Monthly Archives: May 2012

Closing Quotes: Europe – The Final Frontier?

Mario ‘maybe I’m too German’ Monti:

“Their own best product for export which we are very grateful to the Germans for having invented and promoted — the culture of stability — risks being undermined because of lack of promptness in setting up the necessary instruments to limit the contagion,” Monti said.

With Italian 10years once more flirting with 6% & the MIB40 back at the November lows, the usually calm confidence of Mr.Monti sounds a little thin.

The Italian Central Bank Governor Visco said what he really wanted to say, according to Bloomberg evoking: “the possibility of intervening promptly in the securities markets and directly in favor of banks, with procedures that are more flexible and less penalizing for the beneficiary countries that respect the rules.”

Naturally, the Germans will bargain hard, but some sort of deal on the ESM directly funding bank recapitalizations – hopefully aligned to a Eurozone-wide deposit guarantee scheme – has to happen.

Soon.

Or else.

 

 

 

 

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Opening Quotes: You think $FB is bad?

This is beginning to remind me of Anglo Irish – the worst bank in the world EVER!

FT: ‘Pressure on Madrid to probe Bankia’s fall’

Bankia, a merger of seven savings banks, saw about 60 per cent of the shares in its stock market listing last summer sold to individual savers, who have since lost 72 per cent of their investment as of close on Wednesday. The listing was endorsed by the government at the time, the Bank of Spain and the country’s stock market regulator.

“It is quite sad – these people really did not understand what was happening to the bank, and what the dilution would be after the nationalisation,” said one Madrid investment banker.

Of course they didn’t.

But isn’t that the point?

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Realities: Spain Makes It’s (& Ireland’s) Stand

ECB rejects Madrid’s ‘Bankia plan’ but we’re edging closer to dealing with THE issue.

From the FT:

“Senior government officials in Madrid argue that bailouts in Portugal, Greece and Ireland have been catastrophic and Spain will not compromise on its refusal to accept a similar form of intervention.”

http://www.ft.com/intl/cms/s/0/7730ca10-a9b4-11e1-9772-00144feabdc0.html#axzz1wKzRG3Us

Spain have cards to play, and being Irish I’d advise them to play them hard.
Accepting the full <sovereign> cost of their banking resolution will cripple them.
I hope Rajoy makes a <retroactive> stand for all of us.
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Opening Quotes: The Chief Iconoclast

Taleb?

If nothing else – ever the iconoclast.

http://www.bloomberg.com/news/2012-05-30/taleb-says-euro-breakup-not-a-big-deal-as-u-s-scariest.html

“We have zero interest rates,” Taleb said. “If interest rates go up in the United States, you can imagine what the deficit would be. Europe is like someone who is ill but is conscious of it. In the United States we are ill, but we don’t know it. We don’t talk about it.”

Europe’s lack of a centralized government works in its favor, he said.

“The best thing Europe ever did is managing to have members bickering with each other, so you don’t have the big government,” Taleb said. “Centralized government doesn’t work. In Europe they tried to have a powerful Brussels, but what happens when you have a powerful Brussels? You have lobbies hijacking Brussels.”

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Opening Quotes: Irish Truth Tellers

“Don’t piss down my back and tell me it’s raining.” This line from The Outlaw Josey Wales, the classic Clint Eastwood western, is self-explanatory. In contending that the fiscal treaty will solve our dilemma, the European Commission and European Central Bank are pissing down Ireland’s back and telling us it’s raining.

This is a fiscal straitjacket for Ireland, not a union

By David McWilliams

The fiscal treaty will not solve Europe’s crisis. The Spanish and Irish crises stem from too much cross-border private sector borrowing and lending. Ireland’s financial crisis didn’t destroy our nation’s wealth; it just revealed how much wealth had already been destroyed by reckless lending, borrowing and speculation.

Prescribing government deficit reductions to fix these private capital imbalances is like prescribing chemotherapy for heart disease. Today’s large fiscal deficits are a result of, not the cause of, Ireland’s and Spain’s crises. Both countries’ public debt ratios were actually lower than Germany’s in 2008 – but private debts exploded. Since Ireland adopted the euro, its ratio of household debt to income has risen from 93 per cent to 220 per cent.

