Death Star Economics



Libor 2.0 and a £10bn UK-US trade agreement

Over the weekend…
we saw the first proposal for a Libor reform from Martin Wheatley of the FCA (Financial Conduct Authority and successor of the FSA), who told the FT about the Libor 2.0, which could look something like this:

[…] a dual-track system with survey-based lending rates running alongside transaction-linked indices as soon as next year.

In the US however, Gary Gensler of the CFTC calls for an immediate switch to transaction-linked rates. read Financial Times

Meanwhile, the G7 met just outside London to talk about monetary policy and how much liquidity is too much with the conclusion that money is something you can never have enough of: Go ahead Japan, ease some more. read Businessweek

In the US, WSJ correspondent Jon Hilsenrath published two articles on the future of the Fed, both in terms of staffing and monetary policy. Until yesterday, Friday’s article (read ZeroHedge annotations) was pretty much the most talked about news of the weekend, discussing how the central bank will unwind its QE program that is worth $85bn a month. It was followed it up with a piece on Janet Yellen, [probably] the next Ben Bernanke. read Friday’s Wall Street Journal read Sunday’s Wall Street Journal

This morning…

David Cameron is meeting with Barack Obama on future trade agreements, something that is being interpreted as a potential first step for the UK to leave the EU. A free trade agreement between the new and old world could be worth up to £10bn for the British economy. read Bloomberg

The Eurogroup is kicking of with both Cyprus and Greece on the agenda. Cyprus is seeking approval of the first chunk of its bailout program, worth €3bn, while Greece is set to receive €7.5bn in the latest bailout payment. read BBC read comment on Reuters MacroScope

As for the rest of the week, we’ll get all kinds of data from the US, including industrial production and inflation and housing. Same goes for the eurozone and Germany; the UK reports unemployment figures and Japan will give us preliminary Q1 GDP figures.

So long.


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Portugal could need second bailout (to pay for the first)

This morning…

the Eurogroup is meeting in Dublin; on the menu: stop messing around with bank stress tests (i.e. tighten measures) and the bailout schemes of Portugal and Ireland. Some say even if Portugal was granted an extension of its bailout repayment, it could potentially face a second collapse and thus a second bailout. Ireland is looking in the same gloomy direction. According to the FT:

Lisbon’s bailout is due to come to an end in July 2014 and the extension of maturities of its bailout loans is intended to smooth its full return to markets. But it has to raise €14,1bn next year and €15bn in 2015, whereas before the crisis it was typically raising €10-€12bn a year. Ireland is also facing a big financing challenge. It needs to refinance €20bn per year from 2016-20, which is about 12 per cent of the country’s projected economic output for this year.

Thus, the world is quiet in anticipation of next week’s news country of choice. It might be early days for Slovenia, so maybe it’ll drift back to Cyprus or Italy.

Meanwhile, Japan will officially enter the Asia-Pacific trade talks this summer, which are currently held between Canada, Mexico, Australia, Chile, Peru, Singapore, Malaysia, Vietnam, Brunei and the US. read article

Weekend reading…
– The Economist on Margaret Thatcher‘s legacy, read article

– William Cohan on the revolving door between Wall Street and the White House, read article

Climate change may double turbulence on transatlantic flights, read article

– The Winklevoss twins are all over bitcoin, read article

JPMorgan explains why you should avoid investment banks, read article

Have a good one.

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Cypriot capital controls, EU templates and Japanese QE

Cyprus‘ President Nicos Anastasiades announced that the country’s banks are going to stay closed until Thursday (again: which Thursday…) and that capital controls will be put in place until it all blows over. read article

The new head of the Eurogroup, Dutch Finance Minister Jeroen Dijsselbloem, threw everyone for a loop by saying the private sector contribution in Cyprus (i.e. the haircuts) would lead future EU bailouts by example. He retracted the comment later on. Thanks for that.

The MSCI Emerging Markets Index has had the worst first quarter since 2008, lagging behind industrial economies most since 1998. Ongoing QE programs (see below for Japan) are cited as a reason in favor of developed markets. read article

Presumably not for the same reason, the BRICS nations are planning their own version of the World Bank. read article

Meanwhile, China is finding itself in a public health crisis, with rotten ducks floating down rivers in the southwestern Sichuan province and 11,000 dead pigs being fished out of Shanghai’s water supply system. read article

Otherwise, a 17 year-old British kid has sold its bedroom-developed app Summly to Yahoo for $30m. read article

This morning…
there’s not a whole lot going on except digesting overnight news, because most people, including myself, got nothing but chocolate eggs on their minds.

New Bank of Japan Governor Haruhiko Kuroda is already warming up the printers, saying the BoJ will consider buying five-year+ bonds. The next policy meeting is next week, April 3-4.

