Bond Markets in Europe

Interesting development in the European bond markets this week.  The yields of Germany and France, typically thought of as the "safer" countries, saw their 10Y yields rise.  Lower grade bonds of Italy, Spain, and Portugal saw their 10Y yields fall.

Bullish interpretation:
The surprise GDP growth of Q2 has led investors to believe that the recession in Europe is over and spreads on the peripheral countries relative to France and Germany should come down.

Bearish interpretation:
The bond market is becoming concerned on a global basis and starting to demand higher risk premium.

My take is that you should be cautious going into the end of the year.  Seeing bonds yields rise in the most liquid markets should lead to a correction in equity markets.  The fact that bond investors are no longer going to be able to sell their bonds to central banks means that pricing should start to normalize and this risk should be reflected in bond yields.

Catalunya Wants to Exercise Right to Self-Determination

As if Spain didn't have enough problems, now Catalunya is putting to a vote their desire to remain under Spain's sovereignty.

Link

Artur Mas: "It's time to exercise the right to self-determination"

After almost half an hour of speech, the president of the Generalitat, Artur Mas , has called for early elections and has called on the Catalans to decide on the future of Catalonia them to decide between continuity or "the right to self-determination " , which has become the election date of November 25 in plebiscitary elections but more wanted to go beyond stating that the election will go to a desire to lead the process of self-determination.

But the president has brushed the epic when unveiled its intention not to stand again "once Catalunya has decided its national goal", which has sought to foreclose any allegation or suspicion of partisanship on the will to perpetuate power: "The elections are almost always a stage that feeds partisan confrontation, but our times demand a high sense of status and high levels of personal sacrifice." So, "I have reflected deeply on the meaning of a country that touches me so, once Catalunya has decided its national goal I will not submit and hope and wish that occur in a legislature, not better than two."

The composition of the second season have come long speech more emotional words and the clearest reasons for moving up the elections. In the last minute the podium, Mas pointed out that in the inaugural address spoke of " unlimited national transition "because his thesis" was and is "that," in the same way that Spain made ​​the transition to democracy, Catalunya should do to the right to self-determination, "he explained. 

According to the head of the Catalan, "a process of self-determination requires a special force that only the people can give, "he invited, after which he assured that the task force, which could well be a majority," do not ask convenience to me or my party, because these elections are held for a leader is to perpetuate, but to the people to decide what you want your future as a nation, "he explained.

Artur Mas said that "the Parliament that emerges from the elections, likely will face the most difficult task of the last 300 years", but "everyone knows that there will be a before and after the demonstration of National Day" . In any case, the president believes that the elections, the Catalans and Catalan leaders have the opportunity to know if those who did not attend the march Setembre 11 "are all against the national transition", as noted in the most reluctant to independence . 

For the president, "the road is full of obstacles" and evisado that "there will slurs, accusations and insults of all kinds", but as said a few days ago in another speech, "nothing will be easy but anything is possible."

But also recalled the process that has led to this process Catalunya, with recent onset in the judgment of the statute, where  the old demons born of anti-Catalanism " . has acknowledged that President Rajoy will lead the Congress proposed fiscal pact that presented on 20 September at the Moncloa, but the Catalan leader rejected the possibility of the impossibility of its success and to avoid further humiliation, such as trimming statute voted by the people of Catalunya. way, "now is not Congress who vote, but the people of Catalunya "has ruled.

The president has also warned of possible attacks that can receive Catalunya during the electoral process is now open. So has warned that it would be an aberration marginalize Catalan depending on their place of birth, or attack the Catalan language, because "the Castilian heritage of Catalonia is also, as is the Catalan to the rest of Spain "

The key would be to have the bad bank receive it's assets at discounts that would already be attractive to the private sector.  50% may not be low enough for private foreign capital to buy.  The ideal scenario would be for the bad bank of buy the assets at a 75% discount and sell the assets to private investors in chunks.  The profit made by the bad bank would be passed on to Spanish taxpayers.

From Reuters

Spain bad bank assets to get 45-50 pct avg discount-sources

MADRID, Sept 24 | Mon Sep 24, 2012 1:20pm BST

(Reuters) - Lenders will transfer property assets into Spain's new bad bank at an average discount of 45 percent to 50 percent of original book value, three banking sources said.

The figure is obtained by applying an additional discount of 5 percent to 10 percent over the average writedowns of around 40 percent that the government has already forced banks to take on real estate assets, the sources said.

"As an average we could see further writedowns of 10 percent," said one of the sources - a manager at a Spanish bank.

A second source said the additional discount would be equivalent to a capital buffer lenders were asked to set aside earlier this year but which has now been made irrelevant by new, higher capital requirements.

By assuring that the new writedowns would be compensated by the capital buffer, Spanish authorities would protect banks from booking new losses.

However, the discounts will likely not be steep enough to attract foreign investors to the bad bank. That could eventually force the state to use more taxpayers' money to take over the toxic assets to later sell them off.

The sources cautioned that the discount was still being discussed and could vary depending on the type of assets that will be transferred, a key question that has yet to be answered.

