3rd May - Portugal & Spain to parity?

ECB’s meeting is now over and we are back waiting for the US payrolls – to see if the ‘decoupling’ will continue. My gut feeling is risk-off – the Greek election is a major risk event, and the ‘central bank puts’ on both sides of the Atlantic are on hold for now.

I just realized that for several weeks now the Portugal’s credit situation has improved markedly, even while Spain’s has deteriorated. Both the bond yields and CDS-prices of the two countries have moved to opposite directions. I think this is because Portugal was already priced in as a haircuts & bailouts-case, while Spain was still questioned. Now that Spain’s troubles are in a clear view, perhaps the two countries are moving towards parity? (see the charts)

This is not as crazy as it sounds first: the economies and especially the banking systems of the two countries are intertwined, and backstopping Spain effectively means backstopping Portugal as well. So maybe this is a case that both are doomed – but Portugal, a small enough country that would have been allowed to fail, is now saved by its connection to a too big to fail Spain. 

* * *

I try to write down my recent thoughts on the euro crisis during the weekend. I have been pessimistic all the time, but now I am becoming scared. Six months ago there were painful, but doable options. Now I am not sure if there are any workable possibilities left. In the links below the most important thing is the failure of the talks to agree on the Basel III on the European level. This implies that banking is about to become very fragmented, and I think it would be a good thing.

You can get update notifications by following ‘MoreLiver’ on Twitter or Facebook. Contact me with any questions or suggestions, or leave a comment.

 

News – Between The Hedges

Markets – Between The Hedges

Recap – Global Macro Trading

The Closer – alphaville / FT

TV: Bloomberg, CNBC, BBC

Debt crisis: live – The Telegraph

Europe Crisis Tracker – WSJ

Tracking Europe’s Debt Crisis – NYT

FX Options Analytics – Saxo Bank

EURO CRISIS: GENERAL

Five eurozone futures, from Fitch – alphaville / FT

From Fitch’s latest report on eurozone endgames, and their sovereign credit ratings implications

Midnight in Europe – MarketBeat / WSJ
We’ve long been saying Europe’s problem is it has more cans than road. The magicians running the show are about out of tricks.

Eurozone Unemployment and the Recession of 2012 – The Street Light

But while the prospect of a European recession in 2012 is quite bad enough, this understates the scope of the problem. Because not only will this year's recession directly impact millions of unemployed and soon-to-be unemployed EU workers, as well as (for those more fiscally minded) seriously damaging this year's government budget balances, it will have lingering effects on Europe's economies for many years to come.

Faith in the “Anglo-Saxon” model, charted – alphaville / FT

They argue, based on recent OECD research, that a well-designed set of product market liberalisation and labour market reforms could boost GDP per capita by about 15 per cent over a 10-year horizon in many eurozone countries.

“There are human beings involved” in austerity debate – MacroScope / Reuters

While exercising their democratic vote, Europeans will also be contemplating another key issue: their basic economic survival. That is why the debate about austerity versus growth has become so important.

In Europe, Parallels to Japan’s ‘Lost Decade’ – DealBook / NYT

Both regions experienced real estate booms ahead of their financial crises, consumers took on large levels of debt and domestic banks built up unsustainable loan-to-deposit ratios as they sought to feed local demand for borrowing.

Look, quickly, some not disastrous eurozone auctions! – alphaville / FT

Pimco's El-Erian Sees `Two Narratives' in Germany – BB (mp3)

Nomura’s Zentner & Alexander on Central Banks, Economy – BB (mp3)

Nomura's Goncalves Says French-German Spread Is Key – BB (mp3)

EURO CRISIS: BANKING

Killing VaR – alphaville / FT

A number of weaknesses have been identified with using value-at-risk (VaR) for determining regulatory capital requirements, including its inability to capture “tail risk”. For this reason, the Committee has considered alternative risk metrics, in particular expected shortfall (ES). ES measures the riskiness of a position by considering both the size and the likelihood of losses above a certain confidence level. In other words, it is the expected value of those losses beyond a given confidence level.

‘Basel III bunfight: Is this the beginning of the end? – alphaville / FT

The finger is largely being pointed at the UK’s Chancellor George Osborne. Note that the UK has a large financial sector and yet he wants his banks to hold even more capital than Basel III would dictate…This fracturing of capital regulation means that there has to be some risk that the Basel consensus will end.

Better than Basel – Project Syndicate

Stefano Micossi: The problem is that the Basel capital rules – whether Basel I, II, or III – are of no help in separating the weak banks from the sound ones. Indeed, more often than not, the banks that failed or had to be rescued in the wake of the 2008 financial crisis had solvency ratios higher than those of banks that remained standing without assistance.

