What might history tell us about the Greek crisis? - China Financial Markets
China bank debt repackaging, loan growth raises risk of crises, Fitch says - Bloomberg
Ben Bernanke needs fresh monetary blitz as US recovery falters - Telegraph
The next Icelandic banking crisis - Reuters
Sanity in the offing? - Economist
Why isn't the Fed doing more? - Macro and Other Market Musings
World trade volumes dropped in April - Wall Street Journal
Local govt debt could trigger financial crisis - China Daily
Print away your troubles - Economist
Get me a job, Ben! - Slate
Repent at Leisure - Economist
The Renmbinbi runaround - New York Times
The banks keep stealing -- Why do we keep paying? - Business Insider

No Relief from the ‘Trilemma’

- "The PBoC surprised markets at the weekend by removing the currency peg to the US dollar. Not surprisingly, the lack of explicit detail in the PBoC’s communication left investors divided about how significant the appreciation is likely to be."
- "Our China economics team’s prescient call on a summer de-pegging before the G20 summit was for a modest appreciation this year and a continuation of the appreciation into 2011."
- "If this change in policy is a precursor to a more flexible exchange rate regime, then it is a welcome first step away from political frictions and towards a more balanced domestic economy in China, and a more balanced global economy as well."
- "In the short run, however, the predictability of the appreciation may actually increase the constraints on policymakers, in our view. The move to a more flexible exchange rate should, in theory, provide more independence to monetary policymakers."
- "However, the predictable nature of the current regime means that any policy tightening could exacerbate capital inflows and lead to even greater accumulation of reserves."
Morgan Stanley Global Monetary Analyst 20100623

In The Shadow Of Fear

- Overview: In the shadow of fear "The immediate economic and financial context remains market supportive. However, we expect market fears to cast a shadow on EM assets: investors are, justifiably in our view, increasingly focused on the riskier medium-term outlook, hence we are gradually fading our emphasis on the cyclical recovery as a market driver. Nevertheless, we continue to expect EM outperformance as emerging market countries are less vulnerable to the fiscal challenges facing industrial economies."
- Asia: Policy normalisation to continue "GDP growth is expected to slow to 7.6% in 2011 from 8.8% this year, as global PMIs peak, the inventory cycle draws to a close and fiscal stimulus dissipates. Excess capacity is largely absorbed, core CPI is close to trend and, outside China, credit growth is accelerating. Monetary conditions are likely to continue to normalise, driven by modest currency appreciation, cautious rate hikes and further quantitative measures."
- EMEA: Sustaining recovery in times of euro angst "In light of a weaker euro, fiscal consolidation in the euro area, and delayed rate hikes in core markets, we see EM EMEA also focusing on fiscal consolidation while leaving monetary policy looser for longer. Inflation trends support this; the growth outlook is unchanged."
- Latin America: Cruising "Amid a volatile world economy, Latin America’s economy has been remarkably uneventful. Growth has been fast and driven (almost everywhere) by domestic demand. While solvency conditions remain strong, fiscal policy is somewhat procyclical."
- Asia: Recovery on track; beware of tail risks "We enter the second half of the year still positive on EM assets and look to be cautiously positioned for a recovery. Headline risks continue to present tail-risk events, such as Europe, and regulatory changes. China’s currency reform may spark a rebound in risk-taking in Asia."
- EMEA: Sailing close to the wind "Price correction and de-positioning have improved the EMEA market technical outlook. However, the proximity to the key market risk – Europe – continues to produce crosswinds for EMEA assets and tail risk trades warrant greater attention than usual."
- Latin America: Reassessing risks "We remain comfortable with risky assets in Latin America, particularly in credit and FX, but we are keeping an eye on hedging strategies and relative value. In low beta credit space, Colombia remains our favourite pick, and we prefer Argentina over Venezuela.
- EM Corporate Credit: New issuance takes a vacation, but solid fundamentals remain "We view the recent pullback as an opportunity to add corporate exposure, given the strong fundamental backdrop, but expect credit differentiation to gain importance when technicals ease. Corporate liquidity, earnings and commodity prices are likely drivers."
Barclays Emerging Markets Quaterly June2010

