Austerity is not the only option - Financial Times
An Interesting Ratio - Early Warning
China won't dump U.S. Treasuries or pile into gold - Reuters
To Fix Sour Property Deals, Lenders 'Extend and Pretend' - Wall Street Journal
Reserves and other early warning indicators work in crisis after all - Vox EU
Croatia: On The Brink of What? - Credit Writedowns
On Not Owning a Credit Card - New Deal 2.0
Federal Reserve weighs steps to offset slowdown in economic recovery - WaPo
Lumber - Financial Times
Toxic bank assets haven't gone away yet - CNN Money
The Rising Threat of Deflation - AEI Online

European Banks: Who's testing who?

- "The Committee of European Banking Supervisors (CEBS) will be publishing its stress tests on July 23. Following on from our indicative stress test note (“Euro zone stress test”, 18 June), we have expanded our analysis to include the Landesbanks and Cajas."
- "The most important point to make is that although it is the banking sector that is formally being tested, the real test is of the official sector itself: Given the amount of information which is available already, it is not reasonable to suppose that the stress test will provide the bank funding market with important news about intrinsic creditworthiness. The important point being tested is the ability and willingness of the official sector to provide capital to firms which fail the stress test - it is this, not the capital position of European banks, which is the subject of severe market uncertainty, in our opinion."
- "We assess the total bailout capacity of the European official sector as being potentially as much as €900bn, with €130bn available with reasonable availability and certainty:. We would regard the stress test as a “success” in so far as it demonstrates that the political, legal and administrative structures are available to provide an effective lender of last resort to the euro area banking system. Our best case would be one in which it was demonstrated that the resources of the EFSF were available to fund bank bailouts; our worst case would be one in which no evidence was given of available funding. In either case, our favoured stocks would be BNP Paribas and Santander."
CreditSuisse European Banks 20100708


- "“Do not underestimate the eurozone” was the message that Mr. Trichet sent in today’s press conference. It was a message carefully calibrated to instill confidence without sounding too optimistic, and it was exactly the right message to send at the current juncture."
- "Over the last couple of months, fears of a double-dip recession have at times escalated into needless scaremongering that risks undermining already fragile business and consumer confidence, as well as popular support for much needed fiscal and structural reforms."
- "Trichet noted that economic activity indicators in no way justify fears of a double-dip recession, and that if anything European growth is providing positive surprises compared to
excessively low expectations; he went on to stress the importance of fiscal sustainability and structural reforms to ensure robust sustainable growth in living standards. He also argued that many market participants had underestimated the ability of EU and national policymakers to take very difficult decisions, ranging from the EUR440bn stabilization fund to the national fiscal consolidation plans, and that confidence seems now to be gradually returning as investors price in the full import of these policy decisions. He underscored that bank stress tests should now be carried out in the right way and followed up with appropriate steps to strengthen banks balance sheets where needed, but overall sounded guardedly
optimistic that this would indeed happen."
- "I also believe that recent decisions by some individual governments suggest that they might
have acknowledged that courageous steps are needed—Spain is probably the most encouraging example. The next few months will tell us whether governments have the determination to push ahead with reforms. But the publication of the banks stress tests is now
the make-or-break challenge for the eurozone, a one-shot opportunity to clean up the banking system, bolstering balance sheets and investor confidence. If this is done right, Europe should
be able to dispel once and for all fears that a Japanese-style lost decade might lie ahead."
Unicredit Market Sense 20100708

A rather dangerous situation: Excess corporate savings

- "In several countries (United States, Japan, United Kingdom, and Germany prior to the crisis) companies have excess savings in the sense that their profits exceed their investment needs and they are accumulating financial assets."
- "These excess corporate savings reveal an abnormal income sharing at the expense of wage earners. They always generate macroeconomic imbalances:
• if they are offset by household indebtedness (the household savings rate is then low), they trigger a crisis linked to this indebtedness when it becomes excessive (United States, United Kingdom prior to the crisis);
• if they are not offset by household indebtedness (Germany, Japan), there are excess savings overall in the country, an external surplus and chronically sluggish domestic demand."
- "It would therefore be better if countries conducted income sharing policies leading to faster pay rises when corporate savings become excessive."
Natixis Flash Economics 343 20100701

How to prevent the euro zone from being stifled by debt (public and private): An unorthodox proposal (which has no chance of being accepted)

- "The euro-zone economy risks being stifled by debt (public and private) due to its low level of long-term nominal growth. A reduction in debt ratios therefore requires an effort of public and private savings and spending cuts which destroys growth (as was seen in Japan for private debt, whereas in the euro zone public debt is also likely to be involved and the situation is therefore likely to be worse than in Japan)."
- "To avoid this situation of asphyxiation by debt, the following (desperate) plan could be imagined:
force through a 20% wage increase in all the euro-zone countries;
give the ECB instructions not to react to inflation but to devalue the euro by 20%."
- "Price competitiveness would then be maintained and there would be a reduction in debt ratios due to negative real interest rates, while demand and investment would be stimulated."
- "Be reassured, this plan will never be applied."
Natixis Flash Economics 342 20100701

Financial regulation: It is the incentive effects that count

- "Banking and financial regulation is often analysed in a superficial way. For instance, finance and banks must be taxed because profits in these sectors are high; financial intermediaries must hold more capital to reduce the risk of going bankrupt."
- "But in order to be effective, financial and banking regulation must be based on the incentives it generates for financial intermediaries. Let us take a few examples:
taxing financial transactions is effective because it encourages holders of financial assets to hold on to them longer. A shortening of the holding period for assets actually generates a harmful variability, i.e. erratic capital flows to emerging countries, abnormal asset price volatility and discouragement of issuers and institutional investors;
taxing banks based on their total assets is most often counterproductive. It probably does not discourage the banks from engaging in excessively risky activities - but it probably encourages them to reduce the size of their balance sheet, and therefore essentially to reduce lending;
an increase in capital requirements for banks, not linked to the risk they take but a uniform increase (which is to a large extent the case with the changeover from Basel II to Basel III) does not lead banks to take less risk (which is the case when the additional capital is linked to the banks’ most risky activities), but either to reduce credit supply (to limit capital
consumption), or to take more risk (to obtain a return on the excessively large capital)."
- "It is therefore the specific incentive effects of financial regulation, and not its characteristics - which at first sight may seem suitable - that must be analysed."
Natixis Flash Economics 341 20100701