The Bank of Spain and the European Commission, which are leading the negotiations and will have the final say on the pricing of the assets, declined to comment on the matter.

Op-Ed by CS Global Head of FI

• Macro-economic policy, it suggests, is at or near the limit in terms of its ability to regenerate confidence – and new financial regulations together with restrictive fiscal policy may be increasing recessionary forces.
• The IMF suggests euro-area credit could drop by anywhere between $100bn (£62bn) and $400bn in the coming years, with the axe falling especially hard on countries already struggling with relatively high interest rates, such as Spain and Italy.
• Europe traditionally depends far more than, say, the US, on bank lending to fuel growth, and Europe’s banks, with their relatively high loan-to-deposit ratios, depend heavily on capital markets for funding.
• According to Standard & Poor’s, in the next five years, the euro area and UK have $8.6  trillion of corporate debt to be refinanced and will also need $1.9 trillion to $2.3 trillion in new finance.

Link

Highlights from Draghi's OMT Announcement

Highlights from Draghi's remarks:

• There was dissenting view at the meeting
• Draghi believes that the sovereign spreads (ie: Italy vs. Germany, etc)is based on unfounded fears, which he translates into a euro breakup
• Draghi comments that addressing these fears fall squarely within the mandate of the ECB
• "These decisions are necessary to restore our capacity to pursue the objective of price stability in the euro  area....are necessary to restore the singleness of monetary policy in the euro area."
• There is some talk about Article 123 being breached.
• Draghi says this is not the case.  Buying in the primary market would be a violation.  The secondary market is fair game.
• There was no discussion on additional LTROs
• Announces OMTs (Outright Monetary Transactions)
• Article 18 of the ECB justifies these transactions
• Repairing monetary policy transmission, recreating the singleness of monetary policy for the euro area
• In order to do this, governments have to take policy reforms as part of a programme
• Draghi believes that OMTs are an effective backstop to remove tail risk of Europe.
• OMTs will receive pari passou status (no seniority)
• ECB will maintain senior status on bonds purchased under SMP and other programs

Container Shipping Crisis Between Germany and Greece?

Container Shipping Crisis Between Germany and Greece?

Friday, 17 August 2012 | 00:00

According to the Telegraph, over 100 German ship funds have already shut down as the crisis in global container shipping comes to a head, while 800 more funds are threatened with insolvency, according to consultants TPW in Hamburg.
In the UK, Britain’s oldest ship-owner, Stephenson Clark, dating back to 1730, went into liquidation this month, closing the final chapter of Britain’s coal trade and the industrial revolution, citing “incredibly depressed” vessel rates. Like large parts of the German container industry, the firm over-invested in the boom four years ago, betting too much on Asian growth rates.

Germany, however, is said to be the superpower of container shipping, controlling almost 40 percent of the world market; so if collectively they get it wrong, it goes wrong in a big way.

Faced with massive overcapacity following a boom in new vessel construction ordered during the last decade, and correspondingly high levels of debt to fund those vessels, owners are in trouble as volumes are way down as a result of the European crisis and a slowing Asian market.

Container volumes arriving at European ports are said to have plunged in June. Imports fell 7.5 percent from North America and 9 percent from Asia, while flows into the Mediterranean region crashed by 16 percent, reflecting the extent of the recession in Greece, Italy, Spain, and Portugal.

Meanwhile, cash-rich Greek ship-owners who had sold vessels at the top of the market are now buying them back from German owners at rock-bottom prices - the Greek shipping market appears curiously isolated from the rest of the Greek economy.

Market rates for containers have followed shipped volumes, picking up in the spring but recently falling back on weak demand and an excess of capacity. The rates buyers pay for imports into Europe or the US will likely stay flat this year, but in the long run if consolidation is forced on the industry by insolvency or financial strain, rates will rise in the longer term as surviving lines emerge with greater market clout.

The only check on rising freight rates has been competition and overall volumes.

At present, volumes are down so rates are down, but in time as the global economy recovers, volumes will pick up; if rates rise faster due to fewer lines controlling the routes, global trade could suffer and nearshoring will be encouraged.

So much as the Telegraph may take some amusement in Greeks benefitting at the expense of Germans, consumers dependent on the global container market would benefit more from the largest number of healthy lines in the market.

Source: Telegraph

Link

Bank of Italy Says 10 Year Spread to Bund Should be 2%

There is a link at the bottom to the actual paper.  It is obvious that the Bank of Italy would say that the spread is too wide.  The range estimate for the spread is 120-370bps.

Bank of Italy Study Finds Euro Breakup Fear Behind Spread Surge

Wednesday, 05 September 2012 | 00:00

Sovereign bond yield divergence in the euro area doesn't reflect economic fundamentals of individual nations and appear largely to reflect fears the currency union will break up, the Bank of Italy said in a research report released Tuesday.

The study offers intellectual support to European Central Bank President Mario Draghi, who has said the central bank will intervene in markets to counter investor fears of the euro's demise.

