Europe
I would like to present today some reports that are well worth the read.
First, let met suggest a text written by a man who could hardly be characterised as a europhile, Jacob Funk Kirkegaard from the the US think tank, Peterson Institute for International Economics: In Defense of Europe’s Grand Bargain.
His very favourable analysis of the measures taken by European governmental and monetary officials to overcome the sovereign debt crisis within the eurozone coincides with many of the points we have been making for some time now in these lines (Thaler's Corder 13-05-10: ‘Is the ECB experiencing its epiphany?’), although we differ with him about his insistence that Greece will default on its debt in the medium term.
On the same topic, it is worth noting the intelligent about-face performed by Mr Ackermann, the boss of Deutsche Bank, with respect to the probability of the Greeks defaulting.
The day after the European rescue plan, on 11 May, Mr Ackerman responded to a question about whether Greece would set up a credible austerity budget and meet its debt payment schedule by saying:
I consider it doubtful whether Greece over time will really be in a position to achieve this. WSJ-ZDF.
But yesterday, following a banking conference in Vienna at which Mr Papandreou spoke, Mr Ackermann reversed position:
I’m confident that based on the personal commitment given by the prime minister to implement the necessary reforms -- however difficult they are, even sacrificing his own political future -- convinces me it will happen -- It will enable them to service their debt.
In addition, check out this report by Paul Mc Culley, who, in addition to providing a very insightful analysis of the give-and-take ECB-Ecofin agreement, speaks in a language which leaves a pleasant ring in our ears:
Then, there is our Cypriot hero, Mr Orphanides, who expressed his views on the Greek situation and the inflation outlook in Europe:
There is an element of absurdity in talking about a high probability of default by the Greek government right now.
The upward revision in the inflation forecast is primarily driven by energy and other commodity price increases.
It does not reflect an underlying inflation concern.Indeed, core inflation in the euro area has been trending down.
In light of these developments, I do not view high inflation as a concern.
Inflation expectations also remained well anchored.
And for those curious minds, here is the quarterly BIS report, which gives on page 18 some useful although unfortunately a bit outmoded (31/12/09) information on the exposure of banks to peripheral eurozone nation debt.
BIS Quarterly Review, June 2010: International banking and financial market developments.
As of 31 December 2009, banks headquartered in the euro zone accounted for almost two thirds (62%) of all internationally active banks’ exposures to the residents of the euro area countries facing market pressures (Greece, Ireland, Portugal and Spain). Together, they had $727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece (Graph 3).
French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the residents of these countries. This amounted to 61% of all reported euro area banks’ exposures to those economies.
French and German banks were most exposed to residents of Spain ($248 billion and $202 billion, respectively), although the sectoral compositions of their claims differed substantially.
French banks were particularly exposed to the Spanish non-bank private sector ($97 billion), while more than half of German banks’ foreign claims on the country were on Spanish banks ($109 billion). German banks also had large exposures to residents of Ireland ($177 billion), more than two thirds ($126 billion) of which were to the non-bank private sector.
China
Just a small point on a subject we have been covering closely in this country, the quasi governmental SPVs which speculate on real estate. The State Council is is finally trying to put an end to these vehicles and dismantle them.
Victor Shih's figures we used in the Thaler's Corner of 31 May (‘More Credit data…’) were taken up by this article from the China Daily:
The country is continuing along the Minsky path.
Asset allocation biases and advised option strategies
· The long-term macro biases remain downward on eurozone government yields and negative on risky assets (equities, European real estate, commodities) and a deflation/depression scenario, which will require much more effort by the ECB than a shame-faced QE.
· Our short-term biases: a tactical rebound of about 10% on Eurostoxx indices (2800?), accompanied by a narrowing of sovereign debt spread, resulting in a 2-point decline on the Bund.
Disclosure: Long 20 years OAT and 30 years BTP Zero Coupons, EDF Corp 5 Years 4.5%, Grece 2 Y and 10 Y bonds, Long Eurostoxx50 ETF