About 20 years ago or so, it started becoming fashionable to conclude that the Japanese government’s borrowing costs were going to go up a lot.
Demographic changes were going to dramatically increase the share of retirees dependent on the state for income and healthcare at the same time as the working population — and therefore the tax base — would be shrinking. Add in alleged economic stagnation and the result would be a rapidly widening gap between inflows and outflows. The ratio of government debt to GDP would skyrocket. Read more
We’ve run a couple of posts here on FTAV recently about how cancellation of QE debt isn’t really such a big deal: more an accounting change than anything material because both treasuries and central banks are part of the public sector.
Here is an argument that this mere accounting exercise could be worthwhile — particularly if the debt-laden developed countries descend into another downturn. Read more
And so it came to pass, that everyone who worried about whether the euros which people owed them would stay euros for much longer…
…realised that this was not a drill. Read more
This derivative market is not a parrot. It. Is. Not. A. Parrot.
It is a chicken! Read more
On Sunday night, the 17 eurozone leaders debated without reaching a conclusion two potential models to expand the financial firepower of their €440bn European financial stability facility, using financial engineering to leverage the core capital by up to five times. The FT says one plan would set up a special fund to attract global investors, including potentially the IMF, that would buy Italian bonds and those of other troubled eurozone countries. The other, which could run in parallel, would guarantee against losses by bondholders. Angela Merkel and Nicolas Sarkozy warned that both plans involved technical complexity. At the same time top-level officials were negotiating with a consortium of international banks to increase their contribution to a new rescue plan for Greece, to cut the country’s debt burden. Without further cuts in repayments to bondholders, EU and IMF lenders will be saddled with €252bn in bail-out loans until the end of 2020, according to a confidential EU-IMF study (discussed in more detail on FT Alphaville). Negotiators said the two sides remained far apart on the size of any debt writedown. However in one sign of progress, Reuters reports that Mr Sarkozy backed down in the face of implacable German opposition to his desire to use unlimited ECB funds to fight the crisis. Instead, the eurozone may turn to emerging economies such as China and Brazil for help in underpinning its sickly bond market. The WSJ says European leaders are also nearing agreement on recapitalising the region’s banks, with an amount of about €100bn now being discussed to enable banks to reach a 9 per cent core tier one capital ratio. The FT says the bank deal proved far harder than expected because Italy, Portugal and Spain resisted raising the capital bar without more certainty about state assistance for any banks unable to raise the capital themselves. Banks will be told to use their own resources or raise new funds from private investors, government or, as a last resort, turning to the EFSF rescue fund. As well as banks in bail-out countries – which account for almost half the shortfall – institutions in Germany, France, Italy and Spain will be required to find new capital. No UK banks fall under the threshold. Meanwhile Germany and France have turned on Italy to demand further action to boost growth and reduce its huge debt. Ms Merkel and Mr Sarkozy held tough talks with Silvio Berlusconi at the start of the day-long summit in Brussels, insisting that he take more radical measures to restore the trust of investors. Ms Merkel and Mr Sarkozy looked at each other with “wry smiles”, the FT reports, when asked at a press conference after the meeting if they had been reassured on Mr Berlusconi’s efforts to reduce Italy’s debt levels.
US Treasury Secretary Timothy Geithner will attend a meeting in Paris this weekend of the Group of 20 finance ministers at which he is expected to call for more forceful action to tackle the European debt crisis, reports Bloomberg. Concern has been growing that the failure to tackle the crisis will derail the fragile global recovery. The Under Secretary for International Affairs, Lael Brainard, told Reuters that China and other emerging nations “have to play a bigger role to play in bolstering and sustaining global growth nations,” adding that “those with large current account surpluses have substantial capacity to pivot more rapidly to a pro-growth strategy driven by consumption.”
Leading European banks say they would rather sell assets than raise expensive new capital to meet compulsory demands from the European Union for higher capital ratios, threatening a further contraction of credit to the enfeebled eurozone economy, says the FT. This radical approach, led by French banks BNP Paribas and Société Générale, would be copied by lenders across Italy, Spain and Germany, bankers said. However, the banks’ “shrinkage” strategy is likely to prove controversial with politicians and regulators if it led to bankers lending less money to customers, jeopardising the eurozone’s fragile recovery, analysts warned. Also on Wednesday EC president José Manuel Barroso gave a broad outline of a compulsory recapitalisation for Europe’s leading banks, requiring “a temporarily higher capital ratio”, with restrictions on dividends and banker bonus payments in the interim. He stopped short of specifying the target ratio, which had earlier been reported by the FT as likely to be higher than expected at core tier 1 capital of 9 per cent, citing people close to the process.
