Monday, June 4, 2012

Rumors starting early today from the EU , US pressure Germany to bailout Europe - Germany says it may consider eurobonds if EMU counries surrender sovereignty to Brussels ( meaning German control .) Portugal bails out 3 banks and items of interest from The Telegraph liveblog

Barkel Press Conference Begins... And Ends

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The much anticipated press conference between Merkel and Barroso, hence Barkel, in which nothing of any substance will be announced, has begun. Rolling headlines as we get them:
    • BARROSO SAYS EU SHOULD DISCUSS ELEMENTS OF 'BANKING UNION' -> we agree to hold another conference at a future time
    And... that's it folks. Proceed to the egress.

and more inconvenient facts / truths which just oddly aren't  as market friendly as groundless rumors.......

Brussels... We Have A Problem

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The following chart from Ray Dalio's Bridgewater probably explains why the words "funding gap" (or "math") will never be uttered by any Eurocrat as that would mean the jig is up. It is also quite self-explanatory: it simply presents visually all that ZH and others have been saying for years.
And to think Europe already spent €2 trillion in bailout cash achieving... nothing

EUROBLOWN: As the lights go out all over Greece, now at last Berlin moves towards Eurobonds

“Oh very well then….if I must

Frankfurt, Obama pressure tells at last

As the union representing drivers of touring buses starts a four-day strike at the height of the season,  public hospitals begin running out of medicine  after pharmcos demanded cash to deal with the Greek State, and power for lighting and cooking stands under threat because Athens hasn’t paid the bills, Angela Merkel has (at three minutes past metaphorical midnight) began to budge on the issue of common responsibility eurobonds.

It bears repeating before we go any further on this piece that these shortages arethe direct responsibility of the Troika, not Greek civil servants or politicians. The Troika now takes the overwhelming majority of all decisions on who gets paid with bailout money; and in every case, bankers come before cancer patients and old people in need of food and warmth.

The Slog’s favourite source in the Frankfurt banking sector suggested to me late last night that much of the pressure came from Mario Draghi (whose European Central Bank is based there) and some pretty serious jumping up and down by private Bankfurters. But the Bundesbank is – not surprisingly – solidly against the idea until all 16 eurozoners have signed in blood to a deal that severely limits Germany’s responsibility – see the German Finance Ministry leak published in aSlogpost of last week.

But contacts in both Paris and Washington disagree on whose was the most telling influence, saying that – at Geithner’s near-desperate behest – Barack Obama threatened Berlin with dropping Germany’s share of US trade far down the list of Favoured Nation States. That’s a fascinating development, because Forbes only last week wrote this in relation to what Obama should do about Spain:
“An American President would know how to say to Angela Merkel – if you do not compromise, if you do not  resolve this, then we will begin sidelining your companies from our high speed rail projects; we will make it tough for you to sell luxury cars; we will review procurement procedures to eliminate your companies from our public tenders. We will not relent until you do.”
There is no way the electioneering Obama could be seen to be weak on euro-contagion, and so he has acted. Good for his campaign, bad for the Pentagon and the oil business who had other plans for Greece…and if the truth be known, still do.

As always with Berlin, however, there’s a catch: the Chancellery signalled that it may be open to euro-zone bonds or further support for the region’s banking sector, but that would depend on other countries agreeing to transfer more power to Brussels.

A late adman friend of mine, when asked what the ultimate advertising claim was, told the questioner, “Buy this thing or you’ll die”. This is indeed the deal that’s on the table here. But my God, how much time and taxpayer money all this hubris-fuelled denailism has cost. It would be nice to think that some day those responsible will be brought to book for it. But inhaling without further action is not recommended.

So: Obama blackmails Berlin, and Berlin blackmails its eurozone partners. They used to call this diplomacy.



The Rumors Begin Early

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Contrary to what some may have been expecting, there was no coordinated grand central-bank bailout announcement over the weekend (and likely won't be one for a while). Instead we got promises of plans for a master plan, even as Soros gave Europe 3 months (or 2 months and 29 days as of today). Still, that has not prevented European stocks from rising to intraday highs driven by the EUR, and fears of a major snap-back rally in the record oversold currency as explained here yesterday. It also means that, as warned repeatedly, even the faintest hint of German capitulation will trigger buy programs. Such as this one just hitting the tape:
No clarification, nothing of substance: the mere suspense now is enough to make traders ignore that nothing is getting better. But at least for the time being nothing is (much) worse.
Expect Germany to promptly dash hopes that it is fixing anything. Remember XO = 1000 bps before anything real happens.


