Doomstead Diner Menu => Economics => Topic started by: RE on January 28, 2014, 11:19:27 PM

Title: Emerging Market Panic & Peripheral Currency Collapse
Post by: RE on January 28, 2014, 11:19:27 PM
Not being paid too much attention in the MSM as of yet, but the edifice of Peripheral Currencies and FOREX trade is beginning to crumble in earnest now.  Hot Money is running for the Fire Exits everywhere from Turkey to Brasil, India to Thailand and even the Nips are finally getting Hammered here.

Currency Collapse in all these countries simultaneously is a prelude to WAR.  This is what truly gets World Wars started.  In a country that experiences a currency collapse, they can't get any basic necessities of life.  Food doesn't get imported.  The country loses access to International Letters of Credit to guarantee shipping.

It has always been obvious to me that the peripheral currencies would Collapse before the Dollar, and this run is going to take out some very big players.  Even combined, I do not think the PBoC and Da Fed can funnel enough liquidity fast enough to keep all these currencies floating.

Katy Bar the Door.

It's going down now.  This is FAST COLLAPSE.


Gavekal Explains The Emerging Market Panic (

Submitted by Tyler Durden on 01/27/2014 17:15 -0500

Submitted by Charles Gave and Louis Gave via Evergreen Gavekal,

With emerging markets in panic mode, investors are bound to be reminded of the enduring observation, first made by a 19th century British businessman named John Mills, that: “Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal in hopelessly unproductive works.” With that in mind, investors seem happy to link the ongoing emerging market sell-off to either a) China’s large capital misallocation triggered by the 2008-11 credit boom or b) the Federal Reserve’s promise to start tapering last May, followed up now by the real thing. But could there perhaps be another explanation?

As everyone knows, the US dollar is still the world’s reserve currency. If/when the Fed maintains negative real rates for an inordinately long period of time, fewer and fewer people choose to save in US dollar and the currency heads lower. However, the dollar does not go down forever. When the exchange rate becomes between one or two standard deviations undervalued on a purchasing parity basis, it stops falling, if only because foreigners start loading up on US assets (Brazilians buying condos in Miami, Russians in New York city, etc.). Still, as long as real rates in the US are negative, the Fed, for all intents and purposes, is signaling that it does not want the dollar to rise and so it duly remains undervalued—an undervaluation which amounts to a “false price.” Combine this “false price for the currency” with the “false price in the cost of capital,” and the odds of a considerable misallocation of capital go through the roof. As to misallocation due to dollar undervaluation, this chiefly occurs through three mechanisms:

    First, a weak dollar leads to a fall in the value of investments made outside of the US. Such investments would have been perfectly profitable but for dollar undervaluation; meanwhile, marginally profitable activities which should have disappeared in the US do not, lowering overall productivity as US “zombie” companies survive.


    The second effect is a huge “improvement” in the US trade balance, usually with a lag of roughly three years. Since 2006, the US current account deficit has narrowed by nearly 4 percentage points of US GDP—for countries on the other side of this “improvement,” this adjustment can be painful.


    The third effect is more complex. The dollar is the world’s reserve currency, which means the US is the only country in the world which has no foreign trade constraint. However, as we reviewed in our recent book (see Too Different For Comfort), this also means that the US current account deficit needs to grow if global trade is to expand. Indeed, if the US starts to export fewer dollars, then someone, somewhere will find he is unable to finance his trade. The US current account deficit is the monetary base of world trade and a reduction in the US current account deficit is thus equivalent to a massive monetary tightening for the rest of the world. It is for this last reason that we spend so much time monitoring the growth of central bank reserves held at the Fed; for as long as these are expanding, there are few reasons to fear a hiccup in the global trade architecture. However, as soon as central bank reserves start to shrink, then countries running large current account deficits and/or large budget deficits may find pushing more debt through the system challenging. Excluding China, reserves at the Fed are contracting in real terms.

Which brings us to what is unfolding today. The point that we have made for the past six months is that, within the emerging market space, there were clear weak spots but also countries in positions of strength. At times when central bank reserves are shrinking, the weak spots are always the countries running large current account deficits (Turkey, South Africa, Brazil, India...) or attempting to defend fixed, or artificially high, exchange rates in order to cushion the domestic financial industry silly enough to borrow in a foreign currency (Ukraine, Argentina...). Meanwhile, other emerging markets are plodding along, which helps explain why markets as diverse as the Philippines (still recovering from the most powerful Typhoon ever recorded), Indonesia (feeling the brunt of China’s more muted coal demand), Pakistan, Sri Lanka or Vietnam are all up for the year. Even Thailand is flat year to date, despite a violent political crisis.

In the meantime, we are left to ponder whether the years of the Fed following “euthanasia of the rentier” and “beggar thy neighbor” policies are now coming home to roost? After all, it’s all well and good for the Fed to hope for an increase in US “net exports,” but if the end result is to trigger a collapse in global trade (a distinct risk now that the previously fast growing economies of Latin America, Turkey, Ukraine etc., are hitting the wall while China, Indonesia and India slowing down), then it will look as if the Fed will have sown the seeds for the emerging market growth slowdown. In other words: did the Fed just do to the faster growing, deficit-generating, emerging markets what the Bundesbank did to the rest of euroland? If so, then maintaining some exposure to yield instruments in portfolios makes ample sense—if only as protection against growth expectations across emerging markets continuing to be ratcheted down—along with global trade, profits and risk appetite
Title: Re: Emerging Market Panic & Peripheral Currency Collapse
Post by: JRM on January 29, 2014, 10:33:32 AM
I suppose I should have heard of, or known about, "Peripheral Currencies and FOREX trade," but I don't. Wouldn't it just be lovely if these things I know nothing about were to cause the whole world to implode suddenly?!

Why should we be depending upon shit like this so we can eat?


Stock market data of the moment

Dow Jones    15787.60    Down    -140.96    -0.89%
Nasdaq    4069.35            Down    -28.61    -0.70%
S&P 500    1780.45    Down    -12.05    -0.67%
FTSE 100    6544.28    Down    -28.05    -0.43%
Dax    9336.73            Down    -70.18    -0.75%
BBC Global 30    6739.82 Down    -18.32    -0.27%

Percentages pretty small.
Title: Re: Emerging Market Panic & Peripheral Currency Collapse
Post by: Eddie on January 29, 2014, 11:07:51 AM
Why should we be depending upon shit like this so we can eat?

Good question. We shouldn't.
Title: Re: Emerging Market Panic & Peripheral Currency Collapse
Post by: RE on January 30, 2014, 12:17:57 AM
More from Ambrose on the ongoing collapse of the EM Bubble.

Ambrose Muses at the End of this "Why are they Letting it Happen?"

