Here's my Top 10 links from around the Internet at 7.30 am in association with NZ Mint.
I welcome your additions in the comments below or via email tobernard.hickey@interest.co.nz.
I'll pop the extras into the comment stream. See all previous Top 10s here.
#2 is today's must read. Apologies for no Top 10 yesterday. Bit frantic.
1. The real news - The major event of the last week has not been the failed European summit or Britain's withdrawal from the EU or even Dan Carter's wedding.
It was the announcement by the European Banking Authority that Europe's banks needed to raise €115 billion euros of fresh capital.
This has all sorts of implications.
It means banks will have to try to sell shares into a falling market to investors who are already spooked by the prospect of failure. That would mean more downward pressure on share prices and yada yada...you get the picture.
Or it will mean governments have to step up to inject capital or outright nationalise these banks. That would mean bigger deficits which puts more upward pressure on bond yields, which puts more pressure on bank asset values, which yada yada... you get the picture.
Or banks might try to tough it out by reducing their lending to ensure their low levels of capital match a lower level of lending, which would mean loans being called in and assets being sold from under loans, which means slower economies, which means larger budget deficits, which means more upward pressure on bond yields, which yada yada... you get the picture.
Here's Bloomberg with a dissection of the bank capital raising problem and the inevitable negative feedback loop that entails:
“If the Southern governments put money in their banks, their sovereign debt will go up, exacerbating their problems,” said Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels. “Then the banks’ losses will rise because they hold the government debt. That’s a vicious cycle. It’s hard to know which one to stabilize first, the sovereign bonds or the banks.”
While Greek banks have the biggest deficit and need to raise 30 billion euros, according to the EBA, they will get help from the EU and the International Monetary Fund.
Spanish banks face the second-biggest bill, 26 billion euros. Banco Santander SA (SAN), the country’s biggest lender, was ordered to raise 15.3 billion euros, more than any other European bank. The company has said it plans to generate capital from profits and by changing internal calculations to assign lower risk to its assets. The EBA warned banks last week against manipulating risk-weightings to meet the requirements.
“The European banks (BEBANKS) can’t get fresh capital, so governments are going to have to cough up the money,” said Barbara Matthews, managing director of BCM International Regulatory Analytics LLC, a Washington-based consulting firm. “Germany is re-establishing its bank rescue fund, and it has the money to put in its banks. But when you look at public sources, you run into a problem. Do the other sovereigns have the cash to do it?”
2. Today's must read - London Banker, a former central banker and regulator, writes an erudite and often detailed blog on the minutiae of banking. It's fun for geeks like me who are interested in this stuff.
His blog today is a searing indictment of his own industry and the economic and social crisis now gripping much of the developed world.
Here's a sample:
In thinking about my dissatisfaction with financial regulation for much of the past decade, I see that a great deal of it is attributable to who the regulators see as their polity. Their idea of consultation on regulations is to ask the bankers, traders and rating agencies whether they approve. The idea of making public policy in the public interest if the bankers disapprove is unimaginable to them. And so the banks get the regulations they prefer - or at least did so until the crisis.
And my queasiness about David Cameron's behaviour in Brussels on Friday stems from the same concern. He threw his toys out of the pram and turned his back on the EU because they wouldn't guarantee to preserve the City from further taxation, regulation and scrutiny. It's very clear that the polity he was serving was not the United Kingdom's 62,300,000 people - but the one per cent that make their living in the City of London.
3. Wholesale downgrades - Reuters reports Standard and Poor's is warning of wholesale credit rating downgrades in Europe. The European summit last week solved nothing.
Standard & Poor's on Tuesday said there is a greater number of sovereign and banking bonds at risk of ratings downgrades as a result of its recent warning that it might cut the credit ratings on 15 euro zone nations.
"Sovereigns and banks continue to show the greatest downgrade risk. The entities in these two sectors are concentrated in Europe, with 25 European sovereigns and 42 European banks on our potential bond downgrades list," Diane Vazza, head of Standard & Poor's global fixed income research, said in a statement.
4. The problem with ageing - Fund manager Jeff Grundlach has produced a bunch of charts, including this one below showing one of the drivers for slowing economic growth and ballooning budget deficits in the developed world for decades to come.
The implications are profoundly unsettling, although it does beg the question: why is youth unemployment so high.
