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Even Goldman Sachs Is Confused About Irish Economy

In Financial Markets, High Frequency Trading, International Econnomic Politics, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 14.11.10 at 21:54

Goldman Sachs‘s European analyst, Erik Nielsen,  is back in London’s prominent Chiswick with an updated view on the regions partly messed up economies. He is, however, confused over Ireland. But he’s not alone. The  whole European financial market were left in a state, described as of “unusual uncertainty” after close on Friday. The main problem is that no one seem to know what’s going on in Ireland. Erik Nielsen at Goldman Sachs is most worried about the contagion effects, thou.

“Whether (or when – if before early summer) the Irish government seeks financial help from the EU and IMF is a purely political decision on the back of an assessment of the broader risk of the spread levels to economic and financial stability.”

Erik Nielsen

Chiswick - Dublin

“To recoup:  the Irish government is fully funded – with no borrowing needs at all – until mid-2011.  They are in the midst of budget negotiations which should be done by December 7.  If they were to breakdown before then, pressure on Irish spreads would surely widen further, putting the country further at risk,” Nielsen writes in a note to clients.


With courtesy of www.zerohedge.com, here’s the latest economic update on Europe from Goldman Sachs’ London-based European analyst, Erik Nielsen:

Happy Sunday,

* I’m back in my beloved Chiswick after having been on the road most of this past week; and what a week it was!  Here’s the way I see it all:

* It’s been a week of scary spread widening for the periphery mostly due to the uncertainties stemming from the stated policy initiative to include private sector participation in future debt workouts.

* On Thursday, European finance ministers – finally – clarified that this initiative will not apply to existing debt, but whether this is enough to put the genie back in the bottle remains to be seen.

* It is being reported that Ireland has started informal talks with Brussels on a rescue package, but so far there has been no formal request.  I summarise my view on how it may all play out.

* French PM Fillon submitted his resignation yesterday; a cabinet reshuffle is likely later today or tomorrow.

* On the data front it was a quiet week generally lending support to our constructive pan-European views.

* Tuesday-Wednesday will see the Eurogroup and Ecofin meetings; an opportunity to express support for the periphery, if that has not happened before then, but formal agreement on a package will take longer.  Also look out for politics in Italy.

* On the data front we’ll get inflation and trade numbers out of the Euro-zone this coming week; not that exciting although we’ll be hitting the ECB’s target of 1.9%.

* The UK also prints inflation this week along with labour market and retail numbers.  And we’ll get the MPC minutes – and loads of MPC talk.

And Switzerland prints inflation – and trade – data this week.


-1     What started as confusion among investors about a sentence in Merkel and Sarkozy’s communiqué from Deauville in mid-October referring to the participation of private creditors in future debt workouts (after the Treaty has been changed by 2013) escalated to real market worries after the Council approved this language in late October.  It was clearly a grand political statement of intentions rather than a concrete proposal taking into considerations the umpteen legal and practical issues involved in marrying such an approach with the need to keep the process orderly, but it spooked the market and raised a lot of unnecessary uncertainty.  I am sure that this problem was being conveyed to the policymakers from many sides.  On Wednesday, I had a piece in the FT highlighting some of the complexities, concluding that “the sooner Van Rompuy and his team – and the rest of the political leadership – clarify these complex practical and legal issues, the sooner premiums on peripheral sovereign issuance will evaporate.  Otherwise the peripheral countries could see their borrowing costs hit levels not seen since the Greek rescue, in effect, shutting them off from commercial borrowing – hence forcing them to rely on the existing rescue facilities.”  When LCH.Clearnet imposed substantial margins on Irish bonds things turned outright scary because of the possible effects of the sovereign spread-widening onto the financial sector.

