What Krugman Said

.

I took some time to look at Yeves Smith on Moyers.  She is impressive.

I started the day with: http://krugman.blogs.nytimes.com/2012/06/25/deleveraging-and-the-depression-gang/

"June 25, 2012, 11:50 am16 Comments

Deleveraging and the Depression Gang

The Bank for International Settlements has just come out with a report emphasizing the “limits to monetary policy”, which is apparently being taken seriously. I guess I’d start from the observation that the BIS has already embraced liquidationism, the idea that all this suffering is good for us and that trying to mitigate the pain would somehow be a bad thing. Now they’re just trying to come up with additional arguments for doing nothing.
But I thought it might be worth talking for a second about how the various conventional wisdoms of the past few years — the enthusiasm for austerity that swept the VSPs in 2010, and now the chin-stroking doubts about monetary expansion — add up to an insistence that we refuse to do anything that might help us avoid a sustained depression.
What, after all, is the story of this crisis? The simple take many of us have now adopted, which I think gets at most of it, runs along the lines of my Sam and Janet story. At any given time there are some people who would like to borrow more at current interest rates, but are constrained by norms about how much debt is too much. If these norms are loosened, they will borrow more — which is in fact what happened between around 1980 and 2007, as deregulation, financial innovations nobody understood, and general complacency led to a broad willingness to accept higher leverage.
Now, if people are borrowing, other people must be lending. What induced the necessary lending? Higher real interest rates, which encouraged “patient” economic agents to spend less than their incomes while the impatient spent more.
OK, so that’s what happens when an economy is engaged in increased leveraging. Then something makes people remember the dangers of debt, and leveraging gives way to deleveraging.
You might think that the process would be symmetric: debtors pay down their debt, while creditors are correspondingly induced to spend more by low real interest rates. And it would be symmetric if the shock were small enough. In fact, however, the deleveraging shock has been so large that we’re hard up against the zero lower bound; interest rates can’t go low enough. And so we have a persistent excess of desired saving over desired investment, which is to say persistently inadequate demand, which is to say a depression.
By the way, this is in a fundamental sense a market failure: there is a price mechanism, the real interest rate, that because of the zero lower bound can’t do its job under certain circumstances, namely the circumstances we face now.
What to do? One answer is fiscal policy: let governments temporarily run big enough deficits to maintain more or less full employment, while the private sector repairs its balance sheets. The other answer is unconventional monetary policy to get around the problem of the zero lower bound: maybe unconventional asset purchases, but the obvious answer is to try to create expected inflation, so as to reduce real rates.
Now look at what the serious people say: we must have fiscal austerity, not stimulus, because debt is bad; we must not have unconventional monetary policy, because that would endanger “credibility” (where it’s not at all clear what that means).
So basically, we must do nothing to fix this horrific market failure, and allow unemployment to fester instead.
It’s really awesome, when you think about — not just that we’re committing this massive act of folly, but that it’s all being done in the name of sound policy."

I went here:  http://hat4uk.wordpress.com/2012/06/25/spains-e100bn-banking-bailout-tracing-the-road-map-to-the-inevitable-2/
The side bar of recent posts:

• SPAIN’S €100bn banking bailout: tracing the Slog’s road map to the inevitable.
• THE CAMPELL DIARIES: Is the truth about David Kelly hidden in the can of worms Alistair Campbell has opened?
• RBS/ULSTER ‘GLITCH’: Slog survey of users plus analysis of the numbers raise further doubts.
• At the End of the Day
• RBS/ULSTER ‘GLITCH’: Has IT at last done something useful?
• At the End of the Day
• MERKEL’S HURRY-HURRY ESM TACTICS: Full spectrum of German press gives her a drubbing
• Dr Conan Fuller-Bollix
• ESM REFERRAL: Does S&P have a mole inside the Karlsruhe Court?
• GREEK ELECTION: Athens Bar Association declares June 17th election null and void, suspects criminal activity
• ESM & FISCAL UNION: German President refers Merkel plans to Karlsruhe Court

The RBS appears to be insolvent.  

I then went to the Bondad blog:

Monday, June 25, 2012

What Krugman Said

It's taken me a very long time to get my head around the idea of the "liquidity trap" -- and frankly, I'm not sure I still get the idea completely.  However, this is a very lucid explanation of what's involved from Krugman:

Now, if people are borrowing, other people must be lending. What induced the necessary lending? Higher real interest rates, which encouraged “patient” economic agents to spend less than their incomes while the impatient spent more.

OK, so that’s what happens when an economy is engaged in increased leveraging. Then something makes people remember the dangers of debt, and leveraging gives way to deleveraging.

You might think that the process would be symmetric: debtors pay down their debt, while creditors are correspondingly induced to spend more by low real interest rates. And it would be symmetric if the shock were small enough. In fact, however, the deleveraging shock has been so large that we’re hard up against the zero lower bound; interest rates can’t go low enough. And so we have a persistent excess of desired saving over desired investment, which is to say persistently inadequate demand, which is to say a depression.

By the way, this is in a fundamental sense a market failure: there is a price mechanism, the real interest rate, that because of the zero lower bound can’t do its job under certain circumstances, namely the circumstances we face now.
What to do? One answer is fiscal policy: let governments temporarily run big enough deficits to maintain more or less full employment, while the private sector repairs its balance sheets. The other answer is unconventional monetary policy to get around the problem of the zero lower bound: maybe unconventional asset purchases, but the obvious answer is to try to create expected inflation, so as to reduce real rates.

Now look at what the serious people say: we must have fiscal austerity, not stimulus, because debt is bad; we must not have unconventional monetary policy, because that would endanger “credibility” (where it’s not at all clear what that means).

So basically, we must do nothing to fix this horrific market failure, and allow unemployment to fester instead.

It’s really awesome, when you think about — not just that we’re committing this massive act of folly, but that it’s all being done in the name of sound policy.

