Fixing the Eurozone

BCG Study, March 29, 2012 by Daniel Stelter, Marc-Olivier Lücke, and Dirk Schilder

The successful haircut imposed on private holders of Greek debt in early March 2012 has led some observers to conclude that the euro zone is finally on its way toward solving its debt problems.

The move followed the decision of the European Central Bank (ECB) in December 2011 to lower its core refinancing rate to 1 percent and, in cooperation with the U.S. Federal Reserve, to ease the borrowing of U.S. dollars for banks via foreign central banks. The ECB has also offered two new longer-term refinancing operations (LTROs) with three-year maturity dates. These steps have significantly reduced bank financing costs and improved the funding conditions for sovereigns in the euro zone periphery. In response to the LTRO offerings, European banks borrowed €489 billion in December 2011 and a record €530 billion in February 2012.

The High Cost of Gambling on Oil

Date: 11-04-2012
Source: The New York Times By JOSEPH P. KENNEDY II

THE drastic rise in the price of oil and gasoline is in part the result of forces beyond our control: as high-growth countries like China and India increase the demand for petroleum, the price will go up.

But there are factors contributing to the high price of oil that we can do something about. Chief among them is the effect of “pure” speculators — investors who buy and sell oil futures but never take physical possession of actual barrels of oil. These middlemen add little value and lots of cost as they bid up the price of oil in pursuit of financial gain. They should be banned from the world’s commodity exchanges, which could drive down the price of oil by as much as 40 percent and the price of gasoline by as much as $1 a gallon.

Today, speculators dominate the trading of oil futures. According to Congressional testimony by the commodities specialist Michael W. Masters in 2009, the oil futures markets routinely trade more than one billion barrels of oil per day. Given that the entire world produces only around 85 million actual “wet” barrels a day, this means that more than 90 percent of trading involves speculators’ exchanging “paper” barrels with one another.

Because of speculation, today’s oil prices of about $100 a barrel have become disconnected from the costs of extraction, which average $11 a barrel worldwide.

Why Germany Should Leave the Eurozone

A very smart consideration. And Business Week isn’t just a nobody (hfk)

Date: 12-04-2012
Source: BusinessWeek

The departure of Germany would take pressure off the weaker countries, and the costs of breaking up the Eurozone will have to be paid no matter who leaves.

Most discussion about a potential breakup of the Eurozone assumes that Greece and other financially troubled countries would be the ones who ended up abandoning the common euro currency. But there’s a compelling alternative to that conventional wisdom – that the true problems of the Eurozone could be best addressed if Germany were the one to leave, accompanied, perhaps, by a few other rich countries.

The argument for the weak countries leaving is that they would be able to escape the austerity policies imposed by Germany. Once they had abandoned the euro, their new national currencies would quickly depreciate, making their economies more competitive internationally because their exports would be cheaper for foreigners to buy. In the process, of course, the weak countries might have to default on their euro-denominated debt, but that would be the inescapable price of freedom. Presumably, the richer European countries would then try to establish a smaller, more viable common currency zone.

LTRO Failure Full Frontal as Spain 10 Year Approaches 6% Again

Author: Tyler Durden · April 10th, 2012 ·RGE EconoMonitor

US data this week is relatively sparse (as usual in a post payroll week) leaving little evidence over the next few days to progress the seasonality debate but after a long weekend of derisking in mind and now in reality, Europe is front-and-center once again. Spain (and less so Italy) has decompressed to its worst levels of the year (5.96% yield and 425bps spread on 10Y) has now lost all of the LTRO gains as the curves of these liquidity-fueled optical illusions of recovery bear-flatten (as front-running Sarkozy traders unwind into the sad reality – most specifically for Spain – that we described in glorious must read detail here).

Divergence and decoupling remain sidelined also as Deutsche Banks’ Jim Reid notes the 4-week rolling beat:miss ratio in the US macro data has fallen to 24%: 73% (3% in line) from a recent peak at a string 70%:30% on February 29th. His view is still that in a post crisis world, especially as severe as the one we’ve just been through, Western growth is going to continue to be well below trend for many years and with more regular cycles. With Spain teetering on the verge of a 6% yield once again, we are still off the record wides from late November but not by much as the vicious cycle of sovereign-stress-to-banking-stress-to-banking-stress re-emerges in style. The European situation is still incredibly political and while we’d expect much more intervention down the line, expect the discussions and rhetoric to be fairly tough. The ECB last week indicated that they felt the recent widening in Sovereign spreads was more due to sluggishness in the pace of reforms. They are therefore unlikely to intervene in a hurry. So if Europe does need further intervention it is likely to need to get far worse again first.US macro data is missing expectations more and more as US decoupling myths get exposed as seasonal adjustment folly…