Portugal Bails Out Three Banks

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The past two weeks it was Spain, now it is back to Portugal, which overnight announced it is bailing out three banks to the tune of €6.65 billion. If at this point who is bailing out whom is becoming a confusing blur - fear not: that is the whole point. From AAP: "Portugal will inject more than 6.65 billion euros ($A8.49 billion) into private banks BCP and BPI, and the state-owned CGD to meet criteria established by the European Banking Authority. "In all, the state will inject more than 6.65 billion euros in these banks," though five billion euros is to come from an envelope worth 12 billion included in a financial rescue plan drawn up in May 2011, the finance ministry said. Portugal last year became the third eurozone country after Greece and Ireland to be bailed out, receiving an EU-IMF package worth up to 78 billion euros in return for a commitment to reform its economy and impose austerity measures." And surely that will be it, and Portugal will be fixed. Just like Spain was fixed, until someone actually did some math and found a hole up to €350 billion out of left field. Funny how those big undercapitalization holes just sublimate into existence, usually moments before client money is vaporized.


European Union and International Monetary Fund auditors said in April Portugal was meeting debt-rescue targets and could be strong enough to borrow on financial markets next year but is in a deeper recession than thought.

In neighbouring Spain, Economy Minister Luis de Guindos warned last week that 30 per cent of the country's banks faced similar problems, after Bankia called for the biggest banking rescue in that nation's history.

Bankia, born out of the merger of seven spanish savings banks in 2010, is asking the state for 19 billion euros to repair its books, in addition to 4.5 billion euros already injected.

Spanish banks are at the heart of fresh market fears that the eurozone's fourth-largest economy might have to seek an international financial bailout

And finally, it appears Timmah has been here too:

Spanish Deputy Prime Minister Soraya Saenz de Santamaria said the United States and Spain have discussed the possibility that direct loans from Europe's emergency fund could be a solution for ailing European banks.

Well, if the US has given a green light over German involvement, all is well then.

and around the horn in europe .... Forget the story from Die Welte as just a fairy tale and the irish yes just got hosed .....

The quote is from EU spokesman Pia Ahrenkilde-Hansen

11.25 Bruno Waterfield, our Brussels Correspondent who covered the Irish referendum on the fiscal compact last week, tweets:
The Irish will not be pleased.
and back to other bailout and bailouts to come....

11.00 The game of chicken continues in Europe. The German government said today it was up to Spain to decide whether it wants to apply for aid from international lenders.
Reuters reports that Government spokesman Steffen Seibert, reponding to questions following reports that Berlin has urged Madrid to seek aid, said:
QuoteIt is only for a national government to decide whether it draws on the rescue mechanism and the requirements that are linked to it. That of course is also true for Spain.
He also said Spain needed to provide clarity on the volume of funds needed to recapitalise its banks and said Europe stood ready to help if aid were needed.
10.40 Greece could need an immediate cash injection of up to €259bn if it left the euro today, Open Europe says in a briefing released today ahead of the Greek general elections on 17 June.
QuoteDue to a likely bank collapse and urgent cash shortage, Open Europe estimates that if Greece left the euro now, it would need between €67bn and €259bn in external and immediate short-term support, not including support in the longer term or contagion costs to the rest of the eurozone.
It believes this support could potentially be split between the IMF, the eurozone and non-euro countries, with Britain "possibly underwriting €4bn-€6bn of the entire rescue package".
The think tank believes there are "clear economic benefits to Greece leaving the euro", but warns the risks involved in an imminent exit could well outweigh these benefits in the short term:
• The €259bn figure does not include longer-term support or contagion costs to the rest of the eurozone.
• Undercapitalised Greek banks would collapse and need a €55bn capital injection Greece would struggle to raise.
• The country would face a spike in inflation as its central bank creates new liquidity to help keep Greek banks afloat.
• A 30pc devaluation of the new Greek currency could boost exports but increase the cost of imports - Greece has few natural resources or industries to fall back on.
• Greece would still need to find immediate savings of at least €12bn to pay various bills, including hospital and social security expenditure.
09.50 Portugal has today injected more than €6.65bn into private banks BCP and BPI, and the state-owned CGD to meet criteria established by the European Banking Authority, the finance ministry said.
€5bn is to come from an envelope worth €12 billion included in a financial rescue plan drawn up in May 2011. Portugal last year became the third eurozone country after Greece and Ireland to be bailed out, receiving an EU-IMF package worth up to €78bn in return for a commitment to reform its economy and impose austerity measures.
09.45 More Grexit fears. This times it is China, which is said to have called on the central bank and other key agencies to prepare a plan to deal with the potential fall-out from a Greek withdrawal from the euro.
Reuters, citing sources, said the plans may include measures to keep the yuan currency stable, increase checks on cross-border capital flows and stepping up policies to stabilise the domestic economy.
07.15 To make matters worse, last night it was revealed that internationallending is contracting at the fastest pace since the onset of the financial crisis in 2008 as Europe's banks scramble to meet tougher rules.
The Bank for International Settlements (BIS) said cross-border loans fell by $799bn (£520bn) in the fourth quarter of 2011, led by a broad retreat from ItalySpain and the eurozone periphery.
The BIS's quarterly report said the decline in lending was "largely driven by banks headquatered in the euro area facing pressures to reduce their leverage".
07.06 France has warned that a Greek exit from the eurozone will be on the agenda if Athens fails to impose austerity measures required in its EU-IMF bailout deal.
The question would be raised without a doubt.... if the Greeks themselves do not respect their commitments.

