Death Star Economics



Monti set to resign, new stance on global internet regulation

On Saturday, Italy has crawled back to the center of attention of the eurozone blow-up. Mario Monti, the country’s unelected prime minister, announced his intended resignation following the approval of the Italy’s 2013 budgetThe FT summarizes:

The 2013 budget law is expected to receive parliamentary approval before the Christmas recess. Whether parliament is dissolved immediately and Italy heads into snap elections in early February – rather than in March or April as had been expected – depends on Mr Napolitano. The president could decide instead to ask for a vote of confidence in the government and appoint a provisional prime minister who would oversee the passage of key economic reform legislation still before parliament.

Last week Thursday, the Italian parliament faced turmoil, after Berlusconi’s party walked out of a vote on fiscal matters. Since then, rumors got louder that Silvio Berlusconi will try to return to office. He is currently being charged for relations with an underage prostitute and abuse of power (possibly related, but two court cases). In Italy, all legal charges are put on hold if an individual is running for a public office. Berlusconi had been convicted to four years imprisonment for tax fraud in October 2012, which was later reduced to one year and then to the prohibition from ever running for office again. Clearly, that has not worked out so well. But the left ranks before Berlusconi’s People of Freedom party in the polls. The Wall Street Journal spoke to Pier Luigi Bersanti, the current favorite according to said polls. read article

Japan is finding itself back in recession, after Q2 GDP was revised down from 0.1% growth to -0.1% (annualized and seasonally adjusted). Shinzo Abe, who is leading the opposition in the election on Sunday, wants unlimited monetary easing and more stimulus until the economy gets back on track. Expectations, however, point at another quarter of negative growth for the end of the year. read article

Meanwhile in Dubai, the Arab state delegation, supported by Russia and China, have proposed a

new regulatory framework for the internet. The opposition, simply put the Western world, is strongly in favor of the current regulation, which doesn’t regulate so much. read article

American and British financial regulators are working on a blueprint on how to deal with failing banks, or more specifically, failing G-SIFIs (global systemically important financial institutions). Once agreed, the new regime is meant to protect tax payers on either side of the Atlantic, while drawing on creditors and shareholders. read article

According to this Sunday’s New York Times Bloomberg is looking into buying the Financial Times, which also includes a 50% stake in The Economist. The other possible bidder is, of course, Thomson Reuters. The Financial Times Group is estimated to be worth around $1.2bnread article

So long.


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Shakespeare was a central banker/ Greg Smith is back

After the German ESM court ruling, adding €190bn from Germany to the fund, lifted everything in Europe, and Asian shares couldn’t decide whether to rise or fall upon Apple’s iPhone 5 presentation (kind of cool that it’s all black, by the way), the rest of the world is waiting to hear from the FOMC meeting.

So QE or no QE, that is the question. Interestingly, the following lines of the Shakespeare quote also kind of apply to monetary policy:

Whether ’tis nobler in the mind to suffer

The slings and arrows of outrageous fortune

Or to take arms against a sea of troubles,

And by opposing end them? To die: to sleep […]

Well then.

Reuters’ economist poll shows a 60% chance of QE3. So far, the financial crisis and the monetary policies it forced the Fed into, increased the central bank’s balance sheet to $2.9tn. But some actually disagree, and say the question isn’t “whether”, but rather “how” the Fed is going to do it. From 12.30pm EST onwards, there will be interest rates, economic projections and Ben Bernanke’s long-awaited press conference.

More clarity in the Dutch election results (map): with 26.6% for the incumbent VVD (People’s Party for Freedom and Democracy) and 24.8% for the PvdA (labor), the Netherlands has avoided an extremist and eurosceptic government once more. Congratulations. A liberal-labor coalition would form a majority government, which is definitely progress after the last coalition consisted of five different parties.

EADS, the parent company of Airbus, wants to merge with BAE Systems, the British defence, security and aerospace company and largest contractor of its kind in Europe. Just like Boeing does in the US, the new company would combine military and commercial operations. Under the current proposition, EADS would hold 60%, while BAE would hold the remaining 40% of the company that is estimated to have a joint market cap of €38bn (in comparison, Boeing stands at €41bn). A decade has passed since a merger was first spoken of. The Handelsblatt calls the deal an “industrial-policy breakthrough”, which wouldn’t have been possible without a European Union. read article

In the case of Heineken‘s attempt to acquire full control of Singapore beverage conglomerate Fraser&Neave, a new player has entered the stage. Charoen Sirivadhanabhakdi, Thai billionaire and owner of Thai Beverage, F&N’s largest single shareholder since a couple of weeks, has made an $7.2bn cash bid for the company. read article

