Page 3 of
4 CREDIT BUBBLE
BULLETIN Z1, QE3 and
deleveraging Commentary and
weekly watch by Doug Noland
Catalonia's
leader, Artur Mas, accused Mr. Rajoy of losing a
'historic opportunity' to safeguard the
relationship between his region and the rest of
Spain, after Mr. Mas was unable to persuade Mr.
Rajoy to change the tax rules for Catalonia. Mr.
Mas warned that Mr. Rajoy's refusal to negotiate
any fiscal changes was likely to increase
resentment toward the Madrid government among
Catalans, after hundreds of thousands of people in
the region held the largest-ever pro-independence
rally, on Sept. 11 in Barcelona. 'The people and
society of Catalonia are on the move, as we have
seen on Sept. 11, and not willing to
accept that our future
will be gray when it could be more brilliant,' Mr.
Mas said… after a two-hour meeting with Mr.
Rajoy."
September 21 - Bloomberg (Chiara
Vasarri and Lorenzo Totaro): "Italy and Spain
won't request bailouts unless a new surge in bond
yields leaves them shut out of markets as no
government will voluntarily accept conditions
imposed for the aid, a senior Italian government
official said. 'There won't be any nation that
voluntarily, with a preemptive move, even if
rationally justified, would go to an international
body and say - 'I give up my national
sovereignty,'" Gianfranco Polillo, undersecretary
of finance, said… 'I rule it out for Italy and for
any other country.'"
September 18 -
Bloomberg (Anne-Sylvaine Chassany): "European
banks pledged last year to cut more than $1.2
trillion of assets to help them weather the
sovereign-debt crisis. Since then they've grown
only fatter. Lenders in the euro area increased
assets by 7% to 34.4 trillion euros ($45 trillion)
in the year ended July 31… BNP Paribas SA, Banco
Santander SA, and UniCredit SpA, the biggest banks
in France, Spain and Italy, all expanded their
balance sheets in the 12 months through the end of
June. They have Mario Draghi to thank. The ECB
president's decision nine months ago to provide
more than 1 trillion euros of three-year loans to
banks eased the pressure to sell assets at
depressed prices… 'Deleveraging isn't taking
place, especially in Spain and Italy,' said Simon
Maughan, a bank analyst at Olivetree Securities…
'The fact that we haven't got on with it, or very
slowly, suggests that when the time comes we'll
need another ECB injection to roll over the first
one, just to keep the balance sheets of Italian
banks in business.'"
September 21 -
Financial Times (Peter Spiegel and Miles Johnson):
"EU authorities are working behind the scenes to
pave the way for a new Spanish rescue programme
and unlimited bond buying by the European Central
Bank, by helping Madrid craft an economic reform
programme that will be unveiled next week.
According to officials involved in the
discussions, talks between the Spanish government
and the European Commission are focusing on
measures that would be demanded by international
lenders as part of a new rescue programme,
ensuring they are in place before a bailout is
formally requested."
September 17 -
Bloomberg (Charles Penty): "Spanish banks, already
hooked on cheap European Central Bank loans, are
haemorrhaging deposits as the government debates
whether to seek a bailout. Households and
companies drained 26 billion euros ($34 billion)
from Spanish bank accounts in July, driving the
ratio of loans to deposits among lenders to 187%
from 183% in December and 182% a year earlier…
Shrinking deposits undermine the ability of banks
to support economic growth by lending to companies
and consumers. 'There are significant outflows of
deposits now in Spain and they won't start coming
back until people are sure they're safe and that
Spain is secure,' said Simon Maughan, a financial
strategist at Olivetree Securities…"
September 20 - Reuters (Jesús Aguado and
Julien Toyer): "An independent stress test of
Spain's banking sector will likely reveal capital
needs of 50 billion to 60 billion euros (47.9
billion pounds)… Spain became the latest focus
point earlier this year of the euro zone debt
crisis after it became clear its banks would need
financial support to clean up their balance sheets
of around 185 billion euros of toxic real estate
assets. Sources told Reuters the Bank of Spain had
started to communicate to the banks the results of
the stress tests earlier on Thursday and that all
of them would be informed by Monday."
September 17 - MarketNews International:
"European Central Bank Governing Council Member
Luc Coene thinks it is unlikely that the central
bank will engage in outright bond purchases. Coene
told an audience… that Spain and other countries
would have to request a program with the euro
zone's bailout fund in order for the ECB to buy
its bonds: 'I think it's very unlikely - given the
mandate we have and the treaty we have - that the
ECB will engage in outright bond purchases. Of
course, never say never as they say. It's clear
that if Spain decides not to demand a program with
the EFSF we will not buy Spanish bonds, the same
is valid for the other countries ... Whatever
country wants us to buy its bonds has to submit to
the program with appropriate conditionality and
then only on that condition will we buy bonds and
only on the short part of the maturity.'"
Global Bubble Watch September 19
- Bloomberg (Toru Fujioka): "The Bank of Japan
unexpectedly expanded its asset-purchase fund by
10 trillion yen ($126 billion), seeking to counter
an increasing danger of contraction in the world's
third-largest economy. The BOJ's program, in which
it buys mainly government debt, or JGBs, was
enlarged to 55 trillion yen…"
September 18
- Reuters (Sudip Roy): "Emerging markets
sovereigns, corporates and financial institutions
could raise nearly $400 billion of external debt
this year as they seek to take advantage of benign
issuance conditions, according to ING. Borrowers
have already raised a record $314 billion
year-to-date, one-third more than the amount they
issued over the same period last year."