Hey Ambrose!  They AREN'T letting it happen!  They have been pitching out the Funny Money for 5 years straight now, and it AIN'T working!  The CBs are running Outta Ammo!

For those of you not that conversant in how Capital Flows work in the FOREX market, let me try to make a brief explanation for what has been going on here for the last few years.

Da Fed provides basically ZIRP money for the TBTF Banks to do "Investment" with.  The PBoC in China does the same thing.

In search of High Yields, this basically Free Money has been sent to do all sorts of Malinvestment in the Emerging Markets.

In the Panic Exit phase, the "Investors" attempt to Jump Ship and exit stage left fast as they can.  Sadly for them, there are no BUYERS for the Dogshit they invested in, and prices start dropping on the shit.  Their only HOPIUM here is that Da Fed or the PBoC buys the dogshit from them at Par.  In fact the PBoC did just buy out some Dogshit Gold Trust to keep that one from going Belly Up into this mess right now, but that basically was chump change compared to the several $Trillion in Dogshit that is over there right now.

What Ambrose would like to see is for the CBs to buy ALL the Dogshit!  That would be "doing something".  The CBs may eventually capitulate and try this, but the currency blowback would be enormous.  Besides that, the moral hazard in the game is outrageous, and if they do it chances are good that faith is lost in their control of the situation.

So they want to pop the bubble "gradually", but not everybody is going to cooperate with that.  In fact when the Prop Desks sense tightening is coming, they wanna exit stage left before their competitors do.

The rapid outflow of foreign Capital hangs many Locals over there out to dry, and they have to start liquidating other holdings to try and stay solvent and keep their creditors at bay.  So Selloff happens on all the major markets Globally, simultaneously.

So far it is not out of control, but how long the PBoC, Da Fed and the ECB can keep a lid on it is an Open Question.  They simply do not have leeway left here anymore with their interest rates already so low, the Balance Sheets already off the charts and the Collateral they hold NOW is dogshit.  If they heap more dogshit into this pile, "investors" will smell it, and then confidence goes in the CBs.

The result of that?  Monetary System Collapse, on the Grand Scale.  It hasn't happenned at this level probably since the Fall of the Roman Empire.

Anyhow, this is the Lehman Moment for the Emerging Markets, and if it keeps sliding here much longer, it will make Lehman look like a Sunday Picnic.

Short the Phone Book.


World risks deflationary shock as BRICS puncture credit bubbles (

As matters stand, the next recession will push the Western economic system over the edge into deflation
An exchange store staff shows a Chinese RMB$100 banknote) and a US$100 banknote in Hong Kong




It is a remarkable state of affairs that the G2 monetary superpowers - the US and China - should both be tightening

By Ambrose Evans-Pritchard

9:11PM GMT 29 Jan 2014

Half the world economy is one accident away from a deflation trap. The International Monetary Fund says the probability may now be as high as 20pc.

It is a remarkable state of affairs that the G2 monetary superpowers - the US and China - should both be tightening into such a 20pc risk, though no doubt they have concluded that asset bubbles are becoming an even bigger danger.

"We need to be extremely vigilant," said the IMF's Christine Lagarde in Davos. "The deflation risk is what would occur if there was a shock to those economies now at low inflation rates, way below target. I don't think anyone can dispute that in the eurozone, inflation is way below target."

It is not hard to imagine what that shock might be. It is already before us as Turkey, India and South Africa all slam on the brakes, forced to defend their currencies as global liquidity drains away.

The World Bank warns in its latest report - Capital Flows and Risks in Developing Countries - that the withdrawal of stimulus by the US Federal Reserve could throw a "curve ball" at the international system.

"If market reactions to tapering are precipitous, developing countries could see flows decline by as much as 80pc for several months," it said. A quarter of these economies risk a sudden stop. "While this adjustment might be short-lived, it is likely to inflict serious stresses, potentially heightening crisis risks."

The report said they may need capital controls to navigate the storm - or technically to overcome the "Impossible Trinity" of monetary autonomy, a stable exchange rate and free flows of funds. William Browder from Hermitage says that is exactly where the crisis is leading, and it will be sobering for investors to learn that their money is locked up - already the case in Cyprus, and starting in Egypt. The chain-reaction becomes self-fulfilling. "People will start asking themselves which country is next," he said.

Emerging markets are now half the global economy, so we are in uncharted waters. Roughly $4 trillion of foreign funds swept into emerging markets after the Lehman crisis, much of it by then "momentum money" late to the party. The IMF says $470bn is directly linked to money printing by the Fed . "We don't know how much of this is going to come out again, or how quickly," said an official from the Fund.

One country after another is now having to tighten into weakness. The longer this goes on, and the wider it spreads, the greater the risk that it will metamorphose into a global deflationary shock.

Turkey's central bank took drastic steps on Tuesday night to halt capital flight, doubling its repurchase rate from 4.5pc to 10pc. This will bring the economy to a standstill in short order, and may ultimately prove as futile as Britain's ideological defence of the ERM in September 1992.

South Africa raised rates on Wednesday by half a point to 5.5pc to defend the rand, and India raised a quarter-point to 8pc on Tuesday, all forced to grit their teeth as growth fizzles. Brazil and Indonesia have already been through this for months to stem a currency slide that risks turning malign at any moment.

Others are in better shape - mostly because their current accounts are in surplus - but even they are losing room for manoeuvre. Chile and Peru need to cut rates to counter the metals slump, but dare not risk it in this unforgiving climate.

Russia has a foot in recession but cannot take action to kickstart growth as the ruble falls to a record low against the euro. The central bank is burning reserves at a rate of $400m a day to defend the currency, de facto tightening. As for Ukraine, Argentina and Thailand, they are already spinning out of control.

China is marching to its own tune with a closed capital account and reserves of $3.8 trillion, but it too is sending a powerful deflationary impulse worldwide. Last year it added $5 trillion in new plant and fixed investment - as much as the US and Europe combined - flooding the global economy with yet more excess capacity.

Markets have a touching faith that the same Politburo responsible for a spectacular credit bubble worth $24 trillion - one and a half times larger than the US banking system - will now manage to deflate it gently with a skill that eluded the Fed in 1928, the Bank of Japan in 1990 and the Bank of England in 2007.

Manoj Pradhan, from Morgan Stanley, says that China's central bank is trying to deleverage and raise rates at the same time, which "amplifies risks to growth". This is a heroic undertaking, like surgery without anaesthetic. It is the exact opposite of what the Fed did after 2008 when QE helped cushion the shock. Morgan Stanley says that 45pc of all private credit in China must be refinanced over the next 12 months, so fasten your seatbelts.

Moreover, China is struggling to keep its industries humming at the current exchange rate. Patrick Artus, from Natixis, says surging wages - and falling productivity - mean that it now costs 10pc more to produce the Airbus A320 in Tianjing than it does in Toulouse.