China’s gambit

- Clever move. "Last Saturday, China announced its intention to (further) enhance the flexibility of its FX regime and to permit an orderly appreciation of the yuan (p. 7-8). The move was, however, more of a political concession ahead of the G-20 summit tomorrow than a material contribution to the sustained reduction of global economic imbalances."
- Appreciation. "It would, namely, be unwise to bet on a rapid and extensive elimination of the pronounced undervaluation of the yuan. The central bank will not permit anything more than a gradual, moderate revaluation of the currency; that is also what investors expect. This expectation is, however, in China’s vested interest, since it will help curb inflationary pressure and permit a rise in real wages."
- Imbalances. As a result, the impact on the real economy will, however, also remain modest. A sustained reduction of the current account imbalances should be expected at best over the medium term. In the short term, China’s gigantic surpluses and the high US deficit will likely even continue to increase (J-curve effect)."
- Side effects. "On top of that, the rest of the world is facing the prospect of potentially higher government bond yields and rising (import) prices. This applies first and foremost to China’s main customer and investment country, the US. China holds 11% of all outstanding Treasuries and, therefore, more US bonds than, for example, US households or the Fed. And the days of imported deflation from China are probably gone forever."
- Homework. "The next move is now up to the US. While China is moving, at last, in the right direction, the US savings rate is falling while the trade deficit is rising again. But as long as the US persists in living beyond its means, reducing global imbalances will fall by the wayside."
- Further topics:
– Weekly Comment: Dispute on consolidation.
– UK: Emergency budget – an assessment.
– EMU: Deleveraging hurts consumption and investment activity.
– Data outlook: Pronounced job losses in the US.
– Market outlook: EUR temporarily stabilizing.
Unicredit Friday Notes 20100625

Euro Compass: Still on track

- "Six months after the publication of our 2010 Outlook, we provide an assessment of the track record of our main macro calls. We did a good job on GDP and CPI, where our current projections are very similar to the ones outlined at end-2009. Sovereign debt woes and fiscal tightening did not materially change the picture for growth and inflation, mostly because the euro worked as an automatic stabilizer and depreciated sharply since the beginning of the year. The impact on monetary policy, however, was material, with the ECB forced to delay its exit strategy and the refi rate likely to remain on hold until 4Q 2011."
- "Signs of peaking in world growth are starting to emerge, and this will probably translate into a softer export dynamic in the next few quarters. Using a simple VAR (Vector Autoregression) framework, we show how a slower pace of export growth can dent the improving trend in both capex and the labor market."
- "With data for full-2009 now available, we provide an updated assessment of the financial position of the eurozone corporate and household sector. We show that the financing gap of non-financial corporations has narrowed significantly, but we highlight that a return to positive selffinancing requires a sustainable return to profitability, as most of the benefits from the cost side have been exploited. For what concerns households, the savings rate has probably peaked and consumption has embarked into a slow recovery, but weak income dynamics and renewed uncertainty on financial wealth remain an important source of concern."
- "We stress the consistency of our baseline scenario envisaging another year of easing in core inflation. Looking at a broad set of indicators that provide useful information on the turning points in core CPI cycles and “averaging” their messages, we find that our central scenario remains well on track. If anything, several indicators suggest that the trough in core inflation could occur later than we currently expect. At the time of writing, selling price expectations are the only variable that hints at some upside risks to our view."
- FI: "The recent increase in demand at ECB refinancing operations signals renewed tensions in the eurozone money market. The amount of liquidity bid at the 3M and 1W auctions following the expiry of the 12M LTRO in June will signal how many troubled banks are still present in the EMU. We expect the amount that will be rolled-over to be lower than the expiring EUR 442bn. We expect little impact on money market rates after the June expiry as banks will continue to bid all the liquidity they need."
- FX: Despite its recent recovery attempts, there is no indication of a trend reversal and EUR-USD should weaken to at least 1.18.
Unicredit Euro Compass 2010Q3

