The state of the EURO

From this article in Asia Times:
Euro-trash by Chan Akya

When the US Fed last week made an announcement that it would expand its Term Auction Facility (TAF), the idea was greeted with sardonic smiles across the boardrooms of European banks. After all, the Fed had only made operational in March what the ECB had been doing since last summer.

How it operates is quite simple. Banks gather all the collateral on their books that cannot be sold into the wider market and provide it to the ECB against which, following some minor valuation adjustments, the central bank provides immediate liquidity. This has proven quite useful in the current climate of poor liquidity in various market instruments.

Thus, we have found out that European banks have continued to issue billions of euros-worth of residential mortgage backed securities (RMBS) that are never sold to any investor. After securing the rating, the securities, which are simply paper representing actual mortgages in the books of various banks, are pledged as collateral to the ECB and liquidity lines are drawn.

In turn, this borrowing from the ECB is used to support the uneconomic overseas operations of European banks, ie their investments in US subprime collateral, poorly constructed collateralized debt obligations (CDOs) and the like. By not being forced to sell such assets, European banks continue to pretend that they have taken fewer losses than their US counterparts when the truth is the exact opposite.

You can read the entire article here.

Slower China Economy as Inflation Spikes?

I spotted this article in Bloomberg. China's leadership is changing at just about the same time the economy is slowing. We discussed valuation of the Chinese currency at the last meeting, so I copied some excerpts from the article below as a followup:

Wang, Li, May Inherit Slower China Economy as Inflation Spikes

March 4 (Bloomberg) -- China is naming a new generation of economic leaders just as its breakneck growth is slowing.
. . .
. . . China's concerns are going to shift from the economy being too hot to potentially becoming too cold
. . .
The failure to tame a surge in food prices since last year has led to stampedes, injuries and deaths at shops selling discounted cooking oil, rice and eggs, illustrating the toll on the 300 million Chinese estimated by the World Bank to be living in poverty.

``Inflation is clearly a big problem, the most destabilizing factor right now,'' said Xie. ``It's going to be a big challenge how to bring down inflation without a hard landing; achieving a soft landing is the most important task.''

You can read the full story here.