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2012 in Review

"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." Mario Draghi, president of the European Central Bank, July 26, 2012

Having singlehandedly altered the course of the European crisis, the Financial Times named Mr. Draghi "FT Person of the Year." Yet "Super Mario" was anything but acting alone. The emboldened Bernanke Fed soon followed Draghi's bold pronouncement with its own daring commitment to open-ended quantitative easing (in a non-crisis environment!). All throughout 2012, extraordinary monetary easings were announced by central banks around the globe. I will this evening announce the distinguished 2012 "CBB Thing of the Year" recipient: congratulations to Endless Free "Money."

In my Issues 2012 piece from early-January, I posited that 2012 was a "Bubble year." The Bubble might burst, with an expanding European crisis as a probable catalyst. But if it persevered one could expect the potent Bubble to broaden and excesses to intensify. I referred to bipolar outcome possibilities - so-called left and right "tail risks." With Spain's 10-yr yields reaching 7.6% and Italy's approaching 6.6% - along with the euro sinking to almost 1.20 to the dollar - in late-July, the European crisis was indeed spiraling out of control. Capital flight in/from Europe and the emerging markets was becoming a serious issue. A crisis of confidence in the European banking system was in the offing. The world economy was weakening rapidly, and the global Credit system was on the brink of a destabilizing bout of de-risking/de-leveraging.

As it turned out, those with faith in all-powerful global central bankers end 2012 further emboldened. Ironically, however, 2012 was a year when monetary stimulus actually lost potency. In Europe, the ECB's $1.3 TN Long-Term Refinancing Operations (LTRO) liquidity facility bought only a few months respite from crisis. Despite four years of unprecedented monetary stimulus, the U.S. recovery again disappointed. First quarter GDP was cut in half (from Q4) to 2% annualized, and then dropped by almost half again to only 1.3% in Q2. Ominously, growth faltered in the face of another Trillion plus fiscal deficit and robust corporate Credit growth - and despite the strongest system (non-financial) Credit expansion since 2008 (surpassing 5% in Q2).

Despite ultra-loose monetary policies around the world, global growth slowed meaningfully in 2012. Economies throughout Europe downshifted forcefully. Importantly, 2012 saw the crisis gravitate from Europe's periphery to its core. German growth slowed from 2011's 3.1% to less than 1% (OECD estimates 0.9%). France flat-lined after 2011's almost 2% expansion. The Italian economy nosedived, from slightly positive growth (0.6%) to a contraction of 2.2% (OECD estimate). Spain also saw positive GDP (0.4%) succumb to recession (negative 1.3%). But it was the worsening of already alarmingly high unemployment that best illustrated Europe's unfolding recession/depression. Spain's unemployment rate jumped to 25% (up from less than 21% in mid-2011). Italian unemployment surpassed 11%, with France following closely behind at 10.3%. The overall eurozone unemployment rate jumped to 11.7% (as of October), from 10.0% in mid-2011. Worse yet, the region's youth unemployment rate remained shockingly high.

Social unrest became a pressing European issue. Greece's financial, economic and social collapse gathered momentum. More alarmingly for the continent, tensions erupted in ("core") Spain. Throughout the region, a backlash against so-called "austerity" took hold. The socialist Hollande was elected President of France, essentially terminating the German/French European policymaking nexus ("Merkozy"). Italy's Silvio Berlusconi was forced out, replaced by an unelected "technocratic" government headed by a Caretaker Prime Minister, Professor Mario Monti.

There were instances when European politics made Washington appear highly effective. With seemingly no political solutions to deepening problems in Greece, Spain and Italy, the MIT trained Italian economist, Mario Draghi, took it upon himself to incite dramatic change. His pronouncement of essentially unlimited ECB firepower to backstop troubled European debt markets profoundly altered the near-term risk vs. reward backdrop for periphery debt, the euro, European bank liabilities and global risk markets more generally. When it became clear that the ECB governing council was prepared to disregard the Bundesbank's strong objections to Draghi's Outright Monetary Transactions (OMT) plan, the markets believed they finally could enjoy an American-style "Big Bazooka" liquidity backstop. The Merkel government backed Draghi, and also made it clear that they saw intolerable risks in a Greece exit ("Grexit"). As they say, "The rest is history."