This is one of the reasons I harp on the lower levels levels of monetary velocity right now; that tells us people simply are not spending nearly as fast as they should.  As a result, money is being "saved" -- or perhaps more appropriately, not spent.  As a result, there is an excess of funds to lend.  But, there is not enough investment to soak up the increased savings.  In theory, this would be accomplished by lower interest rates -- which, unfortunately, can't go lower than 0%.  This means there's essentially a market failure in the money market -- interest rates can't move lower.  Hence, we see a primary reason for the low interest rates on government debt; we have an excess of savings sopping them up.  This also tells us that government bonds aren't competing with corporates for financing.

Another Week of Negative News

Once again, we had a week where the overall economic news was, at best, bad.

Consider the following:

Australian Leading Index declines:

The Conference Board LEI for Australia fell sharply in April led by a large decline in building approvals (April’s significant drop in the housing indicator was mainly due to a temporary interruption in approval processing), and there were downward revisions to the past few months as actual data for sales to inventories ratio* and gross operating surplus* for the first quarter of 2012 became available. With this month’s decline, the six-month change in the leading economic index remained negative at 2.8 percent (about a -5.5 percent annual rate) between October 2011 and April 2012, significantly down from the increase of 1.0 percent (about a 1.9 percent annual rate) during the previous six months.  In addition, the weaknesses among the leading indicators have been somewhat more widespread than the strengths in recent months.

The overall trend for this number is now down.  As my co-blogger Silver Oz points out, this may be a country specific event; Australia is heavily dependent on China, which is itself slowing down.  In addition, Australia is also heavily dependent on natural resources, which are also declining.

EU Markit Manufacturing index shows contraction:

The Markit Eurozone PMI® Composite Output Index was unchanged at 46.0 in June, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies. The index therefore signalled that the private sector economy shrank at a rate unchanged on May – which had seen the steepest contraction since June 2009.

With the exception of a marginal increase in January, the survey has recorded continual contraction since last September, with the rate of decline having gathered significant momentum in the second quarter. The second quarter has seen the steepest downturn for three years

Philly Fed Manufacturing Index tanks

Manufacturing firms responding to the Business Outlook Survey indicated weaker business conditions this month. The survey’s diffusion index of current activity fell to -16.6 from a reading of -5.8 in May, its second consecutive negative reading. The survey’s indicators of future activity remained positive and improved slightly.

Indicators for new orders, shipments, and average work hours were also negative this month, suggesting overall declines in business. Indexes for current unfilled orders and delivery times both registered negative readings again this month, suggesting lower levels of unfilled orders and faster deliveries

China's manufacturing index dropped into negative territory:

China’s manufacturing may shrink for an eighth month in June, matching the streak during the global financial crisis in a signal the government’s stimulus has yet to reverse the economy’s slowdown.

The preliminary reading was 48.1 for a purchasing managers’ index today from HSBC Holdings Plc and Markit Economics. Above-50 readings indicate expansion. The lowest crisis level was 40.9 in November 2008, when industrial production increased 5.4 percent from a year earlier, compared with a gain of 9.6 percent last month.

.....

If confirmed on July 2, the gauge would be at the lowest since November 2011 and equal the run of below-50 readings from August 2008 to March 2009. 

German sentiment is decreasing:

The Ifo Business Climate Index for industry and trade in Germany continued to fall in June. Although assessments of the current business situation brightened somewhat after deteriorating significantly last month, companies reported far lower expectations with regard to their six-month business outlook.

The German economy fears the growing impact of the euro crisis.  The business climate index in manufacturing dropped further. Manufacturers assess the current
business situation as slightly improved. As far as their six-month business outlook is concerned, however, manufacturers expressed far greater caution than in the past. Their expectations in terms of export business are also much lower and their recruitment plans remain defensive. In retailing the business climate recovered somewhat, after clouding over considerably last month. The retailers surveyed assess their current business situation much more positively and
are also no longer as pessimistic about future business developments as they were last month.

In wholesaling, on the other hand, the business climate indicator fell. Fewer wholesalers described their current business situation as good. Moreover, they are now slightly more sceptical as far as their outlook is concerned.

Simply put, there is nothing good coming out in the economic numbers right now.

Posted by Hale Stewart at 6/25/2012 10:00:00 AM 0 comments Links to this post

http://www.telegraph.co.uk/finance/personalfinance/consumertips/banking/9353390/Royal-Bank-of-Scotland-Nat-West-computer-glitch-Computer-says-no.html

"The Royal Bank of Scotland rode the storm of chronic financial mismanagement by drawing on the taxpayers’ boundless generosity during the banking collapse of 2008. But what billions in bad loans couldn’t do, an apparently tiny computer glitch might yet achieve.

Over the next couple of weeks, the bank’s senior management will be biting their nails as they wait to see how many of their account holders at NatWest, RBS and Ulster Bank consider pulling their custom. A simple flaw in a routine upgrade seems to have knocked the bank’s entire system off-kilter.

Already, there have been reports that doctors in Mexico threatened to turn off a dying girl’s life-support because NatWest did not transfer money owed to the hospital looking after her. At least one couple claimed to have seen a house purchase collapse because payment did not go through. Studying my own account, I notice that while money owed to me has not been paid in, cash has still been going out with ruthless efficiency – although I haven’t been able to establish whether it has reached its intended recipients.

For more than a decade, the banks have been encouraging us to carry out our business online because it saves them huge costs. If we do the work of administering our savings, they do not need so many branches, nor do they need to pay the tellers and bank managers who used to assist us in managing our money. But if that is the deal, then the banks have one unbreakable rule – they cannot allow their computer systems to fail. RBS just broke that rule, and may yet pay a heavy price.

It is, however, far from alone. In late 2011, and again in May this year, HSBC customers were unable to withdraw cash due to a computer malfunction. And the worrying truth is that almost all the basic infrastructure of our society is now controlled by computers. A similar glitch elsewhere could stop water flowing through our taps, food being delivered to supermarkets, electricity to our houses, or cash to our ATMs.

