Month: October 2013

Across the board, we are seeing European bank stocks (most notably Italian) trading halted. The 5-7% plunge in prices – just when everyone is proclaiming victory in Europe – reflects an apparent concern that the tougher-than-expected European bank stress-tests will expose the Italian banks for the bloated sovereign debt issuance soaks that they have become. As Draghi himself noted, in a desparate plea to maintain some credibility "banks do need to fail" to prove the credibility of the exercise, adding "if they do have to fail, they have to fail. There’s no question about that.". Spain is also under pressure and it would appear the "smart"money that chose to catch some knives in Greek banks may just lose more than one finger…

 

 

and here are Goldman's views on the stress tests…

 

ECB releases AQR/test parameters
Today, October 23, the ECB released its Note on Comprehensive Assessment, laying down key parameters governing the Asset Quality Review (“AQR”) and stress-test (“test”) processes.

Hurdle rate parameters: mixed

(1) Hurdle rate definition: below expectations. Fully phased BIII hurdle not used – instead, ECB chose phase-in, at two dates: (1) the AQR will be based on January 1, 2014 “phase-in” (a large difference to fully phased BIII), whereas (2) the stress-test will be based on either 2016 or 2017 phase-in (closer proxy to fully phased).

 

(2) Level of hurdle: 8% phase-in. This is broadly comparable to a 7% fully phased BIII, but only on the stress-test hurdle (so, January 1, 2017) and for the banks that do not rely on state-aid capital.

 

(3) Leverage ratio: an overlay, but definition unclear. In our view, this meets market expectations.

 

(4) RWAs: using adjusted rather than reported; positive, in our view.

 

AQR parameters: positive

(5) Broad scope of AQR, with a wide focus including all problematic areas of assets; positive.

 

(6) Outcome of AQR: a fully standardized and comparable NPL definition, in line with EBA guidance; positive.

Scope of exercise: includes 124 banks
We see the list of banks subject to AQR/test – which includes all German Landesbanken, one Sparkasse – as positive.

ECB makes a positive start – execution is key
All in, we see the release of key parameters as a positive start. Ultimately, however, it will be the execution, the details and, importantly, the willingness of the ECB to be an “intrusive supervisor” that will determine the success of this exercise. With parameters close to Survey expectations, we now believe a number of failures (survey expectation: #11) and meaningful recapitalizations (survey expectations: €75 bn) are a more realistic outcome, especially in the non-listed portion of the bank list.

 

Survey findings:

 

and compared to expectations, the tests "look" tougher…

 

Moar Bail-Ins?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/PcewxLCBFuw/story01.htm Tyler Durden

Across the board, we are seeing European bank stocks (most notably Italian) trading halted. The 5-7% plunge in prices – just when everyone is proclaiming victory in Europe – reflects an apparent concern that the tougher-than-expected European bank stress-tests will expose the Italian banks for the bloated sovereign debt issuance soaks that they have become. As Draghi himself noted, in a desparate plea to maintain some credibility "banks do need to fail" to prove the credibility of the exercise, adding "if they do have to fail, they have to fail. There’s no question about that.". Spain is also under pressure and it would appear the "smart"money that chose to catch some knives in Greek banks may just lose more than one finger…

 

 

and here are Goldman's views on the stress tests…

 

ECB releases AQR/test parameters
Today, October 23, the ECB released its Note on Comprehensive Assessment, laying down key parameters governing the Asset Quality Review (“AQR”) and stress-test (“test”) processes.

Hurdle rate parameters: mixed

(1) Hurdle rate definition: below expectations. Fully phased BIII hurdle not used – instead, ECB chose phase-in, at two dates: (1) the AQR will be based on January 1, 2014 “phase-in” (a large difference to fully phased BIII), whereas (2) the stress-test will be based on either 2016 or 2017 phase-in (closer proxy to fully phased).

 

(2) Level of hurdle: 8% phase-in. This is broadly comparable to a 7% fully phased BIII, but only on the stress-test hurdle (so, January 1, 2017) and for the banks that do not rely on state-aid capital.

 

(3) Leverage ratio: an overlay, but definition unclear. In our view, this meets market expectations.

 

(4) RWAs: using adjusted rather than reported; positive, in our view.

