EU moves closer to total integration

[the DRIZZLE]

So you are agreeing with me then? The presence of the Japanese central bank is preventing a run on their bonds, thus the existence of a similar lender of last resort would result in a similar situation for European countries.

The are missing the nuance in the issue. It's not just a matter of saying they will hypothetically be a lender of last resort. They actually have to be willing and able to buy all the bonds in circulation. Japan also has had unique deflationary pressures that make inflation a non factor to their central bank.

 

[Oric]

They should have done that the day they announced EURO

 

[StinkyPinky]

I wonder what impact this will have on London. It's the financial hub of Europe but the UK have definitely lost influence in the European Union. Although one feels it was always a Germany/France show.

 

[freegeeks]

Yes with a but. The idea of being a lender of last resort is that you say "I will buy all the bonds if I have to in order to keep rates down". Generally this calms markets as you said. The catch is that you may in fact have to buy all the bonds in circulation.

what do you think the Fed and the UK have been doing the last few years?

 

[cybrsage]

The Germans would go ballistic. I don't see that happening.

Fern

Oh, and what are they going to do, invade other European natoins? Pffft....the peace loving Germans would never do something like that.

 

[0roo0roo]

http://www.telegraph.co.uk/finance/...aty-new-EU-plan-abuses-power-say-lawyers.html
might be bs in the end anyways

 

[mshan]

My gut impression is that UK really just wants to protect London's financial district more than anything else (financial transaction tax, don't know if there is any real clamping down on regulatory loopholes during recent summit).

I believe it was loophole in UK regulations that allowed AIG's financial office to write something like $3 trillion in derivatives contracts with no collateral backing it (taking down AIG in 2008), and the missing MF Global money may be due to some rehypothecation loophole that allowed MF Global to use U. S. based client money as it did.

"The actual [AIG] office that blew up the world the first time around, was not even based in the US. It was a small office located on the top floor of 1 Curzon Street in London’s Mayfair district, run by one Joe Cassano: the head of AIG Financial Products. The reason why this office of US-based AIG was in London, is so that Cassano could sell CDS as far away from the eye of Federal regulators as possible."

http://webcache.googleusercontent.c...atives&cd=3&hl=en&ct=clnk&gl=us&client=safari

"A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients.

MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet."

http://newsandinsight.thomsonreuter...d_the_great_Wall_St_re-hypothecation_scandal/

"In the United States we see that the MERS scandal boils down to the wholesale attempt by US banks to avoid paying the transaction taxes on land mortgage registrations with local counties and states. As a result, the very enforceability of millions of mortgages is being thrown into doubt as a matter of law.

Had originators, banks, investment banks and investors been forced to register interests in mortgages in compliance with the law, some of the great abuses of securitisation would have become much more difficult to sustain for so long. In that sense, transparency would have promoted greater accountability and helped curb abuse.

The public has an interest in the integrity of markets. That integrity has been undermined horribly over the past 25 years by demutualisation of exchanges and clearing houses, fragmentation of markets to off-exchange systems and derivatives, leveraged shadow banking, and information assymetries between highly concentrated market insiders and everyone else. We now don't know who owns what and who owes what, and that means that economies are operating with dangerous blind spots. Relaxed accounting rules and forbearance on capital mean that mis-pricing and mis-allocation of capital are endemic and worsening, making any recovery even more doubtful.

A transaction tax on trades, as a pre-condition to legal enforceability, might restore some integrity to markets. That would help restore more efficient functioning to economies with much greater promise than further bailouts to banks."

http://londonbanker.blogspot.com/2011/09/transaction-taxes-and-transparency.html

 

[fskimospy]

The are missing the nuance in the issue. It's not just a matter of saying they will hypothetically be a lender of last resort. They actually have to be willing and able to buy all the bonds in circulation. Japan also has had unique deflationary pressures that make inflation a non factor to their central bank.

That's what being a lender of last resort is. The ECB would most certainly be capable, the entire question is if they are willing.