EM Recommendations

"So far in 2010, the emerging markets have done very well. The benchmarks for both hard- (EMBI) and local-currency bonds (GBI) posted positive returns; EMBI and GBI posted returns of 3.55% and 17.64% during the first four months of the year. We are still bullish about the asset class for the period ahead, but we admit that the ongoing turmoil in relation to Greece and the Exchange Rate Mechanism constitutes a risk for the Central and Eastern European countries in particular. So far, the emerging markets are relatively isolated from the Greek problems, since the public debt and budget deficit of the EM countries are generally much lower. There-fore, the EM countries are not as vulnerable as the PIIGS countries (Portugal, Ireland, Italy, Greece and Spain). In the short term, there is a risk, however, the Central and Eastern Europe will underperform the other EM re-gions due to a higher sensitivity to the euro-zone problems. Provided that the cooperation be-tween Greece and the EU/IMF functions smoothly, we see no reason to reduce exposure to EM bonds. How-ever, investors who overweight Central and Eastern Europe may consider reducing their exposure to the bene-fit of other EM regions. The Greek tragedy is not the only risk factor for the emerging markets. Investors should take into account the many elections in the emerging markets, the possibility of further intervention in the market (like the 2% tax in Brazil and Colombia selling the peso) and the exit strategies from the very relaxed fiscal- and monetary policies pursued around the globe. This publication gives you an overview of our recom-mendations for local-currency bonds."
JyskeBank EM Recommendations 20100624

U.K. Announces Major Deficit Reduction Plan

- "Chancellor of the Exchequer George Osborne laid out a blueprint on June 22 that is intended to reduce the U.K. government’s deficit by £128 billion (about 10 percent of current GDP) by 2016. Although spending bears the brunt of the burden — 77 percent of the deficit reduction comes from the spending side of the ledger—tax hikes, especially an increase in the value added tax, would also play a role in closing the budget gap."
- "Although the fiscal adjustment will likely exert some headwinds on growth over the next few years, we do not expect the U.K. economy to slide back into recession in the near term. Although the increase in the VAT may cause CPI inflation to remain uncomfortably high into 2011, we believe that the fiscal retrenchment will keep the Bank of England on hold for the foreseeable future in order to provide a support for economic growth. The budget plan should provide a firebreak, at least for the time being, to keep the sovereign debt crisis that has engulfed some European countries on the other side of the English Channel."
- "In our view, Chancellor Osborne has put forth a credible plan to bring the government’s budget back toward balance. However, only time will tell if his efforts are successful. Revenue targets will be difficult to achieve if economic growth turns out to be slower than expected, and political opposition could eventually emerge to the spending cuts. It will take a number of years and numerous challenges before the United Kingdom arrives at the end of its thousand-mile journey of fiscal adjustment."
Wells Fargo Special Commentary 20100624

Mainland China’s Growth Momentum to Slow and Currency to Become More Volatile

- "Mainland China’s economy continued to forge ahead in May on the back of strong domestic and external demand, with both investment and consumption climbing at double digit rates. Inflation also moved higher. While the recent spate of wage hikes on the Mainland would exert upward pressure on prices in the longer term if there is no corresponding increase in productivity, consumer price inflation is expected to decelerate in the coming months as food and world commodity prices show signs of easing."
- "The persistent surge of the Mainland’s exports in May amid growing uncertainty in the European economy also raised hopes that the potential impact of the European debt crisis on global trade might be less severe than expected. However, with most of the European countries planning for spending cuts and tax hikes in the months ahead to restore fiscal discipline, mainland China’s exports are bound to advance more slowly going forward."
- "The People’s Bank of China announced on 19 June that it would increase the flexibility of the RMB and re-peg it to a basket of currencies, thus effectively ending the US dollar-RMB peg. It also stated explicitly on 20 June that there would be no one-off revaluation of the RMB against the US dollar. Mainland China has been holding the RMB steady at about 6.83 to the US dollar since mid-2008 in an attempt to cushion the economy from the global financial crisis."
- "Under the new arrangement, there is likely to be more day to day volatility in the US dollar-RMB exchange rate. It also implies that the RMB could appreciate or depreciate against the US dollar. Despite the change, however, we maintain our forecast that the RMB would gradually appreciate, reaching around 6.65 versus the US dollar by the end of this year, or an appreciation of about 2% from its current level."
HangSeng China Economic Monitor June2010

