The European Central Bank is falling behind on a €40bn asset purchase programme launched at the height of eurozone crisis, in a sign it could be dropped as a first step towards unwinding huge emergency support for the region’s financial system. Purchases of “covered bonds” – debt backed by pools of assets favoured by some institutional investors – have so far totalled less than €9bn. The scheme started last November and was originally intended to run until October at the latest. http://www.ft.com/intl/cms/s/0/bdb2c1ec-7367-11e1-9014-00144feab49a.html#axzz1pj9puJ70
WestLB held out little hope of finding buyers for most of its businesses as a deadline approaches for the bank to be wound down, raising the potential cost for German taxpayers of dealing with unwanted assets. The imminent break-up of the German public-sector bank will end a troubled chapter in the country’s banking history after WestLB needed frequent bailouts and sparked arguments with European competition authorities. http://www.ft.com/intl/cms/s/0/f822c96e-734c-11e1-9014-00144feab49a.html#axzz1pj9puJ70
Asian stock markets were mixed Thursday as key manufacturing data out of China confirmed a slowdown in the world’s second-largest economy, triggering a selloff in risk-sensitive currencies such as the Australian and Singapore dollars. Japan’s Nikkei Stock Average slipped 0.1%, Australia’s S&P/ASX 200 added 0.5%, South Korea’s Kospi Composite dropped 0.3%, Hong Kong’s Hang Seng Index was flat, China’s Shanghai Composite Index fell 0.4%, and India’s Sensex dropped 0.1%. ow Jones Industrial Average futures were down 19 points in screen trade. Copper and oil prices also dropped after data showed the preliminary HSBC China Manufacturing Purchasing Managers Index, a gauge of nation-wide manufacturing activity, fell to 48.1 in March compared with a final reading of 49.6 in February. The March reading marks the fifth-straight month the index has been in contractionary territory, signaling extended difficulties for the nation’s manufacturers. http://online.wsj.com/article/SB10001424052702304724404577296290472282610.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews
All news below.
On the sustainability of Italian debt by Voxeu. In late 2011 as risk spreads on Italian government bonds surged to levels that had been associated with debt crises in Greece, Ireland, and Portugal, some leading economists called for a restructuring of Italy’s debt.1 With the recent easing in borrowing rates, such proposals look at best highly premature and at worst reckless. A pre-emptive move to restructure debt for the world’s seventh largest economy, especially in a manner imposing debt reduction, would likely trigger bank runs, a severe new round of financial instability, and perhaps the breakup of the euro.
The calls for debt forgiveness tend to leap from a simple combination of the 120% ratio of debt to GDP with an interest rate of 7% to reach a diagnosis of insolvency. In contrast, my calculations indicate that Italy could manage even such high interest rates for some considerable time, for two central reasons.
- First, Italy has reasonable prospects of achieving a relatively high primary surplus (fiscal surplus excluding interest payments) that can pay for most of the interest bill rather requiring ever more net borrowing.
- Second, the relatively long maturity structure of debt means that only about 10% of long-term debt needs to be refinanced each year. This profile delays the effective arrival of higher interest rates and provides time for demonstration of good policies (including especially growth-oriented reforms) to restore market confidence and reduce interest rates once again before the bulk of the long-term debt needs to be refinanced. (full article here).
The largest debt restructuring in history was heading for a successful outcome last night as Greece looked set to see a participation rate of close to 95 per cent for its €206bn bond exchange, the FT reports http://ftalphaville.ft.com/thecut/2012/03/09/915561/greek-debt-swap-support-close-to-95/
The London Stock Exchange is close to agreeing a takeover of LCH Clearnet, with an announcement possibly as early as Friday morning, the WSJ says. Talks between the two have been difficult and could still founder at a late stage. http://ftalphaville.ft.com/thecut/2012/03/09/915581/lse-close-to-lch-deal/
George Osborne is looking to raise taxes on the pension contributions of the highest earners in this month’s Budget, in a move which will release funds to help low earners escape the tax system but antagonise some Tory MPs, http://ftalphaville.ft.com/thecut/2012/03/09/915591/pension-tax-breaks-on-osborne%e2%80%99s-radar/
Deutsche Bank, whose chief executive decried the stigma of tapping ECB three-year liquidity last month, has borrowed at least €5bn and as much as €10bn from the latest LTRO, the FT reports. Investors briefed by the bank’s finance director and investor relations executives say it was persuaded by the economics of the financing to abandon its concerns. http://ftalphaville.ft.com/thecut/2012/03/09/915491/deutsche-tapped-ltro-cash/
Some insight and implications regarding the Target2. From PIMCO;
- The large TARGET 2 positions developing among national central banks in the eurozone reflect capital flight from the periphery to the core and de facto introduce transfer and burden sharing elements of a common fiscal policy.
