EFSF auction had to be sweetened with yield so much that the original idea of it is almost dead. Italy is slipping towards bond yield levels that might force the big guns (Merkozy & Super Mario) out of their hiding places. Italy is too big to fail and too big to save. After last week's euro hopelessness and ECB signaling weaker SMP, it is again blackmail time - ECB and Merkozy have returned the Italian curve ball and stopped rhetorically or through the SMP any serious support of the Italian goverment bond market. ECB's purchases (Zero Hedge counted five purchases during the day) did not stop the rot. If the Bunga bunga is removed from power and some serious austerity attempts happen, the "new troika" mightreturn with much-needed help.
Quote of the Day: In five years, there would not be anybody to pull into room and say, okay, we’re going to hold you together. Nobody will have any credibility anymore. – Jim Rogers on the handling of the Greek debt crisis
Quote of the Day 2: What we need now is really bold leadership from European politicians and the ECB. Also peace, love, brotherhood, and a pony for everyone, which seem about equally likely. – Krugman / NYT
Quote of the Day 3: Greece is a small dysfunctional economy with a disastrous set of policies — it will be painful, but not impossible for them to default or leave the Euro. Italy is a large robust economy with a disastrous set of deficits — it will be disastrous and impossible for them to default or leave the Euro. They will be bailed out or the Euro will collapse. Spain is a large dysfunctional economy; they cannot restructure or grow their way out of their problems — like Italy — and they cannot default or leave the Euro like Greece. The options for EU policy makers re: Spain are terrible or awful. – Dylan Ratigan / The Big Picture
News (Mon evening) – BTH
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT
EURO CRISIS
European Summary – Peter Tchir / ZH
Greece, IIF, Belgium/Dexia, Italy, Portugal, Spain, EFSF
Today in Euromess – Wonkblog / WP
EFSF yield now 3.45%, up from 2.7% in July (German rate 1.81%). Why: Recession in Europe, Italy threatens to be mega-Greece, sovereign wealth funds and G20 in general not showing any interest in the EFSF, fiscal slippage in France (that is in even worse shape than Italy)
Jin Liqun said the troubles in European countries are “the accumulated troubles of the welfare society… labour laws are outdated… incentive systems are totally out of whack… why should some [Eurozone] members’ people have to work until 65 or longer, whereas in some other countries they are happily retired at 55, languishing on the beach?
Savage wave of repricing hits EFSF’s €3bn deal – alphaville / FT
If the EFSF is given new life, the yield curve should adjust – if demand from the yield-hungry French and German insurance companies meets secondary market supply – giving the leads the breathing room to sell the remaining debt at better rates. If not, the thing set up to borrow for the eurozone has now assumed starkly different credit characteristics than originally envisaged.
EFSF Conducts Bond Sale it Canceled Last Week, Spread at 104 Basis Points, Existing Spreads Widen to 167 Basis Points; Blind Faith – Mish’s
Bear in mind no one knows how this new EFSF even works, how much leverage it will use or how big the guarantee is. Why anyone would want to buy it is a mystery.
MMT, the euro & the greatest prediction of the last 20 years? – Pragmatic Capitalism
In 1992: If a government does not have its own central bank on which it can draw cheques freely, its expenditures can be financed only by borrowing in the open market in competition with businesses, and this may prove excessively expensive or even impossible, particularly under conditions of extreme emergency.
Commerzbank: a chill wind for CEE – beyondbrics / FT
Banks are cutting their lending activities in CEE, as they’ve only promised to prevent credit crunch in euro zone countries.
Damp Squib – Macro Man
What should have happened – and what happened
Why should China lend to someone who won’t repay?... Any net increase in foreign capital inflows to Europe must be matched by a deterioration in Europe’s trade balance. This will probably occur through a strengthening of the euro against the dollar.
GREECE
Jim Rogers on the Greek Bailout – The Big Picture
in five years, there would not be anybody to pull into room and say, okay, we’re going to hold you together. Nobody will have any credibility anymore.
Meanwhile, in Greek haircut plans – alphaville / FT
Nomura’s and FT’s view on the latest fashion in Greek haircuts.
Nomura’s and FT’s view on the latest fashion in Greek haircuts.
It is telling when a journalist started to document the endemic inner dealing of public sector with a hidden camera, the assembly voted with an uncharacteristic speed a law that would make the publication of that material a crime. The courts would have to ignore the material and the journalist would be jailed for illegal breach of privacy. If journalists are deemed to be a thorn, they end up dead too.
History Suggests Greece Will Freeze Bank Deposits, Exit Euro by Christmas; Spain and Portugal to Follow Next Year; What's the Rational Thing to Do? – Mish’s
The rational thing to do if you live in Spain, Portugal, or Greece is to take all of your money out of banks while it's still denominated in Euros, while you still can.
ITALY
Why Italian sovereign CDS has left the banks behind – alphaville / FT
Timeline: Silvio’s Tough Week Ahead – The Source / WSJ
Nomura’s view on Tuesday’s parliamentary vote to ratify 2010 accounts + other Italian.
1 Prime Minister down, 2 to go – The Big Picture
All of the above suggests to me that markets (ex other issues) may well rally short term, particularly if Mr B is (finally) ousted, which, I believe is likely, imminently. However, medium to longer term…
The eurozone decouples from the world – Gavyn Davies / FT
Is there any way of improving the chances of success for the eurozone’s chosen strategy? Theoretically, yes. Germany, as the main creditor nation could choose to grow faster, and accept higher domestic inflation for a while, in order to ease the process of adjustment.
OTHER
Praise be to EU summits. You’ll miss them when they’re gone – euobserver.com
The era in which the summit was king is ending. In the past, it was possible to reach broad agreements and then leave months for civil servants and diplomats to fill in the blanks. Negotiations on treaty change or the design of the single currency took years.
Apple Fatigue – Abnormal Returns
Link fest
Research Review: Asset Allocation – The Capital Spectator
Summaries of six recent research papers
Are Crowds Capable of Identifying Stupidity? – Gresham’s Law