-3     Ireland is reported to have started informal conversations with the Commission on a support program, and an unnamed German official is quoted today saying that Germany is encouraging Ireland to tap the facility to help further calm markets.  I apologise for not being able to take very many calls (or answer the many emails) Thursday-Friday when I was travelling, but my views on how all this may play out has not changed the last few weeks (i.e. after I realised that our original view on Ireland was too optimistic.)  To recoup:  the Irish government is fully funded – with no borrowing needs at all – until mid-2011.  They are in the midst of budget negotiations which should be done by December 7.  If they were to breakdown before then, pressure on Irish spreads would surely widen further, putting the country further at risk. If the budget gets through, then I suspect the original Irish game-plan was to spend the next couple of months convincing markets that things are back on track before they restart the government borrowing sometime late winter/early spring.  This could include the involvement of some of their domestic resources, but I tend to doubt it.  Given its own strong cash position, the spread widening has no immediate or direct effect on the government, but the part of the private sector with financing needs will be hurt, of course, and this degree of market stress will increase the risk for the financial system as a whole (well beyond the benefits stemming from the weaker euro.)  And it may be fuelling the spread widening for other countries as well.  In other words, whether (or when – if before early summer) the Irish government seeks financial help from the EU and IMF is a purely political decision on the back of an assessment of the broader risk of the spread levels to economic and financial stability.

-3     Ireland is reported to have started informal conversations with the Commission on a support program, and an unnamed German official is quoted today saying that Germany is encouraging Ireland to tap the facility to help further calm markets.  I apologise for not being able to take very many calls (or answer the many emails) Thursday-Friday when I was travelling, but my views on how all this may play out has not changed the last few weeks (i.e. after I realised that our original view on Ireland was too optimistic.)  To recoup:  the Irish government is fully funded – with no borrowing needs at all – until mid-2011.  They are in the midst of budget negotiations which should be done by December 7.  If they were to breakdown before then, pressure on Irish spreads would surely widen further, putting the country further at risk. If the budget gets through, then I suspect the original Irish game-plan was to spend the next couple of months convincing markets that things are back on track before they restart the government borrowing sometime late winter/early spring.  This could include the involvement of some of their domestic resources, but I tend to doubt it.  Given its own strong cash position, the spread widening has no immediate or direct effect on the government, but the part of the private sector with financing needs will be hurt, of course, and this degree of market stress will increase the risk for the financial system as a whole (well beyond the benefits stemming from the weaker euro.)  And it may be fuelling the spread widening for other countries as well.  In other words, whether (or when – if before early summer) the Irish government seeks financial help from the EU and IMF is a purely political decision on the back of an assessment of the broader risk of the spread levels to economic and financial stability.

-4     There has been no official request for help so far, but if the Irish want it, there can be no question that they’ll get it without much trouble; i.e. no need for long negotiations on conditionality.  As I have argued throughout this year, their policy adjustments have been impressive, and apart from the valuations of assets transferred to Nama (which triggered the beginning of the sell-off – but was that really bad for the government balance sheets?), I am not really aware of any material macro or political news that would justify the present spreads.  But that said, if investors are running for the door out of fear of being the last one left behind, then there’ll be a liquidity crisis (as there would be for anyone with a financing need), and they’ll need help. In my book, this is not a solvency crisis, and the government’s policies are surely not far off what the Commission and the IMF would demand in return for a loan (which would eliminate the need for private funding for the next 2-3 years.)  The Commission – and fellow Euro-zone members – will surely ask the Irish to raise their corporate tax rate, but the Irish will resist, although they may end up with some sort of “gentlemen’s agreement” to move in that direction over the medium term.  IMF programs (and surely EU-IMF programs as well) do not set specific detailed fiscal policy measures, but more general frameworks.  That said, the Euro-zone will need towards greater tax harmonization, and while Ireland has fought this for a long time, the power is naturally now shifting to those providing the bail-out.  Importantly, with or without a facility to include private creditors in a debt workout in the future, this would not apply to a liquidity crisis like the Irish.

