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from Felix Salmon:
Doomed Europe
It's long -- at some 4,500 words -- but I can highly recommend the debate between George Soros and Hans-Werner Sinn about what Soros calls The German Question.
The debate is profound, and the two stake out radically different positions, even though they end up at pretty much the same place. Soros says that Germany should make a simple choice: either sign on to Eurobonds, where the euro zone as a whole would issue low-yielding debt to the benefit of all, or else leave the euro zone entirely. Either way, he says, Europe would win -- either from reducing the fiscal burden of the various national debts, or else from seeing the euro devalue against the new Deutschmark.
Sinn agrees with Soros that Germany would be making a huge mistake were it to leave the euro zone; he disagrees vehemently, however, on the subject of Eurobonds. But both men are clear that given political realities in Germany, neither of Soros's two choices is going to happen. Germany is going to stay in the euro zone, and Eurobonds aren't going to happen.
That, says Soros, is a tragedy:
Europe would be infinitely better off if Germany made a definitive choice between Eurobonds and a eurozone exit, regardless of the outcome; indeed, Germany would be better off as well. The situation is deteriorating, and, in the longer term, it is bound to become unsustainable…
from Global Investing:
Weekly Radar: May days or Pay days?
So, it's May and time for the annual if temporary equity market selloff, right? Well, maybe - but only maybe. A fresh weakening of the global economic pulse would certainly suggest so, but central banks have shown again they are not going to throw in the towel in the battle to reflate. The ECB's interest rate cut today and last night's insistence from the Fed that it's as likely to step up money printing this year as wind it down are two cases in point. And we're still awaiting the private investment flows from Japan following the BOJ's latest aggressive easing there.
So where does that all leave us? A third of the way through 2013 and it’s been a good year so far for nearly all bulls – both western equity bulls and increasingly bond bulls too! Not only have developed world equities clocked up some 13 percent year-to-date (the S&P500 set yet another record high this week while Europe's bluechips recorded a staggering 12th consecutive monthly gain in April) , but virtually all bond markets from junk bonds to Treasuries, euro peripherals to emerging markets are now back in the black for the year as a whole. For the most eyebrow-raising evidence, look no further than last week’s debut sovereign bond from Rwanda at less than 7 percent for 10 years or even newly-junked Slovenia’s ability this week to plough ahead with a syndicated bond sale reported to already be in the region of four times oversubscribed. For many people, that parallel rise in equity and bonds smells of a bubble somewhere. But before you cry “QEEEEE!” , take a look at commodities -- the bulls there have been taken a bath all year as data on final global demand hits yet another ‘soft patch’ over the past couple of months.
from Global Investing:
No one-way bet on yen, HSBC says
Will the yen continue to weaken?
Most people think so -- analysts polled by Reuters this month predict that the Japanese currency will fall 18 percent against the dollar this year. That will bring the currency to around 102 per dollar from current levels of 98. And all sorts of trades, from emerging debt to euro zone periphery stocks, are banking on a world of weak yen.
Now here is a contrary view. David Bloom, HSBC's head of global FX strategy, thinks one-way bets on the yen could prove dangerous. Here are some of the points he makes in his note today:
from MacroScope:
Why euro zone bond yield ‘convergence’ may be something to fear
Are European bond investors looking for love in all the wrong places?
The premium bankers demand to hold various types of euro zone debt over that of Germany has recently come down. In normal circumstances, this might suggest markets are no longer discriminating between the risks associated with different member countries’ bonds. But analysts say the recent convergence is based on a precarious belief of ECB action rather than any real improvement in economic fundamentals.
Spain and Italy still offer a comfortable premium over Germany. But a narrowing in yield spreads that is being driven by a fall in the funding costs of Spain and Italy, rather than by a rise in German yields, gives reason for pause.
from Hugo Dixon:
Cyprus is edging towards euro exit
Cyprus is no longer centre stage. Nicosia has agreed a 10 billion euro bailout deal with its euro zone partners and the International Monetary Fund. A visible bank run has been averted by stringent capital controls. International markets, which only ever suffered a mild bout of jitters, have calmed down.
