No Run on the Bank

Said a Cypriot lady, Maria,
At a bank branch in old Nicosia:
"With the caps they impose
On capital flows,
Withdrawal's a useless idea."

A Peripheral Question

When the banks on the euro zone's fringes
Must be rescued from too many binges,
There's something to lose
And the rescuers choose
The party on whom it impinges.

When the eurozone finally begins
To determine who loses and wins,
Will the outcome be fair
To depositors there
Or the wishes of Germans and Finns?

Guest Post: ECB Tries Again

My friend Andy Fately sent a brilliant pair of limericks to his clients this morning. Andy, a Corporate FX Risk Strategist for Barclays Capital who used to tweet as @fx_poet, is a foreign exchange limericker, a rare subspecies of financial poet. Here are his verses today:

There once was a group of old fossils
Whose policy slips were colossal,
And later today,
They’re likely to say
Come follow us, like we’re apostles.

But what can they possibly do
To fix all the things that they blew?
The popular theme’s
A new banking scheme
To help failing banks to pull through.

ECB Rate Announcement

Said Mario Draghi: "Please heed me:
Our 'zone isn't going agreeably;
The better to serve you
In line with our purview,
We'll pay you to borrow if need be."

In an acknowledgement that things are bad all over, the European Central Bank has dropped its benchmark interest rates to record lows. ECB President Mario Draghi admitted in a press conference that his fears of a general slowdown in the euro zone have come to pass. Even such notable ECB hawks as Germany's Jens Weidmann have grasped the olive branch and joined in the unanimously dovish rate decision.

After a 0.25% reduction, the central bank's refinancing rate is now 0.75% and the overnight deposit rate, 0.00%. As Mr. Draghi reminded his listeners, this means that real (inflation-adjusted) rates are negative. At the same time, Europe's central banker is aware that any expansion of credit must be driven by demand, and thus the efforts to get the continent's economy moving again may amount to "pushing on a string."

Spanish Bank Bailout

The ECB, EU and Spain
Gave a lesson in legerdemain,
In pledging a sum,
Knowing not where it's from,
Or where it would end up a-gain.

A €100 billion "bailout" of Spanish banks announced on the weekend turned out to be less than meets the eye. Global equity markets tumbled and Spanish government bond yields jumped to 6.521% as investors considered the unresolved issues in the European initiative. For starters, nobody knows yet where the money will come from - the old European Financial Stability Facility, or the new European Stabilization Mechanism. If the latter, the "aid" will comprise a loan to the Spanish government, the proceeds of which will be invested in Spanish banks. This government loan, equal to 10% of existing government debt, would be senior to that existing debt. This means that a short-term fix for the banks would end up damaging the attractiveness of Spanish government bonds, the core holders of which are...Spanish banks.

Can You Have It All?

Politicians who like popularity
May advocate "growth with austerity",
An odd formulation
Of vague calculation,
But perfect political clarity.

European growth vs. fiscal austerity? "We need both," says ECB Executive Board member Jörg Asmussen. Mr. Asmussen, who recently joined the European Central Bank from the German finance ministry, maintained in a speech in Berlin that "the fiscal compact can be complemented by growth-enhancing measures." However, it is clear that, as a good German, he advocates fealty to fiscal discipline first and foremost; growth measures "make sense as a supplement, but the fiscal compact cannot be renegotiated or softened." Most likely Mr. Asmussen is just doing his bit to calm the political waters that have recently swept away such austerity advocates as Nicholas Sarkozy, as well as his own Christian Democrats in a recent regional election. After all, even an elite central banker would have trouble explaining how a government could simultaneously grow the economy while shrinking itself.

Reversal of Fortune, Part I

Said an equity trader named Corso:
"After last week, I certainly swore so
That the Dow was at pains
To give up its gains,
But this week it looks even more so."

The Dow Jones Industrial Average suffered its worst one-day drop for the year to date on Tuesday, falling 213.66 points, or 1.7%, to 12715.93. On the heels of a disappointing, holiday-shortened previous week, that made for a 4% decline over five trading days. After celebrating its best quarter in a decade, it's as if the market paused for reflection, looked around and didn't like what it saw. The Fed seemed to hint last week that no further stimulus would be forthcoming, and the European debt crisis heated up again on Tuesday, with rising Italian and Spanish bond rates reflecting renewed risk fears. Perhaps the rudest shock of all came from China, where we learned that sales of Caterpillar plunged 50% in March, casting doubt on both the company's prospects and the Chinese growth outlook.

€uro Myth

Said an overwrought Eurocrat wistfully,
At the nightmare he once dreamed of blissfully:
"The euro must break up
Or else we must take up
The topic of joining fiscally."