An appropriate spread or interest-rate gap between Italian and German 10-year government bonds would be around two or two-and-a-half percentage points, according to the Bank of Italy researchers, who used a variety of indicators to reach their conclusion. Depending on the variable used, the spread should be as low as 120 basis points or as high as 370 basis points.

The current spread on Italian and German 10-year bonds is 424 basis points. A basis point is one-hundredth of a percentage point.

"Italy seems to be the most severely penalized country," Antonio Di Cesare and his four co-authors wrote in their Bank of Italy study.

They modeled what they described as appropriate yields based on public debt, fiscal and macroeconomic indicators as well as household wealth and determined that the relatively recent surge in euro-zone sovereign spreads "suggests that some common new risk factor is currently at play."
They identified that as "fears of the reversibility of the euro."

That risk factor also mathematically correlated to the yields of fiscally-strong sovereigns such as Germany, the authors said, describing the cost of debt in those countries as having undergone a "spectacular fall" in the past two years.

'Safe haven effects' may have pushed 10-year German bund yields down by as much as 130 basis points, according to the Bank of Italy research.

That means more than half the yield gap they found is due to fear of a euro breakup. In other words, eliminating that risk - as Mr Draghi has said he wishes to do - could push up German yields by 1.3 percentage point, meaning Italian yields might come down only 70 basis points.
The combination of the two would be tantamount to a 200-basis-point correction in the spread. In such a scenario, German 10-year bund yields would rise to 2.69% from their current level of 1.39%, while Italian yields would decline to 4.69% from 5.61%.

The Bank of Italy researchers acknowledge other factors may be at work, including concerns about a worsening fiscal outlook over the medium term of weaker euro area sovereigns and growing doubts about the risk involved in government debt in general.
Source: Dow Jones

Link

Paper

Year 3 of the European Crisis - Why??

We are fast approaching the end of the second year into the crisis in Europe with very little progress made.    The article below from Spiegel Online is the perfect example of why things have moved so slowly.

I'm often reminded that fixing a problem requires identifying the problem, not becoming fixated on the symptoms.  European Parliament President, Martin Schulz, does a great job of discussing symptoms in the article below, but quickly discounts any further discussion on the REAL problem - Too much debt which caused malinvestment which was driven by artificially low sovereign rates.  What Schulz views now as "interest rate speculation" due to "absurd...reactions of the so-called markets" may actually be markets re-calibrating towards the real level of sovereign rates.  Mr. Schulz doesn't seem to care how sovereign rates converged in Europe from 2002-2007.  We are only focusing on the rates diverging now.  I for one know that markets have a way of under-shooting and over-shooting due to emotional psyche of investors.  However, I also know that numbers have a way of telling a story.  

Mr. Schulz and the rest of the politicians in Europe, PLEASE step up and be leaders.  Focus on the real problems because it's the right thing to do, even though it is not the popular thing to do. 

Call for Political Union Now is 'Dramatic Mistake'

Maurice Weiss / DER SPIEGEL

European Parliament President Martin Schulz:

Leaders in Germany and elsewhere are making a big mistake by focusing on long-term EU reform when fast decisions are needed, says Martin Schulz, the president of the European Parliament. The German Social Democrat tells SPIEGEL that Europe needs to pool its debt, give the ESM a banking license and help Greece return to growth. 

SPIEGEL: Mr. President, "Frankfurt School" philosopher Jürgen Habermas has said there are only two possible strategies for Europe: a return to national currencies, or a political union. Is he correct?

Schulz: Yes, we should have introduced a political union together with the euro. That's something we failed to do, and need to catch up on. But that doesn't help us at the moment.

SPIEGEL: Why not?

Schulz: There's no point whining about missed opportunities. What we need right now is to act quickly and in the short term. I can't accept us getting lost in theoretical debate in the current situation. A restructuring of the European Union isn't pressing at the moment -- what we need instead is to solve very difficult problems in a short space of time.

SPIEGEL: You mean the crisis in southern European countries?

Schulz: Yes. We need economic growth in Europe and we need to find a solution for the excessive interest rates that are making it difficult for many countries to get their own debt under control. That is the crucial task for the coming months.

SPIEGEL: Germany is more interested in discussing the introduction of a political union.

Schulz: That's a dramatic mistake. As if a structural change would solve these short-term problems. That's the line of argument from the German chancellor, from the finance minister …

SPIEGEL: … and from the entire leadership of Germany's Social Democratic Party (SPD).

Schulz: From everyone in national-level politics, in fact, and not only in Germany. To me it seems akin to sitting in an airplane that's experiencing serious turbulence, while in the cockpit, they're debating improvements to the engines. Of course we're also dealing with a systemic political crisis, but that doesn't help us with the turbulence we're experiencing at the moment: no economic growth in Greece and interest rate speculation against Spain, Italy and Portugal.

SPIEGEL: What do you suggest?

Schulz: We need to reduce the interest burden on the affected countries in southern Europe. The best way to accomplish that would be with euro bonds. But that, too, is a theoretical debate, because the Netherlands doesn't want euro bonds, Finland doesn't want them and Germany definitely doesn't want them.
SPIEGEL: Which begs the question, why does Martin Schulz want them?