The implications are obvious. China may at some stage try to steer down the yuan to hold on to market share, whatever they say in the US Congress, partly to stop Japan stealing a march with its 30pc devaluation under Abenomics. Albert Edwards from Societe Generale say this may prove the ultimate deflationary shock, dwarfing the 1998 Asia crisis.

Europe has let its defences collapse behind a Maginot Line of orthodox monetary policy. Eurostat data show that Italy, Spain, Holland, Portugal, Greece, Estonia, Slovenia, Slovakia, Latvia, as well as euro-pegged Denmark, Hungary, Bulgaria and Lithuania have all been in outright deflation since May, once tax rises are stripped out. Underlying prices have been dropping in Poland and the Czech Republic since July, and France since August.

Eurozone M3 money growth has been negative for eight months, contracting at a rate of 1.1pc over the past quarter. Bank credit to the private sector has fallen by €155bn in three months, according to the latest data from the European Central Bank.

The ECB's Mario Draghi talked up the need for a "safety margin" against deflation before Christmas but now seems strangely passive, as if beaten into submission by the Bundesbank. I heard him twice in Davos repeating - woodenly, without conviction - that core inflation is merely back to where it was in 1999 after the Asian crisis and in 2009 after the Lehman crisis, and therefore benign.

We are not in remotely comparable circumstances. Those two events were at the outset of a new credit cycle. Right now we are nearly five years into an old cycle - already long in the tooth - and 80pc of the global economy is tightening or cutting stimulus. As matters stand, the next recession will push the Western economic system over the edge into deflation.

The US has a slightly bigger buffer, but not much. Growth of M2 money has been slowing even faster than it did in the nine months before the Lehman crash in 2008, but then the Fed no longer pays any attention to such data so it may all too easily repeat the mistake. The Fed is surely courting fate with $10bn of bond tapering each meeting into the teeth of incipient deflation, as Minneapolis Fed chief Narayana Kocherlakota keeps warning.

Those who think deflation is harmless should listen to the Bank of Japan's Haruhiko Kuroda, who has lived through 15 years of falling prices. Corporate profits dried up. Investment in technology atrophied. Innovation fizzled out. "It created a very negative mindset in Japan," he said.

Japan had the highest real interest rates in the rich world, leading to a compound interest spiral as the debt burden rose on a base of shrinking nominal GDP.

Any such outcome in Europe would send Club Med debt trajectories through the roof. It would doom all hope of halting Europe's economic decline or reducing mass unemployment before the democracies of the afflicted countries go into seizure. So why are they letting it happen?
Title: Re: Emerging Market Panic & Peripheral Currency Collapse
Post by: RE on January 30, 2014, 03:37:14 AM
When shit like this crosses the pages of Zero Hedge, Houston, we GOT A PROBLEM.


JPMorgan Warns "Avoiding China Defaults Now Will Amplify The Future Problem" (      
 ( (
Submitted by Tyler Durden ( on 01/29/2014 22:04 -0500

Investors in China have been running scared of a default on a high risk trust product; but, as Bloomberg's Tom Orlik notes, they should embrace it. The implicit guarantee that no investments will go sour is one of the key problems with China’s financial system as Orlik adds it encourages reckless lending often to borrowers whose only merit lies in backing from a deep-pocketed government. Crucially, as JPMorgan warns in a recent note, "avoiding defaults is not the right answer, as it will only delay or even amplify the problem in the future."
A default that encourages lenders to price in risk would be a positive development and the CEG#1 was an ideal product to 'fail' with its 11% yield and clear idiosyncratic company problems. However, regulators won't have to wait long for a second chance as JPM warns "There will be a default in China’s shadow banking industry this year as economic growth momentum slows."
Via Bloomberg's Tom Orlik,

Investors Should Embrace Defaults in China’s Fragile Financial System
In the years before the 2008 financial crisis, nominal growth outstripped the lending rate. Outstanding credit relative to GDP was low, keeping a lid on the burden of repayment. Against that backdrop, most borrowers were able to cover their costs and the chances of a default were low.
( (
The situation today is different. Nominal growth has more than halved to 9 percent in 2013 from close to 23 percent in 2007.
Borrowers from trusts and other parts of the shadow financial system face interest rates in excess of 20 percent. An explosion in lending has increased the burden of repayment to more than 30 percent at the end of 2013 from about 19 percent of GDP at the end of 2008.
Lower growth, higher borrowing costs and mounting repayment costs mean defaults by borrowers and even bankruptcy at some small lenders are likely. After initial turmoil, that could actually be beneficial.

And JPMorgan adds:
...local media reported that the China Credit Trust has reached a last-minute agreement with investors, with all principal and most accrued interest to be repaid. That means China will again narrowly escaped the first default in its shadow banking. However, the worries remain.
The absence of default has become a major distortion in China’s shadow banking, and we believe that default will happen in 2014 amid economic slowing. The concern is that, if a default occurs, whether investors will walk away and put the whole shadow banking market into a liquidity-driven credit crisis.
But contagion is possible...

The concern about the contagion risk is not groundless. In the past several years, non-bank financing (or the so-called shadow banking) has grown rapidly.
We estimate that the gross amount (i.e. with possible overlapping among sub-components) of non-bank financing in China reached RMB 36 trillion by the end of 2012 (or nearly 70% of GDP), compared to RMB 18.3 trillion in 2010 (or 46% of GDP).
Non-bank financing continued to grow fast in 2013. An update of our estimate suggests that nonbank financing has further increased to RMB 46.7 trillion by September 2013 (or 84% of GDP). The increase was most dramatic for trust assets (an increase of RMB 2.66 trillion in the first nine months of 2013), wealth management products (an increase of RMB 2.82 trillion), entrust loans (an increase of RMB 1.8 trillion) and bank-security channel business (i.e. banks use security firms as a channel to extend loans, which more than doubled in the first three quarters in 2013 and reached RMB 2.79 trillion).
( (
The rapid growth in non-bank financing activities, especially for trust loans, WMPs and banksecurity channel business, has been driven by the perception of implicit guarantee from product issuers and distributors. The absence of default confirmed such perception.
In addition, there is substantial overlap between interbank assets and other components, for instance WMPs investing on interbank assets or claims on trust assets being traded in interbank markets. Nonetheless, banks are closely connected to shadow banking activities, hence possible turbulence in shadow banking will also affect the banking system.

We believe that default will happen in 2014 as the growth momentum slows down, and it will help restore market discipline and mitigate the moral hazard problem in the long run. However, the challenge is how to contain the near-term negative impact, as there could be three possible outcomes (in the order of increasing severity) if a default occurs.

