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Wednesday's Top 10 with NZ Mint: ECB set to turn off easy money tap; Good euros and bad euros; Petricevic didn't read prospectus; Uninsured in Christchurch; Dilbert

Posted in Opinion

Here's my Top 10 links from around the Internet at 3.40 pm 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.

#9 is my must read today from David Hayward on the problems with insurance in Christchurch. Sobering on a tough day. Our best wishes are with everyone in Christchurch.

1. ECB to turn off tap - The European Central Bank's move before Christmas to lend 489 billion euros to banks for three years at 1% helped calm Europe's freaked financial markets.

Another big motherlode is expected to drop from the fingers of the ECB in the accounts of European banks on February 29.

But, as Reuters reports, this free swinging door to the larder may be about to close.

And what happens then?

Will the zombie banks die? Or wake up?

Or look for someone else to bite...

Powerful members of the central bank's 23-man governing council are privately hoping demand at the February 29 auction will fall well short of the 1 trillion euros some expect, backing their view that it should be the last.

Central bank sources say they are worried that banks will become too reliant on ECB funds, removing the incentive to restart lending between themselves.

This may come as something of a shock to some banks and officials. One senior EU official said he had expected the ECB would offer banks a third round of long-term funding.

"We expected a third," he said. "They (ECB) have always said they will keep an eye on how the market is evolving. My guess is that they are hedging their bets."

2. The end of history again - Francis Fukuyama, the author of The End of History, has changed his views on things like globalisation and the primacy of unfettered capitalism.

Here's an interview he gave to Der Spiegel:

SPIEGEL: Even if members of the middle class held on to their jobs, they saw their income stagnate or even decline, while a few of globalization's winners at the top reaped outsize rewards. The level of income inequality in advanced nations is greater than ever before. What effect does that have on our societies?

Fukuyama: It is not good for democracy. If income is relatively evenly distributed and there are not very sharp differences between rich and poor, you have a greater sense of community. You have a greater sense of trust. You do not have parts of the community that have superior access to the political system that they can use to advance their own interests ...

SPIEGEL: … all of which undermines the democratic process.

Fukuyama: What you are going to see in a democracy with a weaker middle class is much more populism, more internal conflict, an inability to resolve distributional issues in an orderly way. In the United States right now, you do have this return of populism. It should be on the left, but actually most of it is on the right. If you talk to Tea Party members about their feelings regarding the government, they are very passionate. They hate the government. They think they have been betrayed by elites.

3. 'The idea that this is over is an illusion' - Kenneth Rogoff makes this good point about the Greek deal via Dealbook.

“I don’t want to be a Cassandra, but the idea that it’s over is an illusion,” said Kenneth S. Rogoff, a professor of economics at Harvard University and co-author of “This Time Is Different: Eight Centuries of Financial Folly.” “I am amazed by the short-term psychology in the market. I don’t think we’re anywhere near the endgame,” he said.

“Italy is essentially in a sovereign debt trap,” said Richard Batty, global investment strategist at Standard Life Investments.

For Italy’s debt to be sustainable, the country’s economy either needs to grow at a nominal rate of 5 percent a year, or the interest rate on its 10-year bond needs to be at 3.6 percent, Mr. Batty estimates. During Europe’s most recent boom period, from 2002 to 2007, Italy’s nominal G.D.P. grew at an average rate of 3.6 percent, Mr. Batty said. Meanwhile, its 10-year bond, even after a big rally this year, has a yield of 5.43 percent.

4. S&P may fight to the death - Michael West reports at SMH.com.au that Standard and Poor's may choose to fight to the death accusations from local councils in Australian court about its AAA ratings of toxic debt. The banks responded (lamely) here.

5. Challenging the Aussie banks - Societe Generale analyst Christian Carillo unleashed on the big four Australian banks yesterday with a research note saying they couldn't justify their 'out-of-cycle' rate hikes because it was almost mathematically impossible for their funding costs to be rising, given they funded most of their lending locally.

"The claim that the recent increase in mortgage rates is due to higher funding costs is very dubious," he said in a research note. "The mortgage hikes seem aimed at protecting their high profit margins."

“Australian banks are essentially an oligopoly," said Mr Carrillo. "They control most of the market anyway. They can effectively set rates where they want to."

"You have four big banks. They want to protect their profit margin. They can do it, so they do it.”

6. 'I didn't read the prospectus' - Bridgecorp's diminuitive supremo Rod Petricevic told the court, the NZ Herald reported.

The 62-year-old told the court yesterday he did not read Bridgecorp's 2006 prospectus in full, despite signing it.

"I read the markups. I didn't read the full prospectus," Petricevic said. "You signed off this important document without reading it in its entirety?" Mr Cathcart asked.

"Absolutely," the former director replied.

I make no comment, other than to say he may have a lot in common with many of the 'financial advisers' and (sadly) many investors who put their money with Bridgecorp.