With a determined Draghi aligned with the election-minded Merkel government and an unleashed Bernanke Federal Reserve, the market environment was suddenly transformed. Draghi explicitly warned the hedge funds to cover their European short positions - and the speculators quickly appreciated that policymakers were making it advantageous to be positioned leveraged long. European debt instruments went from being the global leveraged speculating community's preferred shorts to their best performing speculative longs. Indeed, with the ECB having negated European "tail risk," the prevailing catalyst for global de-risking/de-leveraging had been suppressed. A period of virtual panic buying ensued - in Greek, Spanish, Italian, Portuguese bonds; in the euro; in European equities; in emerging market securities; and in U.S. corporate debt and equities. In short, an historic short squeeze spurred huge rallies throughout global risk markets. Performance-chasing and trend following markets went into overdrive.

Central banks proved, once again, the world's hero. Heightened fears that global central banks had largely expended their bullets were supplanted with childlike enthusiasm that they essentially had unlimited ammunition. And with traditional inflationary pressures well contained throughout much of the world, the view held that there was essentially little risk associated with extraordinary monetary stimulus. Whether it was Europe, the U.S. or Japan, the risk vs. reward equation seemed to strongly support aggressive central bank reflationary measures. Along the way, global risk markets decoupled from fundamentals. A critical facet of the "right tail" scenario unfolded before our eyes: the historic Bubble strengthened and broadened - global risk market prices inflated and risk premiums deflated - even as the economic backdrop turned increasingly problematic.

The U.S. economy and corporate profits disappointed in 2012, while stock prices posted the strongest gains since the policy-induced rally of 2009. The German economy disappointed, although slightly positive GDP equated with a 29% gain in the DAX equities index. The French economy badly disappointed, so the CAC40 was limited to just a 14.6% advance. The Italian economy faltered, yet stocks were up almost 8%. Spain was a near disaster; stocks fell a mere 5%.

The big divergence between fundamentals and stock prices was not limited to the U.S. and Europe. India's growth slowed sharply, while the Sensex Index gained about 26%. The South Korean economy disappointed, although stocks almost posted double-digit gains. Eastern European economies nearly fell prey to the European crisis, although most equities markets posted big advances for the year. In Latin America, Brazil's economy slowed markedly, although stocks gained 7%. Argentina became a bigger mess, yet stocks were up 15%. The resilient Mexican economy spurred a 17% advance in the Bolsa Index.

It is worth noting the 2012 dynamic where growth slowed in the face of ongoing Credit excess. In this regard, Brazil and India were notable major economies demonstrating late-cycle Credit dynamics. In the "old days," the confluence of rampant Credit expansion and waning economic expansion would have provoked destabilizing capital flight - and a rather abrupt end to booms. But the new world paradigm is one of unlimited "quantitative easing" and currency devaluation from the world's major economies. This global Bubble Dynamic sees unleashed central banks promoting unleashed "developing world" Credit systems.

As an analyst and student of Credit, I remain in awe of Credit happenings in China. First of all, Chinese growth also slowed meaningfully in the face of ongoing historic Credit expansion. According to Reuters, total bank lending has been on course to approach $1.4 TN, an increase of almost 14% from 2011. Even more amazing is the growth of non-bank Credit. According to Bloomberg, Chinese corporate debt issuance surged 54% in 2012 to $657bn. Moreover, some analysts have estimated annual growth as high as 50% for China's Bubbling Credit emanating outside of normal banking channels. According to Barclay's, the Chinese "'shadow banking' industry has nearly doubled in the past two years to $4.11 trillion, or more than a third of total lending." While a complete and accurate accounting of Chinese Credit is not available, it is possible that total 2012 Chinese Credit growth approached the U.S. record of $2.5 TN posted in 2007. I have posited that Chinese authorities lost control of their Credit boom back during the aggressive 2009 stimulus period. I have similarly suggested that China is trapped in a late-cycle "terminal phase of Credit excess." I saw only support for this thesis in 2012.

That historic 2011 Chinese Credit growth actually accelerated - and that minimally regulated, high-risk and opaque "shadow banking" Credit exploded - is an important aspect of my "right tail" (Bubble grows much more precarious) year-in-review 2012 analysis. And in what I would contend is a virtual global phenomenon, Credit was expanded in larger quantities, with a riskier profile and with record high market prices. Or stated somewhat differently, global Credit became meaningfully riskier although that did not stop much of it from being re-priced at even more inflated levels.

Various recent headlines support my "right tail" analysis: "Record-setting Year for Corporate Debt;" "Record Year for Junk Bonds;" "Mortgage Bonds Soar on Fed's Refinance Push;" "[Corporate] Sales Approaching $4 Trillion in Stimulus Repast; "A Banner Year For Riskiest Debt;" "Forth-Quarter M&A Surge Spurs Optimism..;" "Leveraged Loan Volume: $456bn in 2012, Thanks to Torrid Fourth-Quarter Market."