 

AQR parameters: positive

(5) Broad scope of AQR, with a wide focus including all problematic areas of assets; positive.

 

(6) Outcome of AQR: a fully standardized and comparable NPL definition, in line with EBA guidance; positive.

Scope of exercise: includes 124 banks
We see the list of banks subject to AQR/test – which includes all German Landesbanken, one Sparkasse – as positive.

ECB makes a positive start – execution is key
All in, we see the release of key parameters as a positive start. Ultimately, however, it will be the execution, the details and, importantly, the willingness of the ECB to be an “intrusive supervisor” that will determine the success of this exercise. With parameters close to Survey expectations, we now believe a number of failures (survey expectation: #11) and meaningful recapitalizations (survey expectations: €75 bn) are a more realistic outcome, especially in the non-listed portion of the bank list.

 

Survey findings:

 

and compared to expectations, the tests "look" tougher…

 

Moar Bail-Ins?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/PcewxLCBFuw/story01.htm Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Oil-rich nations are bedeviled by the Resource Curse.

The global scramble for Africa's estimated 25 billion barrels of oil is on. Those scrambling to secure (and/or exploit) the continent's abundance of fossil fuels include each oil-rich nation's political and economic Elites, international oil corporations, regional powers, trading blocs and the four major (and energy-hungry) economic players: the E.U., the U.S., Japan and China.

Oil-rich nations are bedeviled by the Resource Curse. An abundance of natural resource wealth distorts the national economy and politics in a number of ways: private investment in other less exploitable/profitable sectors of the economy stagnates, leaving the government and economy highly dependent on resource revenues; local Elites quickly gain control of the income stream from the resource wealth and divert it to their own accounts and cronies, institutionalizing corruption, and this diversion of national income to Elites starves the nation of investment in infrastructure, education, transportation networks and all the other foundations of a vibrant, competitive economy.

In geopolitical terms, oil-rich nations become "areas of interest" to neighboring states and energy-hungry global powers, further complicating and distorting national development.

Though many hope that this flood of energy wealth can be used to fund much-needed infrastructure, education and public health projects throughout the continent, the key systems of governance, governmental transparency, an open media and a political process that enables public participation are problematic in many (if not all) of Africa's energy-rich nations.

Unfortunately, these systemic weaknesses render these nations even more vulnerable to the distortions of the Resource Curse.

No energy-importing power center can afford to be sidelined in the scramble for Africa's fossil fuel wealth. Sadly, that insures global and regional powers will continue jockeying for oil leases (vulnerable to cancellation when corrupt regimes change hands), development contracts and political influence within controlling Elites, a process that rewards the least savory aspects of corrupt regimes.

Global rivals who have lost out will be tempted to support armed rebellions that weaken their rival's influence, encouraging conflicts that are inherently destabilizing, not just to the oil-rich nations but to the region.

Arrayed against these powerful forces of corruption and destabilization are grassroots groups supporting democracy and national development and some non-governmental organizations (NGOs) funded by foundations.

In the abstract, almost everyone agrees that this energy wealth should benefit all residents of oil-rich nations. But as long as it is cheaper in terms of time and money to secure oil by making deals with kleptocrats and corrupt Elites, there will be few incentives for major powers to risk losing access to oil/natural gas by supporting policies that would spread the wealth and encourage democracy.

Sadly, few consumers of energy care where the energy they burn comes from, or what distortions were created by the extraction and processing of that energy.

As the Cliff Robertson character said at the end of the prescient 1975 film, Three Days of the Condor: "When the people are cold and their engines stop running, they're not going to ask us why; they'll just want us to go get it." It's difficult to refute that, whether the people are American, Chinese or European.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/FTUM7Jz1vaA/story01.htm Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Oil-rich nations are bedeviled by the Resource Curse.

The global scramble for Africa's estimated 25 billion barrels of oil is on. Those scrambling to secure (and/or exploit) the continent's abundance of fossil fuels include each oil-rich nation's political and economic Elites, international oil corporations, regional powers, trading blocs and the four major (and energy-hungry) economic players: the E.U., the U.S., Japan and China.

