Eurozone watch

[campbell]

I know we've heard it several times before, but perhaps the endgame is near.

http://www.ft.com/cms/s/0/d9a299a8-1...#axzz1exdfrZi5

Last week, the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.
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First, the European Central Bank must agree a backstop of some kind, either an unlimited guarantee of a maximum bond spread, a backstop to the EFSF, in addition to dramatic measures to increase short-term liquidity for the banking sector. That would take care of the immediate bankruptcy threat.

The second measure is a firm timetable for a eurozone bond. The European Commission calls it a “stability bond”, surely a candidate for euphemism of the year. There are several proposals on the table. It does not matter what you call it. What matters is that it will be a joint-and-several liability of credible size. The insanity of cross-border national guarantees must come to an end. They are not a solution to the crisis. Those guarantees are now the main crisis propagator.

The third decision is a fiscal union. This would involve a partial loss of national sovereignty, and the creation of a credible institutional framework to deal with fiscal policy, and hopefully wider economic policy issues as well. The eurozone needs a treasury, properly staffed, not ad hoc co-ordination by the European Council over coffee and desert.

Good luck with that third one.

[campbell]

Quoting Irish Blues:

Originally Posted by Irish Blues

We should probably have a thread specifically for Europe, but we don't. [Yet?]

http://www.marketwatch.com/story/eur...rts-2011-11-27



Just a couple small, inconvenient problems here.

1. Germany's constitutional court has already stated that Germany cannot cede its sovereignty to the EU without a referendum of the voters. I really doubt that Germans (A) want someone else telling them what they can and can't do, and (B) want to be footing the bill for someone else's inability to manage their financial house [which is exactly what would happen in this plan]. So, even if this plan were to move forward, it can't really do anything until Germany signs off - and that could take months. Some countries [Italy, Belgium, Spain, Portugal] probably don't have that long.

2. My understanding is that there's still no real money in the EFSF, as that still requires some treaty amendments to really enact. Even if I'm wrong, a notable about of the €440 billion has already been spent on Greece [and probably on Italy and Spain too], so there's not €440 billion really available. That means that even if it could be leveraged, there's going to be less available [unless they leverage it 10:1, in which case you increase the chances of a negative move wiping out the entire equity in the fund and require all the participating countries who still have money to kick in and fund the losses - which brings us back to the discussion on Germany from above].

3. If the IMF tries to move forward with a €600 billion bailout of Italy, it will be with money from other countries - especially the U.S. I could be wrong, but I suspect a non-trivial number of Republicans will squawk about U.S. funds being used to bail out other nations, which would mean a "if you do it, we'll cut off future funding" move in Congress. Whether that works or not remains to be seen - but much like TARP, there's a really small chance letting U.S. money bail out someone else would be allowed a 2nd time.

4. Germany has to know that if it ties itself to the other AAA-rated countries, they're likely to drown together with Germany stuck paying the bill. The real lynchpins here are France and Austria, and both of them are on shaky ground with their AAA rating.

Thus, what we're really left with is a plan to have a plan to do ... something, at some point.

[limabeanactuary]

http://www.nytimes.com/2011/11/29/bu...e.html?_r=1&hp

Europe’s worsening sovereign debt crisis has spread beyond its banks and the spillover now threatens businesses on the Continent and around the world.

From global airlines and shipping giants to small manufacturers, all kinds of companies are feeling the strain as European banks pull back on lending in an effort to hoard capital and shore up their balance sheets.

The result is a credit squeeze for companies from Berlin to Beijing, edging the world economy toward another slump.

The deteriorating situation in the euro zone prompted the Organization for Economic Cooperation and Development on Monday to project that the United States economy would grow at a 2 percent rate next year, down from a forecast of 3.1 percent growth in May. It also lowered its economic outlook for Europe and the rest of the world, and a credit contraction could exacerbate the slowdown.

In addition, Moody’s Investors Service, the credit-rating agency, on Monday raised the possibility of mass downgrades of European government debt if a forceful resolution to the escalating crisis was not found.

Merry Christmas!