September 21 - Bloomberg (Jody Shenn): "A
measure of relative yields on mortgage securities
that guide US home-loan rates is poised for its
biggest weekly drop in almost four years on
speculation that the Federal Reserve will find a
shortage of the bonds as it expands purchases…
This week's drop of 34 bps, the largest since
December 2008, exceeds the decline of 19 seen in
the final two days of last week after the Fed's
Sept. 13 announcement that it would expand its
balance sheet with monthly purchases of $40
billion of government-backed housing debt until
the economic recovery strengthens."
September 18 - Bloomberg (Lisa
Abramowicz): "Investors are so attracted to junk
bonds that they're accepting less compensation
than holders of loans, which get paid first in
bankruptcies. Yields on US speculative-grade notes
have fallen to 6.2%, 1 basis point less than a
measure of what's being paid by senior secured
loans, according to JPMorgan Chase & Co.
That's the first time the gap has vanished, with
junk bonds paying an average 103 basis points, or
1.03 percentage points, more than loans over the
past three years… Junk-bond buyers are demanding
lower yields to take on greater risk as they seek
alternatives to Treasuries paying the least ever.
Investors have unleashed an unprecedented flood of
cash into the junk-bond market this year that's
almost 18 times the deposits into funds that buy
floating-rate loans…"
September 18 - IFR
(Sudip Roy): "Emerging markets sovereigns,
corporates and financial institutions could raise
nearly USD400 billion of external debt this year
as they seek to take advantage of benign issuance
conditions, according to ING. Borrowers have
already raised a record USD314 billion
year-to-date, one-third more than the amount they
issued over the same period last year. And the
Dutch Bank foresees a further USD78.4 billion of
issuance this year…"
September 17 -
Bloomberg (Mary Childs): "Exchange-traded funds
are poised to overtake credit derivatives by
year-end as a way to speculate on junk bonds. The
value of corporate securities held by the
five-largest junk ETFs almost doubled in the past
year to a record $31.4 billion, while the net
amount of protection bought or sold on the debt
using the two current credit-default swaps indexes
declined 3% to $35 billion… The ETFs are growing
at an average 5.2% monthly pace this year, which
would put assets at more than $36.5 billion by
Dec. 31."
September 15 - Bloomberg:
"China's former banking chief called the Federal
Reserve's third round of quantitative easing
'irresponsible,' while an official at the
regulator said the stimulus won't provide
sustained support to the US economy. 'It's
irresponsible to the US, and also irresponsible to
us,' Liu Mingkang, former chairman of the China
Banking Regulatory Commission, told Bloomberg…
Liu's comments were the latest from China warning
of risks from the US stimulus program, which drove
commodities higher and spurred stocks to the
highest levels since 2007."
September 20 -
Financial Times (John Paul Rathbone and Jonathan
Wheatley): "Guido Mantega, Brazil's finance
minister, has warned that the US Federal Reserve's
'protectionist' move to roll out more quantitative
easing will reignite the currency wars with
potentially drastic consequences for the rest of
the world. 'It has to be understood that there are
consequences,' Mr Mantega told the Financial
Times… The Fed's QE3 programme would only have a
marginal benefit [in the US] as there is already
no lack of liquidity ... and that liquidity is not
going into production."
Germany
Watch September 18 - MarketNews
International: "The sister party of German
Chancellor Angela Merkel's CDU, the Bavarian CSU,
is arguing that Germany's share in the European
Central Bank's new bond-buying program must be
part of the E190 billion that parliament approved
as the country's contribution to Europe's
permanent bailout fund, the European Stability
Mechanism (ESM). CSU party leader Horst Seehofer
told German weekly Der Spiegel… that the agreed
E190 billion for the ESM must also include the ECB
bond purchases. 'The E190 billion is what counts -
including the ECB,' he said. According to Der
Spiegel, the ECB leadership is worried about the
announcement by the CSU and has called for a
meeting with Seehofer."
September 19 -
Bloomberg (Annette Weisbach): "Offenbach, a city
of about 120,000 people neighboring Germany's
financial capital Frankfurt, is so mired in debt
it had to ask the state of Hesse for a 211
million-euro ($277 million) bailout in June. In so
doing, it became one of the largest of 102
municipalities to tap 3.2 billion euros of aid
Hesse is making available as the first of
Germany's 16 federal states to introduce a formal
rescue fund for struggling towns and cities."
China Watch September 18 -
Bloomberg: "A Chinese manufacturing survey pointed
to an 11th month of contraction and Japan's
exports fell in August… The preliminary reading
was 47.8 for a China purchasing managers' index…
by HSBC Holdings Plc and Markit Economics,
compared with a final level of 47.6 last month…
Japan's overseas shipments slid 5.8% on weakness
in demand from Europe and China."
September 18 - Bloomberg: "Net sales of
foreign currency by China's central bank and
financial institutions accelerated last month,
suggesting capital outflows picked up as the
nation's economic slowdown deepened… The report
follows data showing foreign investment in China
fell in July to the lowest level in two years amid
signs economic expansion may decelerate for a
seventh quarter."
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