-5     Portugal is quite different from Ireland.  The 2011 budget is further ahead (and the deficit is smaller), but their financing needs are more acute, and they are facing some significant amortizations in April and June (two times €4.5-5.0bn) which will require measurable borrowings before then (Portugal does not publish their cash holdings, so we don’t know their exact needs.)  Like for Ireland, a decision to ask for help is a political one, but given their ongoing borrowing needs, the present spreads hurt the budget process directly.  Also, if they were to ask for help, negotiations on the underlying policy conditionality would likely be more complicated than for Ireland because of the need for much more wide-reaching structural reforms in Portugal (but do-able, of course.)  While I haven’t seen any reports on it, I rather suspect that the Commission is reaching out to Lisbon this weekend to encourage a more detailed discussion of a Plan B on Tuesday. In spite of their differences, if (when) Ireland or Portugal officially seeks help, it can only be in everyone’s interest to start the process for the other country at the same time.

-6     Following months of speculation and hints, yesterday French PM Fillon submitted his resignation to president Sarkozy.  A cabinet reshuffle is likely to be announced later today or tomorrow.  The key objective will be for Sarkozy to re-energise his government for the last 15 months of his presidency and create a stronger platform for himself from which to run for re-election in 2012.  We do not think it’ll have material impact on domestic policies relevant for investors.  A number of commentators have suggested that Fillon may be re-appointed as the safe pair of hands he is on the domestic front, leaving Sarkozy the necessary time to roam on the global stage as chairman of G20.  Lagarde has been mentioned as a possible new foreign minister, unless she stays in her present position.

-7     In terms of data, this past week was dominated by the key Euro-zone GDP numbers for Q3, coming in at the expected +0.4%qoq (non-annualised), driven largely by Germany (+0.7%), while Spain delivered a respectful flat number.  The German locomotive helped several others perform well; the Czech Republic and Hungary reported Q3 GDP growth of 1.1% qoq, non-annualised, and 0.8%, respectively.  We also got industrial production numbers for September, and for this volatile series, the third quarter ended relatively poorly for the Euro-zone, erasing much of the strong gains in previous months, bringing us back to our estimated trend-line.  Quarter-on-quarter, IP was up 0.4% (non-annualised.)  As I discussed last week, the early indicators for Q4 are looking good, suggesting some (moderate) upside risk to our +0.3% Q4 GDP forecast; +0.3% Q4 growth would give us our full-year 1.7% growth number (which I was laughed out of the room on on more than one occasion when we launched it earlier this year – Dirk Schumacher discussed these numbers in greater detail in Thursday’s European Weekly Analyst, and we’ll publish revised 2011 and new 2012 forecasts in early December.)


Turning to this coming week:

-8     In the Euro-zone, the highlight will be the Eurogroup meeting on Tuesday, followed by the Ecofin on Wednesday.  It’ll obviously be an excellent opportunity to express support and solidarity with the crisis-hit periphery, if they don’t do so even before Tuesday, but I rather doubt it’ll be more than that.  As discussed above, I think we are still some way away from a formal announcement of official financing being launched – but this is, of course, pure guessing on my part because, the Irish government does not need the money for several months so its all a political decision.  Also on the political side, it’ll be important to keep an eye on Italy.  Last Thursday Future and Liberty Party head Fini refused to a proposed cabinet reshuffle without Berlusconi first resigning and an aid to Fini then said that the Future and Liberty Party will pull out of the coalition this coming week; the press reports that the resignation letters are already on his desk.  The crisis may lead to either a reshuffle of the cabinet or it could lead to early elections.  Either way, we do not think it’ll impact the 2011 budget process or outcome.

-9     In terms of data releases, it’ll be an extremely light week in the Euro-zone.  We’ll start Monday with September trade data.  They have an EMEA-relevance score of zero, so our interest is more in terms of the growth rates for exports and imports.  The shift in Q2 from Euro-zone growth being primarily export driven to primarily domestic demand driven was accompanied by stronger import growth (than export growth), opening up a (still small) trade deficit, so it’ll be interesting to see if that remained the case as Q3 closed.  Then on Tuesday we’ll get the full inflation report for October; the flash estimate showed an increase in headline inflation to 1.9%yoy (from 1.8%), so the news will relate to the underlying components, specifically core inflation which we think has remained stable at 1.0% before moving gradually higher towards the end of the year.  On a normal reaction function, the ECB should already be well into its exit, but – like other central banks – normal reaction functions seem a curiosity of the past these days, so it’ll come slowly during 2011’H1, we think.  Finally, Eurostat is set to publish 2009 Greek deficit and debt figures on Monday, and the Troika will discuss the Greek loan program – I’m sure this will attract considerable attention, comments and questions, but we are nowhere near a place where the program is in trouble.

