Here are the best links from the past week. Weekender-post coming on Sunday. I highlighted the really good and the timeless ones. You can follow me on Twitter or Facebook and email me for suggestions and requests. I also have an automated publication based on feeds I follow at paper.li
To the links:
EURO CRISIS: GENERAL
Europe’s Road to Nowhere (Part 2) – Satyajit Das / EconoMonitor
The proposed plan is fundamentally flawed. It made no attempt to tackle the real issues – the level of debt, how to reduce it, how to meet funding requirements or how to restore growth. Most importantly there was no new funds committed to the exercise. Part 1 here.
Eurozone's Friday the 13th – Robert Peston / BBC
Greek negotiation halt, margin hike on Italian bonds and less importantly, the rating cuts.
ESM, just like the IMF, will force bond holder subordination – Sober Look
ESM is super-senior, just like IMF – putting the remaining private investors at risk of even larger haircuts.
The Massendowngrade Effect – Edward Hugh / Fistful of Euros
Complete roundup of the euro crisis, extensively hyperlinked.
The European Principle of Indifference – Macronomics
More apathy, less austerity - faith in Eurozone dissipating fast – Saxo
Only two choices: 1) Who pays the bill and how do we create an internal devaluation of the poor Eurozone countries combined with a move to true solidarity and fiscal transfer. or 2) More of the same: Social riots become the norm, Greece leaves the EU, Portugal follows, and things get out of control leading to the EU breaking up… I have never been more confident than now that this game is just months or a few quarters away from breaking down.
Morning Briefing – BNY Mellon
Officials must work rapidly to bolster the Euro-zone ‘firewall’ as a major first test seemingly awaits
Officials must work rapidly to bolster the Euro-zone ‘firewall’ as a major first test seemingly awaits
Münchau: We are fighting the wrong crisis – Credit Writedowns
To me this situation looks pretty hopeless frankly. Policy makers in Europe just don’t get it. The best we are going to get is austerity and partial monetisation by the ECB until the union breaks or sovereign debtors default and banks are recapped.
Likely scenarios 1) The EUR will survive but will be changed in 2012 in that some countries will leave the Eurozone 2) The EU will survive with austerity, end of circularity and United States of Europe and finally the most likely 3) print money, make presentations, ignore facts and end in panic.
1) Water down the treaty so that it does not have to be voted on 2) Change the rules of the treaty later quietly, after the fact, with majority rule votes or other procedures
To emphasize, the risk is not that large central bank losses would impair the ability of the monetary authorities to provide liquidity, conduct open market operations, target policy rates, or safeguard the payments system. Rather, in the event that losses wipe out too much of their capital, the chief risk becomes the intrusion of politics into central banking. It might even bring about the end of independent central banks.
EURO CRISIS: THE DOWNGRADES
Credit FAQ: Factors Behind Our Rating Actions On Eurozone Sovereign Governments – S&P
A summary of key points in more readable format from ZH.
RBS on those S&P downgrades – alphaville / FT
RBS: Overall, while the market impact of the downgrades is unlikely to be very significant in the short term, they serve as a stark reminder that the euro area sovereign crisis is here to stay.
Why the eurozone downgrades matter – Robert Peston / BBC
But perhaps more importantly the downgraded Italian and French governments would be seen to be less financially capable of bailing out Italian and French banks in a crisis, so other creditors would be shouldering more risk.
What S&P’s Downgrades Mean for the Euro’s Future – The Curious Capitalist / TIME
Okay non-technical roundup: austerity has a feedback, crisis now a boxing match of who retains the burden of reform: private or public, core or periphery.
EURO CRISIS: GREECE
Even with 100% participation and 50% haircut only a 120% debt/GDP would be achieved, which is not sustainable. CAC introductions very likely.
How's That Austerity Working? – Tim Duy’s Fed Watch
How can this downward spiral end with anything other than a technical default? It can't, which is why the debt talks collapsed… It looks like Merkel and Sarkozy are trying to pull the old bait and switch on (Greece’s) creditors.
A Greek Default Would Hit the ECB Hard – Spiegel
Hopes that Greece can be saved are dwindling. Athens had hoped to reach a deal with its creditors on a 50 percent debt haircut, but banks have now made it clear that efforts to reach an agreement could fail. Should the country go bankrupt, the ECB stands to lose the most.
This and the following are the best outlines and views I’ve seen on the negotiations.
Greece Dispatches Officials to US Over Default Fears; Senior S&P Official Expects Default Soon; Greek One-Year Bond Yield Touches 415%; Ducks Lined Up for Merkel Orchestrated Default – Mish’s
The hangup preventing an agreement is the coupon rate. Germany has proposed a 2% coupon rate. That would drive the losses on Greek bonds from 60% to 80%. Is this a signal that Chancellor Merkel has had enough of bailouts and wants to dump Greece? I think so and talks with the IMF suggest so as well.
My expectation is that there will be an exchange; that it won’t be particularly successful; that it will trigger CDS; but that all the same it will be good enough for the EU, which will stump up its €30 billion and keep the can going on its bumpy path down the road. A bunch of hedge funds will be left with a large amount of defaulted Greek debt, and will start all manner of litigation, which will go nowhere for the foreseeable future. And no, there’s no way that Greece will pay those hedge funds just so that it can avoid the CDS being triggered.
Must-read probable outcome from the negotiations. In short: they will announce an agreement, and then spend a month making it so – the governments and the central banks are too scared of a default.
Interesting look at the advisors employed by the PSI parties. Greece’s advisors have previously gotten their way, and Salmon thinks: if the bondholders don’t agree to Greece’s terms, then Greece can simply force them to join the exchange. Greece’s bonds are issued under Greek law, and Greece can change its own domestic law any time it wants.
OTHER
Baltic Dry Index Collapses – Bespoke Investment Group
The index collapsed by almost a half in one month. There went the global economy.
DIVERSION
This mental approach to causality is often effective, which is why it’s so deeply embedded in the brain. However, those same shortcuts get us into serious trouble in the modern world when we use our perceptual habits to explain events that we can’t perceive or easily understand.
Five recent articles on the topic.