7. Check your euros - The Telegraph reports there are different types of euros and the Germans have worked out which ones are their's and which ones they want to trust.

All euros are backed by the European Central Bank but the serial numbers prefixed with X may be regarded as most secure because they are issued by Germany. N is also a good prefix, because these come from Austria. P, L, U and Z prefixes may also be favoured because these are issued by the authorities in Holland, Finland, France and Belgium.

If you share widespread fears that the euro cannot last in its present form, you might want to avoid notes with the prefixes F, G, M, S, T or Y. These are issued by Malta, Cyprus, Portugal, Italy, Ireland and Greece.

8. Robosigning and the erosion of democracy - Yale Management Professor Bruce Judson writes at his blog that the robosigning settlement between the US banks and the US government shows how corrupt American society has become.

One of the central characteristics of highly unequal societies is that two sets of laws develop: One set for the rich and powerful and one set for everyone else. The more unequal societies become, the more easily they accept the unacceptable, and with each unrebuked violation, the powerful actors at the top of the society gain an ever greater sense of entitlement and an ever greater sense that the laws that govern everyone else don’t apply to them. As a result, their behavior becomes increasingly egregious.

In contrast, sustainable capitalism requires that all participants in a contract or bargain believe their interests will be enforced equally by the courts: Capitalism requires that Lady Justice wear a blindfold. When powerful players are permitted to alter established rules at will, capitalism ultimately collapses. Contracts and the idea of a fair bargain become meaningless as less powerful parties to an agreement know their rights will not be enforced. Over time, citizens lose faith in government and their own ability to thrive in what becomes a corrupt economy. This uncertainty leads the small businesses, which are so often cited as important to our economy, to shy away from new activities that might put them at the risk of unequal treatment.

I would suggest that the robo-mortgage scandal is a strong indicator that this type of unequal justice is now becoming ever more commonplace in America. Past bank abuses are typically discussed without a sense of outrage. They have, in effect, become a recognized practice of deception with no consequences.

9. One for Christchurch - David Haywood, who wrote an excellent Reserve Bank annual report, lives in Christchurch and has been documenting the daily dramas of dealing with insurance, rebuilding and staving off his own family's financial crisis.

It makes for compelling reading. Go well David.

Here's his latest via publicaddress:

How can you expect the recovery of a city when one of the conditions imposed by the insurance companies for rebuilding is that insurance will be cancelled – thus instantly placing the owners of the homes or buildings in breach of their mortgage conditions?

How can you expect people to move to Christchurch when they can’t get insurance for rental accommodation? Not just the denial of earthquake insurance, but also the denial of fire and theft cover. Who would come to Christchurch under such conditions? I wouldn’t.

And who has any faith in house repairs that are only supervised by proper builders, i.e. the actual work is carried out by unqualified cowboys. My friends in the building trade are horrified by some of the things they’re seeing. “It’s a bloody shambles out there,” one of them told me. “It’ll end up ten times worse than the leaky homes fiasco. We’ll be paying for these bloody repairs twice: once now, and in another five years when the cowboy repairs fall to pieces and have to be fixed all over again.”

10. Here's Jon Stewart on the dark side of American politics

 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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29 Comments

Bernard - you need an article

Bernard - you need an article on the excellent news that the council is backtracking on its pie in the sky intensification plans. The original plan would have been disastrous for housing

gosh... if I could borrow 400

gosh... if I could borrow 400 billion euro at 1%.... for 3 yrs....    wouldn't that be nice.
If I could make 3% on that ( hey.. I'd lend it to NZ banks )... that would be 36 billion Euro profit.
36 Billion euro equals $57 billion NZ dollars... for doing nothing but borrow from the ECB
Wow... now that is "alchemy"...   
What an amazing world we live in....   with the most amazing business in the world being "banking"...
I'm green with envy....  

So you sell 400B worth of

So you sell 400B worth of assets to the ECB, then go and buy 400B worth of assets?  The banks are not buying, they are doing this because they are in the crapper, and need to reduce risk.
 
One way of reducing risk is to sell all their govt bonds to the ECB.  For example Portugese banks selling Portugese govt bonds to the ECB, though in that instance they may as well buy Portugese govt bonds again, because if the govt cant access funding they are stuffed anyway.
 
It's a circular reference shell game.  I'm not surprised people don't understand it.  Refinance operations, or reverse purchases, mean one thing in normal life, and something different in financial markets.