5. The Straits of Hormuz - Forbes reports the oil price spiked this morning after reports, since downplayed, that Iran may be about to close the Straits of Hormuz, where 40% of the world's seaborne oil has to pass through.
The pop in crude oil prices came after Iranian MP Parviz Sorouri of the Majlis National Security and Foreign Policy Committee said: "Currently, the Middle East region supplies 70 percent of the world’s energy needs, (most of) which are transported through the Strait of Hormuz. We will hold an exercise to close the Strait of Hormuz in the near future. If the world wants to make the region insecure, we will make the world insecure."
The comments, picked up by the quasi-official Iranian Student News Agency, and reported by the Tehran Times, were later complemented by a statement by the Iranian Foreign Ministry noting the Strait remains open, according to Bloomberg.
Hormuz is one of the world’s most important waterways, with daily flow of about 15 million barrels of oil. That’s 90% of Persian Gulf Exports and 40% of global consumption, according to geopolitical analysts at Stratfor.
“The importance of this waterway to both American military and economic interests is difficult to overstate. Considering Washington’s more general — and fundamental — interest in securing freedom of the seas, the U.S. Navy would almost be forced to respond aggressively to any attempt to close the Strait of Hormuz,” explained analysts at Stratfor.
6. Why sovereign defaults seem inevitable - This chart courtesty of BBC explains why a wave of sovereign defaults now seems inevitable. This is the longest term chart I've seen on this.
Here's former IMF economist Kenneth Rogoff on what this means:
"The blue line is global average of public debt relative to GDP. The yellow bars denote the percent of countries in a state of default or restructuring on external debt. The dark pink bars that sometimes rise above the percent of countries in default or restructuring denotes countries with inflation over 20%. The chart suggests that if the historical pattern is followed, there will be soon a wave of sovereign defaults. Needless to say, we appear to be on the cusp of such an event in the eurozone and central Europe, and possibly some countries elsewhere."
7. 'We want a vote on that' - This European austerity agreement is not going to come to pass easily. Already politicians in Ireland are baying for referendum. And we won't even see the details until March.
Fianna Fáil leader Micheál Martin said today the Irish people should be allowed to speak on “these new arrangements” through a referendum.
Mr Martin said he told Mr Kenny that Europe’s political leaders were failing to address the core issues at the heart of the crisis in the euro zone, and urged him to ensure that the critical issue of Ireland’s bank debt be kept front and centre in Ireland’s dealings with Europe.
“The point that I have been making for many months is that by focusing on fiscal controls rather than debt, the EU is failing to address the crisis at hand and may actually be making matters worse,” he said.
8.' In the national interest' - Aditya Chakrabortty writes at The Guardian about David Cameron's decision to align Britain's national interests with those of its banks. It's a good old rant.
Even in the best of times, the finance sector hasn't paid anything like as much to the state as the state has had to pay for them since the great crash. According to the IMF, British taxpayers have shelled out £289bn in "direct upfront financing" to prop up the banks since 2008. Add in the various government loans and underwriting, and taxpayers are on the hook for £1.19tn. Seen that way the City looks less like a goose that lays golden eggs, and more like an unruly pigeon that leaves one hell of a mess for others to clear up.
Ah, but what about lending? After all, this is why we have banks in the first place: to channel money to productive industries. The Cresc team looked at Bank of England figures on bank and building society loans and found that at the height of the bubble in 2007, around 40% or more of all bank and building society lending was on residential or commercial property. Another 25% of all bank lending went to financial intermediaries. In other words, about two-thirds of all bank lending in 2007 went to pumping up the bubble.
This doesn't look like a hard-working part of an economy humming along: it's nothing less than epic capitalist onanism.
9. Fake (abandoned) Chinese Disneyland - David Gray, an old photographer colleague of mine from my Reuters days, has found a deserted fake Disneyland near Beijing. Lots of resonance here. Property bust. IP theft. Ghost cities.
Situated on an area of around 100 acres, and 45 minutes drive from the center of Beijing, are the ruins of ‘Wonderland’. Construction stopped more than a decade ago, with developers promoting it as ‘the largest amusement park in Asia’. Funds were withdrawn due to disagreements over property prices with the local government and farmers. So what is left are the skeletal remains of a palace, a castle, and the steel beams of what could have been an indoor playground in the middle of a corn field.
10. Totally Jon Stewart declaring war on Christmas and getting his facts wrong.
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