Schulz: Because we have a common economic and currency zone, and de facto this means that individual nations no longer have sovereignty over currency matters. Germany belongs to a common currency. Why, then, shouldn't we apply instruments of currency policy at this trans-national level?

SPIEGEL: Because the Maastricht Treaty established that no country would be held responsible for another country's debt -- the so-called "no bailout" clause.

Schulz: The Maastricht Treaty also stated that new debt should not exceed three percent of national economic performance. That's been taken off the table with a single stroke of a pen, by the same people who are now making the no bailout clause a sacred cow.

SPIEGEL: You're referring to the deficit rule breaches by your fellow Social Democrat, former German Chancellor Gerhard Schröder?

Schulz: Certainly Germany and France broke the rules, but if the treaty could be interpreted that flexibly back then, why couldn't the same be done now, for euro bonds? But it's no good, that's not going to happen and we need a different solution.

SPIEGEL: Do you have an idea?

Schulz: There are two options: Either we decide on a debt redemption fund, with which a portion of all EU countries' existing debt will be guaranteed and repaid bit by bit.
SPIEGEL: Or?
Schulz: Or we issue a banking license to the European Stability Mechanism (ESM), the permanent bailout fund, so it can borrow money from the ECB as any bank would.

SPIEGEL: The result of either approach would be that the affected countries immediately abandon their attempted reforms.

Schulz: I'm familiar with that argument, that so-called junkie policies get countries addicted to cheap money, but it's not true. Times are different now. In the past year, we've considerably tightened the screws on deficit offenders through a series of new regulations. Then there's the fiscal pact, which provides further possibilities for supervision. We've fulfilled the conditions we need in order to have a debt redemption fund or a banking license for the ESM.

SPIEGEL: Even your own party, the SPD, doesn't go that far.

Schulz: That may be, but I'm the president of the European Parliament. But aside from that, the SPD has behaved more responsibly on European policy than almost any other European opposition party. For German Social Democracy, Europe is vital to the national interest. And that's sensible.

SPIEGEL: Nor does the majority of the general population support pooling debt.

Schulz: Unfortunately, that statement is absolutely true, and it worries me greatly. What we need to do is explain to people what the alternatives are.

SPIEGEL: And what are they?

Schulz: Reintroducing the deutsche mark. It would be an extremely strong currency, which would make German exports much more expensive. The German automobile industry would no longer have to fear China, but rather France and Italy, Peugeot, Citroën and Fiat. Germany would end up too big for Europe, but too small for the world. That's something to think about for those demanding that Greece leave the euro zone.

SPIEGEL: So you still think, realistically, that Greece has a chance?

Schulz: If we keep going the same way we have been, it will be difficult. We won't get any growth in Greece by just imposing cuts. What I would prefer is a special economic zone for Greece.

SPIEGEL: That sounds vague.

Schulz: But it's not. Businesses will only invest in Greece if three conditions are fulfilled. First, there must be a clear commitment to the euro. No businesses will invest if they have to fear that Greece will leave the euro zone at some point. Second, the Greek government must be prepared to work together with European institutions in order to restructure the country.

SPIEGEL: And how will that look in practice?

Schulz: We need a growth agency in which European and Greek officials together identify projects to be supported by the EU. That provides a measure of control, but also a way of developing mutual trust. It would be a challenge for the Greek government, which would have to accept carrying out reforms together with officials representing the community to which it belongs. But these are not a hostile occupying force, they're instruments for providing help.

SPIEGEL: We're still missing the third of the three points you mentioned.

Schulz: Investment grants for businesses that go to Greece, for tourism, infrastructure or renewable energy.

SPIEGEL: The situation in Italy is hardly any better. The country is groaning under the weight of its debt.

Schulz: There you see how absurd the reactions of the so-called markets are. For a long time, Italy was run by one of the most unprofessional politicians anywhere. But there wasn't much pressure in terms of speculation. Now, in Mario Monti, Italy has the kind of leader you usually only get in Hollywood movies, a distinguished professor who won't even accept a cook at his residence, the Palazzo Chigi. Instead Monti's wife cooks their pasta herself -- and this is the man the markets don't trust.

SPIEGEL: It's not that the markets don't trust Monti, but rather that they fear when he leaves office, the usual sort of Italian politicians will return.

Schulz: That's politically motivated speculation. Monti is making cuts, but everything he manages to save goes toward covering rising interest rates. Then he says, My God, people, help me out here. And what do we answer? We say, you should make more cuts, Italy should figure out itself how to get by. That's not going to work. Let's be plain here.

SPIEGEL: Please do.

Schulz: Italy is one of the eight major industrial nations. What will happen if a G-8 country within the European Union goes bankrupt? Does anyone think Germany wouldn't be affected? Italy is one of our key markets. No, we're not going to get anywhere this way. We need a banking license for the ESM, to bring interest rates back down.

SPIEGEL: Ultimately, all of your suggestions boil down to the same thing: Germany should pay.