Until they are willing, this crisis will not end.

 

[freegeeks]

http://www.telegraph.co.uk/finance/...aty-new-EU-plan-abuses-power-say-lawyers.html
might be bs in the end anyways

in the end the UK will not need their referendum about the EU, the other EU countries will kick them out one day

 

[mshan]

"A stoic Merkel said she had no intention of giving in to a British demand that many observers had expected she would ultimately accept to bring Cameron on board — a written promise that Britain would be free from potentially cumbersome European rules and regulations that could hamper London’s vast financial district. Instead, her message to the British was clear: If you want to be part of Europe, you must submit to its rules.

“I have achieved what I wanted to achieve,” Merkel said."

"Despite all the focus on the summit, Friday’s agreement was aimed at fixing the root causes of the crisis and contained only modest steps to address the immediate problems facing Europe: spiraling borrowing costs for countries that could otherwise slowly get their ledger sheets in order.

The 26 nations did agree to the “aim” of increasing the amount of financial aid available to troubled nations in the region, pledging an additional $268 billion to the International Monetary Fund. They also agreed to move up the establishment of a $670 billion European bailout fund by one year, while keeping in place a $590 billion temporary fund, effectively increasing the total amount.

Addressing the problem of high borrowing rates in countries such as Italy, though, may require greater intervention from the European Central Bank, which could print money to lend to countries at affordable rates, or from Germany, which could allow countries to borrow money with guarantees from the full euro zone.

Merkel has previously hinted that she might accept euro bonds — regionwide instruments like U.S. Treasurys that could require German taxpayers to back up the debts of Greeks and Italians — but only as long as other countries bind themselves to deep fiscal overhauls.

Despite the pact struck Friday, Merkel’s reluctance forced summit leaders to remove a reference to euro bonds from a draft communique of an agreement."

http://www.washingtonpost.com/world...broad-deal/2011/12/09/gIQAFi5UhO_story_1.html

British take -> http://www.bbc.co.uk/news/business-16109444

Slovakia ("EFSF - a Road to Socialism"): http://strana-sas.sk/file/579/ESFS-a_road_to_socialism.pdf

 

[0roo0roo]

My gut impression is that UK really just wants to protect London's financial district more than anything else (financial transaction tax, don't know if there is any real clamping down on regulatory loopholes during recent summit).

I believe it was loophole in UK regulations that allowed AIG's financial office to write something like $3 trillion in derivatives contracts with no collateral backing it (taking down AIG in 2008), and the missing MF Global money may be due to some rehypothecation loophole that allowed MF Global to use U. S. based client money as it did.

sounds good, but sooner or later the truth comes out...the only people paying these taxes will be us in the end.

 

[0roo0roo]

in the end the UK will not need their referendum about the EU, the other EU countries will kick them out one day

ah. the eu ..such a uniting force

 

[mshan]

Some good comments I read or saw on Internet or TV over weekend:


- "necessary but not sufficient" (Mohammad El-Erian of PIMCO, talking about ultimate resolution of Eurozone debt crisis)

- good plan for next crisis, but does not fix current one

- not as good as markets wanted / wished for, but not as bad as markets feared

- for UK, it still seems like Cameron was trying to protect it's financial district, but his domestic critics say he is isolating Britain when future global competitive markets will mean Eurozone going up against emerging economic powerhouses such as China and India and Indonesia (IIRC, 3x population of Germany and lots of natural resources), in addition to the U. S. of course (individual European countries are only middle sized from that perspective)

- Ed Yardeni (coined "bond vigilante" term): http://video.cnbc.com/gallery/?video=3000061844 :thumbsup:

 

[0roo0roo]

not bad as markets feared?

not sure that makes sense, they failed to deal with the problem so how is that not as bad...

 

[OutHouse]

humm lets see 20+ different governments with 20+ different budgets/rules/economy.. all on one money..

im surprised this experiment has lasted this long.