Skudiv...   don't follow what

Skudiv...   don't follow what u are saying..???
Above article talks about the ECB lending the banks money at 1%...  Says nothing about a sale and purchase..????
Circular reference shell game..?  ...  What..??
Nothing circular about the above...  The ECB is nakedly printing money ...but legitimize that by saying they are providing liquidity .
BUT...in fact this does not really provide liquidity, because the money goes everywhere, except where it is really needed, chasing returns... often in emerging economies and countries like NZ.
 
just my understanding of course....  cheers  Roelof

The ECB wants to pretend it

The ECB wants to pretend it isn't 'printing money' so it makes 1% loans to banks in exchange for some the security. This make it appear that it is just exchanging EUR. The ECB will take any govt bonds at 'face value' and lend 100% but this means the banks can offload govt bonds that no-one else would pay face value for eg Greek bonds.
This also means the banks don't have to write down the losses on the bonds.
Its it great that banks (and the bankers bonuses) are saved. Shame about the citizens. I bet the banks wont be buying the citizens devalued assets at full value in exchange for a 1% loan!

I'll explain it using

I'll explain it using property.
 
A Property investor (PI) has 10 houses in his portfolio.  The bank offers to lend him unlimited money at 1%, for 3 years.  In exchange the PI must "pledge his collateral" to the bank.  In effect he is selling his houses to the bank at a set price, with the obligation to buy it back in 3 years.  (This is a simple explanation of refinance or reverse purchase depending on your perspective.)  The bank will consider the current and future value of the asset and calculate a haircut.  So if the asset is a house with a 3% yield, and current market value of 100k, the bank could apply a haircut of 5% and would buy the house for 95k, with the agreement to sell it back to the PI in 3 years for 95k.  The haircut will vary depending on the quality of the asset.  Now the PI has 95k for 3 years at 1%, he can use it in whatever way he requires, but he needs to buy his house back in 3 years.  So he could potentially do the "carry trade" where he buys another house, but it makes little sense, after all if he was in a strong financial position he would be buying another house without the LTRO.  The main reason for doing this would be that he is currently in a tight patch, and hopes things will be better in 3 years.
 
LTRO is not new it has been around longer then the ECB.  The main changes are extending the time frame from 3 months out to 3 years, and reducing the quality of collateral that can be pledged.  Previously the ECB would only accept >A rated government bonds.  Now it will accept BBB+ govt bonds (GB), with the exception of Greek GB which it accepts regardless of ratings.  It also accepts coorporate investment grade bonds.  As well as lower rated GB if they are pledged by a bank that resides in the country with a lower rating eg. if Portugese GB were rated C+ it would still accept them collateral if they were pledged by Portugese banks, but not if pledged by a German bank.
 
LTRO is a regular part of normal market functions, and generall repurchase/refinance transactions would happen between banks without the ECB.  During times of stress the trust between banks that the counterparty will be able to buy back the bonds evaporates, and haircuts become larger, ending with a lack of interbank lending, which is where the ECB steps in with a bazooka 3 year LTRO.
 
There is no such thing as a direct unsecured loan from the ECB at 1%.  It's not a credit card for the banks to go and do a carry trade.  It's the same as any other loan in that it requires collateral, in this instance the ECB becomes the owner of the collateral, and the banks get base money.

Thanks for that.... It is

Thanks for that....
It is still essentially a loan.... and a gift of a loan..    
Irrespective of the fact that the only reason the ECB is doing this is to save the banking system... and financial panic.
For me...  the further back I step to look at this... the worse it smells.
"So he could potentially do the "carry trade" where he buys another house, but it makes little sense, after all if he was in a strong financial position he would be buying another house without the LTRO.  The main reason for doing this would be that he is currently in a tight patch, and hopes things will be better in 3 years."

Money at 1% is almost free money....  Surely it would be imprudent NOT to borrow this... The best way for banks to strengthen their balance sheets would be to relend that money to countries like NZ... ( ie. buy another house )... and make profits.
Cheers  Roelof
 
 

So the PI refi's a house at

So the PI refi's a house at 95k, ang buys another house.  He now has 10 houses, plus the obligation to repuschase 1 house from the bank in 3 years.  He still only has 10 houses which is exactly the position he was in prior to the refi.  He could refi all 10 houses and go and buy 10  different houses.  Some how in 3 years he needs to be able to own 20 houses.  He does get the difference between the previous borrowing cost and the new borrowing cost, that needs to be offset against the risk in 3 years time that he can be able to own 20 houses.  If all PI's did this it would be great for inflating house prices in the short term.
 
Banks are strenghting their balance sheets, by de-leveraging.  How they are doing this is by increasing the amount of cash/deposits/base money they hold, and reducing the amount of loans they have.  The ratio of debt:deposits is being reduced.  A strong balance sheet is different to increasing profits.  The strongest balance sheet would be only deposits, which meanse the banks have a lot of money to lend, and no risk of a bank run etc.  A weak balance sheet would have no cash deposits on hand, and a lot of loans outstanding, meaning that if someone wanted to withdraw money there is no money for them to withdraw, the bank is broke.  So the banks use the LTRO to strengthen their balance sheet by de-leveraging, increasing the amount of cash on hand baisically, and reducing the amount of debt outstanding.