But it would be foolish to forget about Cyprus. The small Mediterranean island is edging towards euro exit. Quitting the single currency would devastate wealth, fuel inflation, lead to default and leave Cyprus friendless in a troubled neighbourhood. Even so, the longer capital controls continue, the louder the voices calling for bringing back the Cyprus pound will grow.
from Hugo Dixon:
Cyprus leaves banking union up in air
The Cypriot catastrophe shows just how far away the euro zone is from creating its much-touted “banking union”. There was no euro zone supervision of Cyprus’ big banks, no transnational approach to put them into controlled bankruptcy, no common deposit insurance and no flow of bank rescue funds from abroad.
Instead, there was weak supervision by the Central Bank of Cyprus and a mad scramble to carve up the banks’ assets on national lines. Nicosia was left to shoulder the whole cost of protecting small depositors and the euro zone said that none of its bailout cash could be injected into the troubled banks.
from Global Investing:
Weekly Radar-”Slow panic” feared on Cyprus as central banks meet and US reports jobless
US MARCH JOBS REPORT/THREE OF G4 CENTRAL BANKS THURS/NEW QUARTER BEGINS/FINAL MARCH PMIS/KENYA SUPREME COURT RULING/SPAIN-FRANCE BOND AUCTIONS
Given the sound and fury of the past fortnight, it’s hard not to conclude that the messiness of the eventual Cyprus bailout is another inflection point in the whole euro crisis. For most observers, including Mr Dijsselbloem it seems, it ups the ante again on several fronts – 1) possible bank contagion via nervy senior creditors and depositors fearful of bail-ins at the region’s weakest institutions; 2) an unwelcome rise in the cost of borrowing for European banks who remain far more levered than US peers and are already grinding down balance sheets to the detriment of the hobbled European economy; and 3) likely heavy economic and social pressures in Cyprus going forward that, like Greece, increase euro exit risk to some degree. Add reasonable concerns about the credibility and coherence of euro policymaking during this latest episode and a side-order of German/Dutch ‘orthodoxy’ in sharp relief and it all looks a bit rum again.
from Hugo Dixon:
Cyprus controls an “omnishambles”
Cyprus’ capital controls are an “omnishambles”. If the Argentine-style “corralito” really can be lifted in seven days, the damage could be contained. But that doesn’t seem credible. Extended controls could spawn bribery, sap confidence, further crush the economy, spread contagion and ultimately lead to the country’s exit from the euro.
The lesson of capital controls elsewhere is that, once they are imposed, they are hard to remove. Iceland’s curbs are still in place five years after they started. In Argentina, they lasted a year.
from Photographers Blog:
The German-French friendship
Near Weisskessel, Germany
By Fabrizio Bensch
Photos of significant gestures between two politicians often mirror the state of the relations between the two countries – and become part of our collective consciousness. As a photojournalist, I am often witness to politicians shaking hands or embracing as part of major engagements. Often it’s daily routine.
REUTERS/Bundesregierung/Guido Bergmann/Pool
However, these days if a German chancellor and a French president reach out for one another, this signifies an important development in international relations – and is a very significant symbol for a united Europe. Historically, relations were dominated by wars – for the generation of our grandfathers and grandmothers, seeing the other country as "the enemy" rather than a neighbor was a defining political and cultural force, which molded everyday actions and experiences.
from Hugo Dixon:
Cyprus must avoid capital controls
Imposing capital controls would be a historic mistake for Cyprus and the euro zone – even worse than the crass idea of taxing uninsured deposits. Non-cash transactions would be limited, while withdrawals from cash machines would be rationed.
This would be equivalent to Argentina’s “corralito”, which lasted a year in 2001/2002. If capital controls are imposed, it will be almost impossible to lift them because people will stampede for the exits once they are removed. But such heavy-handed rationing of limited cash would clobber an economy which is already heading for a slump.