 

[Fern]

It would be exactly them printing more euros, and it would quite likely be inflationary. It would also almost certainly result in a massive decline in bond prices. Bond prices are high right now because of what investors perceive to be a high risk of default, ECB action removes such a possibility.

What is going on right now is basically a bank panic on a state level. While perhaps fears of inflation would make prices higher than they might be otherwise, the removal of the default panic would be a FAR larger influence on interest rates than modest eurozone inflation going forward.

You might want to edit your post to avoid confusion.

I think you accidentally confused bond prices and interest rates.

High bond price means low rate of interest and vice versa.

I.e., if there were "a massive decline in bond prices" that would mean sky rocketing interest rates. I think you're trying to say the opposite. Likewise, bond prices would not be high because of a high risk of default, bond prices would be low (meaning high interest rate).

Fern

 

[Fern]

The interest rates are going up due to a self fulfilling bond panic. Countries pass small bailout packages, it does nothing. Countries impose austerity, it does nothing. Why? Because they aren't addressing the problem. When the ECB steps in and offers to act as a lender of last resort, you will see these bond problems disappear overnight. Countries with higher debt to GDP ratios and equivalent growth pay much, much lower rates.

Japan has had terribly low growth rates for the last 15 years along with vastly higher debt to GDP ratios. Why is there no run on their bonds?

-snip-More on topic is answering the question of why Europe's debt is leading to high interest rates, but not Japan.

-snip-
As to why the endgame in Japan has not yet commenced, seems like float of bonds not held domestically by Japanese is low and Japan's central bank can, at least for now, out-print any speculator that is trying to short the Japanese bond market (speculators may ultimately be proven right, but they don't have staying power to out wait the Japanese central bank, at least right now).

I'm very very reluctant to look at Japan's experience and believe it that will translate into over to Western countries. I'm very doubtful we can use them as a valid model of what can or will happen.

For one thing, I firmly believe their cutler is much, much different than ours. For another, it looks like most of their debt is held internally. I.e., it the Japanese who are buying/holding Japanese debt.

It's my belief that if Japanese people believed they must buy Japanese govt bond at a low rate for the good of the country they'd do it. I also believe they'd never redeem those bonds if they thought it would cause a problem and bring shame/trouble to Japan. I think they'd just roll them over for more low-rate bonds.

Since they own most of their bonds, collectively it makes no sense to put pressure on Japan's central bank, to have it print loads more money. That would create high inflation that would roil their economy, devalue the Yen that would be embarrassing nationally and create problems for international business contracts valued in Yen, and wipe out wealth/value of their bonds which are held by themselves. I can see why (non-Japanese) would have confidence in them defaulting.

Do I feel the same way about Greece, Italy or France? Nope, not a chance.

Fern

 

[fskimospy]

I'm very very reluctant to look at Japan's experience and believe it that will translate into over to Western countries. I'm very doubtful we can use them as a valid model of what can or will happen.

For one thing, I firmly believe their cutler is much, much different than ours. For another, it looks like most of their debt is held internally. I.e., it the Japanese who are buying/holding Japanese debt.

It's my belief that if Japanese people believed they must buy Japanese govt bond at a low rate for the good of the country they'd do it. I also believe they'd never redeem those bonds if they thought it would cause a problem and bring shame/trouble to Japan. I think they'd just roll them over for more low-rate bonds.

Since they own most of their bonds, collectively it makes no sense to put pressure on Japan's central bank, to have it print loads more money. That would create high inflation that would roil their economy, devalue the Yen that would be embarrassing nationally and create problems for international business contracts valued in Yen, and wipe out wealth/value of their bonds which are held by themselves. I can see why (non-Japanese) would have confidence in them defaulting.

Do I feel the same way about Greece, Italy or France? Nope, not a chance.

Fern

It's far far simpler than that. Japan has their own currency and a lender of last resort. End of story.

Go look at the debt/GDP ratios and interest rates of countries of similar debt profile that have their own currencies to the European countries currently drowning in high interest rates, across the board you will see people in the same boat paying way less.