-10     In the UK, we are heading into a week of CPI inflation (Tuesday), unemployment and wages (Wednesday) and retail sales (Thursday).  We expect inflation to have eased to 3.0%yoy in October (from 3.1%) mostly due to base effects, although food and energy prices moved higher in October (and a major provider has just announced a big jump in retail gas prices in November), so one shouldn’t get carried away here; these elevated inflation levels seem likely to be around for a long time.  We are in line on unemployment and earnings growth (7.7% and 2.3% respectively) and slightly above on retail sales (0.5%mom versus 0.2%).  Wednesday also sees the release of the minutes of the MPC’s November meeting.  The consensus expectation is for an 8-1 vote in favour of unchanged policy; we’d be surprised if Adam Posen reversed his vote for more QE after only one meeting.  In any event, as Ben Broadbent has pointed out, it’ll be more important to watch for any shift in the general tone of the minutes, in particular, to see whether the sentence depicting the dovish bias of the Committee – “some members felt the likelihood that further monetary stimulus would become necessary had risen in recent months” – is retained.  Released alongside the minutes are the monthly Agents’ survey and, as is usual a week after the Inflation Report, the detailed numbers behind the MPC’s latest set of forecasts.  It’s also usual to see a spate of MPC speeches after the purdah of the quarterly forecasting round and we get three – Weale on Monday, Posen on Thursday, Tucker on Friday.  Tucker and Dale also give evidence to the House of Lords Economic Affairs Committee on Tuesday afternoon.

-11     In Switzerland, we’ll get producer and import price inflation for October on Monday and trade data (also for October) on Thursday.  We expect the headline Supply Price Index to jump to 0.8%yoy (from 0.3%) on the back of a massive base effect.  The key component to watch will be import prices, for any evidence of further disinflation as a result of CHF appreciation.  The trade data will be important to watch in case the trend line (in a volatile series) for exports were to continue its softening into the end of the year.

… and that’s the way it all looks to me on this lovely mid-November day in Chiswick.  I somehow feel that I’ll be writing more emails to you this coming week, but for now I’ll be heading to the High Street for my (belated) morning coffee.

Best

Erik F. Nielsen
Chief European Economist


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Another BP CDS Blowout Today?

In Financial Markets, High Frequency Trading, Law & Regulations, National Economic Politics, Natural science, Technology, Views, commentaries and opinions on 29.10.10 at 02:43

Reports stemming from the presidential commission investigating the Gulf of Mexico oil spill indicate that Halliburton and BP were aware of flaws in the cement used to seal the well’s bottom. Halliburton’s CDS spreads started to move  Thursday – what will happen on Friday?

“The distribution of the burden, unlike hardened cement, is still fluid.”

Otis Casey



Halliburton and BP may have been aware of flaws in the cement used to seal the well’s bottom, according to an official report.  CDS on Halliburton started out moderately wider on the headlines, but is currently about 38 bps wider than yesterday’s close. Anadarko and Transocean are essentially unchanged. But this can change quickly.

The market’s reaction on BP CDS will come in Friday’s London session

“Whether the report constitutes a ‘smoking gun’ or not remains to be seen, but it has that potential. Litigation risk is high even if the total amount is uncertain. The distribution of the burden, unlike hardened cement, is still fluid,” vice president Otis Casey at Markit writes in a comment.

(www.markit.com)

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Back in May, it was  the Transocean CDS that got the biggest kick.

(www.cma.com)

 

Report: Offshore Banking Needs To Be Revisited

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 21.09.10 at 22:42

A new report by the Monetary and Economic Department of the Bank for International Settlements, economists argue that the offshore banking system needs to be revisited. Offshore accounts can be beneficial for the emerging markets economies, but pose a threat to financial stability in the home countries. However, its possible to manage these risks, the BIS economists says.

