A big hairball of risk
The three biggest problems worth reconsidering. By The Economist.
PERHAPS the most disconcerting aspect of the world’s current flight to safety is the lack of a single overriding threat to justify it. China is slowing, but hardly in recession. Europe is in crisis—but when has it not been in the last three years? And America—well, there’s that fiscal cliff later this year but it’s hard to find any investor thinking that far ahead.
The puzzle was underlined by May’s weak jobless report in America. What fundamental factors could explain it? Consider the usual suspects:
1. Petrol prices rose much less this year than a year ago, and peaked in the first half of April. Retail sales, the most obvious place where petrol prices would be felt, didn’t signal distress.
2. The current episode of European stress can be traced to Spain’s announcement in early March that it would miss its deficit targets, but equity markets in America didn’t take notice until the Greek elections in the first week of May. That’s too late to explain a slowdown that began in April.
3. Emerging markets are slowing sharply. But even after extraordinary growth, exports to China, Brazil, India and Russia only equal 1.3% of American GDP. And a slowdown in emerging markets would be ambiguous for America by both hurting exports and pulling down oil prices. (Full reading here).
Spain-Men in black not welcome
Yesterday Spain asked for a “small” bail out, just for the banks. We all know how it started in Ireland. First the banks, then the rest. As we have been arguing, Spain is in denial when it comes to the economy (don’t confuse this with the IBEX index outperforming as we suggested a week ago). Montoro is assuring us, the men in black won’t be visiting Spain. Let’s see about that. From El Pais.
Spanish Finance Minister Cristóbal Montoro on Tuesday acknowledged Spain needed external help to recapitalize its banks because of the prohibitive jump in its borrowing costs, but ruled out any socially and politically onerous intervention along the lines of those of Greece, Ireland and Portugal.
Meanwhile, in the Senate Prime Minister Mariano Rajoy for the first time in public defended the need to create eurobonds, a move that Germany is only willing to contemplate in the indefinite future.
Spain has been pushing for banks to be allowed to directly tap the European Stability Mechanism (ESM) without the ignominy of the government having to formally ask for a rescue package in its name. The European commissioner for economic affairs, Olli Rehn, on Monday suggested that this proposal should be seriously considered by Europe, although Germany is still reticent about such a move.
Gold-buy or sell?
The sharp moves in Gold over the past weeks has “renewed” the interest around the shiny metal. Let’s see if Soros will be proven right once again. From Bloomberg.
Billionaire George Soros bought more in the first quarter and hedge-fund manager John Paulson held on to the biggest stake in the SPDR Gold Trust, the largest exchange-traded product backed by bullion, Securities and Exchange Commission filings show. Some investors are refusing to capitulate even after failed elections in Greece drove the euro to a two-year low against the dollar and gold slumped as much as 21 percent in December from the record $1,923.70 set in September.
“The $2,000 target has moved further away, but it still holds,” said John Stephenson, who helps manage $2.7 billion at First Asset Investment Management Inc. in Toronto and predicted in November that prices would reach $2,500 in the next several months. “We will see some easing, and that will push gold higher, but the reality is that we are on hold until the outcome of the Greece elections.”
The euro and the global crises
Some thoughts on the Euro and crisis, via Voxeu.
It is a few years since the US-originated global crisis and the world economy now finds itself grappling with another crisis emanating from the OECD countries. The Eurozone sovereign debt crisis currently poses the single biggest downside risk to the global outlook. The crisis is rooted in the uneven growth performance of the different Eurozone countries, the unsustainably large public debts of some periphery countries, and the European banks’ exposure to these debts. These developments exposed the possible dynamic inconsistency of the euro project, dubbed by Pisani-Ferry (2012) as the ‘Euro Impossible Trinity’.1
The short history of the euro project has been remarkable and unprecedented. Earlier concerns about the stability of the transition from national currencies to the euro, and scepticism regarding the gains from forming the euro, were deemed overblown during the 2000s. However, the real test of a currency union happens at times of sizable asymmetric shocks, like recessions impacting some states in the union, while other states boom. The slowing down of the periphery at a time when Germany kept growing awakened the market in 2010 to the growing debt overhang of the Eurozone’s periphery, and the incompleteness of the euro project. The resultant Eurozone crisis is testing the viability of the single currency.
MF Global and creative planning
MF Global is almost a “forgotten” topic, at least for the ones that were not affected by the stupidity of the organization. We will most probably never hear about what actually happened. What seems to have happened though, is the fact MF Global were involved in creative planning when it comes to capital requirements. From NYT.
Under pressure from regulators last summer to increase its capital cushion, MF Global moved some of its risky European debt holdings to an unregulated entity in an effort to avoid having to raise extra money, according to a new report. The revelation raises new questions about MF Global’s actions in its last months — in particular, how it responded to regulators. The brokerage firm had previously disclosed that it had met the capital requirements, but never mentioned that it had transferred some bonds rather than raising additional money. The shift was detailed in a report by Louis J. Freeh, the trustee overseeing the bankruptcy of MF Global. The report is separate from the one issued Monday by James W. Giddens, the court-appointed trustee charged with recovering money for MF Global’s customers.
“This strategy allowed the MF Global Group to transfer the economic benefits and risks,” thus reducing the “regulatory capital requirements,” the report by Mr. Freeh said.
Draghi Day
All eyes on Draghi today. Let’s see if the ECB is up for some prevannouncements. From Bloomberg.
The Group of Seven nations yesterday agreed to coordinate their response to Europe’s turmoil, which has tipped at least eight of the 17 euro-area economies into recession and damped European demand for foreign goods. ECB President Mario Draghi, who said last week the monetary union is “unsustainable” in its current form, could choose to withhold further stimulus until governments do more to tackle the causes of the crisis.
“Despite the recent escalation, the ECB seems to insist on getting backing from governments before going ahead with additional measures,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. Still, “the current combination of moderating inflation and falling sentiment data are paving the way for lower rates soon.”
“The ECB might want to wait for further corroborating data to conclude that its second-half-of-the-year recovery expectations are challenged,” said Silvio Peruzzo, an economist at Royal Bank of Scotland in London. “We push back our June rate cut to July, but we do not exclude the possibility that the ECB might pre-announce it this week, recognizing the increasing downside risk to the economy.” (Full article here.)
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