 

[the DRIZZLE]

It's far far simpler than that. Japan has their own currency and a lender of last resort. End of story.

Go look at the debt/GDP ratios and interest rates of countries of similar debt profile that have their own currencies to the European countries currently drowning in high interest rates, across the board you will see people in the same boat paying way less.

OK, name some of the countries excluding the US and Japan which are special cases.

 

[fskimospy]

OK, name some of the countries excluding the US and Japan which are special cases.

They aren't special cases, they are the norm. The easiest example is the UK. They have a similar debt/GDP ratio to Spain (both around 60%), their budget deficit is about the same percentage of GDP (both around 9%), they are most likely heading back into a recession, etc.

What are the UK's 10 year bond yields today? 2.09%

Spain? 5.78%, getting close to three times what the UK pays.

 

[sandorski]

Does anybody else see this as European countries cutting their budget during a recession? Should give the Progressives here a heart attack cuz they seem to think that's the worst possible thing, ever, in the history of the world, and Paul Krugman says so.

Fern

Europe is bearing a significant penalty to their Economy for doing these Cuts. Debt is a huge issue for them simply because the Nations with the deepest Debt have very limited choice in how to deal with it. If they each had their own currency, things wouldn't be near as dire for them.

 

[Fern]

It's far far simpler than that. Japan has their own currency and a lender of last resort. End of story.

I think that's too simplistic.

Atm, I do think the ECB's backing of national debt would be helpful, particularly given the recent deficit limitation deal.

However, I think even the ECB's backing has limits. If the aggregate Euro debt cannot be supported by the aggregate Euro GDP there will be a problem. Just printing money is not a good solution because it's inflationary and that kills assets denominated in currency (e.g., Euro bonds).

Inflationary printing of money is just another form of default. IIRC, when Greece recently defaulted the bonds took a 50% haircut. There is no real different between that and printing enough currency that bondholders effectively lose 50% of their value due to inflation and their loss of value vis-a-vis devaluation for FMV interest. I.e., older bonds, particularly LT bonds, will take a major haircut because their stated interest rate is far too low given the excessive printing of new currency.

I also believe an ECB backing of member nations bonds is tantamount to a bailout. The difference is that it's guaranteed upfront instead requiring after-the-fact legislation like TARP. The wealthier more financially disciplined Euro members need to be very careful here because under ECB backing they are guaranteeing a bailout to the other nations.

Sure, the ECB can print its way out of technical default but there is still the very same loss of equity/wealth suffered by those invested in currency denominated assets like bonds. This results in problems for banks, and not just those invested in bonds, but their whole portfolio of debt. E.g., mortgages, CC debt and biz loans remain at the same principal and interest, but are hugely devalued because of inflation. Of course, it's a huge bonus for those borrowers assuming their cash flow rises commensurably with inflation.

Go look at the debt/GDP ratios and interest rates of countries of similar debt profile that have their own currencies to the European countries currently drowning in high interest rates, across the board you will see people in the same boat paying way less.

I haven't found any site, ay least nothing yet, that shows both bond rates and GDP/debt together in a handy table.

While I do agree a central bank guarantee can have a positive impact on rates, there are also possibly other factors as well (e.g., net trade surpluses, population demographics and what currency the debt is denominated in.)

Fern

 

[fskimospy]

The whole point is that they won't have to print their way out of a default if interest rates are lower, and having that backing will lower interest rates almost certainly.

 

[the DRIZZLE]

They aren't special cases, they are the norm. The easiest example is the UK. They have a similar debt/GDP ratio to Spain (both around 60%), their budget deficit is about the same percentage of GDP (both around 9%), they are most likely heading back into a recession, etc.

What are the UK's 10 year bond yields today? 2.09%

Spain? 5.78%, getting close to three times what the UK pays.

Spain holds much more Italian and Portuguese debt in relation to it's size, that's one reason. Spain is also in a lot more trouble in other ways as well. I'll agree that not having control of their monetary policy is a big part of what's going on here, but it's only part of the story.