“Expansion of central bank balance sheets amid fiscal expansion in the world’s major economies has, in some views, called into question the major currencies’ reliability as stores of value.”

Dong He/Robert McCauley


The offshore markets intermediate a large chunk of financial transactions in major reserve currencies such as the US dollar. McCauley and He argue that the emerging market economies who are interested in seeing some international use of their currencies, offshore markets can help to increase the recognition and acceptance of the currency, while still allowing the authorities to retain a measure of control over the pace of capital account liberalization.

However, the development of offshore markets could pose risks to monetary and financial stability in the home economy which need to be prudently managed, the two economists points out.

Adding: “The experience of the Federal Reserve and of the authorities of the other major reserve currency economies in dealing with the euro markets shows that policy options are available for managing such risks.”

Securing The Dollar Dominance

According to the report, a significant portion of the international use of major reserve currencies, such as the US dollar, takes place offshore.

In particular, when non-US residents use the US dollar to settle trade and make investments, they do not transact onshore through banks and in financial markets in the United States.

Rather, they concentrate their transactions in international financial centers such as the euro-dollar market in London.

“In fact, one may argue that, without the offshore markets, the US dollar would not have attained the dominant position in international trade and payments that it occupies today,” the report says.

“We show that non-US residents reveal a strong preference for doing their dollar business outside the United States. That is, they tend to deposit US dollars in banks abroad and to buy US dollar bonds issued by non-residents outside the United States (and probably to hold them in European depositories as well).”

Need For Clearing Arrangement

Judging from the US dollar, global investors prefer to transact in a particular currency through the offshore markets.

Non-US residents, private and official alike, keep the bulk of their US dollar deposits outside the United States and invest disproportionately in US dollar bonds issued by non-US residents.

“The payment flows associated with these accounts and investments ultimately pass through bank accounts in the United States, just as payment flows associated with non-bank financial intermediaries in the United States ultimately pass through banks in the United States. While the US authorities put in place capital controls from the late 1960’s until the early 1970’s, they never impeded the flow of payments through US banks to allow the settlement of offshore trade and investment transactions. Offshore markets in a currency can flourish if offshore financial institutions are able to maintain and to access freely clearing balances in the currency with onshore banks. In other words, non-resident convertibility of the currency is allowed at least for overseas banks. Once this condition is met, both long and short positions in the currency can be built up offshore even without a wholesale liberalization of capital account controls by the onshore country authorities. If offshore banks do not have free access to clearing banks kept with onshore banks, then offshore markets can still exist, though in a more limited fashion, through non-deliverable contracts,” Dong He and Robert McCauley writes.

Threat To Stability

The development of offshore markets in a given currency poses several challenges to a central bank’s responsibility for maintaining monetary stability.

An offshore market in a given currency can increase the difficulty of defining and controlling the money supply in that currency. Equally, an offshore market in a given currency can pose a challenge to measuring and controlling bank credit.

“Offshore activity in the currency might also affect the shape of the yield curve or the exchange rate. If the central bank sets the overnight (or some other short-term) rate with a view to targeting inflation and growth, then policymakers would have to factor these effects into their inflation forecasts and set the short-term interest rate appropriately.”

Manageable Risk

The BIS economists makes the following concluding statements:

* “For emerging market economies that are interested in seeing a larger share of their international balance sheets denominated in their own currencies, offshore markets can help to increase the recognition and acceptance of the currency among exporters, importers, investors and borrowers outside the country. This process can begin (but not end) while substantial capital controls are still in place, allowing the authorities to retain a measure of control over the pace of capital account liberalization.”

* “The development of offshore markets could pose risks to monetary and financial stability in the home economy which need to be prudently managed. The experience of the Federal Reserve and of the authorities of the other major reserve currency economies in dealing with the euro markets shows that policy options are available for managing such risks. The lesson to be learnt is that the home authorities need to be alert to such risks, and factor in the additional influence of offshore markets on domestic monetary conditions and financial risks when making monetary and financial policies.”