According to Bloomberg, global corporate bond sales this year just surpassed 2009's record $3.89 TN. "Companies from the neediest to the most creditworthy took advantage of borrowing costs that fell to a record-low 3.27% this week as central banks held down interest rates to prop up the economy... Investors also funneled $475.3 billion into bond funds as global growth, which slowed to an estimated 2.2% this year from 2.91% in 2011, prompted them to seek alternatives to equities." The first, third and fourth quarters all posted record issuance for their respective periods. "The yield on bonds worldwide fell 1.56 percentage points this year... Borrowing costs have tumbled from an all-time high of 9.05% in October 2008... Issuance in the U.S. reached a record, climbing 31% to $1.47 trillion, exceeding the previous all-time high of $1.24 trillion in 2009... Sales of high-yield bonds... reached $354 billion. That's 23% above the previous record of $288 billion set in 2010." According to Forbes' Steve Miller, U.S. leveraged loans jumped 24% from 2011 to $465bn, with lending volumes below only 2006 and 2007.

Instead of de-risking/de-leveraging, Credit instruments enjoyed unprecedented demand. It is worth noting that 2012's record $475bn of positive bond fund flows compares to 2011's $99bn. A virtual buyers' panic saw double-digit returns to corporate debt investors. And the riskier the paper, the higher the 2012 return.

When Total U.S. Mortgage Credit expanded $1.4 TN in 2005, there was no doubt that the Mortgage Finance Bubble had inflated to dangerous extremes. Yet that certainly did not stop a fateful $1.0 TN of subprime mortgage CDO (collateralized Debt Obligations) issuance in 2006. In 2012, global central banks and governments gave the great global Credit Bubble a new lease on life. Markets responded, not uncharacteristically, with only greater speculative excess. Speculative markets responded by only diverging further from fragile fundamentals.

Those market operators most adept at betting on policymaking enjoyed yet another year of stellar returns - along with more incredible growth in AUM (assets under management). The cautious fell only further (and further) behind. The hedge fund community lived to play another day, although with each passing year it seems to become more a story of the giants growing more gigantic. There were notable prosecutions of insider trading, although never in history has inside knowledge of policymaker intentions provided such opportunities for riches. At the Federal Reserve, policies accomplished the objective of spurring the lowly saver into risky securities. Overall, central banks succeeded in bolstering vulnerable global securities markets. Meanwhile, it became increasingly clear throughout 2012 that years of easy money, myriad (ongoing) policy mistakes and attendant misdirected resources have taken quite a toll on the structure of economies throughout Europe, the U.S., Japan, China and around the globe.

In response to deepening structural issues and in the face of ongoing global imbalances, central bankers further ratcheted up their runaway monetary experiment. Seemingly putting an exclamation point on an extraordinary year, December saw the Fed announce $85bn of monthly quantitative easing. Numbed by such incredible monetary largesse, the markets can be forgiven for downplaying U.S. "fiscal cliff" issues and economic vulnerabilities. In Japan, a new government was elected with a mandate to essentially "do whatever it takes" with fiscal and monetary policies to spur growth and inflation. With over two decades having passed since the bursting of their Bubble, Japan's search for solutions has turned desperate. Globally, increasingly desperate politicians and extraordinarily accommodative central bankers make a most perilous combination.

The years pass by quickly. It remains a privilege to chronicle history's greatest Credit Bubble on a weekly basis. I have a rather demanding "day job," but I'll continue to do my best to put together my weekly Bulletins. I only write on Fridays, and I never really know how much time I'll have available. The quality will vary, and there will continue to be those tired and grumpy Friday's to contend with. But I love the analysis and I'm honored that you would take the time to read my work - warts and all. Thank you.


For the Week:

The S&P500 declined 1.9% (up 11.5% y-t-d), and the Dow fell 1.9% (up 5.9%). The Morgan Stanley Cyclicals lost 1.4% (up 17.2%), and the Transports sank 2.2% (up 4.0%). The Morgan Stanley Consumer index dropped 1.7% (up 8.9%), and the Utilities sank 2.4% (down 6.1%). The Banks were down 1.3% (up 28.5%), while the Broker/Dealers were little changed (up 11.7%). The S&P 400 Mid-Caps declined 1.8% (up 14.2%), and the small cap Russell 2000 fell 1.9% (up 12.3%). The Nasdaq100 was hit for 2.2% (up 14.4%), and the Morgan Stanley High Tech index dropped 2.5% (up 14.3%). The Semiconductors fell 2.3% (up 3.4%). The InteractiveWeek Internet index was down 2.3% (up 14%). The Biotechs fell 2.3% (up 39%). With bullion little changed, the HUI gold index recovered 0.8% (down 13.6%).