Schulz: Well, then let's talk numbers. The ESM, the European Stability Mechanism, is not funded by Germany alone. Twenty-seven percent of the bailout package comes from Germany. Italy and France together cover a total of 38 percent. That's reality. It makes no sense to say that everyone wants to get at Germany's money. You're paying too much attention to renationalized rhetoric in Germany.

SPIEGEL: But you can't deny that there are many people here on this continent who don't want more Europe.

Schulz: The vast majority of people support the idea of an enlightened, modern union of countries demonstrating solidarity. Film director Wim Wenders recently summed up the problem to me very well. He said the idea of Europe has become an administration, and now people think that the administration is the idea. But that doesn't mean we should give up on the idea -- it means we should change the administration.

SPIEGEL: If more and more national responsibilities are transferred to Brussels, at some point there will have to be a referendum in Germany too. Is that a danger or an opportunity for the EU?

Schulz: Unlike other countries, Germany has no experience with referendums. But when the German Constitutional Court reaches its decision on the ESM on September 12, the people may have to be asked. And that's a good thing. You have to let the people vote when it comes to a new constitution. I find it surprising, however, that many German politicians generally oppose referendums, but then when it's an EU matter, they immediately scream for a plebiscite.

SPIEGEL: As is the case with SPD leader Sigmar Gabriel. He too is determined to let the people vote on the EU.

Schulz: That's a risk. Referendums have always posed a threat when it comes to EU policy, because EU policy is complicated. They're an opportunity for those from all political camps who like to oversimplify things. European policy is always an interplay of rationality and emotion. The problem with us EU politicians is that we approach everything with cool rationality, and then wonder why we don't win people over emotionally.

SPIEGEL: You don't trust the people?

Schulz: No, I do, but it's not undemocratic to be skeptical. Referendums are a democratic instrument, but so are decisions reached in a parliamentary democracy. I advise extreme caution when it comes to referendums. In Germany too.

SPIEGEL: How can Europe become more democratic?

Schulz: Starting in 2014, there will be no Commission president without a majority in parliament. Government leaders will have to be guided by the outcome of EU elections. That's what the Lisbon Treaty says.

SPIEGEL: That means they would have to field candidates at the EU level.

Schulz: Correct, parties will field EU candidates. There will no longer be nationally-focused campaigns for EU elections.

SPIEGEL: German Finance Minister Wolfgang Schäuble and others suggest having the president elected directly by the people.

Schulz: I think that would be wrong. If parliament doesn't elect the president, who controls that president? Out of 27 member states, only France uses such a model. I'm opposed to introducing such a system at the European level. Imagine a German as president of the European Commission. If he or she goes to some particular country and says do this or that, it won't be very well received. The president quickly ends up being the evil German. But if the president is elected by and controlled by 700 representatives from all EU countries, that legitimizes him or her in a very different way.

SPIEGEL: Mr. President, thank you for this interview.

Interview conducted by Konstantin von Hammerstein and Gordon Repinski. Translated from the German by Ella Ornstein.

Link

PIMCO - The ESM: Saviour, Super SIV or End of the Road

PIMCO released an article on the ESM.  It is worth a read.  Key points are highlighted below.

Link

1. The 4 presidents in Europe:
1. ECB - Mario Draghi
2. European Commission - Jose Manuel Barroso
3. Eurogroup - Jean-Claude Junker
4. European Council - Herman Van Rompuy
2. The lending capacity of the ESM will be  € 500 billion.
3. As of August 29, 2012 the EFSF had €131 billion face value of bonds outstanding.
1. Of this total, the EFSF has placed  €45 billion in the primary market.
2. The remainder,  €85 billion, was essentially funded by the ECB through a roundabout transmission mechanism (ie: IOU from government to EFSF, then IOU from banks to governments, then banks use the bonds as collateral to borrow from the ECB).
4. The 17 stakeholders will have to pay in  €80 billion to the ESM by early 2014
5. Apparently when the ESM lends money to governments, that debt DOES NOT appear as a debt on the sovereigns' national account.
6. Germany's capital subscription to the ESM is initially capped at  €190 billion.  To put that amount in perspective, Germany's annual federal budget amounts to $300 billion.  Granted, the ESM contribution is not supposed to be an annual line item.
7. Since 1989, the new net borrowing requirement of the eurozone's southern countries averaged  €95 billion per annum.

Today's News & Noise (2012-08-30)

News:

• The 6 Apple patents Samsung violated
• http://www.businessinsider.com/apple-versus-samsung-2012-8?op=1
• Berlin's cozy new relationship with Beijing
• http://www.spiegel.de/international/germany/angela-merkel-trip-to-china-to-test-strength-of-growing-ties-a-852288.html
• Too close to state financing via the money press
• http://www.spiegel.de/international/europe/spiegel-interview-with-bundesbank-president-jens-weidmann-a-852285.html
• Weidmann: But we all know that such actions do not solve the fundamental problems. Our actions are based on trust. Doing more and more does not always engender more trust. Over the long term, the central bank can only preserve trust if its actions conform to the mandate that it has been entrusted with.
• Weidmann: At first glance, this of course looks like a good idea. But at second glance, it becomes clear that it leads to coordinated actions between the government rescue funds and the central bank. This results in a linking of fiscal and monetary policy.
• Weidmann: I support the positions that I believe are appropriate as the Bundesbank president and a member of the ECB Governing Council. In doing so, I don't take my cue from the German government's position. That's part of being independent.
• On Greece  Weidmann: Otherwise I doubt that the leader of another country in the program could convince his parliament to support additional austerity measures.
• Weidmann: I can carry out my duty best if I remain in office. I want to work to make sure the euro stays as strong as the deutsche mark was.
• 
  