* “Would the global financial system benefit from a wider array of internationalized currencies with offshore markets? The offshore dollar markets described in the first part of this paper, dominated by non-US banks, issuers and investors, have limited the rents flowing to the United States from the global use of the dollar, at least by comparison with the heyday of sterling. So the issue may be less distributional and more whether greater pluralism in international finance is conducive to global financial stability. The long-standing arguments regarding the stability of leadership/hegemony, on the one hand, and pluralism, on the other, need to be revisited in the light of the experience with the dollar shortage during the financial crisis.”

Here’s a copy of the full report.

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JPMorgan's "Poison Pill" Strategy

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 27.06.10 at 18:12

If there’s anything banks have learned from the financial crisis, it’s the fact that if you’re too big to fail, you can do whatever you want. This seems now to be the strategy of Jamie Dimond and JPMorgan. who is currently seeking to be more global, expand into the emerging markets and become more like Citigroup.

“In effect, Mr. Dimon is constructing a “poison pill” against takeover by the government. This is so simple, so brilliant, and so dangerous that it should take your breath away.”

The Baseline Scenario


While the financial reform negotiation process grinds to its meaningless conclusion, the real action lies elsewhere – in Jamie Dimon’s executive suite, Simon Johnson at The Baseline Scenario writes.

Dimon, the head of JP Morgan Chase, is apparently seeking to (a) become more global, (b) move further into emerging markets, and (c) become more like Citigroup.

This is terrific corporate strategy – and very dangerous for the rest of us.

Jamie Dimon clearly wants to become too big to fail, too interconnected to fail, and – above all – too global to fail.

He knows that the reform package will, among other (very small) things, create a resolution authority that will give the government more power – in principle – vis-à-vis failing financial institutions in the future.  This is a central part of Tim Geithner’s vision for financial stability.

But Mr. Dimon also knows – as a board member of the NY Fed and sometime White House/Treasury confidante – that a US resolution authority will do precisely nothing to make it easier to handle the failure of a large global bank, e.g., Citigroup, doing business in over 100 countries.

The reason global megabanks will get bailouts in the future is simple – policymakers will fear the chaos that would ensue when competing bankruptcy claims swarm over a defaulted institution, much as happened for Lehman (e.g., in London) in September 2008.

Mr. Dimon and his colleagues – who include some top former global regulators – are also well aware that the G20 (and everyone else) will not make any serious push towards creating a cross-border resolution mechanism.

The best way to signal to creditors that they will be protected in all potential future crises is to make JP Morgan bigger and more global.  This will lower the funding costs for the organization and in turn make this global expansion more profitable when times are good – and when times are bad, there will be government support.

In effect, Mr. Dimon is constructing a “poison pill” against takeover by the government.  This is so simple, so brilliant, and so dangerous that it should take your breath away.

If you press serious administration officials, in private, on how they will use the new resolution authority for Citigroup or (now) JP Morgan Chase, they are quite candid: they would create a conservatorship, as with AIG or Fannie/Freddie.  But there is a huge difference between conservatorship and resolution.  Resolution is about winding down the company, typically involves firing, and should imply losses for unsecured creditors.  Conservatorship is about managing the company as a going concern – and would almost certainly in this context involve full creditor protection.

It is perhaps ironic that Jamie Dimon argued strongly, early in the reform process, for a heavy weight to be placed on a resolution authority as a way to prevent future bailouts.  His actions now to undermine the effectiveness of such an authority further suggest that this administration was unwise and naïve to rely on his advise in the early formative phases of reform.

The White House may now be waking up to the profound dangers that Mr. Dimon and his successors will pose, but they are still unwilling to do anything meaningful about it.

By Simon Johnson

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European Banks: "Leman Times Ten"

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 25.05.10 at 17:20

Head of market analysis at Schneider Foreign Exchange, Steven Gallo, says in a interview with Bloomberg Television that European bank woes may be “Lehman Times Ten.”

Gallo, speaking in London, talks with Bloomberg’s Andrea Catherwood about the risk of weaknesses in the Spanish banking system spreading globally, and also discusses the outlook for the euro and gold.

