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from Breakingviews:

Europe slides towards the next Minsky Moment

By Neil Unmack

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

There’s little doubt that markets think the euro crisis is over. Bond yields have fallen below pre-crisis levels for most of the countries formerly known as peripherals; the grab for southern European assets is a crowded trade. Could this be the prelude to the next Minsky moment?

The last crisis fit perfectly the pattern described by the American economist Hyman Minsky. Investors’ exaggerated belief in stability leads them to price assets for perfection - for example no defaults by euro zone sovereigns. Then some imperfection arrives - a serious possibility of default - and there is a violent outbreak of instability - the euro crisis.

The excessive euro-confidence lasted for about a decade, from 1998 to 2008, although the crisis took a further two years to properly get going. During most of that time, investors demanded a mere 0.2 percentage points higher interest rate on Portuguese than on comparable German debt, down from over 5 percentage points in 1995. At the height of the crisis in 2012, the spread was 15 percentage points.

from Breakingviews:

Euro crisis 2.0 will need a new shock absorber

By Neil Unmack and George Hay

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Future euro zone crises will need a different shock absorber. European banks kept yields down during 2010-13 by buying sovereign debt. New capital rules make this an altogether dicier affair.

from Global Investing:

Weekly Radar: Elections and housing in last big week of 2012

So an extra dose of medicine from the Fed on Wednesday helps smother global market volatility further into the yearend -- even though naming an explicit 6.5% unemployment rate could well send Treasury bond volatility soaring as the current 7.7% rate likely approaches that level in 2014 just as the Fed low-rate pledge expires. Not a story for early next year maybe, but...

More nose-against-the-windshield, the busy end to this week - with the EU Summit today and December's flash PMIs tomorrow - makes it difficult to clear the decks yet for yearend -- at least not as much as market pricing and volumes would suggest. Moves to some form of EU banking union are already in the mix from Brussels, however, so another plus at the margins perhaps.

from Global Investing:

Weekly Radar: China and Fed steal the show

Even though US cliff talks remain unresolved, many of the edges have been taken off seasonal yearend jitters elsewhere. Euro pressures have been kept under wraps since the Greek deal,  the possibility of yet another Fed QE manoeuvre next Wednesday is back in play and a significant pulse has been recorded in the global economy via the latest PMIs - thanks in large part to China and the US service sector.US payrolls loom again tomorrow, but the picture is one of stabilisation if not full-scale recovery.

All this has kept markets pretty calm with a positive tilt as investors parse 2013. The Greek deal has proved to be a very important juncture for the euro zone, with Italian 10-year yields down yet another 14bp Wednesday-to-Wednesday. The parallel recentr lunge in Spanish yields backed up a few notches after this week's auction disappointed some traders. Yet even here the relative ease with which a supposedly-cornered Madrid raised more than 4 billion euros for next year’s coffers keeps the financial side of their crisis, if not the economic one, in context for now at least.

from Breakingviews:

Spain’s bank rescue is part bail-in, part bail-out

By George Hay and Neil Unmack

The authors are Reuters Breakingviews columnists. The opinions expressed are their own

Spain's bank haircuts are part bail-in, and part bail-out. The indebted government has lopped 10 billion euros off its euro zone-funded bank rescue bill by cutting the value of its worst lenders' hybrid debt. Yet if it hadn't been for political considerations, the burden-sharing might have been greater.

from Global Investing:

Weekly Radar: Bounceback as year winds down

Yet another Greek impasse, a French downgrade, ongoing DC cliff dodging and a downturn in Citi's G10 economic surprise index (though not yet in the US one) could have been plausible reasons this week to extend the post-election global markets swoon. But at 8 consecutive days in the red up to last Friday, that was the longest losing streak since last November, and a lot of froth had been shaken off these year-end markets already.

