Category Archives: Currencies

Gene Frieda: Europe’s Dying Bank Model

Yves here. Frieda makes a very important point in this Project Syndicate column, that of the role of the banking system in the European debt crisis. On one level, it may seem trivial to say that the sovereign debt crisis is the result of financial crisis. But the Eurozone leadership has not drilled into the next layer: how did this come about? The superficial explanation, that they all ate too much US subprime debt and got really sick, is superficial and shifts attention away from the real issues. European banks have huge balance sheets with a lot of low-return investments. I did some consulting work for some European banks over a decade ago (one of the remarkable things about banking is how little things change over time) and they tended to target commodity areas of banking in the US, not simply because that was where they could break in, but also because the returns were tolerable (although they did hope to move up the food chain into more lucrative business).

Frieda argues that merely having banks raise capital ratios to the 9% level stipulated in the current version of the Eurozone rescue is inadequate. Absent more aggressive measures, “no amount of capital will restore investors’ faith in eurozone banks.”

By Gene Frieda, a global strategist for Moore Europe Capital Management. Cross posted with author permission from Project Syndicate.

Grand European Rescue Already Starting to Come Unglued?

This site has had plenty of company in expressing doubts about the latest episode in the continuing “save the banks, devil take the hindmost” Eurodrama. The same issues came up over and over: too small size of rescue fund, heavy reliance on smoke and gimmickry to get it even to that size, insufficient relief to the Greek economy (the haircuts will apply to only a portion of the bonds), no assurance that enough banks will go along with the “voluntary” rescue, and way way too many details left to be sorted out.

But it is a particularly bad sign to see disagreement within the officialdom about the just-annnounced deal.

Eurozone Leaders Agree a Few Rescue Details, Like 50% Haircut on Greek Bonds; Plan to Develop a Plan Gooses Markets

When failure is too painful to contemplate, any halting motion in something resembling the right direction will be hailed as success.

Eurozone leaders had a session well into the night and announced a sketchy deal that dealt with one major stumbling block, which was getting a deep enough “voluntary” haircut on Greek debt. Government officials regarded it as key that any debt restructuring be voluntary, since no one wanted to trigger payouts on credit default swaps written on Greek debt (a default or forced restructuring would be deemed a credit event and allow CDS holders to cash in their insurance policies, and that could trigger a bigger rout). The banks were unwilling to accept the 60% haircut sought by the Eurocrats, but agreed to a 50% reduction.

Europe Readies Its Rescue Bazooka

It’s one thing to fail to recall relevant events that are genuinely historical, quite another to refuse to learn from recent failed experiments.

Remember Hank Paulson’s bazooka? The Treasury secretary, in pitching Congress to give him authority to lend and provide equity to Fannie and Freddie, argued, “If you have a bazooka in your pocket and people know it, you probably won’t have to use it.”

but the Treasury’s new powers did not do the trick. Less than two months later, Treasury and OFHEO put the GSEs into conservatorship.

If the latest rumors prove to be accurate, the latest Eurozone machinations make Paulson look good.

Satyajit Das: Central Counter Party Politics

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

This four part paper deals with a key element of derivative market reform – the CCP (Central Counter Party). The first part looked at the idea behind the CCP. This second part looks at the design of the CCP.

The key element of derivative market reform is a central clearinghouse, the central counter party (“CCP”). Under the proposal, standardised derivative transactions must be cleared through the CCP that will guarantee performance.

The design of the CCP provides an insight into the complex interests of different groups affected and the lobbying process shaping the regulations.

Marshall Auerback and Rob Parenteau: The Myth of Greek Profligacy & the Faith Based Economics of the ‘Troika’

By Marshall Auerback, a portfolio strategist and hedge fund manager, and Rob Parenteau, CFA, sole proprietor of MacroStrategy Edge and a research associate of The Levy Economics Institute

Historically, Greeks have been very good at constructing myths. The rest of the world? Not so great, if the current burst of commentary on the country is anything to go by. Reading the press, one gets the impression of a bunch of lazy Mediterranean scroungers, enjoying one of the highest standards of living in Europe while making the frugal Germans pick up the tab. This is a nonsensical propaganda. As if Greece is the only country ever to cook its books in the European Union! Rather, the heart of the problem is in the antiquated revenue system that supports that state, which results in a budget shortfall consistently about 10% of GDP. The top 20% of the income distribution in Greece pay virtually no taxes at all, the product of a corrupt bargain reached during the days of the junta between the military and Greece’s wealthiest plutocrats. No wonder there is a fiscal crisis!

So it’s not a problem of Greek profligates, or an overly generous welfare state, both of which suggest that the standard IMF style remedies being proposed here are bound to fail, as they are doing right now. In fact, given the non-stop austerity being imposed on Athens (which simply has the effect of deflating the economy further and thereby reducing the ability of the Greeks to hit the fiscal targets imposed on them), the Greeks really are getting close to the point where they may well default and shift the problem back to those imposing the austerity.

