Top 10 at 10: Spanish banks fear end of ECB support; A coming war of creditors vs borrowers; Dilbert

Here are my Top 10 links from around the Internet at 10 to 12pm. I welcome your additions and comments below or please send suggestions for Wednesday's Top 10 at 10 via email to bernard.hickey@interest.co.nz

1. The European crisis is far from over - The FT.com reports that the European Central Bank is set to end its 442 billion euro special funding programme for banks this Thursday and the Spanish banks are very worried that it is not being extended. We could be in for some euro fireworks in the next couple of days.

Banks across the eurozone, but in Spain in particular, have found it hard in recent weeks to secure liquid funding in the commercial markets, with inter-bank funding virtually non-existent. The €442bn ECB facility, which charges interest at a rate of 1 per cent, is not set to be renewed, something that banks in Spain and elsewhere in Europe say ignores current commercial realities.

A special offer of six-day liquidity will tide banks over until the following week’s regular offer of seven-day funds. On Wednesday, the ECB will also be offering unlimited three month liquidity, and further offers of three-month liquidity will keep banks going until at least the end of the year.

“The system is just not working,” agrees Simon Samuels, banks analyst at Barclays Capital in London. “We’re approaching the third year of liquidity support and still the market cannot survive unaided.”

BarCap estimates that at least €150bn of the ECB funding that is maturing will not be rolled over into shorter-term three-month schemes, forcing banks to shrink their own lending.

2. Spreads blow out again - Meanwhile, the Greece to German bond spread has blown out again to over 800 basis points, which is just below the worst levels in those panicked days before the European bailout plan, CalculatedRisk points out.

3. Essential reading - The Economist has a wide-ranging look at the issue of debt and concludes: "The battle between borrowers and creditors may be the defining struggle of the next generation".  I'd recommend a click through to read it. Here's a taste. HT Andyh Also check out this excellent interactive graphic on debt globally.

Hyman Minsky, an American economist who has become more fashionable since his death in 1996, argued that these debt crises were both inherent in the capitalist system and cyclical. Prosperous times encourage individuals and companies to take on more risk, meaning more debt.

Initially such speculation is successful and encourages others to follow suit; eventually credit is extended to those who will be able to repay the debt only if asset prices keep rising (a succinct description of the subprime-lending boom). In the end the pyramid collapses.

In the aftermath of the latest collapse it is clear that the distinction between debt in the private and public sector has become blurred. If the private sector suffers, the public sector may be forced to step in and assume, or guarantee, the debt, as happened in 2008. Otherwise the economy may suffer a deep recession which will cut the tax revenues governments need to service their own debt.

If the Western world faces an era of austerity as debts are paid down, how will that affect day-to-day life? Clearly a society built on consumption will have to pay more attention to saving. The idea that using borrowed money to buy assets is the smart road to riches might lose currency, changing attitudes to home ownership as well as to parts of the finance sector such as private equity.

This special report will argue that, for the developed world, the debt-financed model has reached its limit. Most of the options for dealing with the debt overhang are unpalatable. As has already been seen in Greece and Ireland, each government will have to find its own way of reducing the burden. The battle between borrowers and creditors may be the defining struggle of the next generation.

4. More falls to come - Barry Ritholz speaks at CNN about another likely fall in US house prices. He points to house price to income ratios being over 4 as a problem. Let's hope no one tells him what they are in New Zealand (6-8 depending on where you are). HT AndyH. 

Today, residential real estate confronts numerous headwinds: Credit, once given to anyone who could fog a mirror, is now tight. Hence, demand is far below what it was during the past decade. Home prices are still unwinding from artificially high levels, and remained over-priced. Inventory is elevated. Unemployment remains high.

A huge supply of shadow inventory is out there: Speculators and flippers who overpaid but have held onto their properties await modestly higher prices to sell. Bank owned real estate (REOs) continues to increase. We are barely halfway through a decade long foreclosure surge.

Whether we are looking at US housing stock as a percentage of GDP or Median income vs home prices or even ownership vs renting costs, prices remain elevated. Indeed, we see prices remain above historic mean. Consider price relative to income. From 1977 to 2010, the median US home price was 4.1 times median household income. But as the chart below shows, Home prices are still above that mean.