The first possibility is that it is perceived as an idiosyncratic event, i.e. no spillover at all. This is the least likely outcome.
The second possibility is that the contagion risk is contained within a manageable level, i.e. only to similar products or sectors. For instance, if "Credit equals Gold No 1" defaults, investors will move away from collectively trust products that are only sold to wealthy individuals (but not affecting WMPs that are sold to retails investors); investors will worry about the credit quality of similar loans (non-SOE borrowers in mining industry), but not spillover to other products (e.g. local government debt, real estate companies and SOEs); investors question about the safety of trust companies but not banks. We can call it "limited spillover".
The third possibility is a “systemic spillover”. In a mild scenario, it will affect the vulnerable components such as trust loans (48% of trust AUM), WMP investment on non-standard credit products (estimated to be 35-50% of total WMPs) and bank-security channel business. In a worse scenario, it will affect the whole trust industry, WMPs and channel business (with a total gross size of RMB 23 trillion). Rollover of trust products (we estimate 30-35% trust products will mature in 2014) and WMP (64% WMPs has maturity less than 3 months) becomes extremely difficult. The liquidity stress could evolve into a full-blown credit crisis.

What can the government do? In our view, avoiding defaults is not the right answer, as it will only delay or even amplify the problem in the future. Meantime, there are measures the government can take to contain the contagion risk.

First, let defaults happen but establish a transparent legal process (rather than under-table arrangements) to resolve the dispute between different parties.
Second, regulators should tighten supervisory and regulatory framework to contain regulatory arbitrage activities, and clarify the responsibilities in various shadow banking products. The uncertainty in regulatory and legal responsibility behind each product is an important caveat in the market, and could amplify the contagion risk.
Third, impose hard budget constraints on local governments and SOEs, so as to avoid crowding out of credit to other business borrowers and establish risk-based pricing practices.
Finally, avoid defaults that could be easily linked to systemic concerns, such as the default of banks (rather than non-bank financial institutions as the perception of government protection on banks is stronger) or local government financial vehicles or SOEs. Similarly, the default of a WMP could have a bigger impact than a trust product, as the latter does not have maturity mismatch problem and are sold to wealthy individuals rather than retail investors. In that sense, China may miss an "ideal” first default if “Credit Equals Gold No 1” gets bailed out.

Investors in China have been running scared of a default on a high risk trust product; but, as Bloomberg's Tom Orlik notes, they should embrace it.
And they are going to get a chance again soon as there are considerably more of these maturing in the next quarter...
( (
Perhaps that is why 3mo SHIBOR has been rising 9 days in a row...
( (
Title: Re: Emerging Market Panic & Peripheral Currency Collapse
Post by: RE on January 30, 2014, 10:56:55 PM
Gets better by the minute.

Fed will try to stop the rout going into Friday close.

Chinese "Investors" will be liquidating the Phone Book next week while Chinese markets are closed.

Short the Encyclopedia on Tuesday.


Dead-Cat-Bounce Dies As Nikkei Drops Over 400 Points From US Highs    (
 ( (
Submitted by Tyler Durden ( on 01/30/2014 23:44 -0500
Mixed data from Japan did nothing to excite and while markets oscillated for a few hours after the US close (and subsequent pile-driver from AMZN), they are now unwinding most of the dead-cat-bounce seen during the US day-session. Japanese stocks are back at fresh 2-month lows with the Nikkei 225 under 15,000 (down over 400 points from day-session highs) and testing debt-ceiling lows. JPY strength has driven USDJPY back below 102.50 and therefore US futures are re-tumbling - down 14 points from US day-session highs. EM FX is drifting lower. With China about to dark for a week for lunar new year, this could get interesting very fast.
Dow futures are pressing towards pre-Taper lows... and Japan has lost support back to the debt-ceiling lows...
( (
Of course, it's all about the JPY... for Japanese stocks (though the correlations are started to creak - which will be a huge worry for Abe)
( (
and the same for US futures...
( (
Title: Re: Emerging Market Panic & Peripheral Currency Collapse
Post by: RE on January 30, 2014, 11:14:42 PM
More from Gavekal courtesy of ZH.


Who Are The Biggest Losers From The EM Crisis? (

Some very relevant observations from Louis Gave of Evergreen GaveKal (
Who Will The Emerging Markets Crisis Adjust Against?
In last summer’s emerging market sell-off, India was very much at the center of the storm: the rupee collapsed, bond yields soared and equity markets tanked. The Reserve Bank of India responded by raising rates while the government introduced harsh restrictions on gold imports. Promptly, the Indian current account deficit shrank. So much so that, in the current emerging market (EM) meltdown, India has been spared relative to most other current account deficit emerging markets, whether Turkey, Brazil, South Africa or Argentina. And on this note, the inability of the Turkish lira, South African rand, Brazilian real, etc. to hold on to gains after recent hawkish moves by their central banks is problematic. Markets won’t be calmed until there is clear evidence these countries’ current account deficits can improve. But how can these adjustments happen?
The problem is twofold. First, current accounts are a zero sum game, so future improvements in emerging market trade balances have to come at someone else’s expense. Second, we have had, over the past year, only modest growth in global trade; so if EM balances are to improve markedly, somebody’s will have to deteriorate.
When the 1994-95 “tequila crisis” struck, the US current account deficit widened to allow for Mexico to adjust. The same thing happened in 1997 with the Asian crisis, in 2001 when Argentina blew, and in 2003 when SARS crippled Asia. In 1998, oil prices took the brunt of the adjustment as Russia hit the skids. In 2009-10, it was China’s turn to step up to the plate, with a stimulus-spurred import binge that meaningfully reduced its current account surplus.
Which brings us to today and the question of who will adjust their growth lower (through a deterioration in their trade balances) to make some room for Argentina, Brazil, Turkey, South Africa, Indonesia...? There are really five candidates:
In short, either oil collapses very soon, or the US dollar shoots up (with Janet Yellen about to take the helm, is that likely?) or we could soon be facing a contraction in global trade. And unfortunately, contractions in global trade are usually accompanied by global recessions. With this in mind, and as we argued in Eight Questions For 2014, maintaining positions in long-dated OECD government bonds as hedges against the unfolding of a global deflationary spiral (triggered by the weak yen, a slowing China, busting emerging markets and an uninspiring Europe...) makes ample sense.
Title: Re: Emerging Market Panic & Peripheral Currency Collapse
Post by: JRM on January 31, 2014, 10:45:04 AM
Suppose you were reading the indethalic register sequencer and the boud topped .0004 on a Sunday in winter, just before the lamax. What then?

This is how all of this high finance stuff sounds to me.

Nevertheless, I predicted the collapse and Great Recession  of 07-08 some many months before it happened.  So I know just enough to read some of the tea leaves.

RE, Can you provide a low down on this which might make sense to guys like me? Cliff Notes?
Title: Re: Emerging Market Panic & Peripheral Currency Collapse
Post by: Eddie on January 31, 2014, 11:23:41 AM
Cliff's Notes = Cash is King.