The NatWest fiasco demonstrates just how fragile this level of dependency on the web and computer networks makes us. It also highlights our lack of what security analysts refer to as “resilience”: the ability to adapt to the consequences of a major systems breakdown. This is not just technological but psychological. Last year, I was visiting a major think tank in Washington DC on the same day that BlackBerry’s email server went down. I observed an outbreak of collective neurosis as the staff, most of whom had some form of graduate degree, suffered minor breakdowns as a consequence of not being able to check their email every five minutes. Similar behaviour was reported worldwide last week, when Twitter went down for a few hours.
Why are we so vulnerable to such disruption? The very genius of the internet is the fact that it connects everything. But this is also its Achilles’ heel. If a car breaks down, it will affect five or six people at most. Yet if the central computer controlling the traffic lights of London goes belly up, an entire city hits gridlock. And these networks are easier to break than you might think.
In 2008, a crackdown by the Pakistan Telecommunication Authority on YouTube, over anti-Islamic videos that were hosted there, resulted in much of the world losing access to the site. The censor had typed in the wrong instructions, and rather than blocking the site sent hundreds of millions of requests for it flooding to Pakistan Telecom’s network. Two years later, in 2010, Waddell & Reed Financial of Kansas attempted to execute an algorithmic sale of 75,000 futures contracts on American stock markets, valued at $4.5 billion. Its poorly written instructions triggered havoc, with automated trading systems misinterpreting the trade and wiping 1,000 points off the Dow Jones Industrial Average within minutes.
The real potential for disaster, however, can be seen in three separate events, all of which took place in 2007. In the first, Los Angeles Airport, one of the biggest in the world, seized up after cables supplying the internet to the US Department of Homeland Security burnt out. Twenty thousand passengers were penned into an area between tarmac and immigration for almost 24 hours before technicians were able to identify the cause of the problem.
The same year, the Metropolitan Police uncovered an al-Qaeda plot to blow up Telehouse in Docklands. This is the main internet hub for the United Kingdom: had the terrorists succeeded, our country would have suffered a technological heart attack. Indeed, in the third example, that is precisely what happened: hundreds of thousands of computers started “attacking” the network systems of Estonia. ATMs stopped working, along with the country’s main media outlets and most of the country’s administration. Estonia was in dispute with the Russian government at the time: Russia denied responsibility, even though the hostile computers were traced back there. In the end, Estonia had to cut off its entire internet from the outside world to contain the problem.
Worryingly, rogue viruses and malicious software aimed at disrupting national infrastructures are set to become a standard tool in the military arsenal. Within the past month, US officials have admitted to having developed two major viruses, Stuxnet and Flame, in collaboration with Israel as part of a covert campaign to undermine Iran’s nuclear programme. The capacities of criminal gangs and terrorists are less advanced – but having spent much of the past three years discussing computer security with online criminals for my latest book, I know that they still have the capacity to circumvent the cyber-defences of banks and other businesses with ease.
So while I have some sympathy with RBS – because it is incredibly challenging to manage such a complicated system – the bank’s misfortune offers us all an important warning. One glaring issue is that the British Government, like all others around the world, has yet to introduce regulation requiring banks and large corporations to report serious failings in, or hacks of, their systems.
Although they may yield to public pressure, RBS’s executives are not obliged to reveal the cause of this system meltdown. Indeed, industry and banking are resisting such compulsory reporting precisely because an admission of failure leads to a massive dent in a company’s reputation.
One way around this is to insist on anonymous reporting of breaches, so that the Government is able to form a much better picture of any problems afflicting our major computer systems in both the private and public sector. But that isn’t all we need to be told about. Speaking as one of NatWest’s customers, I also want to know whether the bank’s IT system is serviced in‑house or by an outside contractor. This is critically important, since the computer security industry now recognises that among the top cyber-threats to business is outside contractors maliciously or carelessly allowing viruses into networks, or even stealing data.
Government is already discussing what might happen in the event of an “Advanced Persistent Threat” succeeding – a computer attack or failure whose consequences inflict huge and widespread damage to our economy or infrastructure. But at the moment, neither the state nor the public really knows how vulnerable we are to the attacks or malfunctions to which large computer systems are subject on a daily basis.
This matters, because our lives have become so utterly dependent on such systems. Without a proper debate, we will be left floundering when the next NatWest takes place – and believe me, there will be another NatWest before very long."

Debt crisis: Moody's downgrades 28 Spanish banks

 

Moody’s downgraded 28 Spanish banks last night just hours after the country formally requested aid from Brussels for its shattered lenders.

25 Jun 2012

| Comment

OBR's UK growth forecasts are too optimistic

 

Official forecasts for growth in Britain are based on unrealistic expectations that the private sector, consumer demand and foreign trade will drive a recovery, according to leading ratings agency Standard & Poor's.

25 Jun 2012

| Comment

Why can't the Bank of England be honest about use of the printing press?

 

Members of the Bank of England's Monetary Policy Committee should take heed of the warnings being sounded in the Bank for International Settlements (BIS) latest annual report before launching another bout of quantitative easing, as they are widely expected to do next week.

25 Jun 2012

| 1 Comment

Debt crisis: as it happened June 25, 2012

 

Cyprus applies to Europe for a bail-out to protect its financial sector from exposure to Greece, as global markets tumble ahead of this week's EU summit.

25 Jun 2012

| 624 Comments

Top banker warns PM of City's fears over British exit from Europe

 

David Cameron has been warned by one of the country’s leading bankers that the biggest threat to the City is the possibility of Britain leaving the European Union.

25 Jun 2012

| 3 Comments

Spain's formal request for €100bn fails to stem bail-out fears

Spain formally requested financial help from Brussels for its shattered banks on Monday, but the continued lack of detailed rescue plan compounded fears that Madrid will need a full international bail-out before a deal is agreed.