Portfolio Strategist

"A decline in the cost of capital generates the anticipated bounce back. Given the extraordinary collapse in credit conditions in 2H07 all the way into early 2009, corporate cost of capital surged and drastically limited the ability for management teams to find investment projects that could generate high enough returns to justify authorizing new programs. But the tightening of credit spreads and easing in bank lending standards over the last 15 months are now allowing for capital programs to move forward with the traditional ninemonth lag manifesting itself once again."
"A new full-blown contraction in U.S. activity remains unlikely. However, 'oneoff' tax incentives now more clearly show larger positive effects on housing activity than we had expected, and the consequent payback to the downside will be larger. Even weather conditions will exacerbate this pattern."
"Second quarter 2010 earnings season is set to kick off in just over three weeks. Our model reveals that the best performance of our most positive surprises relative to that of our most negative surprises occurred from five weeks before the report date to the week of the report date. Therefore, we find it timely to present our latest results of our earnings surprise forecast model."
Citigroup Portfolio Strategist 20100624

Accounting Policy Update: Critical juncture in global accounting standard setting

- Next 18 months will see a flurry of activity: "Efforts by the FASB and the IASB to converge their respective frameworks will reach their most active level over the next 12 to 18 months. The results of these efforts could notably change accounting standards worldwide and will significantly influence the determination by the SEC as to whether to incorporate IFRS into the financial reporting system for US issuers. It may not feel like it to the casual observer, but we are entering a critical period in standard setting."
- Agenda timeline eased, but still aggressive: "The FASB and IASB recently issued a joint statement indicating a modification in their strategy to improve accounting standards and ultimately converge IFRS and US GAAP. Part of the new strategy will entail staggering the publication of Exposure Drafts to allow for effective due process. Given the volume and complexity of issues that need to be addressed, debated and agreed upon in the next year and a half the timeline looks daunting."
- FASB actively soliciting investor input: "We believe it is essential that the FASB, IASB, and SEC receive feedback from investors given the importance of the proposed changes. This relates to (1) the avalanche of proposals scheduled to be issued in the next few weeks/months, (2) the plan for transitioning to numerous new standards, and (3) whether the US should adopt IFRS or continue to use US GAAP. Investors should be prepared to express their views on these important issues."
GoldmanSachs Accounting Policy Update 20100614

Pension review 2010: Pension palpitations refuse to dissipate for corporate plan sponsors

- Challenges remain for corporate pension plans: "Persistently low long-term interest rates, the recent weakness in financial asset prices, and the multi-year nature of pension accounting rules and funding requirements mean that many challenges remain for corporate DB pension plans and their sponsors. Our updated pension palpitation screens help to identify companies exposed to pensionrelated issues."
- De-risking by corporate plans continues: "Plan sponsors continued to shift asset allocation away from equities and towards fixed income in 2009. We expect this trend to continue as sponsors endeavor to better match plan assets with plan liabilities."
- Significant reforms on the horizon: "The latest round of temporary funding reform efforts in Congress appears to be reaching a conclusion. Reforms to the income statement recognition of pension expense that would reduce smoothing have been proposed by the IASB and may ultimately work their way into US GAAP. This may be the most significant reform effort from a plan sponsor perspective given the increased volatility to reported results."
- Retiree health care benefits going, going, …: "The recently passed health care legislation will likely accelerate the trend of companies reducing or eliminating this benefit for current and future retirees. This would continue a trend that has been in place for several decades."
GoldmanSachs Pension Review 2010 20100611

The euro zone’s low nominal growth is not yet completely reflected in the yield curves

- "When taking into account various factors (deleveraging, slowdown in wages, continued job losses, reduction in fiscal deficits and rise in household savings, we should expect a low nominal growth in 2011 and 2012 in the euro zone, perhaps around 2%."
- "While the financial markets seem to expect the slowdown in real growth, the same is not entirely true for inflation. We therefore believe this should lead to an additional flattening in the euro-zone yield (swap) curve."
Natixis Special Report 20100623

Is it possible to understand why China is making the link between the RMB and the dollar more flexible?