And don't keep it at JPM.
Title: Re: Emerging Market Panic & Peripheral Currency Collapse
Post by: JRM on January 31, 2014, 01:32:51 PM
“I have often noticed that these things, which obsess me, neither bother nor impress other people even slightly. I am horribly apt to approach some innocent at a gathering and say, ‘Do you know that in the head of the caterpillar of the ordinary goat moth there are two hundred twenty-eight separate muscles?’ The poor wretch flees. I am not making chatter; I mean to change his life.”

 ~ Annie Dillard
Pilgrim at Tinker Creek
Title: Re: Emerging Market Panic & Peripheral Currency Collapse
Post by: RE on January 31, 2014, 04:34:00 PM
Cliff's Notes = Cash is King.

And don't keep it at JPM.

Also, if you are strolling down Wall Street or the City of London, don't forget to bring an Umbrella.  Heavy Duty.

Title: Peripheral Currency Collapse: Rouble on the Rocks
Post by: RE on February 01, 2014, 01:10:20 AM


It's one thing for the Thai Bhat or Brazilian Real to face a FOREX run, its another can of worms entirely if there is a Run on the Rouble.

JRM asked for a Reader's Digest, it's not that EZ to do.  Peripheral Currency valuation is highly manipulated in the best of times through CB interventions, and there is a Herd/Lemming effect when there are either "Animal Spirits" abounding or in the PANIC phase.

The basic concept however is simple.  During periods when there is a perception of Growth in a given economy, "Hot Money" flows into these economies and they Rev Up.  What is "Hot Money"?  It is newly issued Debt money that the TBTF Banks have access to, mainly by rehypothecation of currently held assets.  They Borrow money from Da Fed based on their assets, then invest said money in the overheating EM market of choice.  When it appears to the MIT pros and Algos that the trade is reversing, the Hot Money tries to ESCAPE.  It is WAY harder to Exit than to Enter this shit though and even the best Trader can be caught with his Pants Down.

If the Rouble gets hammered down here too low, Vlad the Impaler will be in a World of Shit even bigger than the current problems with Ukraine.

If Da Fed and PBoC don't issue new liquidity, this problem will spiral out of control pretty fast.  They simply cannot let the Rouble collapse.  Vlad the Impaler would HAVE to retaliate, perhaps cutting off Gas Supply to Europe.  You can see where this goes I trust.


Emerging market storm spreads to Russia as rouble wobbles (
Russian central bank vowed “unlimited” intervention to defend the rouble after it fell to a record low against a basket of currencies
An elderly South Ossetian man receives monetary aid in Russian rubles in Tskhinvali
Image 1 of 3
Moscow has already burned through $7bn of reserves since early January Photo: AFP
Ambrose Evans-Pritchard

By Ambrose Evans-Pritchard

8:47PM GMT 30 Jan 2014

Comments127 Comments

The simmering crisis in emerging markets has spread to Eastern Europe, forcing Russia and Romania to defend their currencies against capital flight and triggering a sharp rise in Hungary’s borrowing costs.

The Russian central bank vowed “unlimited” intervention to defend the rouble after it fell to a record low against a basket of currencies.

Moscow has already burned through $7bn of reserves since early January. Yields on Russia’s two-year “cross-currency swaps” – closely watched by traders for signs of a liquidity crunch – rocketed by 60 basis on Thursday to 7.6pc. They have risen by 140 points in the past three weeks.

While there is no single cause for the emerging market sell-off, the backdrop is a combined monetary squeeze by the US and China that is draining liquidity from the global system.

Russia’s central bank governor, Elvira Nabiullina, said she would not allow a disorderly rouble slide or risk widespread damage to the financial system, backing away from earlier pledges to free the exchange rate. “We are not planning to quit intervention,” she said.

James Lord and Meena Bassily, from Morgan Stanley, said Russia faces an invidious choice, since any move to defend the rouble automatically tightens monetary policy, pushing up borrowing costs. Russia learnt a hard lesson in 2008-2009 when it spent $200bn of reserves defending the currency but in the process caused a collapse of the money supply and destroyed part of the banking system. Yet it cannot risk a policy of benign neglect at a time of stubbornly high inflation and capital outflows that reached $63bn last year.

Tatiana Orlova, from RBS, said there is a risk of “a run on the currency” unless the authorities take decisive action.

In Hungary, 10-year bonds have jumped 60 points over the past week amid reports that the central bank will be forced to ditch plans for rate cuts to shore up the economy. The bank said it is watching the forint “very carefully” after a 7pc slide this month, a drop seen as “too big” for safety.

“Central and Eastern European currencies are starting to wilt. Hungary is trading on very thin ice, but even Poland is vulnerable,” said sovereign bond strategist Nicholas Spiro.

The fresh ructions came after Turkey’s “shock and awe” move to double interest rates on Tuesday failed to restore confidence in the lira, leaving it unclear what the country can feasibly do next. A less drastic move by South Africa had equally meagre results.

“Our concern is that this could lead to a new phase of the crisis,” said Neal Shearing, from Capital Economics. “These countries are caught between a rock and a hard place.”

Analysts say Turkey has ended up with the worst of both worlds. The rate shock will shatter growth and could trigger recession but the authorities have used up their last credible tool for defending the currency.

Lars Christensen, from Danske Bank, said: “Everybody knows that Turkey cannot raise rates by another 500 basis points and nor can they sustain the current rates for long because it will kill the economy.

“I fear the only way out of this may be capital controls, though it would be disastrous if the world goes down that route. These countries should stop trying to defend quasi-pegs and just let their currencies fall. We now have a very risky situation where several central banks are responding to weakening growth in China by tightening policy, which makes it worse.”

Turkey’s finance minister, Mehmet Simsek, denied that there are any plans for capital controls but admitted that the issue “had come up” and was being studied. It has been widely reported in the Turkish press that premier Recep Tayyip Erdogan favours such curbs as less damaging than a monetary squeeze.

Dominic Byrant, from BNP Paribas, said Turkey is the country most at risk, punished for a current account deficit above 7pc of GDP and external debt equal to almost 180pc of exports. But any state with a trade deficit, sticky inflation that also depends heavily on exports to China, is at risk. “Brazil and Indonesia stand out as obvious candidates: 20pc of Brazil’s exports go to China,” he said.

Kingsmill Bond, from Sberbank, said Russia should be sheltered from the latest storm since it has a big current account surplus and oil is still at $105 a barrel. “It gets hit whenever there is an emerging market shock because 70pc of the free float of the Russian equity and bond market is held by foreigners.”

He said there are concerns that oil prices could start to track the slump seen in other commodities as Iran, Libya and Iraq step up production, although Russia has a “rainy day” fund worth 8pc of GDP to cover shortfalls for a while. “We think oil would have to fall below $80 to become a serious issue,” he said.

