David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Ailing Banks in Italy Now Have to Wade Through the Referendum Quagmire to Secure a Rescue

    Italy's Matteo Renzi thought the "silent majority" would save him, if only he could chivvy enough of them to polls. The prime minister misjudged disastrously.

    The voters certainly turned out. They smashed through the 60pc threshold that Mr Renzi thought would secure him victory in the constitutional referendum, but only to register their silent anger  - with him, with his government, with Brussels, and with an Italo-European establishment that has run the Italian economy into the ground.

    "I didn't realise they hated me so much," he confessed before his resignation, the wunderkind of European politics no more. 

    Markets have reacted with insouciance to the epic scale of Mr Renzi's defeat, betting that the Italian political class will somehow put together a new caretaker government and that business will carry on as usual.  "It's not a psycho-drama," said the EU economics commissioner, Pierre Moscovici.

    The reflex of traders after Brexit and the Trump shock is to "buy the dip" on political upsets, but it is far from clear whether the tumultuous events unfolding in Italy have anything in common with Anglo-Saxon episodes, or indeed with any other episode in modern Italian history. 

    The European Central Bank has bought calm for now by intervening in the bond markets, holding down yields on 10-Italian debt to 2pc. This in turn has steadied the currency markets. The euro has risen slightly against the dollar. 

    But the ECB is effectively "front-loading" purchases of Italian bonds on a short-term basis, which means it will have to buy less early next year since it cannot alter the total volume under its €80bn programme of quantitative easing each month.

    "I am worried about what is going to happen in February when the Italian treasury has to redeem €49bn of bonds. The ECB may not be able to remain aggressively in the markets that long," said Professor Erik Jones, director of European studies at Johns Hopkins University in Bologna.

    The ECB cannot legally step in as a lender-of-last resort for Italian bonds unless Rome requests a formal bail-out under the European Stability Mechanism (ESM), and this requires votes in the German and Dutch parliaments, among others. 

    The terms would be draconian. Italy would lose even more control over its budget. It would amount to a Troika-style take-over of the economy, or a "commissariato" in the horror parlance of Italian politics. "If Europe humiliates Italy and puts the government under a tight rein, then you really will see a popular insurrection," said Professor Jones.

    Belying the apparent calm, the Italian authorities are scrambling to prevent the collapse of their intricate rescue plan for banks, knowing that failure would set off a dangerous chain-reaction. 

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    Email of the day

    On Tony Blair’s ‘logic’:

    Following Tony Blair's 'logic', this is what should have happened when he was elected in 1997. The losers in the general election should have demanded another vote until voters 'get it right', when of course no more voting would be allowed. What a pity we did not do that to the man who inherited the best economy the UK had in a century and who then proceeded to make the country bankrupt - while stuffing his own pockets.
    Sorry if this is blunt, but the dishonesty and deviousness of the man is shocking. I guess he still aches to lead the EU, and is so full of himself that he cannot see they will never consider him.

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    Euro Gains With Stocks as Italy Vote Absorbed in 'Three Minutes"

    This article by Eddie Van Der Walt  and Aleksandra Gjorgievska for Bloomberg may be of interest to subscribers. Here is a section:

    The common European currency rose against the dollar even as Italy slid into political limbo after Italian Prime Minister Matteo Renzi’s resignation opened the door to fresh elections. The euro earlier fell to its weakest in 20 months. European shares headed for the biggest gain three weeks, while the cost of insuring Italian bank bonds against default jumped. Gold headed for the lowest close since February, Treasury 10-year yields rose to 2.42 percent and a gauge of equity-market volatility slid.

    Political risk from Italy hasn’t spread beyond its borders as markets were correctly positioned for the anti-establishment mood sweeping around the world. This was a departure from the Brexit referendum and Donald Trump’s surprise election, when traders were caught out by populist votes.

    “After Brexit, it took three days for markets to shake it off, with Trump it took three hours, with Italy it took three minutes,” said Guillermo Hernandez Sampere, head of trading at MPPM EK in Eppstein, Germany. His firm oversees $260 million. “The outcome was not as much of a surprise as many expected it to be -- markets learned their lesson.”