One and three-month Treasury bill rates ended the week at about one basis point. Two-year government yields were down 2 bps to 0.25%. Five-year T-note yields ended the week 5 bps lower to 0.71%. Ten-year yields fell 6 bps to 1.70%. Long bond yields declined 6 bps to 2.87%. Benchmark Fannie MBS yields declined about 3 bps to 2.21%. The spread between benchmark MBS and 10-year Treasury yields widened 3 to 51 bps. The implied yield on December 2013 eurodollar futures slipped a basis point to 0.38%. The two-year dollar swap spread increased one to 14 bps, while the 10-year swap spread was little changed at 6 bps. Corporate bond spreads widened. An index of investment grade bond risk increased 4 to 97 bps. An index of junk bond risk jumped 27 bps to an almost 4-week high 500 bps.

I saw no debt issuance this week.

Junk bond funds saw outflows of $355 million (from Lipper).

Spain's 10-year yields were unchanged this week at 5.20% (up 16bps y-t-d). Italian 10-yr yields increased 2 bps to 4.48% (down 255bps). German bund yields fell 7 bps to 1.31% (down 52bps), while French yields added a basis point to 1.98% (down 116bps). The French to German 10-year bond spread widened 8 bps to 67 bps. Ten-year Portuguese yields declined 2 bps to 6.75% (down 602bps). The new Greek 10-year note yield rose 6 bps to 11.45%. U.K. 10-year gilt yields fell 6 bps to 1.82% (down 16bps). Irish yields were little changed at 4.37% (down 389bps).

The German DAX equities index slipped 0.3% for the week (up 29.1% y-t-d). Spain's IBEX 35 equities index dropped 1.9% (down 5.1%). Italy's FTSE MIB declined 0.4% (up 7.8%). Japanese 10-year "JGB" yields increased 3 bps to 0.755% (down 20bps). Japan's Nikkei surged 4.6% (up 22.9%). Emerging markets were mostly higher. Brazil's Bovespa equities index was little changed (up 7.4%), while Mexico's Bolsa added 0.2% (up 17.9%). South Korea's Kospi index gained 0.8% (up 9.4%). India's Sensex equities index added 1.1% (up 25.8%). China's Shanghai Exchange jumped 3.7% (up 1.5%).

Freddie Mac 30-year fixed mortgage rates declined 2 bps to 3.35% (down 60bps y-o-y). Fifteen-year fixed rates were unchanged at 2.65% (down 59bps). One-year ARM rates rose 4 bps to 2.56% (down 22bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 10 bps to 4.08% (down 59bps).

Federal Reserve Credit expanded $5.5bn to $2.905 TN (high since February). Fed Credit has increased $94.4bn in 7 weeks. Over the past year, Fed Credit has contracted $15.1bn.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $623bn y-o-y, or 6.1%, to $10.847 TN. Over two years, reserves were $1.823 TN higher, for 20% growth.

M2 (narrow) "money" supply jumped another $36.3bn to a record $10.391 TN. "Narrow money" has expanded 8.0% ($755bn) over the past year. For the week, Currency increased $2.4bn. Demand and Checkable Deposits dropped $46.9bn, while Savings Deposits surged $79.3bn. Small Denominated Deposits slipped $2.6bn. Retail Money Funds rose $4.2bn.

Money market fund assets jumped $28.2bn to $2.665 TN. Money Fund assets have declined $30.3bn y-o-y, or 1.1%.

Total Commercial Paper outstanding gained $7.3bn to $1.066 TN CP was up $106bn y-t-d, or 11.1% annualized.

Currency Watch:

The U.S. dollar index was little changed at 79.68 (down 0.6% y-t-d). For the week on the upside, the Brazilian real increased 1.4%, the South African rand 1.3%, the Swedish krona 0.6%, the South Korean won 0.4%, the Danish krone 0.2%, the euro 0.2%, the Swiss franc 0.2% and the Taiwanese dollar 0.1%. For the week on the downside, the Japanese yen declined 2.0%, the Mexican peso 0.8%, the Canadian dollar 0.4%, the New Zealand dollar 0.4%, the Singapore dollar 0.3%, the Australian dollar 0.2%, the Norwegian krone 0.2%, and the British pound 0.1%.