Also in the news: Greg Smith – again. After publicly resigning from his position in Goldman Sachs‘ London office on the Op-Ed page of the New York Times in March, publishers were throwing themselves at him. This year, we can give our loved ones his book for Christmas. On October 22, Why I Left Goldman Sachs is coming to a book store near you. Smith’s advance, in a time where book advances rarely make 6-figures, is rumored to have been $1.5mread article

In local news, Rafiq/c/k HaririLebanese Prime Minister until 2004, has put his Hyde Park mansion up for sale. For £300m, more than twice the original purchasing price of £140m. The sale would be highest valued housing transaction England has ever seen. Wild guess on the nationality of the buyer: Qatari or French, there’s a pattern.

So long.

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Destroying foreign relations – a how-to guide from today’s news


First things first. Today marks the 200th news brief and I’m pretty excited. In fact, I’m typing with just one hand, brushing dirt off my shoulder with the other. Anyway, thanks for reading (and promoting)!! And no, sorry, despite my awareness of pay-walled content, I will not buy all of you an FT subscription…

Besides this exciting piece of information, however, there is not that much going on. Today is a lot like yesterday in terms of expectations, suspense and the same news all over again. In addition, we have faltering foreign relations and the 9/11 anniversary.

The data du jour includes the US trade deficit, which is expected to rise by $1.9bn, reaching $44.8bn (official announcement at 830am EST/130pm GMT). Across the pond, the UK trade deficit, which has shrunk to £7.15bn, beating forecasts of £9bn and marked the lowest since February 2011. Most of it is attributed to ex-European trade involving oil and diamonds. It’s fine though, we’ll wipe our hands with all those notes.

Meanwhile, German finance minister Wolfgang Schaeuble took his time on the podium, speaking to the Bundestag, to proclaim that what is wrong with the world, is the amount of US public debt. From Reuters:

“Ahead of the election in the United States there is great uncertainty about the course American politics will take in dealing the U.S. government’s debts, which are much to high,” Schaeuble said.

But rather than concern for the global economy, the reason behind statements such as the above, may be that Tim Geither continuously points his finger at Germany. During his last visit to Europe, he made it very clear that Germany needs to step up its game and be proactive about the eurozone crisis, which includes agreeing to eurobonds.

Speaking of which, today marks the highest volume day of debt issuance in 2012 in Europe. Corporates borrowed €7.8bn, riding the risk-appetite wave after Draghi’s bond-purchase promise. read article

A a follow-up from yesterday: the Treasury has sold 554m shares in AIG. At $32.50 per share, that amounts to $18bnread article

Greece has set up a government working group to evaluate Germany’s outstanding reparations from WWII. Now we have two countries, two bailouts and a lot of bad relations. It’s like the prisoner’s dilemma on crack. read article

Something light, finally: Alphaville analyses how Markit was meant to be come the “iTunes of finance”, defeating both Bloomberg and Reuters as instant information providers, but failed miserably and embarrassingly in execution. read article

So long.


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‘Grexit’ scenario roundup

In the last couple of days and weeks, the news websites around the world have been swamped with scenarios for Greece’ exit from the eurozone, from Europe, from the world. It’s time for a roundup. Your experience [or reality] may differ.

Let’s start with the Wall Street Journal’s four scenarios

Scenario 1: Syriza, the leftististists, wins the election in July, the European bailout program comes to a halt, Greece runs out of money and returns to the drachma. Involuntary austerity all over the place. Scenario 2: No exit, “no austerity”. Greece stops any sort of public spending and the country deteriorates while keeping the euro until there is light at the end of the tunnel. Unlikely to be very popular with the Greek people. Scenario 3: No exit, Syriza doesn’t win the elections, the bailout program is renegotiated, i.e. the EU and the IMF pump more money into Greece. Unlikely to be very popular with the European governments. Scenario 4: Greece sticks to the bailout program, regardless of the government that comes into power in summer. Ha! Oh wait, that wasn’t a joke.

In an interview with WSJ, Syriza leader Alexis Tsipras said Greece would have to stop paying its creditors if bailout funds would be withheld.