and Goldman ramps up QE 3 hopium today......

"Crunch Time" - Goldman's Confidence That QE Will Be Announced On June 20 "Has Grown"

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We all know that things are bad and getting worse. Goldman's Jan Hatzius take this opportunity to summarize all the various ways in which the global economy is floundering and once again floats the Goldman solution to everything: More QE, this time with a Bill Gross twist, pun and all, where the Fed again pulls a 2009 and goes for MBS: "Our confidence that the FOMC will ease policy once more at the June 19-20 meeting has also grown... Our baseline remains that Fed officials will purchase a mixture of mortgages and long-term Treasuries, financed via balance sheet expansion and possibly coupled with an extension of the forward guidance into 2015. This would be considerably more powerful than an extension of Operation Twist or other ways of changing the composition of the balance sheet, which are possible alternatives but are limited by the relatively modest amount ($200bn) of short-term paper that is still available for sale on the Fed's balance sheet.Well, if anythingglobal or Fed-based easing will most likely not come before the Greek June 17 elections - after all Greek confidence has to be crushed heading into the Euro referendum, and the only way to do this is by facilitating collapsing markets. So those hoping for a groundbreaking ECB announcement on June 6 will be disappointed. But June 20? That is fair game. We look forward to seeing PIMCO MBS holdings rise to a new all time high when the monthly TRF update is posted in a few days. Also look for something like this in the EURUSD if and when Bernanke "surprises" few at 2:15 pm on June 20.

From Goldman Sachs: Crunch Time
1. Friday’s jobs report for May capped three months of disappointing economic data, with a nonfarm payroll gain of just 69,000 and sizable downward revisions to prior months. This takes the 3-month average jobs gain down to 96,000, the weakest since August 2011, from a peak of 252,000 in February. The household survey showed a decent rebound in May, but on a 3-month average basis—probably a better measure given the noise in this series—employment has grown just 74,000 per month. More broadly, our CAI—a statistical summary of the underlying trend in the 25 most important US weekly and monthly activity indicators—has slowed to 1.7% in the last two months from 3% in early 2012.

2. What lies behind the slowdown? Part of it is clearly due to the reversal of temporary positives, as we had argued back in March. The unusually warm winter boosted the level of seasonally adjusted payrolls by perhaps 100,000 through February, and that boost has gradually reversed since then. There is also some possibility of residual seasonal adjustment distortions from the speed of the late 2008/early 2009 downturn. But temporary factors are not sufficient to explain all of the weakness. The broader point is that final domestic sales growth remains too sluggish, at just 1.5% (annualized) over the past two quarters, to support a healthy recovery.
3. Alongside the slowdown in the real economy, financial conditions have tightened. Our revamped GSFCI has climbed by nearly 50bp since March, as credit spreads have widened, equity prices have fallen, and the US dollar has appreciated. Some of this tightening is clearly a reflection of the weaker US economic numbers, so we should not “double-count” it as a negative impulse to growth. And some has been offset by the accompanying fall in oil prices, which has kept the “oil-adjusted” GSFCI from tightening nearly as much. But there is also a more exogenous factor, namely the intensification of the European crisis as concern about the Greek election and the Spanish banking system has risen. By our estimates, Europe accounts for up to half of the tightening in the GSFCI since April. We estimate that this could shave an additional 0.2-0.4 percentage points from US GDP growth over the next year. This is the main reason why we have pared our GDP estimates slightly and now expect growth to average slightly below 2% over the next year, with Q1 2013 the weakest quarter at just 1.5% due to the likely fiscal tightening then.