Among the 9 Economic Myths deconstructed by Cullen Roche in his Pragmatic Capitalist blog is that of the euro: specifically, that the euro has been saved by the ECB's LTRO (long-term refinancing operation). Euro-zone banks have borrowed a net €520 billion of 3-year LTRO loans, which the ECB hopes will encourage liquidity and lending among the banks in its member countries. Unfortunately, this is another example of can-kicking. Says Mr. Roche:

The problem in Europe is simple. Because none of the countries are autonomous currency issuers, they all suffer from solvency constraints. They can’t print euro without the approval of a foreign central bank, in essence. So, unlike the USA, they can “run out of money”. This makes for frightened bond investors. The problems all arise out of the [intra-European] trade imbalance, which essentially forces the core to lend to the periphery to maintain growth. This is only sustainable up to a point and that point has been reached.

Hat tip to the Reformed Broker, Josh Brown.

Euro Downer

The market's unflinching barbarity
Toward the euro zone's flagging prosperity
Has its rate on a path
From a buck-and-a-half
Toward - eventually - dollar parity.

The euro has reached an 11-month low of $1.30, accelerating a trend that has seen the Old World's currency decline 12% from a high of $1.48 in May. As usual, the reasons are many; they include the belief that Europe is headed for a recession if its leaders do not soon restore confidence. European banks are poorly positioned to ease a credit crunch, as their piles of idle cash result from mandated deleveraging and recapitalization. Even the European Central Bank is contributing to euro weakness, based on the expectation of future rate cuts, which typically devalue a currency.
Chart courtesy of The Wall Street Journal.

Liquidity Injection

Said Bernanke: "I'd like to eschew
That the euro would bid us adieu,
So I'll open the taps
To help out those chaps
In the Old World as well as the New."

The Federal Reserve led an internationally coordinated effort among the leading central banks to inject US dollar liquidity into the European banking milieu. With a half-percent cut in the rate on dollar swap lines to the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank, the Fed hopes that dollars would in turn be made available to those Old World financial institutions for which liquidity has dried up of late. Marketplace's Heidi N. Moore, in her Tumblr, compared the action to siphoning unleaded premium from a Hummer so that a distressed Mercedes tow truck - and the broken Ferrari behind it - can reach the nearest exit and stop endangering the other traffic. Markets reacted ecstatically, which is ironic considering the central banks' implicit acknowledgement of urgency, bordering on panic.

Message From Slovakia

"'Ere a bailout our nation commits to,
Some cold perspiration befits you,
As this saga has shown
That our currency zone
Is prone to financial jiu jitsu."

Well played, Slovakia. This tiny outpost of New Europe now holds the fate of the €440 billion European Financial Stability Facility (EFSF) in its hands. As the last of the 17-member euro zone to take up the ratification of the EFSF, Slovakia roiled the waters Tuesday when its divided parliament voted No. Even though a majority of the Slovak parties support the stability framework in principle, the question is caught up in parliamentary maneuvering, with the government evidently headed for a no-confidence vote. In the meantime, France and Germany can only sweat it out, as they test the limits of their persuasive powers.

@StephenKinsella Recites Dr. Goose

[Audio] Stephen Kinsella, Lecturer in Economics at the University of Limerick, recites Dr. Goose's two-verse poem entitled "Dublin vs. Limerick Economist," proving that economists are good sports.  The verses are based on Dr. Kinsella's debate with Morgan Kelly of University College Dublin over the best way out of Ireland's financial crisis.




For background:

• here is Dr. Kelly's polemic in the Irish Times that started it all; 
• here are parts one and two of Dr. Kinsella's response.

Erin Go Broke?

Said Noonan: "We'd like to inject less
In these albatross banks on our necklace,
For we've already blown
So much cash of our own
To atone for when lenders were reckless."  

Irish Finance Minister Michael Noonan would like the EU and the European Central Bank to agree on a longer timetable for the deleveraging of its banking sector. After the banking collapse brought on by overly aggressive property lending, the Irish government has injected €46 billion, or 29% of GDP, into the country's banks, and could evidently use a breather.

A Non-Stimulating Argument

A program of fiscal austerity 
Is historically really a rarity; 
Though it brings, some maintain, 
Fiscal gain without pain, 
They perhaps overlook its severity.  

Harvard economics professor Greg Mankiw's blog contains links to both sides of this debate.

Overheard at the ECB

"Messieurs, I've developed a test
To determine if banks are too stressed;
It's been rig'rously checked
To be mild in effect,
So of course, it's politically blessed."

Overheard at the European Central Bank

"This bailout we've not had much luck at,
And it's us Greeks are running amuck at,
So we'll just watch, this week,
The World Cup en Afrique,
Which at least the Americans suck at."