Such huge consumer debts indicate that without growth, more mortgage defaults beckon. Ireland has too much debt, exacerbated by the ECB’s insistence that our government continue to pay unsecured bondholders of our bust banks. The bond market shut down to Ireland not because we threatened to default but because we threatened not to.

Now Ireland is experiencing an old-fashioned liquidity trap made worse by vicious deleveraging, which is destroying asset prices. Imposing more austerity now will be as useful as putting an anorexic on a diet and expecting her to become voluptuous.

Given that even in an open economy such as Ireland, most of us are employed in the domestic sector, your spending is actually my income and my spending is your income. My income is also the root of my savings. But as Keynes observed in the paradox of thrift, if we all save at the same time, who is spending? And if no one replaces our spending then demand will fall and fall.

Retailers react to falling demand by cutting prices to coax us to spend. But the very fall in prices convinces people that prices will fall further and the bargain will come next month or next year. So the laws of economics are turned on their heads. When prices fall, demand doesn’t go up, it goes down.

Many Irish people’s balance sheets are broken because on the one side we have assets – houses, land and apartments – that are falling in value but on the other, we have debts, which are fixed. At a time when income is falling because of rising unemployment and taxes, this means the debt burden is getting heavier every day relative to income.

As a result, people with savings are saving yet more. Those with debts are trying to pay them down. The same goes for companies. Ireland’s savings ratio has exploded to 17 per cent of income; it was minus 5 per cent in 2007.

People don’t want to borrow because they have too much debt and banks don’t want to lend because they have too much bad debt. Yet the deleveraging is destroying their capital base too. Again, the paradox is that deleveraging my balance sheet might make my position better, but when we all deleverage at the same time, we drive down asset prices further, demanding yet more deleveraging.

If everyone is saving, who is spending? The rise in government spending is the logical reaction to, not the cause of, the liquidity trap.

As demand falls, real wages don’t fall because those with jobs protect themselves and the adjustment comes via unemployment. Irish unemployment has trebled in four years. Youth unemployment is now 29 per cent. This puts more pressure on government finances.

We are now in the fourth year of austerity and it’s clear the economy is weakening. Someone clever – I’m not sure if it was Albert Einstein or Roy Keane – once said the definition of insanity was doing the same thing over and over again and expecting different results.

This fiscal treaty offers more of the same. It is being marketed as a fiscal union, but it is a fiscal straitjacket. It punishes weak countries when they most need help. A real fiscal union should work as the US does.

Many years ago, like many of my generation, I emigrated looking for work. I ended up as a dishwasher in Boston. Boston too had a boom and bust in the late 1980s but when it collapsed the rest of the US didn’t punish it, it transferred money via the federal budget to help it recover.

With this treaty, the EU envisages the opposite:cutting spending in the periphery when we most need help. In so doing, it creates lower growth, higher unemployment, more political instability and more capital flows from the periphery to the core. This is all aimed at making the eurozone more credible. In practice it doesn’t. When the risk is deflation, creating yet more deflation makes the euro look like it has a death wish.

The writer is a Dublin-based economist

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Opening Quotes – Social Finance IS The Antidote

“There will be no exit by Greece,” Binay Chandgothia, a Hong Kong-based portfolio manager at Principal Global Investors, which manages $250 billion globally, said on Bloomberg Television. “If they take structurally positive steps, things will be all right in the long run. China is a little bit of a concern but China has policy levers. They can use policy incentive to get growth back on track.”

http://www.bloomberg.com/news/2012-05-27/japan-stock-futures-little-changed-as-greek-concern-eases.html

 

I have no idea who this guy (?) is. And to be fair Bloomberg are very good at finding their ‘quote of the moment merchants.’

But it has to be said – by me – this type of drivel represents everything that is wrong with the mainstream financial media.

Every word word oozes with the <over> confidence of a man managing someone else’s money  – & risk.

Every word betrays the mindset of somewhat educated in the <failed> theories of modern finance.

Social finance – as exemplified by the recent $FB debacle – IS the antidote to this outdated/self-serving non-sense.