Noise:

• Analysis: Apple's win dents Android's standard-essential patent hopes
• http://www.reuters.com/article/2012/08/27/us-apple-samsung-patents-idUSBRE87Q19Z20120827?feedType=RSS&feedName=technologyNews
• Mario Draghi vs. Germany continues
• http://www.presseurop.eu/en/content/news-brief/2607771-mario-draghi-vs-germany-continues?xtor=RSS-9
• Tim Cook and Larry Page are talking about their patent war
• http://www.businessinsider.com/tim-cook-and-larry-page-are-talking-the-patent-wars-2012-8?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+businessinsider+%28Business+Insider%29
• Crisis-hit countries may have turned the corner
• http://www.spiegel.de/international/europe/german-report-crisis-hit-countries-have-become-more-competitive-a-852813.html
• Is this the Fed's secret weapon?
• http://www.zerohedge.com/news/feds-secret-weapon
• Germany is cornered
• http://www.zerohedge.com/news/germany-cornered
• More dangerous than Sarah Palin
• http://www.spiegel.de/international/world/paul-ryan-represents-the-conservative-wing-of-a-conservative-party-a-853015.html
• 
  

More on Spain

Spain continues to be a concern on investors' minds.  Bloomberg has some charts today which show a good back drop as to why there is a concern.  Spain, by my accounts, will be the linchpin in the European saga.  Policy makers are going have to stand decisively on one side.  Without a fiscal union, Spain is simply TBTS (Too Big To Save).

Sinatra Anyone....

The worst is yet to come in Europe.  PMIs are all pointing toward a downward spiral.  No wonder Draghi is skipping Jackson Hole.

Draghi skips Jackson Hole as ECB shapes bond plans

Let the speculation begin...

From Businessweek:

FRANKFURT, Germany (AP) — European Central Bank head Mario Draghi has called off his trip to an annual Jackson Hole conference of central bankers this week due to a heavy workload as the bank works on its eagerly awaited plan to lower borrowing costs for struggling governments.

The ECB holds a key meeting Sept. 6 where plans to intervene in bond markets will be discussed. A spokesperson for the bank said Tuesday that Draghi decided not to go to the Wyoming meeting at the end of this week "because of the heavy workload foreseen in the next few days."

Draghi announced Aug. 2 that the ECB might help indebted governments lower their borrowing costs by buying their bonds — but only if the countries first ask for help from the region's bailout fund and agree to take steps to reduce their deficits and debt levels. He left key details blank and said committees of top bank officials would be working on them.

Several countries among the 17-strong group that uses the euro — including Spain and Italy — are struggling to borrow money at an affordable cost — because bond investors fear they may default. Yet the governments must constantly sell new bonds to pay off old ones that are coming due. High borrowing costs were what pushed indebted countries Greece, Ireland and Portugal to need bailout loans from the other eurozone countries.

Key questions remain about how the ECB purchases would work, such as how big they might be. An earlier round of purchases piled up over €210 billion ($263.5 billion) in bonds, but failed to decisively lower borrowing costs in part because ECB officials insisted the program was limited in size and duration.

Draghi's recent announcement said the next round of bond purchases would be "of a size adequate to reach its objective," without specifying how big that would be.

The ECB would first start buying bonds along with the eurozone's bailout fund, but only the ECB has the ability — in theory — to create new money to pay for the bond purchases, giving it potentially much vaster financial firepower.

It's also not clear whether the ECB will set a target interest rate — or yield — that a country's bonds would not be allowed to exceed when it launches purchase program. Buying bonds drives their prices up and their interest yields down, since price and yield move in opposite directions. Setting a specific target could be risky, as the ECB would have to defend it in markets or lose credibility. Spanish 10-year bonds were yielding a painfully high 6.4 percent Tuesday.

Spanish officials have pressed to know more details about the ECB's intentions before they take the politically painful step of asking for a bailout. The bond purchases remain controversial in some quarters, with the head of Germany's Bundesbank national central bank, Jens Weidmann opposed. Weidmann has said goverments might find central bank help "addictive as a drug" and might lose the will to make painful decisions to reduce spending. He also argues it is too close to using the central bank's monetary powers to finance governments — something the EU treaty forbids it to do directly.

The ECB could also face further wrangling over a proposal due Sept. 11 from the European Union's executive body, the Commission, to create a centralized EU banking regulator under the aegis of the ECB. The plan, launched at a summit of European leaders in June, is designed to strengthen Europe's banking industry against further financial shocks.

