Beating a dead horse...

...all the major news sources now see the inevitable. Who thinks it is good for the Euro area that EU banks are demanding more U.S. dollar funding than U.S. banks??

The Buck Stops Where?

European banks set several records today in their continuing quest for dollars, signaling demand isn’t easing despite central bankers’ efforts to grease the greenback market. In the ECB’s latest dollar auction, 63 financial institutions bid for more than quadruple the amount of dollars on offer, bidding over $101 billion for the $25 billion auction.

That’s the highest number of bidders in one of these auctions since the ECB opened its swap line with the Fed last December. It’s also the highest amount bid since then, topping the prior record of just over $90 billion, set at the last auction two weeks ago.

To be sure, some of the demand surge likely comes from the fact that the ECB has boosted its swap line. It started auctioning dollars last December in increments of $10 billion, then boosted the sum on offer at each auction to $15 billion earlier this year. In May, it upped the total amount on offer to $50 billion from $30 billion and committed to auctioning $25 billion in 28-day funds every two weeks. Since then, the amount banks bid has risen at each auction.

But even accounting for the difference in the size of the ECB’s various auctions, today was a barn burner, as the ratio of demand to the amount of funds available hit its highest since the auctions began in December.

There could be several reasons for rising demand. Two seem to have held true almost since the beginning of the money-market turmoil last August: Banks remain wary of lending to one another and are hoarding cash for their own needs. The Bank for International Settlements‘ most recent quarterly review suggested European banks’ dollar-denominated investments in “non-banks” — such as the conduits and structured investment vehicles central to the current turmoil — have surged in recent years. Offices of German, U.K. and Swiss banks in the U.K. have upped such investments by $499 billion since 2000, the BIS report said. That leaves European banks hungry for dollars just when US banks are likely to be keeping funds to themselves.

Still, record-high demand might not reflect a dramatic rise in money-market tension. The ECB’s dollar auctions are “definitely a cheap funding option for European banks,” says Christoph Rieger, money-market analyst at Dresdner Kleinwort in Frankfurt. For instance: A benchmark for the rate at which banks lend dollars to each other for one month — called the London interbank offered rate, or Libor — hit 2.46313% today. The interest rate on the ECB’s dollar funds — the same as the rate the Fed offers on its Term Auction Facility, under which it auctions off loans to banks against a wide variety of collateral — was 2.35%, well below the one-month dollar Libor.

European banks might also be getting used to the mechanics of the auctions “and the fact that they have to bid four times the amount they’ll eventually receive,” says Mr. Rieger. Still, he notes, though rising demand may not signal that tensions are getting worse, it certainly suggests they’re not getting better. –Joellen Perry

Et tu Italy?

No surprise to readers here...

The next meme to fall is the silly "flat earth" thesis, which basically ignores fundamental principles of scarcity - more specifically, the cost of transportation and frictional costs for the flow of trade throughout the world (more on that later)

Growth slump may force Italy out of eurozone
By Ambrose Evans-Pritchard
Last Updated: 12:19am BST 30/07/2008

Italy is sliding into a deep structural crisis and risks being forced out of Europe's monetary union as the region's economic downturn gathers pace, according to a new report by Capital Economics.

Over the last decade, the country has failed to reform its labour product markets sufficiently to cope with the rigours of euro membership and is now caught in a spiral of decline as the working population starts to shrink. Productivity growth has slowed to 0.5pc a year.

"An ugly combination of weak GDP growth, poor international competitiveness, and rising government borrowing costs could lead to renewed calls for Italy to leave the euro," said the report, written by Julian Jessop and Roger Bootle.

Tipping point for EU memes...

"Memes" were first coined by Richard Dawkins (in the book "The Selfish Gene") to describe self replicating ideas whose preferred means of transmission was human communication.

The "EU is doomed" meme is gaining steam.

Spain drops reassuring gloss as crisis deepens
By Ambrose Evans-Pritchard
Last Updated: 1:09am BST 18/07/2008
http://tinyurl.com/6rn8jv

Spain's finance minister Pedro Solbes has stunned the markets with an
admission that his country faces the worst economic crisis in its history as
the full effects of the property crash spread through the economy.

"This crisis is the most complex we have ever lived through given the
plethora of factors on the table at the same time," he told Punto Radio in
Madrid, breaking with past efforts to put a reassuring gloss on events.

Mr Solbes said the Madrid bourse had suffered an "earthquake", crashing 27pc
since the start of June. He blamed the toxic cocktail of high oil prices,
the global credit crisis and the sharp slowdown in the key export markets of
North America and Germany.

The comments follow this week's bankruptcy of Martinsa-Fadesa, Spain's
biggest corporate failure. The property developer - with an empire of
housing estates, hotels, shopping malls and hotels - collapsed after failing
to refinance E5.1bn (£4bn) of debts. The company's demise was a textbook
story of aggressive over-expansion at the top of the cycle, driven by high
debt gearing. It has E11bn of assets.