[campbell]

http://www.insuranceinsight.eu/insur...surance-market

Europe's debt crisis could impact the global insurance industry, reducing competition in markets where insurers have exposure to troubled European sovereigns, says IAG chief.
According to a report by the Sydney Mornind Herald the chief executive of Insurance Australia Group, Mike Wilkins, speaking at the American Chamber of Commerce in Australia, said yesterday some European insurers with exposure to Greek and Italian bonds were facing writeoffs worth more than €1bn, and if the problem continued, the global supply of insurance could be affected.

http://blogs.wsj.com/economics/2011/...n/?mod=WSJBlog

For the first time in six months, the European Central Bank failed to drain the full amount of euros it spent on its government bond purchases, meaning there’s about an extra nine billion euros sloshing around the banking system.

Is it the beginning of quantitative easing? Is money supply-induced inflation around the corner? Not quite.

Tuesday’s miss is certainly noteworthy. It is only the sixth time in roughly 80 tries that the ECB has been unable to drain, or “sterilize” the full amount of its bond purchases. It’s the first miss since the ECB expanded its bond purchases in early August to include Italian and Spanish bonds, and since Mario Draghi took over as ECB president four weeks ago.

No idea how much the other fails to sterilize involved, but the key takeaway here is that with every purchase of bonds from Italy, Spain, Greece, and whoever else, the ECB has to sell bonds from Germany, France, and every other highly-rated country. That only serves to make the ECB's balance sheet weaker as bond prices fall; the question is whether they can actually hold those bonds to maturity given that they are strictly prohibited from monetizing the debt.

Also noteworthy: the ECB has spent about €206 billion on purchasing bonds - which means there's only about €234 billion left of the €440 billion that was collected for the precursor to the EFSF. Since the ECB has stated it's going to buy bonds to defend rates [but it's only going to be for a "limited time"], every euro spent buying bonds is a euro that can't be placed into the EFSF and leveraged up ... which ultimately reduces the amount of "firepower" available [and, depending on how much is there if/when they try to leverage it, could make the fund that much more risky and prone to collapse].

[campbell]

This is an odd, positive spin:

http://www.bloomberg.com/news/2011-1...portunity.html

Insurers and reinsurers may join hedge funds and private-equity firms in bidding for assets as distressed European lenders raise capital to withstand the region’s debt crisis.
“Insurers have the big advantage that they have abundant liquidity coming in from customers’ premium payments,” said Andrew Broadfield, an analyst with Barclays Capital in London. “They could hold assets, which distressed banks may have to sell, until maturity even if they are illiquid.”
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Insurers, the world’s biggest investors along with mutual and pension funds, are also considering bank assets as low interest rates weigh on returns and as Solvency II rules cap investments in equities and real estate.
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Enormous Supply

European banks, vowing to sell distressed assets, are also lending money to buyers to get deals done and avoid greater losses as the sovereign-debt crisis deepens.
Because most buyers of distressed assets fund purchases with debt, which has become increasingly expensive and difficult to obtain, banks are financing transactions themselves, even if it means retaining loans on their balance sheets. That will slow deleveraging and make more asset sales necessary, analysts say.

While the supply will be “enormous,” the first assets offered may not be the best quality, according to Allianz’s Baete.

“Most of the banks are obviously starting with the pieces they don’t like,” Baete said on a Nov. 11 call to analysts. “Over time a lot of assets that are less liquid and meet our requirements for long duration and return will come to the market.”

How much do these European insurers hold in eurozone sovereign debt? Financials?

[campbell]

Asked and answered:

http://www.insuranceinsight.eu/insur...opean-insurers

A 50% haircut on Greek, Irish and Portuguese sovereign bonds could be absorbed into European insurers’ existing capital resources, according to Swiss Re’s senior economist.

Speaking at the reinsurer's economic forum, Darren Pain said: "European insurers capital buffers appear adequate to cope with direct losses on their sovereign bonds, provided debt restructurings are limited to smaller peripheral countries."

Multiple sovereign defaults would have a much greater impact on European insurers than a single one, Pain said, although exposure is not spread equally among all insurers.
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If Greece, Ireland, Portugal, Spain and Italy all defaulted, losses could reach €143bn, eroding 24.3% of shareholders equity according to Swiss Re.