David Cameron has urged European leaders to take a “big bazooka” approach to resolving the eurozone crisis, warning they have just a matter of weeks to avert economic disaster. The UK prime minister told the FT he wants France and Germany to bury their differences and to adopt before the end of the year what he claims would be a decisive five-point plan to end the uncertainty, which was having a “chilling effect” on the world economy. Separately, Mr Cameron wants Germany and others to accept the “collective responsibility” of euro membership and to increase the firepower of the eurozone’s €440bn bailout fund to stop financial contagion spreading from Greece. Although he refused to speculate on a Greek default – some British government ministers believe it is now inevitable – he said all uncertainty had to be removed about the country’s economic future. He also called for the IMF to be more active in “holding feet to the fire”, confronting eurozone leaders in the starkest terms possible with the consequences of further prevarication. The final part of Mr Cameron’s plan is to address Europe’s underlying weaknesses, including deepening the single market and improving the governance of the eurozone, if necessary through treaty change. “That’s the menu,” he said. “It’s not à la carte – you have to do the whole thing.”
Nervousness is growing in Whitehall that the government might have to inject further capital into RBS as part of a European effort to recapitalise the continent’s banking system, the FT reports, quoting an unnamed government official who said: “[RBS’s] sovereign exposure is not fundamentally worrying but if there is a broader European drive to recapitalise the banks it’s conceivable they may need more government money.” RBS received the world’s biggest bail-out during the financial crisis, at a cost of £45bn to the UK taxpayer. In the EBA’s July stress tests, which applied virtually no writedowns for eurozone peripheral bond holdings, RBS, Commerzbank, Deutsche Bank, Société Générale and UniCredit had stress test results in a grey area above the minimum but below 7 per cent. Once sovereign haircuts – likely to range from 20 per cent on Spain up to 65 per cent on Greece – are applied, those numbers will fall, in some cases sharply.
The duck test is a paradigm of inductive reasoning. If, as Douglas Adams chirpily wrote, “it looks like a duck, and quacks like a duck, we have at least to consider the possibility that we have a small aquatic bird of the family anatidae on our hands.”
The sitting duck test, to coin a phrase, involves inductive reasoning of a different sort, as Citigroup explains in a research note on US banks’ European exposure published Friday evening. “The US seems like a ‘sitting duck’, unable to directly respond,” write economists Steven C Wieting and Shawn Snyder. Read more
On Wednesday, the SNB unleashed it’s ultimate Swiss franc depreciation plan — le plan, negatifs taux d’intérêt — a.k.a the strongest signal yet that it is prepared to take interest rates negative to curb Swiss franc strength.
Yes, there were liquidity measures announced too, but make no mistake, that’s not what was really messing with forex traders’ heads on the day. Read more
Can someone please stop the world? We want to get off.
Things are seemingly moving quickly from the ridiculous to the absurd, in sovereign debt crises. Read more
As goes Portugal, so goes Ireland, which is now in junk territory.
The ratings agency cites implementation risks to Ireland’s austerity programme but the main reason — like with its 6 July Portugal downgrade — is the presumed involvement of private creditors as a precondition to a second bailout. Read more
If eurozone leaders press ahead with plans to extend Greek bond maturities in a “soft” or voluntary debt restructuring, then traders in credit default swaps could be one of the main casualties, the FT reports. Sovereign CDS, which insure investors against the risk of a bond default, are facing a critical moment in their short history. The first sovereign CDS trades were made about 10 years ago and the question of whether or not this insurance will pay out could soon be put to the test. A voluntary restructuring of Greek debt, or “reprofiling”, as European Union policymakers describe it, threatens to undermine the intrinsic value of buying the derivatives because such a restructuring is unlikely to amount to a so-called “credit event”. This means that the banks and investors who had bought CDS protection against any restructuring would receive nothing in recompense for any losses in interest due or principal invested in Greek bonds.