25 Jun 2012

| 4 Comments

Debt crisis: Cyprus asks for bail-out

Cyprus became the fourth eurozone country to ask for an international bail-out with the admission it cannot cope with its spiralling national debt without external help.

25 Jun 2012

| Comment

Greek finance minister Vassilis Rapanos resigns after illness

Greece's new finance minister, Vassilis Rapanos, resigned on Monday after being ill in hospital for several days.

25 Jun 2012

| 34 Comments

Debt crisis: France must find €10bn of savings

France must find up to €10bn (£8bn) of savings to bring its budget deficit under control this year, finance minister Pierre Moscovici has said.

25 Jun 2012

| 11 Comments

Cyprus asks Europe for a bailout

Cyprus on Monday applied to Europe for a bailout to protect its financial sector from exposure to Greece.

25 Jun 2012

| 8 Comments

Britain needs more QE, says BoE's David Miles

Britain needs a "substantial" amount of further quantitative easing to jump-start its stalled economy, BoE policymaker David Miles said in an interview with the Financial Times.

25 Jun 2012

| 22 Comments

The euro should now be put to the sword

The 19th crisis summit won’t achieve anything until it faces up to the EU’s economic deceit, writes Jeff Randall.


http://www.guardian.co.uk/business/debt-crisis

• Moody's downgrades credit ratings of 28 Spanish banks

  26 Jun 2012: Announcement comes on day Spain's government formally asks for help in cleaning up sector

• Cyprus leader unhappy with remedies forced on bailed-out countries

  25 Jun 2012: President Demetris Christofias likens the EU, European Central Bank and IMF to a 'colonial force'

• Kipper Williams on Greece

  Cartoon, 25 Jun 2012: Antonis Samaras: 'The economy looks even worse since they fixed my detached retina'
  

• Cyprus seeks eurozone bailout

  25 Jun 2012: Cyprus becomes fifth eurozone country to ask for outside financial help after it is caught in backwash of Greek crisis

• Greece economic woes deepen as tax receipts nosedive

  25 Jun 2012: Athens budget statement shows big fall in tax income and rise in social security payments

• Only a Franco-German bargain can save the euro

  25 Jun 2012: Charles Grant: Merkel and Hollande don't trust each other, but they must find a way of working together – and the markets may not wait very long

• Eurozone fatigue sets in as markets open down

  25 Jun 2012: Prospects for cruch meeting this week fails to excite as FTSE opens down
  Biggest faller Shire suffers 12% fall after rival generic drug gains approval

• Greek leaders' illnesses throw government into disarray

  25 Jun 2012: New PM Antonis Samaras in hospital after eye operation as fears grow finance minister Vasillis Rapanos may have to turn down job because of frail health

• Germany must step up to save eurozone, George Soros says

  25 Jun 2012: Billionaire proposes eurozone fund to buy and hold debt from crisis-hit countries in return for them undertaking reforms

• Eurozone austerity hits world's poor as Europe's aid falls by €700m

  25 Jun 2012: Charities' fears grow as EU falls short of 2005 G8 summit targets, though UK is praised for being on course to meet 2013 aid pledges
  
  

http://www.spiegel.de/international/topic/euro_crisis/

Many Questions Remain Spain Officially Requests Aid for its Ailing Banks

SPIEGEL ONLINE - June 25, 2012 On Monday, the Spanish government in Madrid officially requested EU aid for its troubled banks. Spain will be expected to reform its financial industry in exchange for help, but who will determine the conditions that are applied? SPIEGEL ONLINE answers the most pressing questions. By Christian Teevs more... [ Forum ]

Imagining the Unthinkable The Disastrous Consequences of a Euro Crash

SPIEGEL ONLINE - June 25, 2012 As the debt crisis worsens in Spain and Italy, financial experts are warning of the catastrophic consequences of a crash of the euro: the destruction of trillions in assets and record high unemployment levels, even in Germany. By SPIEGEL Staff more... [ Forum ]

US Deficit 'Higher than Euro Zone's' Germany Rejects Obama's Criticism in Euro Crisis

SPIEGEL ONLINE - June 25, 2012 In a sign of tensions between Berlin and Washington, German Finance Minister Wolfgang Schäuble said on Sunday that President Barack Obama should focus on cutting America's own budget deficit before advising Europe on how to tackle its debt problems. more...

SPIEGEL Interview with Finance Minister Schäuble 'We Certainly Don't Want to Divide Europe'

SPIEGEL ONLINE - June 25, 2012 German Finance Minister Wolfgang Schäuble believes that only further EU integration can save the euro. SPIEGEL spoke with him about how the currency can be strengthened, the hurdles presented by Germany's constitution and what the 27-member club might look like in five years.

http://ftalphaville.ft.com/blog/2012/06/25/1058871/moodys-downgrades-spanish-banks/

Moody’s downgrades Spanish banks

Posted by Cardiff Garcia on Jun 25 23:29. Spanish banks have been downgraded by Moody’s because of their counterparty exposure to the sovereign that backstops them which itself just had its credit rating downgraded by Moody’s because of its pledge to support the banks on which it depends for LTRO funding.
Or something.
And Moody’s is careful to note that it may not be finished yet — perhaps understandable given that we don’t yet know the amount of or conditions attached to the eventual funds needed for a Spanish banking restructuring and recap. We’ll have more on this Tuesday.
That’s the first of two reasons, the second more straightforward: the simple expectation that losses on exposure to commercial real estate will worsen.
The full press release from Moody’s is below.
————-