So long.

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Cyprus to exit the news

Over the weekend…

actually right before, Fitch but the UK on its watchlist for downgrades.

The United States Congress is working on reforming the taxability of debt and equity, changing the traditional debt-bias (i.e. tax-deductible interest payments) to an equity-bias. read article

The Basel Committee on Banking Supervision received at hat tip that there was a MASSIVE loophole in the Basel III regulation that imposes, among other things, higher capital standards on banks. What it doesn’t regulate, however, is the use of credit default swaps to handle riskier assets that count into those capital standards. Changes to be made. read article

Speaking of Basel – after Switzerland came under scrutiny (again) by facilitating tax avoidance, the US Department of Justice has now asked Lichtenstein to hand over documentation of American-held accounts. read article

Over night…

The Eurogroup of Finance Ministers approved troika-sponsored bailout plan for Cyprus, totalling €10bn. In short, bank deposits under €100,000 will be guaranteed, while larger deposits are facing a crazy haircut, possibly up to 40% (others say the cuts will be capped at 20%). After ten days closure, Cypriot banks re-open todayread article

And let’s not forget that besides all this, we’re still waiting on Italy.

Have a good week.

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Leadership: Obama’s 2nd term and maybe Merkel’s last

There won’t be a newsletter tomorrow, Tuesday, 22 January 2013.

In the US, which is closed for Martin Luther King day today, President Obama has officially been sworn in againcommencing his second term in the Oval Office. read article

Overall, this week is full of high profile meetings, with the Eurogroup coming together in Brussels today and tomorrow and the World Economic Forum kicking off in Davos on Wednesday. Also on Wednesday, David Cameron will hold his long anticipated speech on the UK’s future in the EU.

There will also be some economic data out of Spain, where Prime Minister Mariano Rajoy just celebrated his anniversary in office. One of the figures likely to emerge, 26% unemployment, with 6 million Spaniards out of work. read article

As a taster for the general elections scheduled for September, the German state of Lower-Saxony held elections on Sunday. The coalition of social democrats and the Green Party defeated the incumbent conservative-liberal coalition by just one seat. For Angela Merkel, who is running for a third term to lead the EU Germany, this means a much harder campaign than she might have hoped for. read article

In other EU matters, Cyprus bailout package has been delayed again, and while the Cypriot government says it’s due to a review of capital needs conducted by PIMCO, it now becomes apparent that the IMF demands more debt relief before doing a thing (or Halloumi as collateral). So far, Cyprus’ clockwork hasn’t stopped because Russia has agreed to a delayed repayment of a €2.5bn loan. Thanks Russia, maybe you’d like to launder some money here in return. read article

And while Starbucks is offering cheap mediocre coffee on this morning’s free London newspapers, the company continues to serve as the scapegoat for corporate tax avoidance in the UK, which, according to HMRC, has risen by 48% in 2012. read article

In other news, Bejing is trying to get its air pollution problem under control by targeting the real culprits: outdoor BBQers, and Mario Monti has launched his re-election campaign in Italy.

So long.

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Go team Draghi

So we got ourselves a banking union. That is surprising for a number of reasons. First of all, the Eurogroup struck a deal. Secondly, the Eurogroup struck said deal before the deadline. Finally, Germany managed to add a clause that protects its Mittelstand. Oh no wait, the last one isn’t the least bit surprising.

A summary a la WSJ:

Ministers said the European Central Bank would start policing the most important and vulnerable banks in the euro zone and other countries that choose to join the new supervisory regime next year. Once it takes over, the ECB will be able to force banks to raise their capital buffers and even shut down unsafe lenders.

Once approved by the European Parliament, the show could kick off as early as March [let’s be realistic and say July]. The threshold for banks under supervision is €30bn of assets held, leaving Germany’s retail banking sector more or less untouched.

Unfortunately, the EU delegates involved were just as impressed with their own efficiency, so they decided to leave all other decisions be for now… until June. According to the FT, both budget negotiations and economic reform contracts, were completely taken off the agenda. The remaining time spent together will be used to play Secret Santa (guess who got Greece).

Moreover, Mario Draghi, soon to be puppeteer of Europe’s financial institutions was named the FT’s person of the year. Good for you, Mario. We know it hasn’t been easy. read article

In legal/regulatory/scandal news, the FSA, CFTC (US Commodities Futures Trading Commission) and the US Department of Justice are about to fine UBS more than $1bn for fixing libor ratesDealbreaker explains how such a humongous number (double of what Barlcays had to pay) comes together:

The fine-setters seem to have about four things to think about: 1) how much bad stuff did the bank do, 2) how much money did they make doing it, 3) how caught are they, and 4) how sorry are they now.