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    Information Gaps and Shadow Banking

    This article by Kathryn Judge from Columbia University School of Law may be of interest to subscribers. Here is a section:

    This article argues that information gaps—pockets of information that are pertinent and knowable but not currently known—are a byproduct of shadow banking and a meaningful source of systemic risk. It lays the foundation for this claim by juxtaposing the regulatory regime governing the shadow banking system with the incentives of the market participants who populate that system. Like banks, shadow banks rely heavily on short-term debt claims designed to obviate the need for the holder to engage in any meaningful information gathering and analysis. The securities laws that prevail in the capital markets, however, both presume and depend on providers of capital playing the lead role performing these functions. In synthesizing insights from diverse bodies of literature and situating those understandings against the regulatory architecture, this article provides one of the first comprehensive accounts of how the information related incentives of equity and money claimants explain many core features of both securities and banking regulation.

    The article’s main theoretical contribution is to provide a new explanation for the inherent fragility of institutional arrangements that rely on money claims. The literature on bank runs typically focuses on either coordination problems among depositors or information asymmetries between depositors and bank managers to explain bank runs. This article provides a third explanation, one which complements the established paradigms. It shows how information gaps increase the probability of panic by increasing the range of signals that can cast doubt on whether short-term debt that market participants had been treading like money remain sufficiently information insensitive to merit such treatment. It further examines how information gaps also impede the market and regulatory responses required to dampen the effects of a shock once panic takes hold. Evidence from the 2007-2009 financial crisis is consistent both with the article’s claims regarding the ways shadow banking creates information gaps and how those gaps contribute to fragility.

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    New efficiency record for large perovskite solar cell

    This article by Eric Mack for Gizmag may be of interest to subscribers. Here is a section:

    "Perovskites came out of nowhere in 2009, with an efficiency rating of 3.8 percent, and have since grown in leaps and bounds," said Anita Ho-Baillie, a Senior Research Fellow at the UNSW's Australian Centre for Advanced Photovoltaics. "I think we can get to 24 percent within a year or so."

    The solar cells are made from crystals grown into a particular structure called perovskite. Smooth layers of perovskite with large crystal grain sizes allow the cells to absorb more light. The technology has been advancing fast and attracting plenty of attention thanks to its ease of production and low cost compared to silicon cells.

    "The diversity of chemical compositions also allows cells be transparent, or made of different colors," said Ho-Baillie. "Imagine being able to cover every surface of buildings, devices and cars with solar cells."

    Perovskite cells do have downsides like much less durability, something Ho-Baillie and her team say they're confident they can improve, while also shooting for higher levels of efficiency.

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    Singapore must remain open, even as rest of world turns inwards: PM Lee

    This article from ChannelNewsAsia.com may be of interest to subscribers. Here is a section:

    The changes around the world will have major consequences especially for small, open countries like Singapore, said Mr Lee. 

    “We have always depended on open trade, making friends around the world, looking for opportunities to cooperate with others,” he said. “We have relied on a secure, peaceful Asia, an international order where countries big and small cooperate and compete according to rules which are fair to all; where small countries have a right to their place in the sun.” 

    “That is how we have prospered these last 50 years.” 

    He added: “Yes, we worked very hard, and earned our success. But we were also very lucky to enjoy this international environment. We attracted foreign investments, negotiated FTAs, worked with other countries, expanded our exports, traded, prospered.” 

    But now, said Mr Lee, other countries are flexing their muscles and becoming increasingly assertive. 

    “Nobody can tell how relations between the big powers will develop,” he admitted. “If US-China relations grow tense, Singapore is going to be in a very difficult spot, because we regard both as our friends and do not want to have to choose between them.


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    A New Age Beckons for the Special Relationship

    In January 2009, Barack Obama began his presidency by removing a bust of Winston Churchill from the Oval Office. Eight years later, President-elect Trump will likely bring it back, in a symbolic gesture that will speak volumes. America’s hard-fought presidential election will have far-reaching consequences for the  Special Relationship, the most important bilateral partnership in the world. For the first time in a quarter century, conservatives are in charge on both sides of the Atlantic, offering a historic opportunity to re-energize the alliance. 

    Under Barack Obama the relationship was critically weakened. The White House showed little enthusiasm for it, preferring instead to cultivate ties with Angela Merkel’s Germany, François Hollande’s France, and a decaying European Union. His first Secretary of State, Hillary Clinton, was happy to knife Britain in the back, standing shoulder to shoulder in 2010 with Cristina Kirchner in Buenos Aires, when the Argentine President called for UN-brokered negotiations over the sovereignty of the Falkland Islands, a British Overseas Territory whose 3,000 inhabitants overwhelmingly voted to remain British in a subsequent referendum. And President Obama himself eagerly proclaimed that America has no “stronger ally” than France when then President Nicolas Sarkozy came to call in 2011, at a time when British troops were fighting and dying in large numbers alongside their American allies in Afghanistan. 