The Dutch newspaper de Volkskrant (article in Dutch) starts by pointing out that Greece is not just like a bankrupt company that can be liquidated. Actually, I’m pretty sure you could find buyers for all those islands and the acropolis… Maybe there’s a plan there. Anyway, the article goes on to argue that if Greece runs out of money, its banks will shut down completely to prevent a full-on bankrun, meaning that debit and credit cards would stop working from one minute to the other, factories would close down, the police force would shrink, there would be a country-wide curfew to prevent riots, gas and coffee would become unavailable. The alternative scenario sees Greece returning to the drachma, while the euro lives happily ever after in the rest of the monetary union. Greece would be demoted to the same status as Hungary, which received structural financial aid form the EU on better terms.

The scenario of German magazine Der Spiegel (article in English) is more dramatic by name: Life or death.

Greece returns to the drachma and gets the same status as Hungary et al. That way, EU members outside the eurozone have to contribute to the financial aid pie as well. While the drachma is redistributed, the country takes a week off from everything, while the police is guarding the delivery process of new money. The switch is flipped and everything changes into the drachma over night at a fixed rate. When they say ‘everything’ , I presume they only mean public spending (pensions etc) and not private contracts. That should be a bit more difficult (and corporate lawyers will make a lot of money off it). The IMF predicts that the Greek economy would contract by up to 10% within the first year before resuming growth. And it better grow fast, because “the last bond held by the ECB matures in 2030.” The devalued drachma would shift the import/export balance in Europe and Tesco olives would suddenly actually be from Greece (fine, they already are, but you get the point). None of this means Greece’s debt burden will decrease as such. Instead more of it is likely to be written off, meaning that more money will vanish.

If Greece returns to the drachma, that will be the point when Europe’s work really begins.

JP Morgan put its scenarios in a flow chart, also found on Alphaville’s roundup of banks’ opinions on the future of the value of the euro. Consensus(ish): a plummeting euro and crazy volatility [which is not a technical term].
As for the costs of an exit, it could amount to €66.4bn for France, €89.8bn for Germany and €19.8bn and €4.5bn for French and German banks respectively, assuming 50% depreciation of the new drachma.

Reuters Breakingviews editor Hugh Dixon writes that Greece was meant to be a special case for an EU bailout in 2010. But then Ireland and Portugal happened and governments started falling all over the place. So why would Greece remain the only country leaving the monetary union? What would happend to the other troubled countries? The panacea: the European bailout funds EFSF and ESM, provided the IMF chips in more money to actually make them big enough to make a difference.

Nouriel Roubini, who saw it all coming long long before it was actually coming (…), sees an exit as the only viable option. The alternatives: devaluation of the euro, retarded amounts of quantitative easing, reduction of unit labor costs, internal devaluation. All of this kind of leads back to the question how you devalue parts of a currency. As for the exit, Greece’s balance sheet would we absolutely out of control and many European financial institutions would lose a lot of money. Greece would return to the drachma and the European Stability Mechanism (ESM) would provide money to recapitalize the banks. The bottom line: the exit is necessary, despite how painful it may be.

Martin Wolf of the FT points out that while 80% of Greeks want to keep the euro, its the politicians just don’t get their shit together. And then some inductive reasoning:

A departure would create severe dangers. The danger of contagion is obvious. The long-run danger is more subtle. But the eurozone either is an irrevocable currency union or it is not. If countries in difficulty leave, it is not. It is then an exceptionally rigid fixed-currency system. That would have two dire results: people would not trust in its survival and the economic benefits of the single currency would largely disappear.

In public appearances yesterday, both Mario Draghi and David Cameron (less clearly) stressed that they don’t want to see Greece leaving the eurozone. Having said that, they are running out of patience – something everybody’s really short on in Europe.
Do we know more now? We certainly do. Nonetheless it isn’t really clear what is going to happen. It looks like Greece will exit the euro. It probably should, disregarding the non-existence of an exit clause. It probably should have already done it over Christmas. Needless to say, this won’t be pretty, but what’s the world to do? The political turmoil that all of Europe is finding itself in these days is likely to continue until economic growth is restored, whenever that may be…

Have a good weekend.

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Protectionism vs. globalization, round 65

Recap of yesterday’s May Day protests:

Spain saw more than 80 protests, most of which were motivated by the country’s ridiculous unemployment figures. InGermanymore than 400,000 unionists went on the streets showing their discontent with the government’s austerity measures. Obviously, there were demonstrations in Greece and France as well, but since that’s pretty much the norm now, it doesn’t seem worth mentioning. read article

In the US, most expected Occupy protests were peaceful, except for an “anarchist faction.” (Also, great picture, Reuters…)

A very fitting comment from an FT reporter on the interweb:

A thought: shouldn’t the “austerity vs growth” debate in Europe have been settled before austerity was hardwired into EU law?