[limabeanactuary]

http://www.telegraph.co.uk/journalis...uro-burns.html

The chief executives of Shell, Unilever and Phillips called it "one minute to midnight." Even the EU's own financial affairs commissioner, Olli Rehn, says Europe only has ten days to stop the euro falling apart.


By this coming Friday, the ninth of those ten days, the continent's leaders are supposed to have agreed a plan that satisfies the markets and gives their tottering currency a future. They have tried, and failed, three times this year already. A fourth failure would probably be the end. But in the Brussels corridors, with the sands fast running out, you really wouldn't know that these are perhaps the most dangerous times in Europe since the Second World War.
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"I don't know whether we will have an EU in six months' time," says Sharon Bowles, the British Lib Dem MEP who chairs the parliament's economic and monetary affairs committee. Asked whether she meant the EU or the euro, she said: "I don't think we'll have either it's game over." Ms Bowles and the Commission's president, José Manuel Barroso, are among those pushing one of the only things which can halt the slide – the creation of "eurobonds," mutual debt instruments backed by all the euro states collectively, with the strongest standing behind the weaker ones. But both eurobonds, and any use of the European Central Bank as lender of last resort, have been blocked in the place that would have to pay for most of them, and which really makes the decisions these days: Berlin.
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The EU is perhaps not the ideal organisation to enforce fiscal discipline. It is, of course, a body whose auditors have for the last 17 years running refused to sign off its own budget because of "material errors" amounting, last year, to 3.7 per cent of all its expenditure. The EU's financial control systems were, the auditors said, "only partially effective." Nearly 40 per cent of its agro-environmental aid budget, they found, went to farms on which there were no environmental problems on site or within a seven-mile radius. And the EU budget is a mere £105 billion, a minute fraction of the sums it is supposed to be supervising under the German plan.

But there are bigger problems with Berlin's idea than that. First, it will need time to take effect: time that the euro may not have. It will have to be agreed, probably with a treaty amendment, then implemented successfully, perhaps in the face of significant opposition from electorates. And even more importantly, it might be the wrong answer anyway, on its own.
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"My hunch is that [next week's] plan will fail. It is not going to be enough," says Whyte, who says there is now a "fifty-fifty" chance of the euro's collapse. "We already have a slow-motion run on the banking system in certain countries. If that starts gathering pace, and we start having TV pictures like Northern Rock, it could spread very quickly to Italy or Spain." By the end of last week, the panic had subsided a bit: Italian bond yields fell back to about 6.5 per cent. Senior figures in Brussels were sounding a bit more hopeful. "In return for her fiscal union, we are hopeful that Mrs Merkel will, at this week's summit, make some kind of movement towards allowing shorter-term fiscal relief," said one high official. "She is under pressure from a lot of countries and she does not want to be held responsible for the collapse of the euro." There is talk of essentially laundering extra bail-out money through the IMF, or turning the bail-out fund itself into a bank. Even eurobonds are hovering somewhere in the background.

[campbell]

http://www.zerohedge.com/news/sp-abo...creditwatch-ne

From the FT: "Standard and Poor’s has warned Germany and the five other triple A members of the eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc. The US ratings agency is poised to announce later on Monday that it is putting Germany, France, the Netherlands, Austria, Finland, and Luxembourg on “creditwatch negative”, meaning there is a one-in-two chance of a downgrade within 90 days. It warned all six governments that their ratings could be lowered to AA+ if the creditwatch review failed to convince its experts. Markets have been braced for a potential downgrade of France but few expected Germany’s top rating to be called into question.

[campbell]

I have a good feeling about this....


http://www.telegraph.co.uk/finance/f...-collapse.html

Senior analysts and traders warned of impending bank failures as a summit intended to solve the European crisis failed to deliver a solution that eased concerns over bank funding.

The European Central Bank admitted it had held meetings about providing emergency funding to the region's struggling banks, however City figures said a "collateral crunch" was looming.
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Many banks, including some French, Italian and Spanish lenders, have already run out of many of the acceptable forms of collateral such as US Treasuries and other liquid securities used to finance short-term loans and have been forced to resort to lending out their gold reserves to maintain access to dollar funding.

"The system is creaking. There is a large amount of stress," said Anthony Peters, a strategist at Swissinvest, pointing to soaring interbank lending rates.