Madrid, June 25, 2012 — Moody’s Investors Service has today downgraded by one to four notches the long-term debt and deposit ratings for 28 Spanish
banks and two issuer ratings.
Today’s actions follow the weakening of the Spanish government’s creditworthiness, as captured by Moody’s downgrade of Spain’s government bond ratings to Baa3 from A3 on 13 June 2012, and the initiation of a review for further downgrade. For more details on the rationale for the sovereign downgrade, please refer to the press release.
Moody’s adds that today’s downgrades of the long-term debt and deposit ratings also reflect the lowering of most of these banks’ standalone credit assessments.
The debt and deposit ratings declined by one notch for three banks, by two notches for 11 banks, by three notches for ten banks and by four notches for six banks. The short-term ratings for 19 banks have also been downgraded between one and two notches, triggered by the long-term ratings changes.
Today’s actions reflect, to various degrees across these banks, two main drivers:
(i) Moody’s assessment of the reduced creditworthiness of the Spanish sovereign, which not only affects the government’s ability to support the banks, but also weighs on banks’ standalone credit profiles, and
(ii) Moody’s expectation that the banks’ exposures to commercial real estate (CRE) will likely cause higher losses, which might increase the likelihood that these banks will require external support.
This notwithstanding, Moody’s views positively the broad based support measures being introduced by the Spanish government to support the Spanish banking system as a whole. Moody’s will assess the impact of the upcoming recapitalization on banks’ creditworthiness and bondholders once the final amount, timing and form of funds flowing to each individual bank are known.
The ratings of both Banco Santander and Santander Consumer Finance are one notch higher than the sovereign’s rating, due to the high degree of geographical diversification of their balance sheet and income sources, and a manageable level of direct exposure to Spanish sovereign debt relative to their Tier 1 capital, including under stress scenarios. All the rest of the affected banks’ standalone ratings are now at or below Spain’s Baa3 rating.
In addition, Moody’s has also downgraded (i) the ratings for senior subordinated debt and hybrid instruments of affected entities; (ii) all rated government-backed debt issuances from Spanish banks; and (iii) the long-term debt ratings of Instituto de Credito Oficial (ICO), which are based on an unconditional and irrevocable guarantee from the Spanish Government.
RATINGS RATIONALE — STANDALONE BFSRs
Moody’s has today downgraded the standalone BFSRs of 25 Spanish banks out of a total of 33 rated institutions, three BFSRs were maintained, and
five institutions do not have a BFSR assigned to them.
FIRST DRIVER — REDUCED CREDITWORTHINESS OF THE SPANISH SOVEREIGN
Moody’s said that the reduced creditworthiness of the Spanish sovereign, as captured by the agency’s three-notch downgrade of Spain’s government
bond rating, implies a weaker credit profile for Spanish banks. This results from the banks’ multiple linkages with the sovereign, including
(i) the impact of the government’s financial position on the domestic economy; and (ii) the large exposures of most banks to their domestic
government and to other counterparties that depend on the credit strength of the government.
After today’s rating actions, only the standalone ratings of Banco Santander and Santander Consumer Finance are higher than Spain’s Baa3
rating in light of their geographical diversification when measured by lending activities, revenues, and earnings. In addition, Moody’s believes
that Banco Santander’s Tier 1 capital ratio would be resilient to applying conservative haircuts to not only the sovereign exposures but
also loans to sub-sovereigns. Santander Consumer Finance does not hold any domestic government securities on its books. Moody’s believes that
the very diversified portfolios of these entities reduce their direct linkage to the sovereign risk profile, and they are therefore rated one
notch above the sovereign (see Moody’s Sector Comment “How Sovereign Credit Quality May Affect Other Ratings” published 13 February, 2012).
SECOND DRIVER — BANKS’ CREDIT PROFILES VULNERABLE TO HIGHER LOSS ASSUMPTIONS, PARTICULARLY ON COMMERCIAL REAL ESTATE EXPOSURES
Several Spanish banks’ balance-sheet clean-up exercises have illustrated the difficulties involved with establishing credible CRE asset
valuations, because of the lack of market liquidity. Furthermore, the required extended period of fiscal consolidation, both at central and
regional government levels, is likely to maintain negative pressure on banks’ balance sheets. As such, Moody’s stressed loss assumptions on the
banks’ CRE exposures as well as its other credit exposures now anticipate outcomes ranging from its more adverse scenario to more highly stressed
scenarios typical of countries that have experienced severe market disruptions in their CRE sectors (e.g., Ireland). Many banks don’t have
sufficient shock absorbers (earnings and capital) to withstand such potential stresses. The downgrade of the banks’ standalone credit
assessments and their new levels mostly in sub-investment grade directly reflect the banks’ relative vulnerability in such a stress scenario as
well as the heightened likelihood that they may need further external support.
Nevertheless, Moody’s views positively the Spanish government’s efforts to stabilize the entire banking system as well as Bankia (Ba2, b2, all
ratings under review with uncertain direction), which have culminated with the announcement made on 9 June to seek financial assistance from
euro area Member States of up to EUR 100 billion to recapitalize Spanish banks. The support will be provided by the EFSF or ESM in the form of a
loan granted to the FROB. This amount is intended to cover the capital needs that will be revealed by the two valuation processes currently
underway plus an additional “safety margin”. The Spanish government has not revealed yet the amount that will be finally requested and individual
capital needs will be made public once the last phase of the valuation is completed.
Moody’s will assess the impact of such support on banks’ creditworthiness and on bondholders – including the conditionalities that are likely to
be imposed on restructured or recapitalized banks along the EU framework for banks’ bailouts — once the amount, timing and form of funds flowing
to each individual bank are known. Moody’s will also assess to what extent the funding of Spanish government debt by the banks may be curbed
to reduce the risk of contagion between the banks and the government.
With regards to Bankia, the b2 standalone credit assessment and the three notch uplift for its debt and deposit ratings to Ba2 incorporate the
expectation of significant capital inflows along the lines of the government’s announcements dated 25 May 2012; at the same time, the
ratings reflect, among considerations, the uncertainty about the exact form of the capital injection, as well as the conditionalities that may
be imposed by the EU in return for the receipt of state aid.
For the three other banks that are currently under administration of the FROB, NCG Banco and Catalunya Banc (both rated B1/b2/Not Prime) and
Banco de Valencia (B3/caa1), in Moody’s view these banks may be the most likely next recipients of further capital in addition to any capital they
have already received. However, since the FROB’s approach up to now had been to sell these banks via auction processes, there is no clarity yet
about any further capital injections in the event that these auctions are not successful. Therefore, the ratings do not yet reflect the potential
for further capital injections.
A primary driver of the rating actions on CECA, Banco Cooperativo Espanol and Ahorro Corporacion is the rating adjustment applied to their main
