Germany at the World Economic Forum, calling on Berlin to contribute significantly more resources and guarantees to help solve the eurozone crisis, the FT reports. The British prime minister stressed on Thursday that although progress had been made, particularly with the European Central Bank’s funding of the European banking system, policymakers were still far from finding a solution to the underlying problems of the crisis. He criticised eurozone leaders for being distracted by other issues, such as the introduction of a financial transaction tax – an initiative he described as “quite simply madness”. The Telegraph says he suggested a stamp duty on shares, as in the UK, which France and Germany are currently considering as an alternative if their proposal fails. Meanwhile the FT reports separately that François Hollande, the socialist candidate vying for the French presidency, has pledged to renegotiate the German-inspired fiscal compact, if elected. Other socialist figures from Belgium to Sweden have also criticised the compact.
JPMorgan chief executive Jamie Dimon has admitted the bank considered pulling out of the eurozone’s most troubled periphery on economic grounds, says the FT. Mr Dimon said his company had “about $15bn exposure” across the GIIPS countries. “It’s largely to corporations and sovereign and some banks. But we made a decision which was largely social, and partially economic, to stay,” he said. Mr Dimon also told a panel at Davos he might support President Barack Obama’s “Buffett rule”, which would raise taxes on high-earning Americans. Mr Dimon said the US should have a “conversation” about tax rates.
The European Commission will complain to Treasury Secretary Timothy Geithner that proposed US regulations could discourage banks from trading European sovereign bonds, the WSJ says. Michel Barnier, the European commissioner for the internal market, told the newspaper he would speak to Mr Geithner next month, adding: “We can’t accept extraterritorial consequences or Europe will be tempted to do the same thing”. Mr Barnier said the UK chancellor George Osborne raised concerns at a meeting on Monday.
Angela Merkel is prepared to let the existing EFSF, which has about €250bn in unused funds, run in parallel with its successor, the €500bn ESM, says the FT, citing unnamed German and eurozone officials. In return, the German chancellor wants eurozone heads of government to sign up to rules to cut budget deficits and public debt that are much tougher than those currently foreseen by eurozone governments. The German offer emerged as Christine Lagarde, the IMF head who met Ms Merkel on Sunday, pressed Berlin for “a clear and credible timetable” to fold the existing EFSF into the ESM to increase its size. Without a larger bail-out fund, fundamentally solvent countries like Italy and Spain could be forced into a financing crisis, Ms Lagarde said in a speech in Berlin. “This would have disastrous implications for systemic stability,” she said.
*This* is a bazooka.
Not a €2,000bn bazooka… a €5,000bn bazooka to repair the eurozone, according to Peter Boone and Simon Johnson, writing for the Peterson Institute where they are both fellows. In fact, somewhere between €2,000bn and €2,500bn is a good scenario, they argue; their base scenario is €2,800bn. Read more
The IMF has asked its member countries for an extra $500bn in firepower to combat the world’s spreading fiscal emergencies, which it estimates will generate demand for bail-out loans totalling $1tn over the next two years. The FT, citing people familiar with the discussions, says the estimate was presented by Christine Lagarde to the fund’s executive board this week, and would most likely be financed by voluntary ad hoc loans rather than mandatory contributions. The IMF currently has $387bn in available resources. Eurozone countries last month pledged about $200bn to the IMF, which will count towards the new goal. But with the US unwilling to contributeand the UK reluctant, much of the remaining commitments will have to come from large developing countries. “The IMF cannot substitute for a robust euro area firewall,” the US Treasury said in a statement. “We have told our international partners that we have no intention to seek additional resources for the IMF.”