The Verboten Story of Argentina’s Post-Default Economic Success

Even notice nothing is ever said in the mainstream media about Argentina’s economy, save that it had a big default? You’d never know the following about Argentina:

Eurozone Rescue Going Off the Rails

In the runup to the crisis, it was striking to read the undertone of worry in quite a few of the articles in the Financial Times, and I don’t mean only Gillian Tett’s fixation on collateralized debt obligations. It was palpable that a lot of writers were uncomfortable with how frothy the markets were, yet couldn’t say anything too much at odds with what their largely cheerleading sources were telling them.

Even though the overall mood at this juncture is far more downbeat, there is again a reporting gap between the pink paper and the two major US print business outlets, the Wall Street Journal and the New York Times on the expected crisis nexus, the Eurozone.

Eurozone Leaders Ready €80 Billion Band-Aid for Banking Industry Gunshot Wound

I must confess I don’t stay on top of the blow by blow of the ever-devolving Eurozone mess. The broad lines of the trajectory look all too predictable. The officialdom could patch up things for quite a while if the powers that be let the ECB monetize the debt (eventually, you could have an inflation problem, but with the EU and global economy so slack, “eventually” will take quite a while to show up).

However,everyone in positions of authority seems to believe in certain-to-fail-much-faster austerity instead. So the permissible short-to-medium term fixes involves lots of complicated programs, multi-party negotiations, and in some cases, political approvals. The timeline for the governmental maneuvering seems badly out of line with what Mr. Market requires. And to make matters worse, an earlier deal on a Greek funding, which involved bondholders taking a 21% haircut, is now deemed not to be punitive enough to banks. While that is narrowly true, having this deal come unglued could be the detonator that sets off a crisis chain reaction.

And from a wider vantage, none of these remedies address the real issue

Rob Parenteau: Blinded by Faith – Sinking the Eurozone

By Rob Parenteau, CFA, sole proprietor of MacroStrategy Edge, editor of The Richebacher Letter, and a research associate of The Levy Economics Institute

Wolfgang Munchau has raised a very important point in his current Financial Times article, “Why Europe’s officials lose sight of the big picture.” The eurozone, Wolfgang points out, is more like a large closed economy than a collection of small open economies, and this has implications for fiscal policy outcomes, yet these implications remain largely unrecognized by policy makers within the region. Wolfgang noted:

Is a Rising Yuan Inevitable?

By Zarathustra, the founder of Hong Kong blog Also sprach Analyst. He was educated at the London School of Economics and the Chinese University of Hong Kong and was once a Hong Kong-based equity research analyst focusing on Hong Kong real estate (which he did not really like), with a secondary coverage on China real estate sector (which he actually hated). Cross posted from MacroBusiness

Let’s face it, China is manipulating its currency. You can call it whatever you want, but China is manipulating its currency.

Warning: Greece Can Break Glass and Leave the Eurozone

One of the things that has been intriguing about the handwringing among European policy-makers has been the general refusal to consider the idea that one of the countries being wrung dry by doomed-to-fail austerity programs might just pack up and quit the Eurozone. The assumptions have been three fold. One is a knee-jerk assumption that the costs of exiting are prohibitive (this argument comes from Serious Economists in Europe, but they never compare it to the hard costs of austerity and the less readily measured but no less real cost of loss of sovereignity). Second is that an exit would come via a country being expelled, since the Eurozone treaties prohibit unilateral departure. Third is that it would be too much of an operational mess to revive a defunct currency.

A very good piece by Floyd Norris in the New York Times fills this gap by describing that Greece has the motivation and the means to leave.

Marshall Auerback and Warren Mosler: Core Europe Sitting Pretty in their PIIGS Drawn Chariot

By Marshall Auerback, a portfolio strategist and hedge fund manager, and Warren Mosler, an investment manager and creator of the mortgage swap and the current Eurofutures swap contract. Cross posted from New Economic Perspectives

The refusal to countenance a Greek default is now said to be dragging the euro zone toward even greater crisis. Implicit in this view, of course, is the idea that the current “bailout” proposals are operationally unsustainable and will lead to a broader contagion which will ultimately afflict the pristine credit ratings of core countries such as Germany and France.

Well, we see a very different view emerging: The “solution” currently on offer – i.e. the talk surrounding the European Financial Stability Fund (EFSF) now includes suggestions of ECB backing. This makes eminent sense. Let’s be honest: the EFSF is a political fig-leaf. If 440 billion euros proves insufficient, as many now contend, the fund would have to be expanded and the money ultimately has to come from the ECB — the only entity that can create new net financial euro denominated assets — which means that Germany need no longer fret about being asked for ongoing lump sums to fund the EFSF in a way that would ultimately damage its triple AAA credit rating.

Despite public protestations to the contrary, it is beginning to look like the elders of the euro zone have begun to embrace the reality that, when push comes to shove, it is the ECB that must write the check, and that it can continue to do so indefinitely.

Stocks Hammered by EuroCrisis Worries; Bank of America, Citi Down Nearly 10%

It’s becoming increasingly obvious to Mr. Market that the officialdom in Europe is not on a path to resolving its burgeoning sovereign/bank crisis. It is insisting on imposing austerity on debt burdened countries, which will only shrink their GDPs, making their debt hangovers even worse.

And Germany wants to have its cake and eat it too