Oil-rich nations are bedeviled by the Resource Curse. An abundance of natural resource wealth distorts the national economy and politics in a number of ways: private investment in other less exploitable/profitable sectors of the economy stagnates, leaving the government and economy highly dependent on resource revenues; local Elites quickly gain control of the income stream from the resource wealth and divert it to their own accounts and cronies, institutionalizing corruption, and this diversion of national income to Elites starves the nation of investment in infrastructure, education, transportation networks and all the other foundations of a vibrant, competitive economy.

In geopolitical terms, oil-rich nations become "areas of interest" to neighboring states and energy-hungry global powers, further complicating and distorting national development.

Though many hope that this flood of energy wealth can be used to fund much-needed infrastructure, education and public health projects throughout the continent, the key systems of governance, governmental transparency, an open media and a political process that enables public participation are problematic in many (if not all) of Africa's energy-rich nations.

Unfortunately, these systemic weaknesses render these nations even more vulnerable to the distortions of the Resource Curse.

No energy-importing power center can afford to be sidelined in the scramble for Africa's fossil fuel wealth. Sadly, that insures global and regional powers will continue jockeying for oil leases (vulnerable to cancellation when corrupt regimes change hands), development contracts and political influence within controlling Elites, a process that rewards the least savory aspects of corrupt regimes.

Global rivals who have lost out will be tempted to support armed rebellions that weaken their rival's influence, encouraging conflicts that are inherently destabilizing, not just to the oil-rich nations but to the region.

Arrayed against these powerful forces of corruption and destabilization are grassroots groups supporting democracy and national development and some non-governmental organizations (NGOs) funded by foundations.

In the abstract, almost everyone agrees that this energy wealth should benefit all residents of oil-rich nations. But as long as it is cheaper in terms of time and money to secure oil by making deals with kleptocrats and corrupt Elites, there will be few incentives for major powers to risk losing access to oil/natural gas by supporting policies that would spread the wealth and encourage democracy.

Sadly, few consumers of energy care where the energy they burn comes from, or what distortions were created by the extraction and processing of that energy.

As the Cliff Robertson character said at the end of the prescient 1975 film, Three Days of the Condor: "When the people are cold and their engines stop running, they're not going to ask us why; they'll just want us to go get it." It's difficult to refute that, whether the people are American, Chinese or European.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/FTUM7Jz1vaA/story01.htm Tyler Durden

Today’s Chart of the Day comes by way of SocGen’s Albert Edwards who in one image shows why, with gross debt issuance needs between budget funding and rolling maturities at 60% of GDP, Japan has no choice but “to print and print and print“

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/S9pC6K-Wtyk/story01.htm Tyler Durden

Today’s Chart of the Day comes by way of SocGen’s Albert Edwards who in one image shows why, with gross debt issuance needs between budget funding and rolling maturities at 60% of GDP, Japan has no choice but “to print and print and print“

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/S9pC6K-Wtyk/story01.htm Tyler Durden

We can only imagine the overwhelmingly positive perspective that Boehner and the GOP leadership will have as they discuss Obamacare’s early days… What’s worse than a “train wreck?” …grab your popcorn…

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ExCBcM8A54A/story01.htm Tyler Durden

Submitted by F.F. Wiley via Cyniconomics blog,

We followed the latest Paul Krugman feud – this one with Niall Ferguson – until Krugman’s tag team partner and CYNICONOMICS reader Brad DeLong entered the fray.

After about a half dozen posts on Krugman and DeLong this year, we had some topic fatigue.

Yesterday, we learned that we dropped out too soon. It turns out that Ferguson followed his DeLong post with possibly the definitive piece on Krugman – a three-part series published in the Huffington Post earlier this month (h/t Tim Iacono and Ralph Benko).

On one level, Ferguson’s series reinforces what we already know. Those familiar with Krugman’s positions are well aware that his regular boasts about being “right about everything” are blatantly false. We know, for example, that he recommended creating a housing bubble in 2002, which didn’t work out so well in hindsight. We also know that he says completely different things about government debt depending on which political party is driving the deficit higher. When the GOP is responsible, he complains about “fiscal train wrecks” and the “threat to the federal government’s solvency.” When advising the Democrats to add even more debt, he claims that “we’re not facing any type of fiscal crisis.”