The (pictorial) European bank capital rules deathmatch – alphaville / FT

You may thank the strange machinations of politics for the fact that something that was agreed in principle in 2010 by the European Union and Group of 20 still hasn’t actually been written into law (i.e. we don’t get it either).

The consequences of financial disintegration – bruegel

The recent ECB report on "Financial Integration in Europe" has exposed in detail the deterioration in European financial market integration caused by the crisis. Banks located in the weakest countries find it more and more difficult to access liquidity, and this translates into segmented funding conditions for the private sector as a whole and forces the ECB to play an ever bigger role as financial intermediary of last resort in lieu of a structurally malfunctioning interbank market.

EURO CRISIS: ECB

Introductory statement to the press conference – ECB

ECB meeting and press conference - cuts coming – Saxo Bank

He tried to obfuscate, he avoided using the sort of code words which characterised Trichet's reign but, in the end, right at the last minute, ECB President Draghi couldn't hide it - the ECB is worried about growth and will cut later in the summer.

Flash Comment: ECB meeting: No cut in June – Danske Bank (pdf)

The ECB should act before another crisis – Gavyn Davies / FT

…there is no obvious enthusiasm for any pre-emptive action to shift the eurozone economy further away from the danger zone. In fact, the ECB still seems to believe that it needs to keep politicians’ feet close to the flames in order to ensure that the reform process continues to move in the right direction.

What Mario means when he talks about growth – Free exchange / The Economist

Structural reforms in product and labor markets, infrastructure investments, cutting current spending over investment cuts or tax hikes. And politicians giving away budgetary sovereignty to the centre to avoid a transfer union.

ECB in Graphics – Thomson Reuters

Excellent quickies.

BNP’s Saywell Says Setting One Rate Is Problem for ECB – BB (mp3)

Commerzbank's Dixon Discusses ECB, Bond Auctions – BB (mp3)

EURO CRISIS: ELECTIONS

Greek elections: Be afraid, be very afraid – alphaville / FT

Greece goes to the polls this weekend. And it looks like it’s going to be messy. The potential for the “wrong” result to wreak havoc in the markets on Monday morning is real.

Previewing The First Of Many Greek Elections – ZH
Credit Suisse’s research note on the elections: We believe that the Greek situation is far from resolved and that a further restructuring of the debt is quite likely.

ASSET CLASS VIEWS

Crude Crushed, Stocks Slump, Silver Recouples With Gold – ZH
Today’s asset price moves charted and explained.

A Tide In The Affairs Of Man – Mark J. Grant / ZH

The election weekend, Ireland’s referendum in June and end of easy central bank money. Time to go risk-off.

Are Stocks Ahead of the Economy? – The Big Picture

Today, I want to bring a simple analysis to your attention. It is based upon the chart of GDP versus the total stock market valuation…It contains several flaws worth noting.

ECB, NFP, Don’t Hold Your Breath Waiting for Rotation into Equities – TF Market Advisors

The belief that “everything” is priced in is overwhelming. The only thing I hear more than that, is the view that decoupling is occurring, and not just with the U.S. decoupling from Europe, but with different countries within the EU decoupling. That theory may or may not be correct (I don’t think it is), but it certainly seems fully priced in. The divergence of markets in Spain and Italy compared to Germany and the U.S. is huge. Option premiums also reflect that.

UBS’s Walker Sees Range-Bound Euro for Next Month – BB (mp3)

OTHER

ETFs, unregulated banks in disguise – alphaville / FT

…the thing that really worries regulators is the role ETFs play in the shadow banking world today. To what degree do their security deposits fund banks, and what sorts of maturity transformation is going on behind the scenes?

What Could Possibly Go Wrong? – EconoMonitor

Michael Milken Faces Off With Nouriel Roubini, 1h

Special Report: Documents allege HSBC money-laundering lapses – Reuters

In April 2003, the Federal Reserve Bank of New York and New York state bank regulators cracked the whip on HSBC Bank USA, ordering it to do a better job of policing itself for suspicious money flows. Staff in the bank's anti-money laundering division, according to a person who worked there at the time, flew into a "panic."

Revisiting predictions – mpettis.com

In 2006 I started making a number of predictions based on what I thought was the necessary and logical development of China’s growth model. Some of these predictions seemed fairly outlandish, especially to China analysts – Chinese and foreign – who had very little knowledge of economic history or other developing countries, but many of them so far have turned out quite well.

You Are Now About to Witness the Strength of Street Knowledge – The Reformed Broker

But a punk analyst sitting in his office cranking out DCF-driven "research" with assumptions literally supplied by management itself?  He doesn't know that pain, he doesn't know shit.  He doesn't get it, has never felt it firsthand.