Oh, and that mean is artificially elevated due to the 2002-07 boom. Same with home prices relative to rentals, or housing value as percentage of GDP. Further, we should not assume that prices will merely mean revert back to historic levels. In most markets, a near 3 standard deviation price move is resolved not by reverting to the mean, but by by careening far below it.

 5. Back on again? - New Australian Prime Minister Julia Gillard wants to restart the carbon credits trading regime dumped by Kevin Rudd. But not until after the election, Guardian.co.uk reports.

Gillard, in her first comments to the media after former prime minister Kevin Rudd stepped down earlier on Thursday, said she believed in climate change, backed renewable energy and that the nation needed a price on carbon emissions.

But she also said emissions trading laws would lead to a significant structural shift in the resources-rich nation and they needed to be explained properly to the community. "It is as disappointing to me as it is to millions of Australians that we do not have a price on carbon," Gillard told reporters.

"And in the future we will need one. But first we need to establish a community consensus for action."

 6. The bankers are back - Bloomberg reports that the bankers are back to their big spending and hiring ways, offering pay deals 30-40% above expectations and guaranteed bonuses of US$2-4 million. They're thrilled the Congressional reforms have been watered down and they can get back to their happy ways leveraging up with Federal Reserve money and a government guarantee because they are Too Big to Fail. Is it any wonder US voters are revolting? Barack Obama will lose his congressional majorities in the November elections.

“Candidates are now getting multiple offers, and companies risk losing their desired candidates if they don’t act quickly enough -- and that’s a real change,” said Constance Melrose, managing director of eFinancialCareers North America, which has seen a 75 percent rise in investment banking jobs posted on its website from a year earlier. The removal of uncertainty regarding Congress’s financial reform bill may reinforce the hiring rebound.

A deal reached by members of a House and Senate conference last week diluted provisions from the tougher Senate bill, limiting rather than prohibiting the ability of federally insured banks to trade derivatives and invest in hedge funds or private-equity funds.

The demand for investment bankers and traders has led some firms to offer pay packages as high as $8 million, including guaranteed bonuses, which are paid regardless of an employee’s or the company’s performance, recruiters said. That recalls Wall Street compensation practices before the credit crisis forced banks to cut more than 345,000 jobs worldwide.

While most new hires aren’t receiving guarantees, banks including Nomura and UBS have offered top prospects one-year guarantees paying between $2 million and $4 million, people briefed on the offers said. Some managing directors have been offered two-year guarantees, recruiters said.

7. At least I'm not as bad as a telemarketer - This Readers Digest list of New Zealand's most and least trusted has gotten a lot of play this time around. Somehow, Rodney Hide and Hone Harawira are trusted less than Mark Bryers. And journalists are trusted less than tow truck drivers and fast food servers. Although, to be fair, journalists are trusted more than sex workers, politicians and telemarketers in that order. Colin Meads, who promoted Provincial Finance, was seen as 6th most trusted.

8. The ultimate insult - Now when you want to insult someone you say their debt is as bad as Greece's. However, it turns out many US states are in just that position, Bloomberg reports.

Even as the U.S. appears to be on the mend -- gross domestic product has climbed three straight quarters -- finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to US$112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP.

“States are going to have to cut back spending and raise taxes the same way Greece and Spain are,” says Dean Baker, co- director of the Center for Economic and Policy Research in Washington. “That runs counter to stimulating the economy and will put a big damper on the recovery in the latter half of this year.”

9. Nothing to see here. Move along now - Felix Salmon from Reuters has the best summary of the G20 pronouncements and commentary entitled: "The G20 tee up another crisis.

Essentially the world is now split between the printers (the United States) and the cutters (Europe and UK). None of them are reforming their banks to fix the problems that caused the crisis. Everyone is extending and pretending. Everyone is passing the parcel of debt and hoping growth ... or something... will happen to stop the debt bomb from going off.

The U.S. is going to stay on its borrow-and-spend course, while Europe sees huge fiscal cuts. That, we could do without the G20. And it guarantees that the global imbalances the G8 and G20 have been so worried about since long before the financial crisis are going to get worse rather than better.

There’s no solution in sight, which almost guarantees that the world is going to see another crisis, this time surrounding U.S. interest rates and the dollar rather than credit. The only question is when.

10. Totally irrelevant video - This is a fascinating video of a speech talking about how typical monetary incentives don't actually incentivise performance for the important stuff. HT Sargon via email.