It calls for an investigation.

Co-head of Deutsche BankJuergen Fitschen, is under investigation for tax fraud committed in 2009. In his opinion, the reaction of German authorities, sending officers with machine guns to the Deutsche Bank headquarters in Frankfurt on Wednesday, was a bit much and he doesn’t intend to resign any time soon.

For the weekend, Japanese elections are on, with the opposition (the Liberal Democratic Party) led by Shinzo Abe expected to winread article

Weekend reading

– North Korea: playing with rockets, read article

– Felix Salmon on NYT Dealbook’s first conference this week and whether it was a success, read article

– Joris Luyendijk’s banking blog returns to blame fund managers, read article

– Alphaville is selling shirts (or ECB collateral) for charityread article

Have a good one.

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The unexpected: A deal for Greece, a Canadian for the BoE

The Eurogroup has completed its first successful Greece-related meeting measured by the measurability of its results. In short: we got a deal. It’s not a haircut (go Germany!), but it’s not far from it. The deal finally releases the delayed €34.4bn bailout tranche. Before the money is wired down south however, Greece has to buy some of its debt back [i.e. buying outstanding bonds at a massive discount price]. The deadline is mid-December. Other changes in T&Cs are cuts of interest rates on debt from the first bailout and a €7bn payment of profits from Greek debt held by international creditors. Two that are especially hurt by these measures are Spain and Italy, whose interest on Greek bonds held is getting cut as well, while their own borrowing costs are much higher. Although the Eurogroup agreed to lift Greece’ debt:GDP target from 120% to 124% in 2020, it is meant to be below 110% by 2022. So maybe that’s when the world economy will be fully revived. The IMF refuses to free up new funds until the debt buyback is finalizedread article

Yesterday afternoon, the Bank of England appointed Mervyn King’s replacement. The bank’s new governor is Mark Carney, Harvard PhD and governor of the Bank of Canada and ex-Goldman Sachs (consult map below). I’m pretty sure William Cohan is about to write another book as you read this. A summary from Twitter.


– Peter Spiegel: Do I have this right? The British government just appointed a Canadian to head its central bank? #StillAColony?

– Matina Stevis: #eurogroup reporters gasp at #carney #boe announcement partly because there’s nothing to report on from here yet. #Greece

– [again] ZeroHedge: Oh, and dear Germans… Completing The Circle: Meet The US Ambassador To Germany

Carney, who previously also headed the Financial Stability Board, was approached about the job in April, as the FT reported then.

More detail on ZeroHedge’s comment including a map of how Goldman Sachs runs Europeread article

Next thing you know Jamie Dimon is in the run up as Treasury Secretaryread article

In the US, Mary Schapiro, head of the Securities and Exchange Commission, has been replaced by Elise Walter, who previously heading Finra, the Financial Industry Regulatory Authority. read article

In other news, ING repaid another €1.125bn to the Dutch government, including €375m interest, which saved the bank with a €10bn bailout. Following the latest repayment, ING stills owes €1.2bn plus interest.

Otherwise, the OECD slashed its 2013 growth forecast for developed economies. Back in May, the estimate was still at 2.2%. The revised forecast sees only 1.4% growthSouth Africa’s GDP grew at the slowest pace since the hight of the financial crisis in 2009, reducing to 1.2% on the back of decreasing mining output following massive strikes and lack of reformread article

So long.

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Splitting up – Barclays reconsiders investment bank, Catalonia favors seperatism

Barclays may have to follow the seemingly unavoidable path of European banks and split. The bank’s shareholders have demanded that new CEO Antony Jenkins should let go of investment banking operations, along the lines of UBS‘ shut down of its fixed income business last month that eliminated 10,000 jobs. The Swiss bank was fined £30m by the British FSA in connection to the $2.3bn insider trading loss that Kweku Adoboli got seven years for. Of course, axing the division would help Barlcays get around ringfencing investment banking and retail operations and may therefore be desirable from a regulatory point of view. read article

All of this coincided with Qatar Holdings selling a pile of Barclays shares this morning. read article

Yesterday, Spainish region Catalonia held elections, which saw a slight reduction of seats of CiU (Convergencia i Union), the party that demands a referendum. But those seats lost, were picked up by ERC (Esquerra Republicana di Catalunya), which demands independence from Spain without a referendum and as soon as possible. Four parties in favor of separating from Spain, holding 87 of 135 seats, are now present in the Catalan parliament. Gaining independence from the Spanish mothership would neither be simple nor quick. Catalonia is contributing 7-8% of its output to the central government in Madrid, and could cause an overhaul of Spain’s fiscal politicsread article

In terms of reforms, there is a new idea from Germany’s Finance Minister, who wants to force banks to write a restructuring manual for a bankruptcy scenario. Lawyers and advisory firms just collectively ordered new cars.

