Note, this first link builds on a story that Claus Vistesen first presented in June about Danish covered bonds. Niels Jensen took a different view in September. Punters are now taking their bets, with Danish CDS rising today as a result. The three posts on that issue are as follows:
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The hidden contingent sovereign liability of Danish mortgage bonds, Jun 2011
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Will ARMs de-stabilise the covered bond mortgage system?, Sep 2011
For context see “Is Ireland the Next Iceland” from November 2008 and “Too big to rescue” from February 2009. This has to do with the credibility of the sovereign to rescue banks if asset quality erodes and capital is impaired. I have argued that Ireland tried to do the Swedish approach but its banking sector was too large.
Today’s links follow:
- Luxor Capital Q3 Shareholder Letter: Long Denmark CDSs, Denmark is on Verge of Icelandic Style Crash | ValueWalk.com
Danish bank regulators, like many European bank regulators, took, in our opinion, undue comfort in the risk-weighted capital models of Basel II. Simplistically put, Basel II did away with ratios based upon tangible equity to total assets in favor of "new and improved" ratios that sought to risk-weight every bank asset. The impact of Basel II was two-fold: 1) it did away with non-risk-weighted asset ratios and 2) it allowed banks to internally risk-weight assets to model. In Denmark’s case, this led the banks and regulators to come to the following conclusion: by law in Denmark, you can form a bank with $8MM of equity capital and borrow (with government guaranteed deposits and wholesale borrowings) $992,000,000 to fund a $1BN residential mortgage portfolio of, as you will see later, largely one-year, floating rate, interest-only, single family mortgages and you’d be considered "well capitalized" by the regulators.
- Brazil’s rapid growth shudders to a halt – FT.com
Gross domestic product contracted 0.04 per cent in the three months ending on September 30 compared with the previous quarter as weakness in the industrial sector spread to Brazil’s once vibrant consumer.
- What Can Save the Euro? – Joseph E. Stiglitz – Project Syndicate
The prevailing view when the euro was established was that all that was required was fiscal discipline – no country’s fiscal deficit or public debt, relative to GDP, should be too large. But Ireland and Spain had budget surpluses and low debt before the crisis, which quickly turned into large deficits and high debt. So now European leaders say that it is the current-account deficits of the eurozone’s member countries that must be kept in check.
- Citi: Euro Breakup Would Result in Years of Global Depression – MarketBeat – WSJ
If they read and believed Citigroup economist Willem Buiter, there’d be a bit more panic right now. That’s because Buiter really thinks a breakup of the euro would be a global catastrophe resulting in years of economic horror, and the Europeans right now don’t seem to be particularly aggressive in trying to prevent that from happening.
- Bernanke Escalates Foodfight with Bloomberg: Score Bloomberg 1, Fed 0 « naked capitalism
Consider the dead bodies in this room: the costs of the REAL programs are not yet known, so any made money/lost money declaration is premature. In addition, the aggregate support, which comes out of more buckets than just the emergency lending programs, and the total support was necessary for the banks to be able to pay back the facilities they did pay down. How much of this operation is really tantamount to someone refi-ing their house (an analogy the Fed uses), except the nature of the inflows and outflows is masked by all the other action on bank balance sheets?
- The Irish Economy » Worse than Sinn
the Euro area is undergoing a real crisis and there is a huge need for an informed public debate on potential solutions. We don’t need academics making up fake crises and stirring intra-European resentments based on a misunderstanding of central bank arcania.
- My Budget Predictions For 2012: Expect Even Less | Capital Gains and Games
There will be no movement on the federal budget until after the 2012 elections. Does anyone really think it will be easier in an election year for either political party to agree to a compromise that its base doesn’t want and won’t support than it was this year when it was already virtually impossible? A better question: Why does anyone think that the intractable budget politics of 2011 that led to repeated failures on every budget-related effort will be any different next year?
- Has the Global Business Cycle Ended? « naked capitalism
So, what does all of this say about the global business cycle? Firstly, we’d have to say that without the US, global production would be in big trouble. Everywhere else is slowing swiftly.
- The Irish Economy » Fiscal Union in the 1990s…
Let’s cast our minds back to, say, October 3rd. 1990. An asymmetric shock (re-unification) struck the unsuspecting Bundesrepublik. The deficit, on the Maastricht definition, stayed below 3% until 1994 and then hit, hmmm, 9.5% of GDP in 1995. Gott in Himmel! The ECJ then pronounced that Germany was liable for ‘automatic sanctions’ and in 1996 ……
- Bank of England holds quantitative easing at £275bn | Business | guardian.co.uk
Bank of England keeps interest rates at 0.5% and puts more emergency medicine for economy on hold, despite more evidence recovery is grinding to a halt
- Eurozone crisis could plunge airline industry into $8bn loss, IATA warns | Business | guardian.co.uk
International Air Transport Association said the best possible outcome, based on EU governments ‘muddling through’ and resolving the eurozone crisis, would be for global airlines to generate total profits of $3.5bn
- Citi to Cut 4,500 Jobs – WSJ.com
Citigroup Inc. will eliminate roughly 4,500 jobs over the next few quarters, or about 1.6% of its work force, as volatile financial markets and new regulations crimp profits. Vikram Pandit, Citigroup’s chief executive, disclosed the move on Tuesday afternoon at a Goldman Sachs investor conference in New York. Mr. Pandit said Citigroup would take a $400 million charge in the fourth quarter to cover severance and other expenses.
- Spain Weighing a Fast, Costly Cleanup of Banks – WSJ.com
Spain’s incoming prime minister, intent on curing the country’s ailing banking sector, is considering cleanup plans that could dwarf the cost of previous efforts, including the creation of a state-funded "bad bank" to acquire toxic assets or a move to force banks to dramatically boost loan-loss reserves, people close to the situation say.
- The arrogance of eurozone elites could kill the European Union – Telegraph
Disaster in the eurozone will lead to a democratic crisis unless EU reforms have popular consent.
- Economists see France losing AAA in 3 months: Reuters poll | Reuters
France will lose its AAA credit rating early next year regardless of last-ditch efforts by President Nicolas Sarkozy to resolve the euro zone crisis at an EU summit this week, a Reuters poll of economists showed on Wednesday.
- GOP Candidates to Trump Debate: You’re Fired – Walt Cronkite – NationalJournal.com
Planned debate strikes some as a publicity stunt for the moderator.