Commodities Watch:

The CRB index increased 0.2% this week (down 3.4% y-t-d). The Goldman Sachs Commodities Index rose 0.8% (down 0.1%). Spot Gold was little changed at $1,656 (up 5.9%). Silver declined 0.8% to $29.98 (up 7.4%). February Crude jumped $2.14 to $90.80 (down 8%). January Gasoline rallied 2.4% (up 5%), while February Natural Gas slipped 0.4% (up 16%). March Copper gained 0.6% (up 5%). March Wheat declined 1.7% (up 19%), and December Corn fell 1.1% (up 7%).

Fiscal Cliff Watch:

December 28 - Bloomberg (Richard Rubin and Margaret Talev): "U.S. lawmakers are entering a weekend of budget negotiations in a final effort to prevent at least some of more than $600 billion in tax increases and spending cuts from taking effect in January. Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell said they'll try to reach a deal by Dec. 30, likely focusing on a relatively narrow range of issues rather than the full list of tax and spending changes. They face the same partisan mistrust and divides on fiscal policy that have prevented a budget deal for more than two years, compounded by the Dec. 31 deadline and the Jan. 3 start of the next Congress. 'The hour for immediate action is here,' President Barack Obama told reporters..., declaring himself 'modestly optimistic' about a deal... 'The American people are not going to have any patience for a politically self-inflicted wound to our economy.'"

Global Bubble Watch:

December 27 - Wall Street Journal (Patrick McGee): "Bond investors willing to take on more risk in 2012 got their reward. Among major fixed-income picks, high-yield, or 'junk,' bonds were the best performing this year, notching total returns of 16% through Monday, according to Barclays... Efforts by the Federal Reserve, led by Ben Bernanke, to keep long-term interest rates low by pumping money into the economy pushed yield-seeking investors into the debt of companies rated below investment grade... Investment-grade corporate bonds handed investors returns of 9.6%... Treasurys returned 1.8%. The rush into junk bonds sent yields, which move in the opposite direction of bond prices, tumbling. Yields touched a record low 6.1% last week, compared with 8.1% at the start of 2012..."

December 27 - Bloomberg (Aaron Kirchfeld and Serena Saitto): "Global mergers and acquisitions rose to the highest level in four years this quarter... Companies worldwide have announced $691.9 billion in purchases in the final three months of the year, the most since the third quarter of 2008... While transactions for all of 2012 shrank about 10% to $2.19 trillion, the same level as 2010, about $86 billion of telecommunications deals... gave the end of the year a boost."

December 24 - Dow Jones (Tatsuo Ito): "Faced with strong political pressure, the Bank of Japan is resorting to an 'unprecedented' lending program in the hopes it would rein in the yen's strength, but combined with aggressive monetary easing, the move risks inviting resentment from other countries. The central bank Thursday announced the details of the program in which the BOJ provides cheap funds to commercial banks in return for an increase in their loans, an attempt to pump more money into the real economy. But in a rare admission they were also targeting the currency's value, BOJ officials said they hoped it would spur money flows overseas and bring about a weaker yen. 'If firms using the scheme convert the yen into foreign currencies when they increase their M&A activity globally, that would strengthen money flows that correct the yen's strength,' BOJ Gov. Masaaki Shirakawa told a news conference... after the central bank also decided to increase its purchases of government debt by Y10 trillion ($119bn). The governor said the program was an 'unprecedented' step for central banks in that it allowed banks in Japan to use the money from the BOJ for lending to non-Japanese firms overseas, including hedge funds, and in foreign currencies.

December 24 - Bloomberg (Christine Idzelis): "Loans made to the neediest U.S. companies rose to the most in five years, as investor demand for the debt with the highest claims on a borrower's assets grew amid a struggling global economy and fiscal uncertainty. Speculative-grade borrowers raised more than $315 billion of the debt from collateralized loan obligations and hedge funds, exceeding 2011 levels and the most since $388.3 billion was issued in 2007, data compiled by Bloomberg and JPMorgan Chase & Co. show... 'The market is red hot,' Richard Farley, a New York-based partner at law firm Paul Hastings LLP who focuses on leveraged finance, said... 'I don't think there's anything that will knock us off the horse at this point.'"

