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November 26, 2011

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Posted: 26 Nov 2011 12:06 AM PST

Fed Watch: Greece Again

Posted: 25 Nov 2011 10:44 AM PST

One more from Tim Duy:

Greece Again, by Tim Duy: Just a day after Greece's ND opposition party "committed" in writing to the details of the October summit agreement, Zero Hedge spots a potentially decisive Reuters story:

The country has now started talking to its creditor banks directly, the sources said.

"There are a number of people in the market who are saying why did (the IIF) take upon themselves this responsibility," one of the people said, asking not to be named.

"In part for that reason, Greece has been talking to creditors individually, just to get their own sense of market sentiment," the person said.

The Greeks are demanding that the new bonds' Net Present Value, -- a measure of the current worth of their future cash flows -- be cut to 25 percent, a second person said, a far harsher measure than a number in the high 40s the banks have in mind.

Banks represented by the IIF agreed to write off the notional value of their Greek bondholdings by 50 percent last month, in a deal to reduce Greece's debt ratio to 120 percent of its Gross Domestic Product by 2020.

In all fairness to Greece, the details of the October summit were somewhat fuzzy (as in nonexistent), and so arguably they are not backing out. But the banks were clearly thinking the ultimately haircut not be as great as Greece is demanding. Once again, the complete lack of useful outcomes calls into question why the Europeans even bother to have summits.

But probably more important is the fact that Greece is now taking a direct role in negotiations. Remember that the previous haircuts were "voluntary" and negotiated by Greece's European overlords to prevent triggering a credit event and CDS payouts. And one has to believe that "following the October agreement" implicitly means the Greeks will not upset the apple cart and trigger a credit event unilaterally. But if Greece is at the table forcing lenders to take massive haircuts, it will be virtually impossible to justify that this is not a technical default.

This is shaping up to be the final test of the credibility of the sovereign CDS market - either exposure is hedged or it is not. Interestingly, either outcome is potentially catastrophic, with the end result being either the unknown outcomes of triggering CDS payouts or a complete flight from European sovereign debt. Maybe both.

I really hope somebody at the ECB is sticking around to work this weekend.

Ideoloogical Bias and Antitrust Law

Posted: 25 Nov 2011 10:17 AM PST

Apparently some judges refuse to enforce antritrust law because "Such judges just do not like antitrust laws for ideological reasons." That attitude -- which is not confined to judges -- explains a lot about detrimental the rise of economic and political power in recent decades. This is Shane Greenstein discussing the proposed merger between AT&T and T-Mobile:

Lawyers invariably ... launch into comments about the uncertain state of antitrust law in the United States, observing that many judges today do not think there is any valid reason to enforce any antitrust law, irrespective of the facts of the case. Such judges just do not like antitrust laws for ideological reasons. Recently such friends have gotten more specific, commenting on the odds of getting past the particular judge assigned to hear the from Department of Justice, as it tries to block the merger.
Political analysts, in contrast,... invariably launch into comments about AT&T's enormous powerful presence in Washington, observing that AT&T has gotten whatever it has wanted from the Obama and Bush administrations. Recently such friends have gotten very specific, about which representatives and senators were most likely to act on AT&T's behalf.

The point he is making, however, is that in this particular instance economics did seem to matter:

To make a long story short, there was not much evidence of benefits. To make efficiency gains AT&T would have to fire quite a few people, but to get the merger past its unions AT&T's management had to promise to preserve jobs. To buy political support AT&T had to promise to build broadband in under-served areas, but independent analysis showed that far cheaper ways to build such broadband than through a thirty billion dollar merger. The economic benefits did not exist. To use an old expression, there was no there there.

And therefore:

The FCC recently announced it would move to have a hearing about the AT&T and T-Mobile merger. In response, AT&T withdrew its application from the FCC, delaying the hearing indefinitely (or until AT&T resubmits the application).

But the fact that the police catch the bad people when (and seemingly only when) the facts are really, really obvious isn't all that comforting. Big banks, for example, appear to be far larger than the size required to take advantage of economies of scale/scope, etc., and the additional size enhances their political clout and the chances of regulatory capture without any clear economic benefits. There are potential costs, large ones -- see the recession. But it's hard to find a solid analysis demonstrating that there's any reason banks need to be so large that they are able to dominate particular markets. However, prior to the crisis instead of looking at these banks with an eye toward reining in their market power, we were told how wonderful such large institutions were -- how necessary firms with so much power are in a global economy. Even now we still hear arguments about how much these firms are needed (and it's still hard to get people to care about this issue).

Anyway, I could go on with this rant -- the problem of large, powerful firms is by no means confined to the financial industry -- but I've made these points many times in the past (starting before the crisis hit) and hopefully the point is clear. To me, the rise of economic power among the few is one of the strongest and clearest indications of how thoroughly economic and political power has shifted to the rich and powerful in recent decades.

Fed Watch: From Bad to Worse

Posted: 25 Nov 2011 09:27 AM PST

Tim Duy:

From Bad to Worse, by Tim Duy: I awoke to this news, via the Wall Street Journal:

Italian two-year and five-year government-bond yields soared to euro-era highs Friday as investors began giving up on the euro zone's ability to break the political gridlock that is blocking a more decisive response to the currency bloc's debt crisis.

Italian two-year and five-year yields climbed to 7.7% and 7.8%, respectively, and the 10-year yield moved further above the key 7% mark to 7.3%.

This just a day after an apparently not-confidence boosting meeting of the leaders of Germany, France and Italy. Perhaps European policymakers need fewer summits, not more?

Contrary to conventional wisdom, Ralph Atkins at the Financial Times views yesterday's European commitment to back off the ECB as a positive development:

My reaction on hearing that Mr Sarkozy had agreed to keep silent was that it would actually increase the ECB's room for manoeuvre. Fiercely independent, the Frankfurt-based institution would have hated any suggestion it was reacting to pressure from Paris. Now, any steps it took would clearly be at its own initiative.

I am sympathetic to this line of reasoning. That said, Atkins gets to the next problem:

Of course, this does not mean the ECB will act. Mario Draghi, new ECB president, sees governments as responsible for resolving the crisis and the central bank as having a limited role. He worries about putting ECB credibility at stake.

Yes, if European Central Bank President Mario Draghi has more room to act, he apparently isn't using it. The ECB's forays into the bond markets appear to be increasingly futile. Via the Financial Times, the ECB is in the market again today:

The European Central Bank again bought Italian and Spanish debt on Friday but analysts have complained that its purchases are no longer sufficient to stem a wave of selling. Yields on the 2-5 year range for Italy were 7.67-7.77 per cent in late Friday trading.

Despite the mess in Europe, hope springs eternal on Wall Street. The early news from Bloomberg:

U.S. stocks rose, snapping a six-day drop in the Standard & Poor's 500 Index, as speculation European leaders will do more to fight the debt crisis overshadowed concern about higher borrowing costs in the region.

I think it is dangerous to attribute too much day-to-day noise to news flow. Still, if this is anywhere near accurate, whoever is left on Wall Street today must still be groggy from Thanksgiving feasting. Zero Hedge attributes the morning rally to hopes the Swiss National Bank will act to support the Euro. In any event, the momentum looks to be fading in the late-morning as reality sets in.

Bottom Line: Europe is quickly moving from bad to worse. To be sure, we should anticipate a rally will follow the eventual ECB capitulation on quantitative easing, but that will only be half the battle. The ECB will only capitulate in return for massive, sustained austerity. It is too late for an easy end to this story.

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