But Ferguson raises the scrutiny on Krugman’s work in his “HuffPo” series. He draws on meticulous documentation of Krugman’s public positions on the global financial crisis and Euro crisis. He also calls out the posse of liberal bloggers who follow Krugman’s lead by insulting and name-calling anyone who doesn’t think as they do. (See here for one of our related posts.)

Benko published a nice summary of Ferguson’s articles in Forbes.

I’ll combine the links with a handful of other Krugman-related posts we saved this year, starting with the HuffPo series:

• In “Krugtron the Invincible, Part 1,” Ferguson notes that he didn’t make up his title – it’s actually a name Krugman calls himself (!) – and focuses especially on Krugman’s stated views on the Euro. Here’s an excerpt:

“I like to think,” Krugman wrote on August 14, “that if I had been proved … utterly wrong … I’d have had the strength of character to admit it and question my premises. But I don’t know for sure, and with some luck I’ll never find out.” Now that I have shown Krugtron the Invincible to have been utterly and repeatedly wrong about the euro, I look forward to reading his admission of error.

To be precise, I would like to see him admit that he got the biggest call of the last several years dead wrong, again and again and again…

• In part 2, he turns to the global financial crisis and again scours the public record to show that Krugman failed to understand events as they developed, concluding that:

One might have expected a little more humility from an economist who so clearly failed to understand the nature of the biggest financial crisis of his lifetime until after it had happened. Or at least a little less egomania: “Yes,” he wrote in January, “I’ve heard about the notion that I should be Treasury Secretary. I’m flattered, but it really is a bad idea.”

• The third part places both Krugman and Krugman’s economics in their proper context. I’ll share the first two paragraphs and recommend reading the whole piece if you haven’t already done so:

In my previous two articles, I have shown that Paul Krugman – revered by his acolytes as the Invincible Krugtron – failed to anticipate the financial crisis and wrongly predicted that the single European currency would fall victim to it. I have exploded his claim to intellectual invincibility. Very clearly, he has made at least twice as many major mistakes in his career as the mere two he has previously admitted to.

You may ask: Why have I taken the trouble to do this? I have three motives. The first is to illuminate the way the world really works, as opposed to the way Krugman and his beloved New Keynesian macroeconomic models say it works. The second is to assert the importance of humility and civility in public as well as academic discourse. And the third, frankly, is to teach him the meaning of the old Scottish regimental motto: nemo me impune lacessit (“No one attacks me with impunity”).

Like a Fourth of July fireworks show, Ferguson’s series feels like a grand finale to a succession of Krugman feuds and clashes this year. Here are just a few of the skirmishes from the past six months:

False accusations, unsuccessful forecasts and other errors

• Krugman joined a host of other pundits in badly misrepresenting the Reinhart-Rogoff controversy in April. He continued to spread misinformation more than a month after the story broke, finally prompting a reply from Carmen Reinhart and Ken Rogoff, which set the record straight on several matters including their past policy advice and the public’s access to their data. Krugman was shown to have made false accusations and called out for childish antics.
• Responding again to a critique of his work, Rogoff showed that Krugman’s various positions on Europe’s economy and financial markets were contradictory, while discussing flaws in Krugman’s analytical framework.
• Robert Murphy showed that Krugman incorrectly forecast disinflation in a blog post dated February 2010. Instead of drifting toward deflation territory as predicted by Krugman, inflation soon turned around and began to trend upward.  Murphy points out t
  hat the facts make a mockery of Krugman’s claim to inflation forecasting supremacy.
• Presumably to compensate for Krugman’s inability to admit mistakes, Tyler Cowen intervened on his behalf in June. In a post amusingly titled “Krugman and I were both wrong about the Fed and interest rates,” Cowen pointed out that the second quarter’s taper-induced bond market rout invalidated Krugman’s näive claim that bond yields were mostly impervious to QE.
• Krugman challenged a Cowen post containing a hypothetical comment about El Salvador. But he discussed the country’s currency without realizing that Cowen chose El Salvador for his example because it doesn’t have its own currency – it uses the U.S. dollar. Note that any other blogger arguing a point on such an obviously mistaken premise would have surely faced Krugman’s snark. In the same response in which Cowen acknowledged Krugman’s correction, he demonstrates that Krugman managed to not only contradict but also parody his own prior views.