Period.

 

 

 

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Monti’s Spin

http://www.bloomberg.com/news/2012-05-25/merkel-may-be-persuaded-on-euro-debt-sharing-compromise.html

Clarifying Monti’s rather <deliberately> optimistic claims:

“Monti’s account of the meeting contrasted with that of Luxembourg Prime Minister Jean-Claude Juncker, who told reporters in Brussels that joint debt sales “didn’t find much support,” particularly in the German-speaking area, while the French-speaking area was more enthusiastic.”

BUT?

“Back in Berlin 15 hours later, Merkel’s coalition and the opposition Social Democrats and Greens agreed that euro bonds “are not up for discussion,” Volker Kauder, the floor leader of Merkel’s Christian Democratic Union, told reporters. At the same time, the two sides will “exchange studies” on the redemption fund before next month’s meeting.

The fund, backed by euro member states’ gold reserves, would be worth 2.3 trillion euros ($2.9 trillion) and help governments cut outstanding debt to below 60 percent of economic output. Limited to 25 years, it would be accompanied by a pledge by states to anchor debt limits in their constitutions and commit to economic reforms.”

In theory the fund allows members to get their debt back to a Maastricht like 60% of GDP.

Hmmmmmmmm.

Big theory.

And this is Europe.

The horror <quote follows> continues.

 

 

 

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Opening Quotes – They would wouldn’t they?

http://www.bloomberg.com/news/2012-05-25/european-stock-futures-erase-drop-bankia-might-be-active.html

“Italy’s Prime Minister, Mario Monti, told Italian television station La7 yesterday that the majority of European Union leaders at a Brussels meeting this week backed joint euro- area bonds. He added that Italy can help persuade Germany to support Europe’s “common good” as well.”

 

Well ….. they would wouldn’t they?

Whatever else happens – and the market unshakable (somewhat justified?) belief in the ‘Central Bank Put’ keeps the equity market bears at bay – EuroBonds?

See yesterday’s post – they can’t even ‘discuss’ pan-European deposit guarantees &/or bank recapitalizations.

 

 

 

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Opening Quotes: Fiddling Away the Future

 

http://www.ft.com/intl/cms/s/0/81d5eab0-a539-11e1-b421-00144feabdc0.html#axzz1vS2HweJF

“Herman Van Rompuy, president of the European Council, cautioned that even the June plan would be limited to “building blocks” and “working methods” towards economic integration and not specific proposals towards a banking union or mutualising eurozone debt.

“These ideas on stronger, stricter banking supervision and resolution were only mentioned. We did not have a real discussion on it, but we will work on them in the upcoming weeks,” said Mr Van Rompuy.”

 No ‘real discussion’ – what we’re you ‘talking’ about?
AND:

“The failure to decide on a clear path forward for Greece, Europe’s banks or eurozone bonds reflects continued, deep divisions over how to respond to the mounting crisis caused by the possibility of a Greek exit. Officials said there had not been any in-depth discussion about Greece during more than six hours of deliberations.”

Close your eyes ….. and pretend its not real?

 

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Opening Quotes: Wall Street 1 Retail 0

FT: ‘Morgan Stanley subpoenaed over Facebook IPO”

The top securities regulator in Massachusetts has issued a subpoena to Morgan Stanley as part of an investigation into whether its analysts communicated revisions of Facebook’s revenue forecasts broadly to all clients ahead of last week’s initial public offering.

In spite of cutting forecasts for Facebook’s revenue growth after the social network group revised its prospectus, the underwriting banks, led by Morgan Stanley, soon afterwards increased the size of the offer by 25 per cent and priced the shares at $38, at the top of a new range of $34-$38.

Analysts at JPMorgan and Goldman Sachs also alerted clients of Facebook’s lower growth forecasts in the days before its IPO, people familiar with the process said.

Analysts cannot publish research about a company when their banks are providing underwriting services but they are allowed have verbal discussions with clients in the period leading up to an IPO.

The head of the Financial Industry Regulatory Authority, a private market regulator, also warned that selective communication could be “a matter of regulatory concern to Finra and the SEC”.

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