December 21 - Forbes (Steve Miller): "U.S issuers printed $465 billion of new leveraged loans in 2012, 24% more than in 2011... That's the third-biggest year of primary loan production, behind 2006 and 2007. The market has been especially hot in the fourth quarter, amid a largely stable macro environment and demand-rich technical conditions. All told, new-issue loan volume climbed to $136 billion during the final three months of 2012 - the most since the first quarter of 2011, when quarterly activity reached a post-credit-crunch high of $141 billion - from $126 billion in the third quarter."

December 26 - Bloomberg (Matt Robinson): "Standard & Poor's and Moody's Investors Service are cutting corporate debt ratings at the fastest pace since 2009 as a global economic slowdown and record borrowing erode credit quality. The ratio of ratings downgrades to upgrades worldwide climbed to 1.85 this year from 1.23 in 2011..."

December 26 - Bloomberg (Shamim Adam): "Central banks in Indonesia and India, with the worst-performing currencies among Asian emerging markets this year, will face more challenges in 2013 as they balance inflation risks with the need to boost growth. The Reserve Bank of India must deal with 'conflicting cues' from elevated prices and an economic slowdown, complicating policy decisions even after it recently signaled there is room to lower interest rates, Mizuho Corporate Bank Ltd. economist Vishnu Varathan said. Indonesia's inflation may be at the upper end of the central bank's targeted range, forcing it to raise borrowing costs 'aggressively,' according to HSBC Holdings Plc. Demand for higher wages, reduced government subsidies and greater capital inflows may drive up price pressures in the world's fastest-growing region."

December 28 - Bloomberg (Lee Spears, Ruth David and Fox Hu): "Initial public offerings in 2012 slumped to the lowest level since the financial crisis as signs of an economic slowdown and Facebook Inc.'s disappointing debut curbed demand and prompted companies to push back sales. IPOs have raised $112 billion worldwide this year, the least since 2008... Initial sales in western Europe dropped to one-third of last year's level, while concern about China's economy helped cut proceeds in Asia by almost half. U.S. offerings raised $41 billion, little changed from last year..."

Global Credit Watch:

December 24 - Bloomberg (Katie Linsell): "European Central Bank President Mario Draghi's $1.3 trillion of cheap loans and pledge to do whatever it takes to stand behind the euro helped push indicators of stress in the continent's money markets down by an unprecedented degree this year. The difference between the euro interbank offered rate and overnight index swaps, a measure of European banks' reluctance to make unsecured loans to one another known as the Euribor-OIS spread, contracted a record 0.85 percentage point this year to 0.12%... The... ECB has lent financial institutions more than 1 trillion euros ($1.3 trillion) under its longer-term refinancing operations since December and is committed to providing cheap, unlimited cash for lenders to boost the economy."

December 26 - Bloomberg (Olga Tanas, Stepan Kravchenko and Scott Rose): "Russia has no plans to grant a 5 billion-euro ($6.6bn) loan requested by Cyprus because the risks are too great to be assumed by a single creditor, Deputy Finance Minister Sergei Storchak said. 'We have no specific plans or instructions to do so,' Storchak said... 'It's obvious that no single creditor can work with Cyprus alone,' he said. 'Anyone who steps up on an individual basis to finance that country's government or to help recapitalize its banks would be taking an enormous risk.' Cyprus, whose public debt is forecast to reach 89.7% of gross domestic product this year, in late June became the fourth euro-area nation to request a financial rescue... In addition to seeking aid from its euro-zone partners and the International Monetary Fund, Cyprus asked Russia for a fresh loan after borrowing 2.5 billion euros last year."

Italy Watch:

December 28 - Financial Times (Guy Dinmore): "Mario Monti, Italy's technocrat prime minister, ended the uncertainty over his political intentions on Friday night by formally announcing that he would lead a coalition of centrist forces into elections early next year. Mr Monti's declaration followed an intense week of political manoeuvring barely interrupted by Christmas festivities, with Italy's mainstream parties on the left and right fearing they are set to lose a considerable middle ground of votes to the prime minister's centrist alliance in February's elections."

December 24 - Bloomberg (Andrew Davis): "Italian Prime Minister Mario Monti said he won't run in the country's elections in February, though he would consider being the candidate for a coalition backing his economic agenda. 'For the forces that are willing to convincingly and coherently adhere to the Monti agenda, I am ready to give my appreciation, encouragement, and if requested, my guidance and I'd be willing to assume one day, if the circumstances lend themselves to it, the responsibilities that could be bestowed by parliament,' he said... In Italy, voters don't choose a prime minister candidate directly. They cast ballots for a party list or coalition, which picks its premier. So Monti, while not running for Parliament, could still be a designated candidate for prime minister. If a party or coalition backing his agenda asked him to be their candidate, 'I would consider it,' he said."