Egotism and pomposity

• Despite sharing some of Krugman’s core views, Clive Crook objects to his contemptuous attitude.
• Bryan Caplan disputes Krugman’s boast that he can see the other side’s argument but they can’t see his.

Just to be clear, I’m not criticizing Krugman for the number of battles he gets himself into. If he argued his case truthfully and respectfully, there would be little reason for this post. But Krugman accumulates enemies by inventing his own facts, denying obvious mistakes, displaying über-arrogance and insulting those with opposing views. Fortunately, folks such as Ferguson occasionally bring these points to light.

(For more on Krugman’s public positions, see our critiques of his book, End This Depression Now. In “It’s Time to Change Focus From Reinhart-Rogoff Witch Hunts to Krugman’s Contradictions,” we flagged the circular logic in one of Krugman’s favorite excuses for fiscal profligacy. In “Testing Krugman’s Debt Reduction Strategy and Finding It Fails,” we exposed the flaws in his claim that $5 trillion in additional government debt isn’t such a “big deal.”)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/UaXxDDGYuXM/story01.htm Tyler Durden

While the world awaits with bated breath until the moment that Greece can no longer afford to pretend it is solvent and has to apply for its third bailout from Europe, or else threaten to take down Deutsche Bank and its tens of trillions in gross derivatives, the world has to listen to the constant jawboning from the Troika which for the past nearly 4 years continues to express its displeasure with Greece, and yet still provides every Euro of funding the imploding country requests. In the latest iteration of this charade, the Troika has apparently flexed its muscles and made it clear that if Greece wants to receive the next round of cash, it will have to shutter the state-owned Hellenic Defense Systems (EAS) and the Hellenic Vehicle Industry (ELVO). In short: shut down the domestic defense and auto industries, and we’ll talk. Oh, and if as a result you have to import your guns and cars from Germany (whose generous funding has kept you afloat so far), and have to take out Deutsche Bank loans to pay for them, so be it.

From Kathimerini:

The heads of the troika mission in Greece are due to return to Athens at the beginning of November, it was revealed on Tuesday as sources in Brussels insisted that the country’s lenders would not back down over their demands for further fiscal measures and the closure of Hellenic Defense Systems (EAS) and the Hellenic Vehicle Industry (ELVO).

 

The Greek government has balked at suggestions it may have to find as much as 2 billion euros more than it has planned in savings next year. However, EU sources told Kathimerini that the troika does not consider the draft 2014 budget reliable. Greece’s creditors believe the plan overestimates tax revenues and underestimates social spending.

 

As a result, the troika wants to thrash out more measures with the Greek government, ensuring that the deficit target for 2014 will be met. The European Commission, European Central Bank and International Monetary Fund agree with Athens’s positions that any extra savings should not come from “horizontal” cuts to wages and pensions.

 

The precise amount needed to cover Greece’s fiscal gap next year will not be assessed fully until the current troika review is completed. This requires Greece to meet the milestones agreed with its lenders, such as rounding off the first phase of a public sector mobility scheme. EU sources noted that Greece could survive without receiving its next loan tranche until spring, thereby underlining that the troika is not in a rush to complete the review.

 

With regard to EAS and ELVO, Greece’s lenders do not believe it is possible to save the two state firms as they are a drain on public finances, in contrast to other European countries, where companies in the defense industry are profitable.

 

Athens has been in contact with the European Commission over the past few days to respond to queries about its plans to keep the firms afloat. The government believes that it could turn EAS into a profitable company with two years. EU sources said Brussels had heard similar pledges from Greek governments over the past 20 years.

The last snarky sentence was from Kathimerini, not us.

And of course, all of the above would be dramatic if it wasn’t quite clear apriori that this is merely the latest iteration of the kick-the-can closed loop, best summarized by the schematic below.

h/t @GreekFire23

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/6-o8jCMJZ-0/story01.htm Tyler Durden

The FHFA reported home prices gained at the lowest pace in 11 months (0.3% MoM vs 0.8% expected) missing expectations by the 2nd largest amont on 13 months. It seems, just as we pointed out that with fast money leaving the room and slow money crushed by higher mortgage rates at the margin that indeed something had to give… Prices in the South Atlantic and East Central actually fell MoM.

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/TW4tP1pMYCw/story01.htm Tyler Durden