In the NetherlandsGeert Wilders, leader of the far-right freedom party, has announced that his campaign for the general elections in September will advocate a Dutch exit from the EU. In an interview with new broadcaster NOS, he said

“We can be a member of the European Economic Area just as Norwayor of the European Free Trade Association, as Switzerland.”

This is really upsetting for a whole truckload of reasons. First and foremost, the only thing that keeps Europe from [continuously] falling into pieces is the interconnectedness of its countries. Arguably, a contract that forces nations into a union is worth more than alliances of independent parties. What is more, it’s like we’ve left the peak of globalization and the appreciation thereof far behind us and all that’s left is Occupy, a broken EU and protectionist policies.

On Project Syndicate, former LSE director Howard Davies, argues why protectionism is bad.

Tonight will see the last stand [off] between Nicolas Sarkozy and Francois Hollande. The 2.5hr debate, which I expect to be filled with contradictions and anti-European statements and which the French expect to be watched by 20 million people.

Otherwise, Germany has added a bureaucratic layer for oil companies by forcing operators Germany’s 14,700 gas stations to register their purchases and prices to harmonize [consumer] prices across the country. Needless to say, the industry is little amused. Also, now that it’s May, it’s time to have a look at how the world was doing in April. The answer is pretty consistently ‘shit’… read article

So long.

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…and the EU keeps getting it wrong

EU fluff language has reached another peak today, with Michel Barnier saying financial regulation was a “work in progress,” representing “a balance between flexibility and harmonization […] to ensure that financial actors, be they banks or hedge funds or other financial institutions are appropriately regulated.” Thank god all players in financial services are the same so that we only have to have one big fat rule book for all of them. It’s nice when policy making is so comprehensive. Almost seems like we’ve missed something here… read article

Meanwhile, an 11 year-old Dutch boy is solving the eurozone problem [and gets recognized by the Wolfson Economics Prize]: read article

The German, sorry, European fiscal pact is entering the next round. Yesterday afternoon, German finance ministerWolfgang Schaeuble presented the plan, which would replace budget sovereignty with technocratic supervisors, preferably from Germany. Call it the German Union, Zerohedge calls it a dictatorshipread article

Clash of the titans: Reuters and Bloomberg now each employ more journalists than the New York Times and Washington Post combined, plus they actually have substantial revenue. That’s how the romance of print newspapers will actually die, killed by data providers tempting writers with better salaries. The Reformed Broker says “Bloomberg, Reuters are becoming the Coke and Pepsi of Journalism.” read article

Daily Factoid from MarketBeat: On April 3, 1948, Harry Truman signed the Marshall Plan designating $5bn in aid to 16 European countries. Five billion dollars. That’s like what Greece runs through in a day…

To put that number in contemporary context, UK companies spent £5bn only on online advertising in 2011. Times have changed. A bit. read article

So long.

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Stimuli and mercantilism. That’s Europe for you.

There won’t be a news brief tomorrow, 13 March 2012.

After the Greek bond swap went through with less than 90% participation of private investors; those who didn’t want to play ball were forced into it by use of collective action clauses (CACs). In return, $3.2bn worth of credit default swaps were activated. Here is how that works.

So Greece avoided involuntary default and the evil investors got a taste of their own medicine (…), but as Felix Salmon wrote on Thursday,

This is important to remember: just because bondholders are taking a haircut, doesn’t mean this isn’t a bailout.

The EIB (European Investment Bank) is looking to give Greece another €1bn stimulus; the country is also entitled to another €20bn of structural funds from the EU, to be used for regional development until 2013read article and on to other matters, such as Spain, Portugal and Italy…

Meanwhile, Evangelos Venizelos, the current Greek minister of finance, who has the charisma of a potato, confirmed that he will run for the office of prime minister in the April elections for the socialist party PASOK. His main competitor, conservative Antonis Samaras, is currently ahead in the polls.

On another note, does anybody else think £1 is a lot of money for a cucumber from Tesco? What is the world coming to…!

Nicolas Sarkozy gave his re-election campaign a touch of old-school mercantilism over the weekend. He called for more trade barriers to boost domestic production and build France up again from the inside out. Arguably. Oh yeah, and he also wants to halve immigration influx. According to Reuters, Sarkozy has the worst popularity rating of all French presidents everread article

And finally, don’t hate the banker for his bonus, he’s just a herd animal (credit to Andrew Oswald of the University of Warwick). read article

So long.

