Ominous

This shouldn’t be happening after this weekend’s good political news. The spread widening is weighing on France who will be on the hook for their banks who are heavily exposed to European sovereigns. Where are you

Gross, El-Erian on Europe, Strategy, Treasuries

PIMCO’s Mohamed El-Erian and Bill Gross spoke exclusively with Bloomberg Television’s Tom Keene today from the company’s headquarters in Newport Beach, CA about Europe’s crisis, PIMCO’s investment strategy and Treasury yields.

Video here

India getting hit by European slowdown

Over the past couple of days I have noticed a lot of posts on the FT’s emerging markets blog about a growth slowdown in India that is occurring as a direct result of the worsening outlook in Europe

Euro zone breakup is inevitable

I continue to predict that Europe will move to change its constitution to include greater fiscal integration but also include explicit mechanisms for countries to leave the euro area

Credible lenders of last resort use price, not quantity signals

Let’s talk about credible government bond backstops for a bit

Full Text: ECB says Europe has “high uncertainty and intensified downside risks”

“Based on its regular economic and monetary analyses, the Governing Council decided to reduce the key ECB interest rates by 25 basis points.”

Sixty percent of China’s rich want to leave the country

Sixty percent of the rich Chinese people have said they intended to migrate from China in a recent poll. What would that mean for FX reserves, interest rates and the economy

What will the Fed do tomorrow?

The Federal Reserve holds a two day meeting that concludes near midday tomorrow. It will likely be the first meeting in a while where there is not change in the composition or size of the balance sheet and no fresh initiatives, like cutting the rate of interest paid on excess reserves, or guidance. The tweaks in the communication are likely to be modest at best

Turkey: On restoring central bank credibility and EM vulnerability

The Turkish central bank took a turn back to orthodox policy today despite leaving the benchmark 1-week repo rate unchanged at 5.75%. It dropped the language from several previous meetings about potential easing. The bank did hike the overnight lending rate from 9% to 12.5% and the late liquidity borrowing rate from 12% to 15.5%. These hikes are meant to tighten liquidity by raising the cost of borrowing from the central bank, but we do not think it is enough to change the outlook for the lira yet. What’s needed to restore central bank credibility is a more pronounced tightening in monetary policy, and yet policy-makers are not ready to do this due to slowdown fears

Chart of the day: Italian bonds back over 6%

This chart shows how the Italians have suffered in the sovereign debt crisis. It is as if the ECB never bought bonds

A year later everyone is catching on about Fed policy and net interest margins

Last November, in anticipation of QE2, I wrote a post called “How Quantitative Easing and Permanent Zero are Toxic To Bank Net Interest Margins”. The gist of the post was that if the ‘extended period’ for low rates was too long, net interest margins would suffer, especially during a recession. I was looking at Japan and their economic policies and seeing low yields and super-low net interest margins killing bank earnings. Now that we are seeing more movement down on net interest margins (BofA and Wells Fargo both showed margin compression for example), the mainstream media is finally catching on to the connection between Fed policy and net interest margins. You heard it here first though

The Outlook for a European TARP

Europe is slowly but inexorably moving toward its own version of TARP—the U.S. “toxic asset relief program”. Rather than sub-prime mortgages and related derivatives, the toxic assets in Europe are sovereign credits, which in some cases – namely, Ireland, is a function of the nationalization of private sector debt