The International Monetary Fund said it in its annual health check that Russia’s growth potential has collapsed, exhorting the country to reinvent itself to escape the middle income trap. “Russia needs to embrace a new growth model. The previous model of high growth on the back of rising oil prices cannot be replicated,” it said.

The emerging markets are now at a critical juncture. There have been record redemptions this month from mutual funds that invest in these countries but big insurance companies and sovereign wealth funds have held firm.

“Any sign that institutional money is starting to flee would mark a much more severe escalation of the sell-off,” said Mr Spiro.
Title: Emerging Market Panic: Short the Dictionary
Post by: RE on February 03, 2014, 04:03:42 AM
Starting off the Week with a Bang.

Short the Dictionary.


Japanese Stocks Tumble - Down 10% In 2014 Following Record Low China Services PMI (
 ( (
Submitted by Tyler Durden ( on 02/02/2014 21:46 -0500
USDJPY opened the evening under 102 with JPY holding its losses until aroun 1700ET when it broke back above the crucial level. S&P futures and USDJPY recoupled for a few hours but are now decoupling faster than the Seahawks and Broncos (S&P -1pt, USDJPY +30 pips). The catalyst for the disconnect (which Japan's Nikkei is also following) was weakness in Chinese data. Following Aussie PMI's lowest print in 5 months, China's Services PMI printed at its lowest on record and it sbiggest 3 month slide in 16 months. Japan's Nikkei 225 is now down 10% in 2014 and 7 of the last 8 days and 20Y JGB yields are testing 9-month lows.
China Services PMI at its lowest on record...
( (
with the biggest 3-month slide in 16 months...
( (
Which triggered a disconnect between stocks and US futures...
( (
and the Japanese stocks are now down 10% on the year....
( (
and 20Y yields are testing 9 month lows...
( (
Charts: Bloomberg
Title: Re: Emerging Market Panic & Peripheral Currency Collapse
Post by: WHD on February 03, 2014, 08:14:25 AM
Cliff's Notes = Cash is King.

And don't keep it at JPM.

Also, if you are strolling down Wall Street or the City of London, don't forget to bring an Umbrella.  Heavy Duty.


So there were these four dudes, standing on the head of a pin, named Eeyu, Chin', Dolla' and Oi'...

Title: Japan in FREEFALL
Post by: RE on February 04, 2014, 12:14:00 AM
Well, I nailed this one last week.  I am fucking cleaning up here.  I gotta put out an Investment Newzletter.  LOL.
Japan is Baumgartnered


Short the Google Database


Japanese Stocks In Freefall - TOPIX Plunges Almost 5% To 4-Month Lows; Nikkei Down 15% In 2014
 ( (
Submitted by Tyler Durden ( on 02/03/2014 23:46 -0500
UPDATE: USDJPY has re-tumbled back below 101.00, recoupling with S&P 500 futures from the tried-and-failed attempt to ramp stocks overnight. It seems the short-JPY-driven carry traders have backed away from risk for now, no matter how much the BoJ primes the pump.
( (
 Nikkei futures are under 14,000 and down 15% from Dec 31st highs.
( (
Despite the hope-driven exuberance exhibited immediately post the Abe/Kuroda show, the USDJPY-pumping stock-momentum fest has ended - abruptly. Japan's Nikkei 225 has lost all its gains and is now trading below US day-session lows (3-month lows) but it is the broader TOPIX index (more akin to the S&P 500) that is collapsing. Down almost 5% on the day (its biggest drop since the May collapse), the TOPIX is at 4-month lows. The TOPIX Real Estate index just hit a bear-market - down 20% from Dec 31st highs. Japanese sell-side shops are in full panic desparation mode as "suggestions" that a sub-14,000 Nikkei will prompt an acceleration of Japan's QQE money-printing idiocy. This is getting ugly fast.
TOPIX collapses to 4-month lows...
( (
As Bloomberg notes, the sell-side is in full panic mode...

Japan’s central bank will probably boost purchases of ETFs as early as this month if Nikkei 225 drops to about 14,000, Hidenao Miyajima, chief strategist at Parnassus Investment Strategies in Tokyo, says in interview.

But this won't help as the ramp in USDJPY is not helping...
( (
and The TOPIX Real Estate Index is in Bear market territory - down 20% from Dec 31st highs... and 6 month lows...
( (
Title: Re: Emerging Market Panic & Peripheral Currency Collapse
Post by: RE on February 05, 2014, 04:15:57 AM
I held my shorts through the Dead Cat Bounce.  I will exit either another 1000 down in the DOW or if Da Fed signals a big Easing.  Possibilities are decent for a bigger drop, but risky to hold past this level.  I'm not hedging.  I already knocked down a decent take, worst case scenario I will only be around 5% up for this week.  If I get another 1000 down, I'm up around 10%.

Beyond the actual risking of bets, there is a damn good possibility this one breaks the bank.  Yen under 100 is FOREX CATASTROPHE.  Such a huge reversal of the carry trade demands the big players run out of the Yen, and that is equivalent to an Internation Bank Run.  For that to be stopped by the CBs, even in concert they would have to buy a whole lot of Dogshit.  I find it hard to imagine how Janet Yellen would have the stomach for this.  Time will tell of course.

Meanwhile, if you did not already drop in on this "correction", its a bit risky to do it now.


Japan Is Re-Crisis-ing; Nikkei Plunges 300 Points From US Close; S&P's Dead-Cat-Bounce Dead (
 ( (
Submitted by Tyler Durden ( on 02/04/2014 21:52 -0500

US and Japanese stocks began to fall the moment the bell rang in NYC on the end of the US day-session. By the times futures closed 15mins later, the S&P had already lost 6 points and the exuberance in the Nikkei had snapped back to USDJPY reality (100 points off its highs). As the evening progressed the dead-cat-bounce died with US and Japanese stocks tumbling to day-session lows. Dow futures are down 110 from the highs; S&P futures are down 16 points from the US session highs; and Nikkei futures - not helped by the 19th month in a row of falling YoY base wages - are testing 14,050, having dropped 300 points from the highs and removed all day-session gains. Stocks are re-crisis-ing as USDJPY tests back towards 101.
US and Japanese stocks started to crumble the moment cash closed in the US...
( (
Nikkei snapped down to USDJPY at the close and has now lost all the gains of the day....
( (
As has the S&P 500...
( (
Title: Re: Emerging Market Panic : Venezuela - A Crisis in the Making
Post by: g on February 05, 2014, 05:23:28 AM
Venezuela - A Crisis in the Making
By Sober Look
Created 02/03/2014 - 08:36

As a followup to our recent discussion [1] on Venezuela, here are the latest developments:

1. The government has since created two exchange rates in order to stem rampant dollar outflows - essentially devaluing the currency - see story [2]. Only essential goods are permitted to be imported using the original rate. The weaker exchange rate (more expensive dollars - nearly 2x the original rate) is used for everyone else. Black market dollars trade at some 10x the original rate.