Portugal’s cost of borrowing brushed close to euro-era highs on Tuesday as Germany resisted calls to bolster the eurozone’s bail-out fund for heavily indebted economies on the continent’s periphery, the FT reports. Portuguese bond yields jumped above 7 per cent – a level that Lisbon has admitted is unsustainable – after concerns rose that the eurozone crisis could worsen, following comments from Wolfgang Schäuble, the German finance minister. Mr Schäuble appeared to put the brakes on plans to increase the size and scope of the €440bn ($588bn) European financial stability facility, at the end of ministerial meetings in Brussels, saying “It cannot be that European solidarity just means that six countries carry solidarity and the others profit.” Mr Schäuble’s comments also hit other peripheral bond markets, with yields rising sharply in Greece and Ireland and a bond auction in Belgium.
Another day, another fresh cyclical high for many risk asset benchmarks as optimism over US corporate earnings and hopes for an easing of eurozone sovereign debt tensions bolstered the bulls, reports the FT. The FTSE All-World equity benchmark was up 0.4 per cent to its best level since August 2008. Commodity prices were higher, with copper hitting a record, and the dollar weaker as the “risk-on” trade was applied with gusto. US stock futures pointed to the S&P 500 opening up fractionally to a new 27-month peak just shy of 1,300, boosted by strong results from Apple and IBM after the closing bell on Tuesday. Meanwhile, the euro breached $1.35 for the first time since November as traders bet that last week’s “peripheral” bond auctions and international verbal support meant the eurozone sovereign debt contagion had been halted, thus removing a stain on the global recovery narrative that has delivered a startling rally since the autumn. The S&P 500 is up 24 per cent since September 1.
José Luis Rodríguez Zapatero, Spanish prime minister, has issued a hardline warning to the country’s autonomous regions that they must curb public spending and debt creation so that Spain can recover from its sovereign debt crisis, the FT reports. After decades of government concessions to regional demands, Mr Zapatero said in a Financial Times interview that the central government would strictly enforce deficit limits and act against any region that stepped out of line. “At the end of the day, who is accountable, who is responsible?” he asked. “It’s the central government, isn’t it? And we have to spearhead, lead the way forward with the control of public spending for the autonomous regions. And they have to deliver. They have to fulfil those obligations, because if they don’t, the government will act.”
Japan on Tuesday pledged to buy more than 20% of the eurozone’s inaugural bond issue, suggesting strong support among international investors — including from sovereign wealth funds in China, Norway and the Middle East — for the region’s fund-raising effort, reports the FT. The European financial stability facility, the €440bn ($570bn) eurozone bail-out fund, will price its first bond issue of up to €5bn next week. The funds raised will go towards the €85bn bail-out of Ireland. FT Alphaville considers the big change in regional fortunes that brings countries such as China and Japan to Europe’s rescue.
It’s one of those days to marvel yet again at how quickly times can change.
Just a few highlights from the now-daily diet of China-related developments includes the fact that China has overtaken the UK to become the world’s second-largest market for Rolls Royce limos (behind the US), that it has broken world records for the level of its FX reserves, and that it is currently sealing a swag of deals in Europe … Read more
Pressure is growing on Portugal from Germany, France and other eurozone countries to seek financial help from the EU and IMF to stop the region’s debt crisis from spreading, reports Reuters, citing a senior eurozone source. There have been preliminary discussions about Portugal asking for help if its financing costs on markets become too high. Pressure however is now rising in the Eurogroup, which brings together eurozone finance ministers. “France and Germany have indicated in the context of the Eurogroup that Portugal should apply for help sooner rather than later,” the source said, adding that Finland and the Netherlands had expressed similar views. But a German spokesman denied any pressure from Berlin.
Bloomberg News has filed a lawsuit against the European Central Bank to try to force it to disclose documents showing how Greece used derivatives to hide its fiscal deficit and helped trigger the region’s sovereign debt crisis, the newsagency reports. The lawsuit asks the EU’s General Court to overturn the ECB’s decision not to disclose two internal documents drafted for the central bank’s six-member executive board in Frankfurt this year. The notes show how Greece used swaps to hide its borrowings, according to a March 3 cover page attached to the papers obtained by Bloomberg News. ECB President Jean-Claude Trichet withheld the documents after the EU and IMF led a €110bn bailout ($144bn) for Greece.
As if Arnaud Marès hadn’t already scared the proverbial out of everyone …
Arnold Kling, a blogger at EconLog and libertarian economist at George Mason University, has written a paper exploring the possibility of a US sovereign default in the medium term, which he defines as 2015 through 2035. Read more