counterparts (i.e., Spanish savings banks and rural credit cooperatives).
Moody’s has maintained the standalone ratings of Banco Pastor and Banco CAM at current levels, based on the fact that these banks are already
fully-owned by Banco Popular and Banco Sabadell, respectively, and that they will cease to exist as independent legal entities by year–end 2012.
Furthermore, in the specific case of Banco Sabadell, which has recently acquired Banco CAM, Moody’s has factored in the more ample
risk-absorption capacity of the combined entity as a consequence of the acquisition and the way it was structured, which has limited the
magnitude of the downgrade of Banco Sabadell’s standalone BFSR.
The review status and outlooks of the standalone BFSRs of 28 affected banks are as follows:
— 16 standalone ratings remain on review for downgrade reflecting the continuing review for downgrade of the Spanish government’s Baa3 bond
rating.
— The ratings of nine institutions that are involved in merger transactions are also on review, as Moody’s continues to assess the
impact of such transactions on their credit profiles. This explains the review status of CaixaBank, Unicaja and Banco Ceiss, Banco Popular and
Banco Pastor, Banco Sabadell and Banco CAM, and Ibercaja Banco and Liberbank. In all these cases, the standalone ratings are on review for
downgrade, with the exception of those of Banco CEISS (E+/b2) and Banco CAM (E+/b3) that are on review with direction uncertain. These review
placements reflect the likelihood that the rating of the resultant combined entity might be higher than their current ratings.
— Bankia’s (E+/b2) standalone ratings remain on review with direction uncertain, given the uncertainties regarding the impact on its credit
profile of any conditionality that may accompany its’ recapitalisation, the terms and conditions of instruments that will be used to recapitalise
the bank, and the precise timing of its recapitalisation.
— The remaining two banks (Banco de Valencia and Dexia Sabadell) have stable outlooks assigned to their E BFSRs. However, the corresponding
standalone credit assessments could face some pressure to be remapped to a lower level within the E BFSR category from the current caa1 level.
RATINGS RATIONALE — SENIOR DEBT RATINGS
Today’s downgrades of 28 debt and deposit ratings reflect both (i) Moody’s assessment that the ability of the Spanish government to provide future
support to Spanish banks has declined; and (ii) the banks’ reduced standalone credit profiles. The downgrades of 19 banks’ short-term
ratings followed the downgrades of their long-term ratings, consistent with Moody’s standard mapping of short-term to long-term ratings.
Moody’s has also lowered its systemic support assessment for NCG Banco, Catalunya Banco and Banco de Valencia to levels that are consistent with
their nationwide market shares, in line with the criteria applied to the rest of the banking system as per Moody’s methodology (see “Incorporation
of Joint-Default Analysis into Moody’s Bank Ratings: Global Methodology” published on 30 March, 2012).
Moody’s had increased the uplift factored into the senior debt ratings of these three banks as a result of their ownership by FROB (Fondo de
Restructuracion Ordenada Bancaria). These banks were intended to benefit from an Asset Protection Scheme by the Deposit Guarantee Fund — which is
funded by annual contributions from member banks. However, Moody’s assigns a very low probability to the completion of a swift auction
process, given the system-wide pressures and the uncertainties regarding the size, terms and schedule of the recapitalisation of the system by the
EFSF or ESM.
Furthermore, Moody’s has downgraded the issuer ratings of La Caixa and Banco Financiero y de Ahorro (BFA), triggered by the downgrade of the
debt ratings of their operating companies, CaixaBank and Bankia, respectively. The issuer ratings of La Caixa and BFA are positioned two
and three notches, respectively, below the long-term ratings of their operating companies. The issuer rating of La Caixa is on review for
downgrade, whilst BFA’s is on review direction uncertain. Both outlooks reflect the outlooks on their operating companies’ ratings.
Moody’s has maintained the debt and deposit ratings of three entities at their current levels (Banco Pastor, Banco CAM and Lico Leasing). The debt
ratings of Banco Pastor and Banco CAM incorporate their full ownership by Banco Popular and Banco Sabadell, respectively, and our expectation that
their debt will be legally assumed by their owners during the current year as they will cease to exist as independent legal entities. To
reflect this situation, Moody’s has assigned a very high probability of parental support to these banks’ debt ratings.
The review status and outlooks on the debt and deposit ratings of 33 publicly rated institutions are as follows:
— 30 are on review for downgrade, reflecting the review for downgrade of the Spanish government’s Baa3 bond rating and the review for downgrade
on the banks’ standalone BFSRs.
— The debt and deposit ratings of Banco CEISS and Bankia are on review with direction uncertain, reflecting the review with direction uncertain
of these banks’ standalone BFSRs.
— The issuer rating of BFA is on review with direction uncertain reflecting the review with direction uncertain of Bankia’s standalone BFSR
RATINGS RATIONALE — SENIOR SUBORDINATED DEBT AND HYBRID INSTRUMENTS
Moody’s has downgraded the senior subordinated debt and hybrid ratings of 24 Spanish banks in line with the lowering of their standalone credit
assessments. Moody’s had previously removed government support assumptions from its ratings of subordinated debt and hybrid instruments
of Spanish banks on 12 December 2011, see “Rating Action: Moody’s reviews Spanish banks’ ratings for downgrade; removes systemic support
for subordinated debt” (http://www.moodys.com/research/Moodys-reviews-Spanish-banks-ratings-for-do
wngrade-removes-systemic-support–PR_232353).
RATINGS RATIONALE — GOVERNMENT-GUARANTEED DEBT
Following the downgrade of the Spanish government’s bond rating, Moody’s has also downgraded to Baa3, on review for downgrade, from A3, and with a
negative outlook the backed senior debt of 17 institutions. The backed-Baa3 ratings assigned are based on the unconditional guarantee,
which directly links these ratings to the Spanish government. (See ”Moody’s to assign backed Aaa ratings to new euro-denominated long-term
debt securities covered by Spanish government’s guarantee,” published on 22 January 2009.)
RATINGS RATIONALE — THE DOWNGRADE OF ICO’s RATINGS
Moody’s has downgraded to Baa3, on review for downgrade, from A3 (negative outlook) all of ICO’s rated debt. Since ICO’s liabilities are
explicitly, irrevocably, directly and unconditionally guaranteed by the government of Spain, the rating action on ICO is triggered by the
three-notch downgrade of the sovereign’s ratings.
WHAT COULD MOVE THE RATINGS UP/DOWN
Downward pressure on Spanish banks’ ratings primarily arises from the current review for downgrade process of the Spanish sovereign rating,
given the negative implications of the weaker creditworthiness of the sovereign on banks’ credit risk profiles. Further downward pressure on
the banks’ ratings might in addition develop if (i) operating conditions worsen beyond Moody’s current expectations; (ii) asset-quality
deterioration exceeds Moody’s current expectations; and/or (iii) pressures on market-funding intensify.
Upward pressure on the ratings may arise upon the implementation of the government’s plan to stabilize the banking system, to the extent that
banks’ resilience to the challenging prevailing conditions improve. Likewise, any improvement in the standalone strength of banks arising from stronger earnings, improved funding conditions or the work-out of asset-quality challenges could result in rating upgrades.