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Happy Brits, unhappy Greeks and very happy private equity investors

After the manufacturing PMI rose earlier this week, the British services sector is doing better as well. Forecasts saw slow growth for the month of January, but au contraire, it was its fastest expansion since March 2011 according to Reuters. read article

Otherwise, you might have noticed that there is still no deal on the private sector involvement in Greek debt. The ECB still refuses to partake in the discussions, which is shifting the whole scenario to the right side of this [FT Alphaville] graphic. More detailed guesses on “logical [next] steps” hereZero Hedge says none of this matters, as it just comes down to how much Greece is willing to fulfil German demands in order to be ‘saved’. read article

If you’re really really interested in the Facebook IPO, or more accurately in the company’s structure, who got what and what happens if Mark Zuckerberg dies, have a look at this (See p.133 for Accel Partners share value increase since 2005. One word: WHOA.). And if you’re lazy, have a look at this infographic that puts Facebook nation into perspective.

A new story from Joris Luyendijk’s Banking Blog: this time about the very end of the food chain, being an intern. The girl, M&A intern at a major bank at the time of the interview, sounds like about a good handfull people I know. Not generic, just familiar. She talks about thankless work and the “bruising” process of applying for jobs. I don’t think anyone who got out of university in the last four years would disagree, particularly with the latter… read article

On that happy note, have a good weekend!

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Woohoo, another EU summit!

It’s summit-day again and the EU comes together to argue about policy. On the agenda, designating €20bn to job creation and loans to small and medium-sized companies and setting up the ESM (European Stability Mechanism) as a permanent bailout fund. The IMF [i.e. Christine Lagarde] also wants to see a ceiling (maximum amount committed to the fund) discussed, but Germany [i.e. Angela Merkel] is only willing to do that once the fiscal pact, leaving the control of national budgets to Brussels, is passed. The meeting starts at 2pm GMT. All in all, this is the 17th fun EU-get-together in the past two years (That’s 0.7 summits per month! Who has time for this?). Here is the list of attendees, I never realized Finland’s prime minister, Jyrki Katainen, was a minor.

But, Greece and Germany are headed for collision. Angela Merkel wants her new shiny budget rules to be enforced on Greece asap, the Greek reaction was this: view image
Reason for the outrage was mainly the proposed cut of 13th and 14th monthly salaries in the Greek private sector and lowering of minimum wage.

Very amusing fact of the moment, Bloomberg and Reuters have somewhat contradictory headlines on the same topic. The former writes “Euro-Area Economic Confidence Rises Less Than Forecast“, while the latter proclaims “Optimism builds in euro zone economy“. See the difference in sentiment? Does that mean it’s neutral? The bottom line is, the economic sentiment indicator rose from December, but didn’t reach the mark predicted by surveys. Meanwhile, inflation is rising [slightly] in Germany, due to fuel and food prices, and Spain is in a recession.

Otherwise, Ryanair will up its prices by approximately 12% on the year-on-year comparison (Q4) and get rid of 80 aircraft to effectively deal with rising fuel costs. Other than that, the budget airline is doing pretty well and just revised its net profit target for Q1 upwards. Also, and I was not aware of this, because I don’t fly them, Ryanair apparently sells smokeless cigars on board. Puzzling… to say the least. read article

So long.

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Of procrastination and the 1%

Rumor has it, Greece might not blow up in our faces (yeah, right…). Olli Rehn, European Economic and Monetary Affairs Commissioner, said that a deal is close. “If not today then over the weekend.” So now this is aboutprocrastination… read article

Meanwhile, SocGen economist James Nixon is running around declaring a eurozone credit crunch, after ECB loans to the private sector came in at 1.1% less than estimated. read article

Arianna Huffington and Felix Salmon advocate moving the World Economic Forum to Greece (“Maybe an island…”), while sitting in what looks like the storage closet of a board game-fanatic. watch video

Salmon also has an idea why Davos delegates don’t care about the Occupy “movements” (and yes, I’m still putting that in quotation marks, because if we talk about inchoate things, Occupy X is pretty high up on my list). read article

Stratford, primarily known to me because it’s not in zone 1, will shortly become the hub of athletic excellence when the 2012 Olympics come to London. This is what the shopping list for Occupy Stratford and its 16,000 ripped attendeeslooks like: read article

Why loving Apple and hating Goldman Sachs is an example of inconsistent preferencesread article

And finally, in case you have been educated in economics and biology, a chart showing why the 1% end up becoming investment bankersview chart (read full article)

Have a good weekend.

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