Otherwise, it is Cyber Monday, which is estimated to be the biggest online shopping day of the year for the third time in a row, says the Associated Press.

In Brussels, the “Eurogroup meets for third go at kicking can down the road” and to assess Angela Merkel’s campaign strategy in conjunction with Christine Lagarde’s hopes and dreams of a Greek debt haircut.

In the week to come, we’ll get the new governor of the Bank of England (330 pm today), updated US GDP, the Spanish budget, Chinese manufacturing and all unemployment number of the rainbow, with France on Tuesday, Germany on Thursday and eurozone on Friday.

So long.

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All talk, no results, but at least Glencore is happy.

If things continue like this, I’m going to start making news up. I hear it works for The Sun.

Japan’s exports to China fell by 12% in October, amounting to JPY948bn ($12bn) or the largest monthly trade deficit ever, in the hangover since the dispute about the East China Sea has re-arisen. read article

Meanwhile in the US, Ben Bernanke held a press conference reiterating every apocalyptic comment about the fiscal cliff and threatening recession in case of insufficient government action. Talks between the White House and Congress have kicked off this week, but it’s not going well so far.  read article

In Greek news, the Eurogroup of finance ministers failed to strike a deal on how to reduce Greece’ debt. After 11 hours of back and forth, the meeting was broken up, to be continued on Monday of next week. Allegedlya document was circulated at the meeting, now in the hands of Reuters, which proposed a haircut for official bondholders or a two-year extension for the 120% debt-to-GDP ratio. The former goes against Germany’s wishes, the latter against those of the IMF. Nothing is solved and tomorrow’s summit will be a disaster. read article

Twinkies and Wonder Bread parent company Hostess, which had struggled over the past couple of months,

will continue with the company’s liquidation, after it failed to find an agreement with the bakery workers union. Hostess had filed for bankruptcy in January, when the company had around $860m debt, and announced to close down operations on Tuesday. The private equity vultures are circling… (Hello, Sun Capital Partners.) read article

In other company’s news, the merger of Glencore and Xstrata has now been passed on to European antitrust authorities who are expected to approve the deal tomorrow, almost nine months after merger negotiations started. Besides the EU, China and South Africa also have to approve the proposed transaction, which would create the largest natural resource conglomerate in the world. read article

So long.

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War of the roses: IMF vs EU

There won’t be a news brief tomorrow, Wednesday, 14 November 2012.

Everything seems a bit unsettled today: the EU and the IMF had there biggest falling out yet, Swiss banks face more fraud investigations now that Switzerland is opening up more and more to bi-lateral data sharing agreements, the investigation of ex-CIA head David Patraeus‘ private affairs are getting increasingly confusing, adding more people to what started as a simple affair (as simple as an affair with the head of the CIA can be…), and the FSA is investigating the potential manipulation of prices in the British gas market. It’s messy, that’s what it is.

“Just this time, we’ll let you get away with it, you hear me?”

That is what EU finance ministers decided to tell Greece yesterday. What’s one concession when everything else is working according to plan? So Greece got a two-year extension to balance its budget. Except, that’s not what the IMF wanted to hear them say. Lagarde insists to stick with the 2020 target for Greece to decrease the deficit to 120%. The decision about further rescue funding is postponed to November 20, when all parties step back into the ring. While Eurogroup chairman Jean-Claude Juncker, who has admitted to lie to the press at times, indeed wants an extension of the deadline for Greece, Lagarde is in favor of another haircut, to help the country meet its targets. In Germany, Angela Merkel is worried about these developments; she has an election coming up in September 2013 and big losses for the German taxpayers would be ill-timed. read article

Also in Germany, 50 clients of struggling Swiss bank UBS are being investigated for tax fraud. The personal details of clients were obtained on CDs with information of Swiss bank accounts held by German citizens, which were purchased by German tax authorities in 2010. Last week, the same authorities started an investigation of UBS employees for aiding said tax fraud. Switzerland is just not what it used to be anymore.

Meanwhile, the New York stock exchange has to suspend trading of 216 companies due to a technical fuckup, and the UK inflation exceeded expectations by 0.2% for October, hitting 2.7% due to an increase in tuition fees and food prices.

In post-election AmericaGlenn Hubbardeconomist and dean of the Columbia University Graduate School of Business, said the US could make significant steps away from the January fiscal cliff by increasing taxes on high income earners. The crux: Hubbard was one of Mitt Romney‘s led economic advisors throughout his presidential campaign. Awkward.

So long.

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