This entry was posted by Cardiff Garcia on Monday, June 25th, 2012 at 23:29 and is filed under Capital markets. Tagged with moody's, spanish banks.

http://ftalphaville.ft.com/blog/2012/06/21/1053921/koo-on-german-bubbles/

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Koo on German bubbles

Posted by Simon Hinrichsen on Jun 21 16:05. Ancestors of the eurozone crisis, with Richard Koo – from the Nomura economist’s latest note (our emphasis):

In 2005, I told a senior ECB official that it was unfair to force other countries to rescue Germany by boosting their economies with loose monetary policy without requiring Germany to administer fiscal stimulus, when it was Germany that had become so deeply overextended in the bubble. The official responded that that is what a unified currency means: because Germany could not be granted an exception on fiscal stimulus, the only option was to lift the entire region with monetary policy.

In other words the ECB is at fault for blowing bubbles, helped by the framework of fiscal deficit (dis)allowance.
Picture yourself back in the bursting of the IT bubble, which hit Germany hard. The Nasdaq-like Neuer Markt plunged 96 per cent in value before shuttering in 2002.
According to Koo, a balance sheet recession struck the German economy. As Germans increased savings, aggregate demand decreased. With fiscal policy somewhat constrained by the Stability and Growth Pact (not really, but a little), the ECB had to step in (our emphasis):

Germany’s actual fiscal deficits modestly exceeded that threshold on several occasions, but the resulting fiscal stimulus was far from sufficient to prop up the economy. The ECB therefore took its policy rate down from 4.75% in 2001 to a postwar low of 2% in 2003 in a bid to rescue the eurozone’s largest economy.
But those ultra-low rates still had little impact on Germany, where balance sheet problems were forcing businesses and households to minimize debt. The money supply grew very slowly, and house prices continued to fall. Naturally there was only minimal inflation in wages or prices.

In Germany, inflation was low and money supply grew slower than the rest of the eurozone, because people were paying down debt. But it was another story in the periphery:

The countries of southern Europe, which had not participated in the IT bubble, enjoyed strong economies and robust private sector demand for funds at the time. The ECB’s 2% policy rate therefore led to sharp growth in the money supply, which in turn fueled economic expansions and housing bubbles.
In short, the ECB’s ultra-low policy rate had little impact in Germany, which was suffering from a balance sheet recession, but it was too low for other countries in the eurozone, resulting in widely divergent rates of inflation.

Which reminded us of just how skewed monetary policy has been inside the eurozone. Fernanda Nechio of the San Francisco Fed did a post a while ago, plotting the ECB’s monetary policy against a simple Taylor Rule for the core and the periphery:

Anyway, back to Koo (our emphasis):

In other words, there would have been no need for such dramatic easing by the ECB—and hence no reason for the competitiveness gap with the rest of the eurozone to widen to current levels—if Germany had used fiscal stimulus to address its balance sheet recession.
The creators of the Maastricht Treaty made no provision for balance sheet recessions when drawing up the document, and today’s “competitiveness problem” is solely attributable to the Treaty’s 3% cap on fiscal deficits, which placed unreasonable demands on ECB monetary policy during this type of recessions. The countries of southern Europe are not to blame.

And so it is today. Essentially, Germany and the periphery have traded places.
The competitiveness issue, which is being addressed albeit slowly, has the problem of overshooting in the core if only moved by monetary policy:

But the 1% policy rate and a 10-year Bund yield under 1.5% are clearly too low for a strong economy like Germany and have prompted house prices to rise sharply for the first time in 15 years.

So instead of letting fiscal policies help smooth out the imbalances — monetary policy is at the forefront. A tool not right for the job, says Koo.
Not that he’s a fan of fiscal integration…

Unfortunately there have been growing calls in the eurozone for fiscal union. But that would only make the problem worse by forcing the same fiscal policy on all countries, regardless of whether they were in a balance sheet recession.
European policymakers simply do not understand the concept of balance sheet recessions. Inasmuch as many continue to argue—whether out of ignorance or emotion—that the current gap in competitiveness is attributable to laziness in the southern European countries, I suspect a proper policy response is still far off.

