5th Jul - Weekender: Best of the Week

The best articles from the ending week. Last week’s ‘best’ here.

The main news of the week were the ECB’s and BoE’s move towards forward guidance – in case of the ECB, it is already done, and BoE is expected to introduce such policies in August. The EURUSD was hit hard, while asset markets loved it.

In Europe, Portugal is in a tight spot, but with the usual recipe of the Troika turning a blind eye and some political posturing, things will probably continue as they were, at least until the German elections are over.

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EUROPE

The EU Executive Is Being Assailed from All Sides – WSJ

Some governments are beginning to realize the consequences of their actions. Having bought the mostly German prescription for dealing with the crisis, they are now suffering buyers' remorse.

Eurocrisis Conversation with Peter Bofinger – Sony Kapoor

Note: Peter Bofinger and Sony Kapoor wrote the original Growth Compact for the EU in late 2011, which was then adopted in such a watered down form so as to make it ineffective.

France and the Eurozone recovery – Sober Look

The biggest threat to near-term recovery in the Eurozone is not the periphery. It's France - which represents over a fifth of the area's GDP.

The Road to a European Banking Union: Part I – PIIE

The Road to a European Banking Union: Part II – PIIE

The Road to a European Banking Union: Part III – PIIE

  BOE & ECB MEETINGS

ECB After-thoughts: As dovish as can be – TradingFloor

Juhani Huopainen: By introducing forward guidance, hinting at possible cuts on all interest rates, the ECB acted in as dove-like a manner as it could without resorting to balance sheet expansion.

Bank of England: how big is the Carney premium? – Danske Bank (pdf)

What form forward guidance might take, if implemented at the BoE, is the big question. It could be a Fed type rule with thresholds on unemployment or similar, it could be the 'old' Fed type rule with a specific date before which no rate hike should be expected, it could be a Japanese type rule with targets on money balance, or something new like a NGDP type rule etc. This uncertainty should be reflected in a market risk premium going forward

Q&A: What is 'forward guidance'? – BBC

What is forward guidance and what does it mean? – Nordea

All in all, forward guidance seems to be the new black among central bankers. The soft guidance from the ECB today has a significant degree of discretion to it, which means that Draghi can use it to guide market expectations and the risk sentiment. However, it is not actually a promise and should probably not be seen as more than an indication of the ECBs clear easing bias.

Forward guidance crosses the Atlantic – Free exchange / The Economist

Quite how effective forward guidance will prove to be in Europe is debatable. But another irony about today’s flurry of activity is that it has sprung from a failure in the Fed’s communication.

  PIIGS

There's no suffering too great if it's for the sake of the euro – and Ireland proves it – The Telegraph

Credit Contraction Exceeds 6% in Spain, Highest Ever in Crisis – Mish’s

Portugal and the euro: Floundering on – The Economist

Portugal: Revisiting crisis backstop facilities in Q&A – Danske Bank (pdf)

In the light of the PGB sell-off we revisit the current crisis backstop facilities in this

Q&A

Portugal Weighs on Euro – Marc to Market

Portugal’s Political Crisis – PIIE

As the horse trading takes place, the Troika will grant Portugal limited economic latitude to change policies. Little change should be expected in the economic outlook, apart from further short-term deterioration in the markets.

Portugal: The Price of Austerity – Macro and Markets

My view is that debt relief ultimately will be required. Perhaps the near-term risk to watch is deposit flight.  Deposits, which are down 10 percent over a year earlier, have been falling in line with assets as Portuguese banks delever.  What happens next could be the first real test of whether the precedents set in the Cyprus restructuring will cause meaningful contagion when the risk of restructuring rises.

The forgotten man of the eurozone returns to the headlines as Portuguese government struggles to stay afloat – Open Europe

Portugal has only met its deficit targets due to one-off measures while competitiveness adjustments have slowed and contingent liabilities remain a hidden risk. With the country on the cusp of an unsustainable debt burden any delays would likely be the final straw which pushes Portugal into needing some form of further assistance.

Analysis: Portugal, Greece risk reawakening euro zone beast – Reuters

A teetering Portuguese government has underlined the threat that the euro zone debt crisis, in hibernation for almost a year, may be about to reawaken.

Portugal Leads Rise in European Bond Risk as Coalition Crumbles – BB

“Portugal is almost certainly going to become a crisis,” Bill Blain, a strategist at Mint Partners Ltd in London, wrote in a note to clients today. “When politicians walk away from government, you know a new election is coming. That’s the point economic reform dies.”