We've seen a decent bounceback in nearly all risks assets instead. That may be partly due to volume-sapping Thanksgiving week and partly due to the fact that more and more funds think the year is effectively over now anyhow. The only big wildcard left is the timing of an fiscal agreement stateside and few managers now honestly believe there won’t be some sort of a deal. (Deutsche, for the record, said this week that the divide between the sides over tax is much less than many assume).  Greece is a slower burner but again, few people believe it will be hung out to dry any time soon and a deal on the next tranche – whatever about deep and meaningful OSI, payment moratoriums and loan rate cuts – will most likely be reached next week at the latest. Talk of a EFSF-funded Greek debt buyback meantime has helped pushed its debt yields to the lowest since the restructuring.  And the French downgrade was probably the least surprising move of the past five years.

from Global Investing:

Weekly Radar: In the shadow of the cliff

It’s been another rum old week market-wise, with global stocks off another 2 percent or more and recording seven straight days in the red for the first time since August. Throw any spin you like at the reasoning, but the pretty predictable post-election hiatus on U.S. fiscal cliff worries now seem to be front and centre of everything. And that will just has to play itself out now, leaving markets stuck in this funk until they come up with the fix. The running consensus still seems to be that some solution will be reached, but no one wants to be too brave about it. And given the cliff is one of the few good explanations for the sharp divergence between the equity market and still rising US economic surprises,  you can see why many feel the US fiscal standoff is merely delaying a resumption of the rally.

The euro zone story has rumbled again of course, with the Greek hand-to-mouth financing, pressure for official sector debt write-offs there and another nervy wait for the latest tranche of bailout funds. Anti-austerity protests in Greece, Spain, Portugal and elsewhere meantime stepped up a gear this week and Q3 data out today confirmed the euro bloc back in recession.

from Breakingviews:

Soft approach sadly best for next Greek debt deal

By Neil Unmack

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

There’s no question that Greece’s public creditors - euro zone governments which helped bail out the country, and the European Central Bank which bought some 40 billion euros worth of its bonds - should take a hit. Athens just revised economic and budget forecasts showing that debt will reach 189 percent of gross domestic product next year, 22 percentage points more than estimates in March. Private creditors have already lost more than half their money in a restructuring earlier this year, but public sector lenders, who make up the lion’s share of the remaining debt, have been largely spared so far.

from Global Investing:

Weekly Radar: Q3 earnings; China GDP; EU summit; US debate

Markets have turned glum again as October gets underway and the northern winter looms, weighed down by a relentless grind of negative commentary even if there’s been little really new information to digest. The net loss on MSCI's world stock market index over the past seven days is a fairly restrained 1.5%, though we are now back down to early September levels. Debt markets have been better behaved. The likes of Spain’s 10-year yields are virtually unchanged over the past week amid all the rolling huff and puff from euroland. The official argument that Spain doesn’t need a bailout at these yield levels is backed up by analysis that shows even at the peak of the latest crisis in July average Spanish sovereign borrowing costs were still lower than pre-crisis days of 2006.  But with ratings downgrades still in the mix, it looks like a bit of a cat-and-mouse game for some time yet. Ten-year US Treasury yields, meantime, have nudged back higher again after the strong September US employment report and are hardly a sign of suddenly cratering world growth. What's more, oil’s back up above $115 per barrel, with the broader CRB commodities index actually up over the past week. This contains no good news for the world, but if there are genuinely new worries about aggregate world demand, then not everyone in the commodity world has been let in on the 'secret' yet.

So why are we all shivering in our boots again? Perennial euro fears aside for a sec, the latest narratives go four ways at the moment. 1) The IMF’s World Economic Outlook (WEO) downgraded world growth and its Financial Stability report issued stern warnings on the extent of European bank deleveraging 2) a pretty lousy earnings season is just kicking off stateside, 3)  U.S. presidential election polls are neck and neck again and unnerving some people fearful of a clean sweep by Republicans and possible threats to the Federal Reserve's independence and its hyper-active monetary policy 4) it’s a new quarter after a punchy Q3 and there’s not much new juice left to add to fairly hefty year-to-date gains. Maybe it’s a bit of all of the above.

from Global Investing:

Euro emigration – safety valve or worker drain?

Four years of relentless austerity in many of the euro zone's most debt-hobbled countries have forced many of their youngest and sometimes brightest workers to grab the plane, train or boat and emigrate in search of work. For countries with a long history of emigration, such as Ireland, this is depressingly familar -- coming just 20 years after the country's last debt crisis and national belt-tightening in the 1980s crescendoed, with the exit of some 40,ooo a year in 1989/90 from a population of just 3-1/2 million people.

The intervening boom years surrounding the creation and infancy of the Europe's single currency and expansion of the European Union eastwards saw huge net migration inflows back into the then-thriving euro zone periphery  -- Ireland, Greece, Portugal, Spain and Italy -- and created a virtuous circle of rising workforces, higher demand for housing/goods and rising exchequer tax receipts.

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