2. Oil exports have fallen to the lowest level since 1985. A great deal of the oil the country does export is shipped to China to cover the billions of dollars worth of loans - see story [3].

3. Government bonds have sold off sharply in January, with long-term rates now above 15%.


4. According to the central bank, core inflation is running at close to 60%, although given the shortages it's difficult to measure.

4. Shortages of basic goods persist - see story [6] (quite sad).

5. Dollar debt to the private sector is now over 60% of FX reserves  - see story [7] (in Spanish).

6. Foreign reserves are dwindling.

    The Economist: [8] - Venezuela is running out of dollars to pay its bills. Although payments to its financial creditors of around $5 billion this year do not appear to be at risk, the country’s arrears on non-financial debt are put at over ten times that sum. These include more than $3 billion owed to foreign airlines for tickets sold in bolívares, and around $9 billion in private-sector imports that have not been paid for because of the dollar shortage. “Under the current economic model, and with this economic policy,” says Asdrúbal Oliveros of Ecoanalítica, “this [debt] looks unpayable.”

7. The country's sovereign CDS volume has picked up as traders smell profits, and the spread hit a new high. This is what a crisis in the making looks like.

                                                               ( ( :icon_study:


Title: Ambrose Sez: PRINT MORE MONEY!
Post by: RE on February 06, 2014, 01:05:51 AM

Yes Ambrose, if Super Mario Dragon just put the Pedal to the Metal on the Printing Press, the Eurotrash would come Roaring Back to Life.  ::)

Abenomics has worked so well for the Nips, right?  Helicopter Ben was a GENIUS, right?

Is he really this dense or does he get paid off for writing the nonsense?


Euroland is sliding further into Japanese deflation trap every month, whatever they claim in Frankfurt (

By Ambrose Evans-Pritchard

8:44PM GMT 05 Feb 2014

 The US and China are withdrawing stimulus on purpose. The eurozone is doing so by accident, letting market forces drain liquidity from the financial system for month after month.

The balance sheet of the European Central Bank has fallen by €553bn over the past year as banks repay money that they no longer want, either because ECB funds are too costly in a near-deflationary world or because lenders are being compelled by regulators to shrink their books.

This is "passive tightening" or "endogenous tapering". The ECB balance sheet has plummeted to 23pc of eurozone GDP from a peak of 32pc in July 2012.

Hardliners will be delighted to learn that we now have synchronized G3 global tightening at last, further compounded by enforced tightening in Brazil, India, Turkey, South Africa and a string of emerging market states trying to defend their currencies. At least two-thirds of the global economy is turning down the liquidity spigot.

This is causing collateral damage everywhere. Japan's Nikkei index of equities is down 14pc this year, a victim as ever from safe-haven flight into the yen. Julian Jessop, from Capital Economics, said this is not yet enough to derail's Japan's recovery, but nothing can be excluded at this point. "Investor sentiment is clearly very negative and the risks of a downward spiral are growing," he said.

The eurozone has been growing just enough on export growth and a burst of restocking to create the illusion of recovery, though business investment continues to fall each month, dropping to modern-era low of 18.9pc. (It was 21pc even during the depths of the dotcom bust in 2003.)

Retail sales fell 1.6pc in December, the biggest drop for two-and-a-half years. The unemployment rate has stabilised at 12pc, but only because so many people have dropped off the rolls or fled abroad. Italy has lost a further 425,000 jobs over the past year.

Euroland is sliding further into Japanese deflation trap every month, whatever they claim in Frankfurt. Passive tightening has caused private sector loans to fall by €155bn over the past quarter. "The ECB's insistence on waiting for more evidence of deflation is a dangerous gamble. Delays are costly, and risk allowing pathologies to fester," said Ashoka Mody, until recently the International Monetary Fund's Troika firefighter in Ireland and now a contributor to Bruegel.

Core inflation has fallen to 0.6pc when you strip out taxes. The ECB has failed to meet its own 2pc inflation by a shocking margin, and missed its 4.5pc M3 money supply target (If it remembers that it had one) by an even bigger margin, and is therefore in breach of its EU treaty obligations. It has ignored pleas for action from the IMF and the OECD.

"The ECB should be picking up the baton of quantitative easing from the Fed instead of sitting on its hands. They have presided over tight monetary policy for so long that they have let an intense deflation risk take hold," said Andrew Roberts, credit chief at RBS.

There have been hints from Frankfurt that the Bundesbank is at last willing to let the ECB stop "sterilisation" of its bond holdings, perhaps as soon as this Thursday's policy meeting. Such a move would be tantamount to QE worth up to €175bn. "The meeting is enormously important. If they don't act, this could snowball," said Mr Roberts.

But the ECB's Mario Draghi has been burned before. He was pilloried in Germany for his emergency rate cut in November, intended to give Euroland a safety buffer against deflation. This time he wants the Bundesbank out in front, openly and fully committed. Mr Draghi is tired of dealing with ideologues who either wish to reduce the eurozone to a hard core, or who have not yet accepted the political, strategic and moral responsibilities inherent in the creation of monetary union. You can see the glint of anger in his eyes. It is his turn to hold their feet to the fire.

Peter Bofinger, one of Germany's five "Wise Men" and a critic of the Bundesbank foot-dragging, said the ECB should launch "far-reaching bond purchases" immediately to head off the danger of deflation, deeming any other measure to be a drop in the bucket at this stage.

The ECB's tight policy has led to the surreal situation where the world's weakest economy - barely out of a deep recession - has the strongest currency. This dynamic is all too familiar to anybody who remembers what happened to Japan. "The greatest danger for the eurozone recovery is a further rise in the euro. They must avoid a rise to $1.40 at all costs," said Mr Bofinger.

But he is a rare voice in Germany, and circumstances are vastly complicated by wrangling at the constitutional court in Karlsruhe on the legality of the ECB's rescue operations.

We know that all five expert witnesses attacked Mr Draghi's bond rescue plan for Italy and Spain in hearings last June. The Bundesbank itself savaged him in its own pleading, even arguing that it is not the task of the ECB to prevent countries being thrown out of the euro. The court has delayed its ruling until April. Paralysis reigns.

It is often said that the ECB has no mandate to conduct QE. This claim is a smoke-screen. The ECB has an over-riding treaty obligation to support the general purposes of the Union. It can at any time buy EMU bonds across the board - weighted by GDP - in any volume it chooses as a tool of liquidity management, or it can buy gold, pig iron, equities, vintage wine, green cheese or anything else.