Mr Solbes has pursued a rigorous "no bailout" policy, saying Martinsa-Fadesa
took "excessive risks" and must now face the consequences. He has reportedly
clashed with cabinet colleagues, who are now searching for any means to stop
the downward spiral in the economy.

As wrong as I have been...

...regarding the S&P, I am not convinced that the SEC limitations on short selling are prudent measures to limit speculation or that it is a good thing for market stability. I am not certain what this will do to intraday volatility (Long/Short funds will be hampered in going short), but my first inclination is not a positive one.

As a side note, the SEC is so desperate to remain relevent in light of the Fed and Treasury usurping its authority that it may have overshot by a large margin here. Regulatory turf wars will beget bad decisions as each agency wants to look good in front of Mom and Dad.

The $/EUR Bandwagon starts rolling...

A person whose name escapes me at the moment once told me that Europe is always six months behind the U.S.

Major investors are starting to see the truth of this rather flippant statement. Things in sovereign debt land are a bit strange as well...default protection of U.S. bonds are twice German Bunds? (as reported by today's Wall Street Journal)

And so the bandwagon is rolling:

Gross Likes Dollar More Than Euro for 1st Time on EU
2008-07-14 03:01:05.740 (New York)

By Gavin Finch

July 14 (Bloomberg) -- For three years euro bulls used the
prospect of higher interest rates in Europe to justify the
currency's 31 percent rally against the dollar.

No more.

A growing number of the world's biggest investors say a
slowdown in the region's economy may be more severe than in the
U.S., forcing the European Central Bank to reverse this month's
rate increase. By January, the euro will be lower against the
dollar, yen and even the pound, according to the median estimate
of strategists surveyed by Bloomberg. Bill Gross, manager of the
world's biggest bond fund, turned bearish on the euro for the
first time since the currency's inception in 1999.

``We might have hit a point where the euro doesn't have a
lot to stand on,'' said Emanuele Ravano, co-head of European
strategy in London for Gross's Pacific Investment Management Co.,
which runs the $129 billion Pimco Total Return Fund. ``The euro
is ultimately very overvalued. It could be quite a bit lower at
some point in time over the next couple of years.''

The ontogeny of the Euro

Trichet continues to deny reality whilst sticking to an inflation (which is itself based on inflation expectations) target. A wonderful example of what mechanical "one rule" based systems can accomplish in the hands of civil servants. I applaud his dogged quest to slay the inflation dragon, but bemoan his (and by extension the ECB) lack of forsightedness and the grave danger the EU is in.

This can be illustrated by the question: Which economic phenomenon happens faster? Inflation (based on expectations which require time to formulate) or Deflation (which is based on market prices of real and financial assets)?

The below article is one of many that will come out in the next year or two reflecting the prospects of the Euro as a viable currency. The history of the Euro will one day be described as (I will now demonstrate my education by inserting a widely used phrase from an English philosopher) "Nasty, brutish, and short".

Euro's Popularity Drops Among Currency Reserves
By Joellen Perry
Word Count: 517

FRANKFURT -- The euro's share of global foreign-exchange reserves fell last year, the European Central Bank said in a report that could damp speculation that the dollar is losing its status as the world's dominant reserve currency.

Meanwhile, ECB policy makers Wednesday ratcheted up their anti-inflation rhetoric. ECB President Jean-Claude Trichet said in testimony to the European Parliament that he sees the "first signs" that high oil and food prices are spilling into broad price rises across the euro zone.

With euro-zone inflation at 4%, its highest since official records began in 1997, the ECB raised its key rate by ...

Mother Russia roars...

Wonderful example of protectionism and the the new paradigm of financial and economic warfare. Risk socialization is taking the form of reduced/increased standards of living (which in turn benefit the goverments "serving" them) as opposed to violent death on a battlefield.

Not that this kind of trade warfare did not happen before, but its interesting to note modern conflict in the developed world is almost entirely based on non-military solutions...and how quickly all players agreed to this state of affairs.

Now, historically speaking, this status quo will not last when a state realizes that violence could be an "innovative" way of solving conflict. Russia and Georgia is a perfect example of this.

Russia halts big foreign holdings in minerals

Tony Halpin in Moscow and Carl Mortished
The door to investment in Russia's vast mineral resources was almost
shut to foreigners yesterday as government regulators tightened rules
on share sales.

New limits on foreign investment in Russian companies published by the
state market regulator will restrict non-Russians to no more than 5
per cent of mineral exploration companies. The move will severely
hamper a strong flow of public offerings on foreign stock exchanges by
Russian companies, potentially dealing a blow to the London Stock
Exchange, which has been the favoured host for the main public
offerings to date.

The new regulations, which take effect in ten days, will also limit
foreign stakeholding in industries related to national security and
defence to no more than 25 per cent, while those making public
offerings in other sectors may sell a maximum of 30 per cent of their
shares shares abroad, down from 35 per cent.

The regulations give legal force to the "resource nationalism"
practised by the Kremlin to retain control over Russia's oil, gas and
mineral reserves.Chris Weafer, equity strategist for Uralsib bank in
Moscow, said: "They have locked down the sector completely."