 

[mshan]

"No-one thinks the eurozone crisis is over or that European leaders did enough last week to rule out nasty surprises in the next few weeks, but talking to officials, economists and analysts closer to the trading floor in the last few days, something has changed that I'm going to take as a sliver of good cheer.

What's new is that the people closest to the markets are no longer the most pessimistic.

For most of the past six months the opposite has been true. Bankers and those closest to the money markets have been more frightened, more quickly, about Europe's financial system and its economy. The rest of the world has then followed them down.

The money men probably reached the slough of their despond towards the end of November. That was when some were starting to seriously question whether Italy was losing access to the financial markets and when the lack of official activity in the wake of the Cannes Summit had become painfully apparent.

Don't get me wrong: those same analysts and traders are still gloomy today and they're still nervous of what's to come, but the air of barely-suppressed panic has subsided.

If you ask them why, they will tell you it's all in the tail: the "tail risks" that loomed so large a few weeks ago have receded.

What does that mean in plain English? It means that a truly catastrophic disaster, for example a wholesale freezing up of financial markets following a massive bank failure, or a run on banks, looks less likely to happen next week or next month than it did before. It's not impossible, but it's much less likely.

Does that mean that the eurozone governments did something important after all and that the summit was a secret success? The answer is no.

Part of the credit for this change of mood goes to the US and relatively good news about the US recovery, but most of the credit has to go to the world's leading central banks, including the ECB.

It is they who have once again stepped in with more liquidity life support to keep the patient stable while governments continue to struggle to come up with a cure.

On this telling, the co-ordinated central bank action on 30 November marked a turning point. That, followed by the more generous lending facilities for banks announced by both the Bank of England and the ECB, have sent an important signal to the financial system: that the authorities are willing to do a lot to avoid an important financial institution running out of money.

As Robert Peston has noted, this is still quite possible, but the Italian and other banks that have caused so much concern do now have somewhere to go when no-one wants to lend to them, and when the assets they've got left to put up as collateral (small business loans, for example) are not the kind that central banks (or anyone else, for that matter) will usually accept.

Now such institutions can go to their national central banks for support.

It's true that the ECB has insisted that the credit risk for this kind of lending - lending in exchange for illiquid collateral - should remain on the national central bank's balance sheet, not be carried by the euro-system as a whole.

But it has permitted that lending to happen, and it will fund it. As I said last week, that means the ECB has become even more of a lender of last resort than it was before."

http://www.bbc.co.uk/news/business-16137955

Oliver Sarkozy (Carlyle Group) on CNBC Wednesday Nov. 23, 2011

- http://video.cnbc.com/gallery/?video=3000058679 (U. S. money market funds apparently provide some wholesale funding for European banks, but have pulled back)
- http://video.cnbc.com/gallery/?video=3000058810 (so so clip; just points out immediate crisis is lack of wholesale funding for European banks, not soveriegn debt per se)
- http://video.cnbc.com/gallery/?video=3000058830 (Euro-TARP?)


Ultimately, I think problem is same as it was during Lehman moment in 2008*: way too much leverage, based upon way too little (if any) underlying capital, all interconnected in ill-transparent ways that requires blind faith confidence among market participants to keep the whole thing from coming unglued (I can get out before house of cards collapses, or I can always sell to greater fool).

It sounds like EU leaders felt like they were at that precipice last Thursday when they apparently worked through night to point of near exhaustion to hammer out those deals.




* From commentary of talking heads on tv, it may not be default per se that market participants fear, it is an uncontrolled default that no one anticipated and prepared for that people seem to fear could crash the global financial markets and economy (Bush and Paulson defined no rules of the road in 2008, making up arbitrary solutions which seemed to change from weekend crisis to weekend crisis, and I think I read that Dick Fuld of Lehman apparently didn't draw up bankruptcy contingency plans because he always assumed he would get bailed out).