Check it out:

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Albert Edwards: Europe On The Edge Of A Deflationary Precipice

“Sending Europe Back To The 1950′s”

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Europe’s Crisis; Out Of Control

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The Euro Is Going Down; Now Trading Below $ 1,24 (Update)

In Financial Markets, International Econnomic Politics, National Economic Politics on 14.05.10 at 12:12

The euro is going down like free beer and have Friday reached it’s lowest level against the dollar since October 2008, currently trading at USD 1,24080 after closing at 1,23690 in Europe on shrinking volume. Deutsche Bank CEO Josef Ackermann says it’s unlikely that Greece will repay all its debt.

“I would doubt that Greece over time will be in a position to come up with the economic potential to pay back what it owes.”

Josef Ackermann

The euro fell below 1,24 against the dollar in European trading Friday afternoon, closing at 1,23690 – the lowest level since October 27. 2008 when it touched down on USD 1,23331.

The charts shows clearly that investors are fleeing out of all euro related deals, both currency, stocks and oil drop in European trading Friday.

The 16-nation currency is headed for a fourth week of declines against its U.S. counterpart, Deutsche Bank Chief Executive Officer Josef Ackermann said in a German TV talk show last night that Greece will require “incredible efforts” to repay its debts and may not be able to do so in full.

Adding that Europe has “no other choose” than keep bailing out the troubled E.U. states, otherwise a total meltdown would be inevitable.

“I would doubt that Greece over time will be in a position to come up with the economic potential” to pay back what it owes, Ackermann said in an interview with ZDF television.

Greece needs to be stabilized, as a collapse of the country would most likely trigger a contagion of other countries and lead to “a form of meltdown,” he said in the interview aired late yesterday and posted on the German broadcaster’s website.

“While the European austerity measures are a good thing in the long term, they will be negative for the domestic economy and that makes the currency less attractive,” Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London says to Bloomberg News.

“The euro trend is still downward,” Jones adds.

Financial Times points out that investors are getting scared by two factors;  the prospect for economic growth in view of the austerity programmes, and the now prevailing assumption that the ECB is likely to keep lose monetary policies irrespective of inflationary developments.

Here’s today’s euro story – illustrated (charts updated at 7:30pm CET):

EUR/USD:

The chart below show the eur/usd over the last two years. The euro have not been traded at this level against the dollar since October 2008.

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EUR/JPY:

(intraday)

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EUR/GBP:

(intraday)


Europe’s currency has fallen 2.2 percent this week after the region’s policy makers crafted an unprecedented loan package of almost $1 trillion to combat the sovereign-debt crisis that’s threatening the currency.

The euro has lost 8.8 percent this year, according to Bloomberg Correlation-Weighted Indexes.

Former Federal Reserve Chairman Paul Volcker (82)  said in a speech in London yesterday that he’s concerned that the euro area may break.

“You have the great problem of a potential disintegration of the euro,” Volcker, said.

Related by the Econotwist:

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Bailout Euphoria Is Evaporating

Scandinavian Reactions To E.U. Measures: “We Are Not Safe”

Bank Funding Crunch Deepens as Swap Rates Soar

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Bank Funding Crunch Deepens as Swap Rates Soar

In Financial Markets, International Econnomic Politics, National Economic Politics on 09.05.10 at 22:55

Europe’s government debt crisis is starting to infect the bank funding system, driving borrowing costs higher from Asia to the U.S. and threatening to slow the global economic recovery, Bloomberg reports.

“At the moment, it feels worse than 2008. There is no buyer of risk in the market.”

Geraud Charpin

The interest rate that financial companies charge each other for three month loans in dollars is the highest since August, while traders are paying record amounts to hedge against losses in European bank bonds. Yields on all types of corporate bonds rose last week by the most relative to government debt since Lehman Brothers Holdings Inc.’s bankruptcy in September 2008, according to Bank of America Merrill Lynch indexes.

European Union finance ministers pledged to stop a sovereign debt crisis from shattering confidence in the euro as they held an emergency summit over the weekend to hammer out a lending mechanism for deficit-stricken nations. The sovereign debt crisis may end up costing governments more than $1 trillion, according to credit investment firm Aladdin Capital Holdings LLC in Stamford, Connecticut, with knock-on effects on banks and corporates.