UNITED STATES
The Fed should listen to the grapevine, i.e. markets – Historinhas

It wasn´t the case, according to Mishkin, that “in 2007 and 2008, the US economy encountered a perfect storm.” Much more likely it was the Fed concentrating on headline inflation and disregarding what market indicators – such things as the stock market, inflation expectations and the foreign exchange rate – were signaling.

Banks benefiting from "taper" on both sides of the balance sheet – Sober Look

US equity markets are continuing to price in higher premiums for bank shares relative to the overall market. The increased steepness of the yield curve will mean higher net interest income, as banks borrow at historically low rates from depositors and lend longer term at the highest rates in two years.

Fed pledges to get tough on Wall Street as adopts Basel rules – Reuters

The U.S. Federal Reserve pledged to draft tough rules for Wall Street while shielding smaller banks from some of the harshest impact of the global Basel III capital rules it adopted on Tuesday.

Forget Tapering and Exit via Reserve Requirements – David Kotok / The Big Picture

Instead of spooking fixed-income markets with uncertain proposals for asset sales, they might opt for an obvious alternative, which we have put forth before. Raising reserve requirements to idle at least 90% or some other very high percentage of the excess reserves would eliminate the need for the Fed to sell assets.

Fed Watch: A Pledge To Be Responsible – Tim Duy’s Fed Watch

Monetary policymakers have bent over backwards to convince financial market participants that tapering quantitative easing does not imply an earlier date for the lift-off from the zero interest rate policy.  It has been a hard message to sell.

ASIA

The three pillars of Likonomics, China’s path to growth – MarketWatch

Barclays Capital has a word for Premier Li Keqiang’s plan for China’s growth: Likonomics… In a nutshell, Likonomics stands for short-term pain leading to long-term gain.

New threats to China's property bubble – Sober Look

These threats to China's property markets, combined with weakness in manufacturing, do not bode well for China's near term growth prospects.

Has the Chinese central bank really taken a hard line on liquidity? – Bruegel

China still has a long way to go to disassemble the liquidity crisis bomb.

Likonomics: what's not to like – Free exchange / The Economist

Like the three "arrows" of Abenomics, Mr Li's strategy comprises three parts, they argue. Unlike the arrows of Abenomics, however, all of them hurt: 1) no stimulus 2) deleveraging 3) structural reform

Likonomics, or neologism X as we like to call it – Free exchange / The Economist

Michael Pettis on China – CFA Institute

Too much credit not just a problem for shadow banking system

China, Australia and a hard landing – alphaville / FT

Roach v. Pettis (on China) – Humble Student

China's transformation from investment led growth to consumer led growth is a story of short-term pain for long-term gain. The only questions are when?...and how much pain?

OTHER

Crisis Chronicles: 300 Years of Financial Crises (1620–1920) – N.Y. FED

Global Macro In 12 Simple Charts - Find The Clean Shirt – ZH

Investment Outlook July 2013: The Tipping Point – PIMCO

Immediate analysis of the past 6 weeks’ market action would argue that in late April, both the Fed and PIMCO observed that bond markets were approaching a tipping point… It will also record however, that the risk was not only in narrow credit spreads and emerging market debt/equity markets but at the heart of the credit system itself: U.S. Treasuries.

The Men That Broke Banks - Rogue Traders – ZH

FINNISH

Talousvaikuttajat voivat puhua eurokriisistä vapaasti vasta eläkkeellä – Perussuomalaiset

Juhani Huopainen: Useat demaritaustaiset kansantalouden ja rahoitustoimintojen keskeiset vaikuttajat ovat eläkkeelle päästyään avanneet suunsa eurooppa- ja europolitiikasta. Perussuomalainen kokosi vaikuttajien julkisuudessa esitettämiä puheenvuoroja - ne ovat jyrkässä ristiriidassa SDP:n esittämien rahaliittolinjojen ja kriisinhoitomenetelmien kanssa.

Euroalueen kriisi pohjoisesta katsottuna – Suomen Pankki

SP:n Honkapohja: EU tarvitsee kipeästi pankkiunionia – TalSa

Euroalueen pankkijyvät ja –akanat – Henri Myllyniemi / US Puheenvuoro

"Suomi jättää euron ensimmäisenä" – KL

Euroalue hajoaa, jos sen maat eivät saa enemmän valtaa muun muassa valuuttapolitiikassa ja verotuksessa, sanoo tunnettu saksalaisekonomisti Thomas Mayer.