A top ECB official, Joerg Asmussen, said in a speech Monday that the ECB would refuse to take over the job unless it is given the power to close down insolvent banks — a power that could bring it into conflict with national governments and regulators who have been protective of their home banks.

Bloated Balance Sheets in Europe

Tracking Spain's Economy

Q2 2012 GDP came in at -0.4% QoQ and -1.3% YoY.
Private sector deposits were down 5% from  1.583 trillion to 1.509 trillion.

From Zerohedge

Spain's Economic Collapse Results In Whopping 5% Deposit Outflow In July

Submitted by Tyler Durden on 08/28/2012 05:26 -0400

• Borrowing Costs
 
• Central Banks
 
• European Central Bank
 
• fixed
 
• Greece
 
• Gross Domestic Product
 
• Recession
 
• Reuters
 
• Unemployment

Yesterday, Spain was kind enough to advise those who track its economy, that things in 2010 and 2011 were in fact worse than had been reported, following an adjustment to both 2010 and 2011 GDP "historical" data. Today, we learn that Q2 data (also pending further downward adjustments), contracted by 0.4% sequentially in Q2, in line with expectations, but somehow, and we have to figure out the math on this, the drop on a Year over Year basis was far worse than expected, printing at -1.3% on expectations of just a -1.0% decline. However, while its economic collapse is well known by all, the surprise came in the deposits department which imploded by a whopping 5% in July, plunging to 1.509 trillion euros at end-July from 1.583 trillion in the previous month. Keep in mind this is after the June 29 European summit which supposedly fixed everything. Turns out it didn't, and the people are no longer stupid enough to believe anything Europe's pathological liar politicians spew.The good news: Greek deposits saw a dead cat bounce after collapsing by ridiculous amounts in the past several years: at this point anyone who puts their money in Greek banks must surely realize that the probability of getting even one cent back is equal odds with going to Vegas and at least having a good time while watching one's money burn.

Reuters first has some data on Spain's relentless depression:

Spain's economy shrank further in the second quarter of the year and a slump in domestic spending accelerated, signalling a protracted recession as the country presses on with efforts to slash its public deficit.

Gross domestic product fell by 0.4 percent in the second quarter of the year, according to final data that confirmed a preliminary reading. But on an annual basis it dropped by 1.3 percent, worse than initial estimates of 1.0 percent.

Spain's economy fell back into recession in the first quarter of the year, when output fell 0.3 percent, and government estimates show GDP will probably fall for this year and next year as it pushes through further measures aimed at slashing a bloated deficit.

The data came a day after Spain said its economy performed less well than expected in both of the last two years.

On Tuesday, the National Statistics Institute, INE, also revised down 2011 fourth quarter GDP to -0.5 percent from -0.3 percent.

Close to record high borrowing costs and an economy showing little sign of picking up any time soon is nudging Spain closer to calling for a European bailout, which analysts say is only a matter of time.

"With much more fiscal austerity in the pipeline and unemployment at astronomic highs, the risks are clearly tilted towards a more protracted recession," said Martin van Vliet, economist at ING.

He expected Spain to make a formal request for additional external financing in mid-September or October. Spain has already negotiated up to 100 billion euros in aid for its ailing banks.

Keep expecting buddy: as long as the ECB ponzi scheme allows Spanish banks to buy Spanish bonds, repo to the ECB, and pretend all is fine, keeping yields at or around 6%, Rajoy will never demand a bailout.

As for the deposits...

A rush by consumers and firms to pull their money out of Spanish banks intensified in July, with private sector deposits falling almost 5 percent as Spain was sucked into the centre of the euro zone debt crisis.

Private-sector deposits at Spanish banks fell to 1.509 trillion euros at end-July from 1.583 trillion in the previous month.

However, in a more positive sign, Greek banks stopped bleeding deposits in July after June elections decreased the worst fears of the country dropping out of the common currency bloc, European Central Bank data showed on Tuesday.

Speculation about Greece possibly quitting the euro was intense in May when anti-bailout parties saw a strong showing in elections, but the Greek central bank said the process had reversed after the elections.

Then again, with both nations and banks now entirely reliant on central banks for funding, who needs deposits... or taxes?

Europe's Average Asset Age at Record Highs

It older post from Zerohedge which explains why trying to treat a solvency problem with liquidity doesn't work.  The old "extend and pretend" mantra of the banking sector seems to be closer to the edge.  The chart from Goldman would suggest the need for a Capex cycle in Europe to begin.  With the huge amount of economic uncertainty it is no wonder why we're not seeing a huge pick up in investment.