Spain Watch:

December 27 - Bloomberg (Emma Ross-Thomas): "Government expects the budget deficit to end year at around 9% of GDP due to impact of recession on revenues and cost of restructuring banks, El Confidencial reports."

December 27 - Bloomberg (Emma Ross-Thomas): "Bankia SA shares fell the most in a month after Spain said the lender has a negative value of 4.15 billion euros ($5.5bn) in an exercise to determine how much of the rescued lender remains in shareholders' hands. Bankia dropped as much as 15.5%... Bankia group, including its parent, Banco Financiero y de Ahorros, is set to receive 18 billion euros of European funds, making it the largest recipient of the country's bank bailout."

European Economy Watch:

December 28 - Bloomberg (Gregory Viscusi): "The French economy grew less than initially reported in the third quarter, signaling a recovery that may be too weak to help President Francois Hollande's government reduce unemployment that's at a 15-year high. Gross domestic product rose 0.1%... Data... showed jobless claims rose for a 19th straight month in November to 3.13 million, the highest since January 1998."

December 24 - Bloomberg (Jennifer Ryan): "U.K. house prices fell for a sixth month in December and the decline will extend into 2013 as Britons' reluctance to borrow weighs on property demand, Hometrack Ltd. said... Britain's economic recovery has yet to gain traction amid a squeeze in credit markets, keeping consumers under pressure as inflation outpaces wage gains."

China Bubble Watch:

December 27 - Dow Jones (Dinny McMahon): "Chinese companies are raising money in the domestic bond market at a record pace as the country's banks scale back lending... The bonds have been sold almost exclusively to domestic investors, led by mutual funds... Market watchers say the buying spree by mutual funds has been underpinned by one belief: What many companies lack in profit and cash flow, they make up for with their close relationship to local-government authorities that would step in to repay their debts if needed. 'Investors come in on the assurance that there won't be defaults anytime soon,' but not because they are comfortable with the creditworthiness of the issuers, says Zhang Zhiming, head of China research at HSBC in Hong Kong. It's the expectation of government support that has fueled the surge in bond sales, Mr. Zhang adds. The value of yuan-denominated bonds sold by nonfinancial Chinese companies rose to a record $327 billion in the year to Dec. 19, a 77% increase over the... the same period in 2011, according to... Dealogic. Companies backed by some level of government now make up a bigger share of total bond issuance, 75% compared with 68% in 2011..."

December 27 - Bloomberg: "China plans to increase the budget deficit by 50% to 1.2 trillion yuan ($192bn) in 2013, including the sale of 350 billion yuan of bonds to fund local governments, a person familiar... said. The central government deficit is budgeted at 850 billion yuan... The nation's leaders target about 8% trade growth, down from this year's 10% goal... A bigger fiscal deficit may give China's new leadership under Xi Jinping more room for tax cuts and measures to boost urbanization and consumer demand."

December 28 - Bloomberg: "Chinese companies raised 14 times more selling bonds than stocks this year and policy makers have given the market a pivotal role in reviving the world's second- largest economy in 2013. Debt offerings increased 54% to a record 4.1 trillion yuan ($657bn)... Issuance of equity fell 14% to 277 billion yuan... Average yields on top-rated corporate bonds maturing in three years dropped 20 bps to 4.69%. That compares with the 2.59% yield on company notes globally."

Japan Watch:

December 24 - Wall Street Journal (Tatsuo Ito and William Mallard): "Japan's incoming prime minister fired a volley into increasingly tense global currency markets, saying the country must defend itself against attempts by other governments to devalue their currencies by ensuring the yen weakens as well. Shinzo Abe's call comes as others including Bank of England Gov. Mervyn King warn that the world's economic-policy makers risk becoming embroiled in currency spats that could heighten tensions among countries. Mr. Abe... called on Japan's central bank to resist what he described as moves by the U.S. and Europe to cheapen their currencies... 'Central banks around the world are printing money, supporting their economies and increasing exports. America is the prime example,' said Mr. Abe, referring to the Federal Reserve's policy of flooding the market with dollars by purchasing massive amounts of Treasury bonds and other assets... It was part of an effort by countries to preserve trade advantage, he said. 'The policies pursued by countries for domestic purposes are leading to tension collectively.'"