Related links:
Monetary Policy When One Size Does Not Fit All - Fernanda Nechio, the Federal Reserve Bank of San Francisco.
Money still matters – Macro and other market musings
Cheat sheet for Europe – FT Alphaville
Richard Koo’s prescription for Greece (and Germany) – FT Alphaville
This entry was posted by Simon Hinrichsen on Thursday, June 21st, 2012 at 16:05 and is filed under Capital markets. Tagged with liquidity trap, Richard Koo.

http://blogs.ft.com/martin-wolf-exchange/2012/06/25/what-was-spain-supposed-to-have-done/

"In January 2004, I attended a property conference in Switzerland, to give a talk on the European economy. I talked about the end of European catch-up on US productivity levels. But the most interesting part of the conference was a workshop in which I argued that a number of European countries, the UK being one, had dangerous property booms.
The most dangerous of all, I suggested, was Spain’s, because it is a large European country which was experiencing a huge rise in property prices and, as a result, a huge boom in property development and a correspondingly overheated construction sector. The results could be extremely painful. This remark led to a heated altercation with a Spanish property developer. I understood why he was so angry. But he was wrong, of course.
The Spanish property sector created a huge boom and a huge crash. The big question is what the Spanish authorities should (or could) have done about it.
One answer is that they should have tightened fiscal policy, since they could do nothing about the monetary policy of the eurozone, which was wildly unsuitable for their economy, prior to the crisis (far too loose then and far too tight now). Maybe so, but Spain’s fiscal performance looked pretty good, as data from the International Monetary Fund’s World Economic Outlook Database show.

Prior to the crisis, Spain had a reasonable primary fiscal surplus (before interest payments) and an actual budget surplus in 2005, 2006 and 2007. Then, as we can see, the fiscal position collapsed as a direct consequence of the financial crisis and the collapse of the property boom. I had expected the fiscal position to worsen, but not by more than 13 per cent of GDP in just two years. As a result, what had seemed a robust public debt position began to deteriorate rapidly.
To sharpen the point, I compare below Spain’s net public debt with that of Germany. By 2007, it had fallen to half of Germany’s levels. Spain seemed to be in an excellent fiscal position.
One can argue that Spain’s structural or cyclically-adjusted deficit was much higher than its actual deficit. So these apparently excellent figures disguised the truth. But, as my colleague Chris Giles has recently noted, nobody knows what the structural position is. This was certainly true for Spain.
Below I show what the IMF thought in April 2008 and what it thinks now. In 2008, the IMF, among the world’s most independent and respected official institutions, thought that Spain had run a substantial structural – or cyclically-adjusted – fiscal surplus in 2004, 2005, 2006 and 2007. Now it thinks this had in fact been a substantial structural deficit.
That change in view would seem to support the point made by Chris Giles. But it also means that there was no obvious reason why Spain should have run a tighter fiscal position before the crisis. It had an official seal of approval for what it was doing. In a boom, just about everybody misunderstands what is happening.Those who do not are Cassandras and so tend to be ignored.
In retrospect, the only way the Spanish authorities could have prepared themselves for the shock would have been to run fiscal surpluses of 10 per cent of GDP over the five or six years before the crisis, so generating a positive net asset position of at least 20 per cent of GDP. That might have been enough (though even that is uncertain). There is no chance whatsoever that a democracy would run such surpluses. Incidentally, Angela Merkel’s beloved fiscal compact would have unambiguously failed, since Spain was in fact thought to be running structural surpluses before the crisis, just as the compact demands.

What else could the Spanish authorities have done?
Well, they could have tried to curb bank lending directly, via rapidly falling loan-to-value ratios or direct curbs on lending. There are two reasons for wondering whether this would have worked. First, it would have been desperately unpopular in Spain. People like the property developer I met, not to mention the construction workers and many other interests, would have been ferociously angry if the authorities had tried to curb lending. It takes a very tough set of regulators do so. Often, too, the latter cannot imagine how badly things will turn out. Second, the lending might then have come directly from foreigners rather than via Spanish institutions. Would the Spanish authorities have been able to prevent such inflows under European Union rules? I believe not.
Alternatively, they could have tried to make their banks more robust. But they did in fact try to do so, with their famous policy of dynamic provisioning. It was controversial at the time, though a good idea. The problem, as we can now see, is that it was nothing like enough. Banks needed far more capital than they had to survive a crisis of this magnitude.
Spain did not run irresponsible fiscal policies, as Germans believe, and the fiscal compact would not have saved it from crisis. It did have a huge property boom associated with financial excesses and illusionary prosperity. But that boom was, in sizeable measure, also financed from abroad, via capital inflows, as the history of current account deficit shows (see below).

Do those who financed these wasteful investments not deserve to lose money, too? Yet some of them must be among the creditors of Spanish banks who are now to be rescued by the €100bn loan that the Spanish government is planning to take, thereby risking its solvency: this is surely unconscionable.
Above all, how could Spain have prevented this crisis, which was unambiguously generated in the domestic private sector and fuelled by private sector capital inflows? If it could not have prevented the crisis, how can it bear some deep moral fault? Surely, a far more sensible – indeed moral – approach would be to recognise that this is more misfortune than misdeed and offer Spain the help it needs to adjust its economy to the post-crisis reality, without letting it either be pushed into sovereign bankruptcy or humiliated. Yet that is what is now threatened.
In my view, Spain made only one big mistake: joining the euro. Without that, it would probably now look more like the UK: yes, the economy would be in serious trouble, but its exchange rate and its long-term interest rates would both be far lower. After all, its fiscal position is even now no worse than the UK’s, as I note in my blog post here. But reconsidering that choice is no longer possible. Now it needs help to survive the crisis. Will Spain get enough of what it needs? I doubt it.
The first chart in this post has been updated to correct a labelling error."

About here I went to gocomics.  Enough reality.


Barring a miracle we are looking at a world depression.

Much wealth will vanish in the shadow banking collapse.











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