From Zerohedge:

"No Continent For Young Assets" - Charting The Root Of Europe's Problems: Record Old Asset Age

Submitted by Tyler Durden on 02/17/2012 10:22 -0400

• Central Banks
 
• default
 
• European Central Bank
 
• fixed
 
• Monetary Policy

It is no secret to those who follow the daily nuances of global monetary policy that the primary reason for Europe's deplorable fate has little to do with liquidity, and everything to do with an ever diminishing base of money-good assets, which in turn is a solvency problem when run through the cash flow statement and balance sheet. Need an explanation for the ever declining collateral thresholds by the ECB? There it is: assets in Europe are generating ever lower returns, which means that an ever lower inverse LTV has to be applied to them by monetary authorities in order for the asset holder to get some return. And with trillions in incremental cash needs, before all is said and done, the ECB (and various regional central banks, as was discussed last week), will be forced to accept virtually anything that is not nailed down as collateral for 100 cents on par (not amortized) value. Yet while observing the symptom is simple, the diagnosis is much more difficult. In other words, why is Europe's asset base getting progressively worse. Courtesy of Goldman we may have found the answer. As the following chart shows, the average age of assets in years in Europe, has just hit a record high. The implications of this are substantial, and explain so very much about the core problem at the heart of the European quandary.

it will come as no surprise that the return on an aged assets gets progressively lower the further it depreciates and amortizes. Further, the less cash available for capex, the lower the rate of asset replacement, and the older the prevailing asset base becomes. This all ends up in a toxic spiral in the context of continent deleveraging, where old assets create lower returns, leading to less cash, leading to less capex spending, all the while the liability side of the balance sheet stays fixed.

So as ever more cash is spent on interest outflows and debt maturities, the average asset age continues to get progressively higher, the PPE base of Europe gets even older, finally resulting in the situation Europe is in right now: a decrepit bed of Property, Plant and Equipment, amortizing ever faster, not being replaced, generating ever less cash.

Unfortunately, until a virtuous cycle begins where European (and soon American) firms start spending more on CapEx which more than offsets annual depreciation and amortization, everything else is irrelevant, yet the ongoing confusion of a liquidity with a solvency problem (because unlike Assets, liabilities do not "amortize" on their own absent a default of course) will continue.

Some Eurozone Related Articles

The 40 new hires by the ECB makes it appear like they are gearing up to become the EU wide regulator.  The Bundesbank's Target2 claims essentially means they have already bailed out Greece.

From Bloomberg:

ECB Drains 211.5 Billion Euros to Offset Government Bond Buys
2012-08-21 11:04:03.134 GMT


By Gabi Thesing
     Aug. 21 (Bloomberg) -- The European Central Bank said it drained 211.5 billion euros ($260.3 billion) in seven-day term deposits to neutralize the liquidity created by its government bond-purchase program.
     The Frankfurt-based central bank said 57 banks submitted bids totaling 446.8 billion euros. The marginal rate on the term deposits was 0.01 percent.
     The ECB sterilizes its government bond purchases to ensure they don’t fuel inflation. The ECB hasn’t bought any government bonds for 23 straight weeks.


ECB Funding Watch: ELA Highest Since July 27
2012-08-21 13:17:15.244 GMT


By Alexandra Harris
     Aug. 21 (Bloomberg) -- (Updates ECB data under “WEEKLY” subhead)
     Euro Area Funding Watch compiles daily, weekly and monthly functions that track money flows among the ECB and national central banks through the eurosystem.
  * DAILY
    * Banks borrowed EU1.19m overnight from ECB Aug. 20 vs EU949m Aug. 17, most since July 10
    * Banks deposited EU333b overnight w/ECB Aug. 20 vs EU327b  Aug. 17, most since Aug. 15
    * ECB’s current account holdings fall to EU537m Aug. 20 vs EU542m Aug. 17, least since Aug. 15
  * WEEKLY
    * ECB allots $9.3b to in 7-day dollar tender at 0.64% Aug. 15; allots $4.5b to 11 banks in 84-day dollar tender at 0.64%
    * ECB balance sheet falls to EU3.085t week ended Aug. 17 vs EU3.086 previous week; near record EU3.10t week ended July 13
    * ECB balance sheet lending to euro-area credit institutions falls to EU1.208b week ended Aug. 17 vs 1.21b previous; record high 1.26b week ended June 29
    * ECB margin calls fall to EU2.18b week ended Aug. 17 vs  EU2.23b previous week, lowest since June 22
    * ECB’s emergency liquidity assistance rises EU4.16b to EU218b week ended Aug. 17 vs EU214b previous week, highest since July 27
    * ECB has not purchased any sovereign debt for 23rd consecutive week
  * MONTHLY
  * Target2, debts/liabilities between euro area’s central banks:
    * Bundesbank claims fall to EU727b in July vs record EU729b June
    * Bank of Spain liabilities rise to record EU415b in July
    * Bank of Greece liabilities fall to EU105b in July vs record EU106b June
    * Bank of Italy liabilities rise to record EU280b in July  vs EU274b June


ECB Has Approved 40 New Hires to Fight Euro Crisis, Welt Reports
2012-08-21 06:14:01.597 GMT


     (For more on Europe’s debt crisis, see TOP CRIS.)

By Rainer Buergin
     Aug. 21 (Bloomberg) -- The European Central Bank has approved 40 new positions to help it fight the euro region’s sovereign-debt crisis, the German newspaper Die Welt reported, citing the bank.
     The ECB’s governing council made the decision in July without publishing it, the newspaper said. It was preceded by a controversy between the ECB’s executive board, which wanted to hire more people, and representatives from the national central banks, who opposed the executive board’s proposal, it said.