“Whether the markets completely unravel depends on whether politicians can stabilize the peripheral government market,” said James Gledhill, who helps manage about 58 billion pounds ($85 billion) as head of fixed income at Henderson Global Investors Ltd. in London. “The tail risk is the stress on banks which stops them from lending to corporates and feeds through to become a real economy problem.”

Global corporate bond issuance plummeted last week, with $9.4 billion of debt sold, the least this year, following $30.1 billion in the previous five-day period and $47.9 billion in the week ended April 23, according to data compiled by Bloomberg. JPMorgan Chase & Co. said in a May 7 report that it’s taking off a recommendation that investors own a greater percentage of junk bonds than contained in benchmark indexes.

“Look for the de-risking that is underway to continue,” the New York-based bank’s fixed-income strategists including Srini Ramaswamy wrote. “Funding pressures have increased for European banks and could worsen over the near term, but are unlikely to deteriorate to the extent seen in 2008 that led to forced develeraging.”

The rate banks say they pay for three-month loans in dollars, known as the London interbank offered rate, or Libor, jumped 5.5 basis points to 0.428 percent on May 7. It climbed 8.2 basis points, or 0.082 percentage point, on the week, the biggest increase since October 2008.

The spread between three-month dollar Libor and the overnight indexed swap rate, a barometer of the reluctance of banks to lend known as the Libor-OIS spread, jumped to 18.1 basis points on May 7, three times the 6 basis-point spread on March 15 and the highest level since August.

“At the moment, it feels worse than 2008,” said Geraud Charpin, a fund manager at BlueBay Asset Management in London. “There is no buyer of risk in the market.”

Full article at bloomberg.com

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Iceland: New Eruption – More Ash

In Health and Environment, International Econnomic Politics, National Economic Politics on 20.04.10 at 10:06

The volcano at the Eyjafjallajökull area in Iceland started pumping out new enormous masses of volcano ash around midnight Tuesday. A new heavier than expected ash cloud reached the coast of Norway this morning, closing the airport at Bergen and Stavanger. The cloud is now moving towards southern and western parts of Europe.

“I can confirm that the outbreak has now become stronger.”

British Metrological  Service

British meteorologists confirmed late Monday that the volcano in Iceland has had a powerful eruption and a new ash cloud is moving south and west in Europe, according to the Norwegian News Agency, NTB.

“I can confirm that the outbreak has now become stronger, and it appears that a new ash cloud is moving, but we do not have more details now. It’s very hectic here,” a spokesman at the British meteorological service said to Norwegian Aftenposten.no at midnight, Monday.

According to the Norwegian Broadcasting Corporation (NRK) the projections show that an ash cloud will pass over the Stavanger area at 2 o’clock Monday morning.

It is intended to reach the Bergen airport Flesland around eight o’clock Tuesday morning.

This probably means that air traffic will be affected.

According to NRK the cloud will be in the area throughout the day, but go away and get smaller over time.

Icelandic meteorologists said earlier Monday to NTB that the ash from the volcano no longer reached more than 12,000 to 15,000 feet. That would imply that it would not reach all the way to Norway.

Airports in Scotland will probably be open on Tuesday morning as planned. But it is uncertain what happens to airports in Northern Ireland, according to a statement from the British air traffic control company, National Air Traffic Services (Nats).

Still, Nats plan to open portions of airspace in parts of England and Wales, but the airports in London will probably still have to be closed, the web site DN.no report.

Airports in the Baltic states and in Finland are now being shut down, baticbusinessnews.com reports.

Related by the Econotwist:

Volcano Ash Can Send The Earth Into “Deep Freeze”

“Mini Ice Age” Underway?

Mother Earth On Crack

As Climate War Intensifies, So Does Extreme Weather

Europe Risks Being Sidelined In Climate Talk

Netherlands Adds New Controversy To UN Climate Report

Top Scientist: “UN Climate Panel Is Losing All Credibility”

World May Not Be Warming, Scientists Says

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