December 26 - Bloomberg (Mayumi Otsuma and Kyoko Shimodoi): "Taro Aso, son of a cement magnate and a champion of pork-barrel spending when prime minister, will become Japan's sixth finance chief in three years, auguring expanded fiscal stimulus in the world's third-largest economy. Aso, 72, will also serve as deputy prime minister and financial services minister in Prime Minister Shinzo Abe's administration... Fumio Kishida will be foreign minister, while Akira Amari will be economy minister. The finance minister's first task will be to deliver his party's pledge of a 'large-scale' supplementary budget to stimulate the economy, which is forecast to shrink for a third straight quarter. At issue will be averting any sell-off in the bond market as the nation grapples with debt in excess of twice the size of gross domestic product."

December 26 -Financial Times (Michiyo Nakamoto): "Shinzo Abe has chosen Taro Aso as his finance minister just hours after being formally appointed as Japan's seventh prime minister in six years. The Liberal Democratic party leader unveiled his new cabinet on Wednesday after the Diet confirmed him as prime minister. Mr Abe is taking up the role for a second time, following a one-year stint as premier six years ago. The LDP this month won a crushing election victgory over the ruling Democratic party... He has vowed to reflate the economy through fiscal stimulus and monetary easing. He has also called on the Bank of Japan to carry out 'unlimited' easing and warned that it risks losing its independence - through legislative changes - if it does not introduce a 2% inflation target... The finance ministry is opposed to the kind of big stimulus spending that Mr Abe says is needed to boost the economy which recently entered its fifth recession in 15 years, unless the additional spending is funded by tax increases. It is concerned about Japan's fiscal situation, with the IMF warning that gross public debt will reach 236% of the size of the economy by next March."

December 24 -Financial Times (Mure Dickie): "Shinzo Abe, Japan's prime-minister-in-waiting, has threatened to revise the law governing the Bank of Japan if it refuses to introduce a 2% inflation target at its January policy meeting. The comments by Mr Abe, whose Liberal Democratic party won a landslide victory in this month's general election, highlight his determination to push the BoJ to adopt a more aggressive monetary policy in an effort to end chronic deflation and boost economic growth. It marks the most explicit challenge yet from Mr Abe to the independence the central bank has enjoyed since 1998 in setting monetary policy... 'It has to be different from the traditional methods - the traditional methods have not been able to defeat deflation for more than a decade. That's no good,' he said."

Asia Bubble Watch:

December 27 - Bloomberg (Cynthia Kim and Eunkyung Seo): "South Korea lowered its growth forecasts for this year and for 2013... Gross domestic product will expand 3% next year, the Finance Ministry said..., less than the 4% predicted in September. Growth may be 2.1% this year, versus a previous 3.3% estimate."

Latin America Watch:

December 28 - Bloomberg (Matthew Malinowski): "Brazil in November posted its first budget deficit before interest payments in almost three years, as government spending continues to rise faster than tax collection in the world's second-biggest emerging market. Federal and local governments, including state companies, had a primary deficit in November of 5.5 billion reais ($2.7bn)... Brazil's tax receipts in November grew 4% from a year ago, while expenditures jumped 15% during the same period, Maciel said."

U.S. Bubble Economy Watch:

December 27 - Bloomberg (Jody Shenn): "Sales of U.S.-backed mortgage bonds soared to a three-year high as steps by the Federal Reserve and Obama administration to make home ownership more affordable propelled a 34% jump in refinancing. Issuance of securities guaranteed by government-supported Fannie Mae and Freddie Mac or U.S.-owned Ginnie Mae has climbed to $1.72 trillion, compared with $1.22 trillion last year and $1.73 trillion in 2009... With weekly rates on 30-year home loans falling to record lows eight times since July, the first increase since 2009 in refinancing has driven total lending to almost $1.8 trillion this year, double a forecast from the Mortgage Bankers Association in October 2011. The Fed, the biggest buyer in the $5.2 trillion market, has purchased about $500 billion of the debt in 2012..."

December 26 - Bloomberg (Cotten Timberlake): "U.S. holiday sales growth slowed by more than half this year after gridlock in Washington soured consumers' moods and Hurricane Sandy disrupted shopping, MasterCard Advisors SpendingPulse said. Retail sales grew by 0.7% from Oct. 28 through Dec. 24, the Purchase, New York, research firm said yesterday, without providing a dollar figure in the billions. Sales grew at a 2% pace in the same period a year ago. SpendingPulse tracks total U.S. sales at stores and online via all payment forms."


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