There is no prohibition on open-market operations. If there were such a ban, the ECB could not function as a central bank. It has already bought the bonds of Greece, a country that was insolvent, which surely is illegal under the Maastricht Treaty. The whole argument over QE has become hopelessly confused.

Deflation creeps up on countries and on central banks. There is no cliff-edge moment. The effects can be toxic for high-debt states even before the price level reaches zero, since the interest burden rises faster than the underlying base of nominal GDP. "The lower the inflation rate, the more dangerous it is for the eurozone recovery," says Olivier Blanchard, the IMF's chief economist.

The argument is by now well-known. Club Med states cannot deflate their economies to claw back competitiveness against northern Europe while at the same time controlling their debt trajectories. The two objectives are in contradiction. It is a key reason why Italy's debt has jumped from 119pc to 133pc of GDP since 2010 despite a primary surplus.

Global liquidity is drying up

A study by the Bruegel think-tank in Brussels found that each one percentage point fall in the EMU-wide inflation rate forces Italy to increase that surplus by an extra 1.3pc of GDP to stabilise public debt. It becomes a Sisyphean task, ultimately self-defeating.

Put bluntly, the ECB is condemning Italy, Spain and Portugal to long-term insolvency by failing to comply with its own M3 and inflation targets.

Frankfurt must now act with extreme care. The ECB is a global institution, not a regional Riksbank for the Lower Rhine. What it does on Thursday will set the tone for world bourses and may decide whether the emerging market storm turns into a full-blown crisis.

If mishandled, contagion could blow straight back into the ECB's face through financial links to Asia, Eastern Europe and Latin America. European (and British) banks have lent $3.4 trillion to emerging markets, four times as much as US banks. Spain's Santander has a $132bn exposure to Latin America, half in Brazil.

The long-suffering citizens of southern Europe and Ireland have put up with the failings and 1930s ideology of EMU policy-makers with remarkable stoicism for a long time. An aborted recovery at this point - with an another leg up in mass unemployment - might be more than democratic societies can tolerate.

There is a concept in physics known as a critical state, the moment when apparent stability suddenly gives way to drastic change. Europe must be getting close.
Title: Kraut Kourt Kaboshes Kurrency Krapola
Post by: RE on February 11, 2014, 03:19:48 AM
Kraut Judges  have drawn a new line in the sand for the ECB to cross, and it will be interesting to see what kind of loopholes and workarounds Super Mario Dragon can find to keep PIIGS Bond Spreads from a Blowout.

This should cause a new dive in the DAX and FTSE, and probably has some blowback here tomorrow as well.  I personally am back out of this shitstorm at the moment, it is Risk Off for me right now.

Flash Crash yesterday in Bitcoin makes it apparent the instability here right now is tremendous.

Best Hedge would seem to be about 30% USTs, 30% PMs, 30% Oil Futures and 10% miscellaneous betting on your favorite Stocks.

The Blowout nears here though, at which point Hedging won't work too well as all asset classes will dive.


ECB paralysed by German court decision as deflation threatens (

The ‘thunderbolt’ ruling on eurozone rescue policies by Germany’s top court marks a serious escalation of Europe’s governance crisis

Germany's constitutional court said it was "inclined" to rule ECB's eurozone crisis backstop is illegal Photo: Reuters

By Ambrose Evans-Pritchard

8:51PM GMT 10 Feb 2014

Comments180 Comments

Last week’s ‘thunderbolt’ ruling on eurozone rescue policies by Germany’s top court marks a serious escalation of Europe’s governance crisis and may ultimately force Germany to withdraw from the euro, the country’s most influential magazine has warned.

A sweeping report by Der Spiegel said the court ruling amounts to a full-blown showdown between Germany and the European Central Bank over the methods to shore up southern Europe's debt markets.

“It is nothing less than a final reckoning with the crisis-management strategy pursued by the ECB. The German justices insist that the German constitution sets limits on the ECB’s crisis strategy. In a worst-case scenario, the Court could forbid Berlin from contributing to efforts to save the euro or even force Germany to leave the currency zone entirely,” it said.

The warning came as market analysts began to see the darker implications of the ruling, which was initially seen as a green light for the ECB's bond operations.

Germany’s top institutes questioned whether quantitative easing is still possible in this political climate, leaving it unclear how the region can respond if deflation draws closer. “I think generally bond buying is now difficult territory,” said Clemens Fuest, head of the ZEW Institute.

Marcel Fratzscher, head of the DIW Institute, said the ruling greatly constrains the ECB. "A central bank must have unlimited scope for conducting monetary policy. If this prerogative is limited, it undermines credibility. The constitutional court has created fresh uncertainty with this decision," he said.

The German court in Karlsruhe said there were grounds for concluding that the ECB’s back-stop plan for Italy and Spain - known as the OMT - breaches the ECB’s mandate and violates the treaty prohibition on “monetary financing” of budgets. It did not address QE as such, but that distinction is becoming irrelevant in Germany.

“However they do it people will say ‘you are circumventing the OMT discussion’,” said Mr Fuest, addressing a Reuters forum in Frankfurt. He said the ECB may have to resort to other means to combat any spill-over from the emerging market storm this year, even if these are weak instruments.

Olli Rehn, the EU’s economics commissioner, told the forum that the ruling changes little. “The ECB certainly has its big bazooka and plenty of ammunition for the bazooka if needed. In my view the ECB has definitely worked within its mandate,” he said.

However, German eurosceptics were in ecstasy. “Finally, a court has found that the ECB’s bond-buying program is a clear violation of European law,” said professor Bernd Lücke, head of the AfD anti-euro party. Bavarian politician Peter Gaulweiler, a plaintiff in the case, said “Karlsruhe has shown ECB president Mario Draghi what a bazooka really is.”

While the court referred the case to the European Court (ECJ) for a preliminary ruling, it did so in such a way as to pre-judge the matter and fire a warning shot across the bows of EU institutions. Retired judge Udo di Fabio said it was intended to bind the hands of the ECJ in advance.

The German court does not accept the primacy of EU law over Germany’s Basic Law, and reserves the right to strike down any decisions by the ECJ, but views on this cover a wide spectrum. Gunnar Beck, an expert on European law at the University of London, said the German court is legally obliged to follow the verdict of the ECJ and has in effect cleared the way for a positive ruling by referring the case and "washing its hands" of matter.

Hans Werner Sinn, head of the IFO institute, said the German government cannot ignore the judgement by Karlsruhe “whatever the ECJ says”, and warned that markets were likely to react badly once they grasp that “German resistance” to eurozone rescues is hardening.

The German court said the ECB’s actions are probably “Ultra Vires”. If so, German institutions such as the Bundesbank are prohibited from taking part.

The ECB can in theory carry out rescue policies without the Bundesbank. Whether this would have any market credibility in a crisis is doubtful.