People that continually spend

People that continually spend more then they earn are generally accepted as poor, or the soon to be poor.  While those that spend less then they earn are securing their financial future.  How is it, that countries act as if this does not apply? 
If individual members in a family are financialy sensible, then the family cannot be financialy irresponsible.  This scales upward, to communities, regions, and on a national level. 

FYI for those who think the

FYI for those who think the Greek deal is done and Europe is saved.
 
http://www.telegraph.co.uk/finance/financialcrisis/9097004/Battle-over-E...

At a G20 summit in Mexico in two days the EU will plead for increased IMF contributions by non-euro countries to help shore up a eurozone "financial firewall" seen as vital to protecting Spain and Italy from Greek debt contagion.

The IMF will refuse to make extra cash available to the EU and will threaten to pull the plug on its contribution to Tuesday's €130bn bailout of Greece unless the eurozone creates a €750bn fund, a move opposed by Germany.

 

My view is that the saving of

My view is that the saving of Greece and the Eurozone is a process, rather than an event, so I'm not looking for some magic bullet that once fired solves all the problems. That's not how this is going to work. I think it's good for the IMF to tell Europe that it must still do more. The US and the Chinese have being saying this to them for some time.

Everyone is broke.  Everyone

Everyone is broke.  Everyone is getting broker.  I have heard no solution to that one simple fact.  If governments used GAAP instead of cash based accounting tricks maybe people would realise the true situation.  However if Greece has taught us anything, it should be that public dissent cannot oust a dictatorship in a western "democracy", especially when there is money at stake.

You blaming the brokers then?

You blaming the brokers then?

Clever. Two in one day.

Clever. Two in one day. Fleeced and Broker. Go together nicely.

Wether yew like it or not.

Wether yew like it or not.

The LTRO is not like QEx.  It

The LTRO is not like QEx.  It is an unlimited amount, so the uptake is on the banks.  The main reason it may be lower is because of the stigma attached to accessing it, not because the banks have no use for the money.  It's a refinance operation, so in essence the bank maybe takes some coorporate loans, or another asset and sells it to the ECB.  They are not borrowing it as most people would understand borrowing.  To put is simply they are swapping a bond for cash.  This new money in its account isn't classed as a current liability.  Retail deposits are a liability on a banks balance sheet.  What this does is strengthen the balance sheet of the banks, effictively a firewall in readiness for the Greek default.  Since the first LTRO, the amount of deposits at the ECB has increased by an amount greater then the LTRO.  I assume from this that the banks have deposited the money from the LTRO back with the ECB, for a loss of 50bp.  Essentially without the LTRO the banks would be insolvent if they used GAAP, mark to market real accounting.  Now they should survive the Greek default.  As Schauble said, "we are in a better position now then we were".  The same is not true for Greece sadly.

skudiv...  r u sure about

skudiv...  r u sure about this..??   I do understand the banks have to provide collateral... but it is essentially aloan... as far as I know.???
the key point that i understand... is that the ECB wants the banks to onlend to countries like Greece...  ( ECB can't monetize and lend to countries directly..?? )
Do u have an links I can follow..??

Perfect symmetry #6

Perfect symmetry
#6 Rodo-signing
#8 Robo-signing

Isn't Petricevich lucky he

Isn't Petricevich lucky he didn't live in America.
On February 9, 2012 forty-nine state prosecutors struck a $25 billion agreement with the nation’s five largest ... over robo-signing (not looking at what they signed). Under the Agreement, the states agreed not to pursue civil charges against the banks ...  In return for immunity from "civil charges" ....
 
Poor old Rodo is up on "criminal charges" at the moment .. has just opened his mouth and dropped both feet in the "civil charge" swamp.

You got that right...and I

You got that right...and I bet the legal lot took note too...more money....

As US Debt To GDP Passes

As US Debt To GDP Passes 101%, The Global Debt Ponzi Enters Its Final Stages
If the moment when this ratio went from double to triple digits is still fresh in readers minds, is because it is: total debt hit and surpassed the most recently revised Q4 GDP on January 30, or just three weeks ago. Said otherwise, it has taken the US 21 days to add a full percentage point to this most critical of debt sustainability ratios: but fear not, with just under $1 trillion in new debt issuance on deck in the next 9 months, we will be at 110% in no time.
 

Note the size of NZ debts

Note the size of NZ debts compared with the other countries in 'Exhibit 1'

Also note that our household

Also note that our household debt is the second highest after Aussie. This is incredibly bullish for consumption.

That is amazing... goodbye

That is amazing... goodbye dollar, hello war.
 

In other words, Petricevic's

In other words, Petricevic's defense is "I'm not dishonest, I'm just incompetent. Honestry, I'm really incompetent". We see the same excuse used everywhere else in the finance industry. It doesn't wash.