4. The hit from Europe could shrink or grow, but the risks are skewed to a worse outcome than our current baseline. Related to this, Huw Pill and team have sketched out three potential scenarios for the Greek exit discussion—(1) more of the same, (2) a proactive Greek exit, and (3) a decision by the ECB to squeeze Greece out gradually. Scenario (1) corresponds roughly to our baseline forecast, which our European team revised to a slightly bigger sequential contraction in the remainder of 2012 and a more shallow recovery in 2013 last Friday. Scenarios (2) and (3) would imply bigger declines in euro area GDP, and probably further tightening in US financial conditions.
5. Our conviction that the stickier inflation period of the past 1½ years is coming to an end has grown. This is not just because of the drop in commodity prices—including the $25/barrel plunge in crude oil prices—and the appreciation of the US dollar but also because labor cost pressures remain absent. Average hourly earnings are still decelerating, and a sharp downward revision to Q4 wage and salary income in last Thursday’s GDP report implies that unit labor costs will be revised down substantially. We expect inflation to be back below the Fed’s target by 2013.

6. Our confidence that the FOMC will ease policy once more at the June 19-20 meeting has also grown. At a time when Fed officials are far short of their dual mandate of maximum employment and 2% inflation, financial conditions should be accommodative and GDP growth should be well above trend in order to re-employ displaced workers and avoid a gradual transformation of cyclical into structural unemployment. Instead, financial conditions are only roughly at average levels according to our GSFCI, and GDP growth is below its long-term trend. Moreover, both financial conditions and growth have been moving in the wrong direction, to a degree that we think warrants action.
7. Assuming they do ease, what are Fed officials likely to do? It is a tricky call because there are many different options on the table. At the most basic level, they could increase the size of their balance sheet, change the composition of their balance sheet, and/or change their forward guidance in a way that pushes rate hike expectations even further into the future. If the easing comes via changes in the size or composition of the balance sheet, they could buy long-term Treasuries, mortgages, or both. If they decide to extend their balance sheet, they could add excess bank reserves or “sterilize” the reserve impact via reverse repos and/or term deposits. They would also need to decide whether to announce a balance sheet extension problem in one go or adopt a meeting-by-meeting strategy. And if they change the guidance, they could simply push out the date for the first rate hike in the statement or make the first hike conditional on an economic criterion such as a nominal GDP target or the Evans proposal (commit not to hike rates until the unemployment rate has fallen, or until inflation has risen, above a specific level).

8. Our baseline remains that Fed officials will purchase a mixture of mortgages and long-term Treasuries, financed via balance sheet expansion and possibly coupled with an extension of the forward guidance into 2015. This would be considerably more powerful than an extension of Operation Twist or other ways of changing the composition of the balance sheet, which are possible alternatives but are limited by the relatively modest amount ($200bn) of short-term paper that is still available for sale on the Fed's balance sheet. We still think that Fed officials might decide to “sterilize” balance sheet expansion via reverse repurchases or term deposits. We may get a better sense on all of these issues from Chairman Bernanke's testimony to the Joint Economic Committee of Congress on Thursday or other Fed speeches this week.
9. What about the objection that rates are already so low that additional asset purchases will either fail to push rates down further or that further rate declines will be ineffective in boosting economic activity? This concern looms a little less large if purchases are focused on the mortgage market, where the zero bound is still further away. It is also important to remember that the low current level of rates incorporates some expectation of further easing, so rates would presumably rise if the Fed decided to do nothing. All that being said, we do have sympathy with the idea that the liquidity trap is moving out the yield curve, and the Fed’s ability to provide support via “conventional unconventional” options—which we define as date-based forward guidance and changes in the size and composition of the balance sheet—is declining. Therefore, the “unconventional unconventional” options— the Evans proposal, a higher inflation target, or a nominal GDP or price level target—deserve another look. Amongst these, we continue to believe that a nominal GDP level target is the most promising. It would provide reassurance that Fed officials will keep monetary policy loose until nominal spending and income have recovered. Once that recovery has occurred, it would provide a natural “exit strategy” from a loose to a tighter monetary policy. However, we do not expect Fed officials to adopt a nominal GDP target or other unconventional unconventional policies anytime soon