- Monetary policy ends up substituting for fiscal policy without going through the same democratic channels that governments’ expenditure and taxation decisions entail. Taxpayers in the eurozone are contingently liable for eventual losses incurred by the Eurosystem’s monetary policy operations.
- Three discernible consequences will likely come out of this cheap money and capital flight mix: inflation in Germany will increase, the internal devaluation process underway in southern Europe will proceed slowly and it will strain the political foundation of the euro.
(Full article here).
While the LTRO is saving the banks, people of Southern Europe are pulling money out of the local system and moving it to Northern safety. From Spiegel;
More and more people in southern euro-zone countries are moving their money north amid fears of losing their savings in the crisis. The capital flight makes things difficult for banks back home, but experts say there are no legal measures to stop it. Any steps would probably come too late, they say, and might even endanger the European project.
The TARGET2 numbers also show that a growing share of the money flow in crisis-stricken euro-zone member states is “involuntary.” The totals represent money borrowed by individual central banks from the ECB — and not foreign investment. Commerzbank analyst Lutz Karpowitz has calculated what capital flow balances would look like without the TARGET2 system. The result, as seen in the graphic below, is not terribly encouraging.
— F. Scott Fitzgerald
Mitt Romney has won the crucial Michigan primary, reports the FT, fending off a strong challenge from Rick Santorum after a bitter contest that has left Republicans anxious about damage to the party from the prolonged presidential nomination race. http://ftalphaville.ft.com/thecut/2012/02/29/902901/romney-wins-crucial-michigan-primary/
JPMorgan Chase executives have told investors the bank will prosper even after the implementation of new regulations as they maintained profit targets and dismissed talk of a historic threat to Wall Street’s business model, http://ftalphaville.ft.com/thecut/2012/02/29/902761/dimon-dismisses-regulatory-threat/
The US investigation into insider dealing on Wall Street has broadened to include trading of biotechnology and pharmaceutical stocks, says the FT, citing a person familiar with the matter. The FBI and the US attorney’s office in Manhattan are honing in on trades by hedge funds in biotech and pharmaceutical stocks around important drug approval announcements and corporate takeovers, http://ftalphaville.ft.com/thecut/2012/02/29/902721/insider-trading-probe-broadens-to-pharma-stocks/
Taxpayers will have to wait up to 15 years to recoup the money spent on rescuing Northern Rock, according to the first official analysis of potential returns from the bail-out. The FT says a report published on Tuesday by UK Financial Investments, http://ftalphaville.ft.com/thecut/2012/02/29/902681/taxpayers-face-15-year-northern-rock-wait/
As the European mess situation has been unfolding, people have moved cash out of the imploding Med countries into the stable German banking system. From Bloomberg;
Money is leaking out of banks in southern Europe as customers scoop deposits out of Greece, Spain and Italy to move cash to less indebted nations such as Germany.
Greece (TODETOGR)’s total deposits plunged 28 percent from the peak in June 2009 to 169 billion euros ($225 billion) at the end of December, according to data compiled by Bloomberg. In Spain (TODETOES), deposits slid 5 percent in the five months through November to 934 billion euros, the least since April 2008. Italian (TODETOIT) banks held 974 billion euros in November, the lowest in 18 months.
“The biggest systemic risk is if people lose confidence in keeping their euros in Spain, Portugal or Italy,” Perkins said. “It makes sense to put your cash into Germany just to be safe and that’s where the real systemic danger lies. That contagion isn’t priced in, and bank deposits are the place we’d spot it.” (Full reading here).