    A deep-seated Eurofederalist mindset was pervasive throughout the Obama years, with Vice President Joe Biden even proclaiming that Brussels had a legitimate claim to be the “capital of the free world” in a speech before the European Parliament. It culminated in President Obama’s decision not only staunchly to oppose Britain’s exit from the EU, but also directly to intervene in the domestic debate. Just weeks before the EU referendum he warned the British people, in front of Downing Street, that they would be at the “back of the queue” for a free trade deal with the United States if they dared vote to leave it. 

    Similarly, Hillary Clinton spoke out against Brexit during the presidential campaign, believing it to be a dangerous development for Europe. Her opponent had no such qualms  declaring on British soil the day after the referendum that Britons “basically they took back their country.” Trump saw the vote as a momentous victory for sovereignty in the face of supranationalism. Unlike his Democrat rival, he prefers the idea of working with nation states over negotiations with multilateral organisations.

    The Brexit vote was a shot across the bow of not only the EU elites but also the Obama presidency. For the next US administration, Brexit is not a threat but an opportunity for the United States, a country with a huge economic stake in the UK. As the Congressional Research Service notes, there are $5 trillion of US corporate assets in the UK, representing 22 per cent of total US corporate overseas assets. Britain is America’s largest foreign direct investor, and roughly a million US jobs depend on British companies based in America. 

    A Trump administration should make a US-UK free trade deal a foreign policy priority, riding a wave of momentum on Capitol Hill. There are already no less than five pieces of Congressional legislation calling for an Anglo-American free trade deal, the most prominent being the United Kingdom Trade Continuity Act, introduced in the Senate by Mike Lee of Utah and Tom Cotton of Arkansas, both rising stars in the Republican Party. It is also the view of Paul Ryan, the pro-British Speaker of the House of Representatives and a long-standing admirer of Churchill, that America must pursue a trade agreement with the UK. As he puts it, “we need to emphasise that they are our indispensable ally.”

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    Leave Voter Patience is Starting to Wear Thin as They Fear Betrayal

    Just get on with it! That is the consistent message from Leave voters up and down the country. For such people, it’s simple: “There was a vote, the Leave side won and now the UK has to leave the EU. No ifs or buts”. It’s an instruction that our MPs would do well to heed, and one that permeates all of the findings from a fascinating series of focus groups that I have been shown. 

    Change Britain, a new Eurosceptic campaign, has been speaking to voters in Yorkshire, in the Midlands, in the North East and North West. One of the most striking findings is the complete absence of any buyers’ remorse. Those who voted to quit the EU are happy; their frustration stems purely from the stalling of the Brexit process, and the return of finger-wagging, preachy Remainers telling them that it can’t be done.

    Many have been supportive of Theresa May, who is saying many of the right things, but patience is wearing thin. As one Leaver put it last week: “Now I want to see something. You have said it, now do it. They seem to get there and it fizzles out like a Roman candle.” Many are demanding “a plan” and some “action”. Plenty are upset at the lack of communication, smelling a rat. “They asked us to make a decision. We’ve done what we were asked to do. They should let us know what’s happening.” There is a widespread suspicion that a deeply untrustworthy establishment is preparing to sell them out, that “there’s obviously some wheeling and dealing going on”.

    The tragic, explosive reality is that “ordinary Leave voters”, as they are often called by London-based commentators, are right: the Brexit process is on the verge of going badly wrong, even though the economy has been astonishingly resilient since the vote.

    The Remainers are on the march, with Tony Blair and his vast financial and human resources returning to the fray; the legal complications relating to Article 50 are becoming ridiculously onerous; and foreign leaders are making the most of our divided, unsettled establishment to humiliate Britain as often as possible. 

    Barack Obama’s infamous intervention ahead of the referendum backfired; it is a fair bet that reading about the Maltese prime minister who wants the UK to “be worse off” or the Polish foreign minister who said that we may never leave the EU will have driven many into an even greater rage.

    Angela Merkel’s decision to block any fast-track deal over European expats was a seminal moment this week, as was the news that some lawyers believe that the Supreme Court could yet allow Scotland or even the European Court of Justice to have the final say over Article 50. 

    The reason why so many Remainers now feel able so openly to undermine Brexit is because the government has allowed itself to portray Britain as a supplicant, a divided, rudderless country. To European diplomats, it looks as if our government’s heart is not really in this, and that our strategy is purely defensive, a bid to retain as close links to the EU as possible

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