"Two trends have appeared that will definitely persist:
China’s economic policy will seriously try to substitute household consumption for exports and speculative real estate investments as the growth engine;
− growth in Asian countries (and the Pacific) is set to remain higher than growth in OECD countries (United States, Europe) for a long time to come, which means that intra-Asian trade will become increasingly important compared with Asian exports to the United States. Trade with other Asian countries will therefore be increasingly important in China.
The first development reduces the importance of the exchange rate for China’s economic policy; the second development means that China is likely to be more interested in the stability of the RMB's exchange rate against other Asian currencies than in its stability against the dollar, which will lead to significant variability in the RMB’s exchange rate against Asian currencies. At a time when the reduction in the US external deficit with China is likely to make the question of a revaluation of the RMB less sensitive in the United States, China is making its exchange-rate regime more flexible in a perfectly normal way, according to the above. However, we should not necessarily expect a systematic appreciation against the dollar as a result."
Natixis Flash Economics 321 20100623

What would have happened had Greece, Spain, Ireland and Portugal been outside the euro zone?

- "It is now clear that the euro-zone membership of Greece, Spain, Portugal and Ireland has saved them from a default: the ECB is buying (or can buy) their debts, the euro-zone countries have collectively decided that there would not be any default (hence the creation of the stabilisation fund); when the interbank market tightens, the ECB finances the banks directly; and even though yield spreads are high, the levels of interest rates paid by these countries remain much lower than if they were outside the euro zone. This fiscal solidarity has created a need for budgetary rules in order to prevent moral hazard."
- "But before concluding that the euro has been beneficial for these countries, we must bear in mind that if they had not been in the euro zone, their monetary policies would have been far more restrictive in the past; and they would not be in a crisis today. As euro membership can give rise to excess private indebtedness and asset price bubbles, which subsequently turn into fiscal deficits by the recessions they lead to, it is even more important to control private debt and asset prices than to control fiscal policies in the euro zone."
Natixis Flash Economics 320 20100622

Greek Sovereign Debt Crisis: Assessing Contagion to Emerging Economies

- "The impact of Greek Sovereign Debt Crisis on capital flows into Emerging Market (EM) economies has been quite mute. In fact, fixed income funds have virtually remained on positive territory during the current turmoil."
- "A regional comparison leaves Emerging Europe as the worst performer in this episode as happened already during Lehman Brothers’ default. However, CDS rose more then and stock markets fell further."
- "The impact on commodity prices, crucially determined by USD appreciation, has been less severe this time around due to China’s rapid growth."
BBVA Economic Watch 20100623


- Overview: "A G20 to cover up disagreements?"
- Japan-Q1 2010 Flow of Funds Accounts point to surge in private savings: "Strong overseas demand and very accommodative policies resulted in a widening of the financial deficit of both the rest of the world and the government to 3.2% and 6.1% of GDP, respectively, in Q1 2010. By contrast the surplus of the private sector widened to 9.3% of GDP. In the coming quarters, the government’s financial balance is expected to improve gradually due to higher tax receipts, while the financial surplus of the private sector might decline modestly. Recently, Prime Minister Naoto Kan unveiled a fiscal strategy to reduce government debt. The plan aims to take the primary balance in positive territory again by 2020.
- United Kingdom-Austerity: The new Chancellor presented his first budget on Tuesday, 22 June. He predicted that the budget would return to balance in five years. This target is expected to be achieved thanks to major cuts in spending, with tax increases making only a modest contribution to the fiscal consolidation effort. On the revenue side, the totemic measures include raising VAT from 17.5% to 20% and levying a tax on banks; on the spending side, public sector wages are to be frozen and there will be a 25% real-terms cut in current spending by ministries. However, the Chancellor seems to be minimising the effect of the austerity plan on domestic demand, and in particular on household consumption. The success of the British public finance consolidation plan is largely dependent on returning to sustained growth from 2011.