Angela looks bad naked; Good news for foresters; Italians extend and pretend; Dilbert

3. Now for the hard part - Here's a reminder from McKinsey of the power of de-leveraging and why the European sovereign debt issues are way too powerful to be dealt with in one bailout. Europe faces years and years of grinding debt reduction, deflation and low growth without either debt restructuring (the preferred option) or money printing-driven inflation. HT John Walley via email.

The euro's fall against the dollar and yen, coupled with investors' ongoing concerns about a European sovereign debt crisis, underscore the need for the massive task of debt reduction--or deleveraging--that will weigh on global growth and many of the world's largest banks after the bursting of the credit bubble. Recent McKinsey research explores the time line and implications for economic recovery under deleveraging pressures, as well as the ongoing risks for banks as borrowing costs rise.

4. Alternatives? - The Reserve Bank of Australia seems to think the recent burst of competition between the Australian banks for term deposits may be a temporary thing as other ways to raise secure, long term funding are re-opening, Bloomberg reports. The European crisis may, however, put paid to that. The creation of a viable domestic securitisation market may require something like the creation of covered bonds used in Europe. Could New Zealand's banks start issuing covered bonds? They essentially are bank bonds backed by the interest earnings from mortgages, but the mortgages remain on bank balance sheets.

There are “reasons to think that the factors giving rise to the current wave of competitive pressure might prove to be partly transitory,” Edey said. “In particular, conditions in alternative funding markets have been improving.” “A further recovery in securitization markets, for example, would help lenders to diversify their funding sources and probably help to take some pressure off the deposit market,” said Edey, who heads the Reserve Bank of Australia’s financial system department.

5. Deflation arrives - US prices unexpectedly dropped in April, Bloomberg reports. Again, this is all about debt de-leveraging in the developed world driving balance sheet recessions that cause deflation and very slow growth (or worse). There is no getting away from the grind, unless you print money or destroy banks...or both.

The cost of living in the U.S. unexpectedly dropped in April for the first time in more than a year, reinforcing forecasts that the Federal Reserve will keep interest rates near zero for much of 2010. The 0.1 percent fall in the consumer price index was the first decrease since March 2009, figures from the Labor Department showed today in Washington. Excluding food and fuel, the so-called core rate was unchanged, capping the smallest 12- month gain in four decades. Retailers such as Wal-Mart Stores Inc. are cutting prices to bolster sales as customers face almost 10 percent unemployment and rising foreclosures. The European debt crisis, which has pushed up the value of the dollar and may restrain global growth, will probably further depress prices at a time when inflation is already running below Fed policy makers’ projections.

6. What was she thinking? - Angela Merkel's attempt to cover up the European debt emperor so no one could see he has no clothes backfired badly overnight. It just drew attention to the nudity. She did it with a plan to ban naked short selling.

Merkel’s coalition seeks to prevent traders from buying credit insurance on government bonds they don’t own, so-called naked swaps, as German lawmakers debate a bill authorizing their contribution to a $1 trillion bailout to support the euro. The unexpected ban, done independently of the European Union, came after the aid package failed to stop the 16-nation common currency from weakening to a four-year low and as banks became increasingly reluctant to lend to one another. “The market sees an inadequate policy such as this as an act of desperation and a refusal to address the fundamental problems at hand,” said Brian Yelvington, head of fixed-income strategy at Knight Libertas LLC in Greenwich, Connecticut.

7. Extend and pretend - Italy's regulator has ruled Italian banks don't have to revalue their toxic debt lower, Bloomberg reports. Sigh.

The Bank of Italy’s decision to stop requiring banks to mark the value of their government bond holdings to market will spare lenders an 800 million-euro ($984 million) reduction in their regulatory capital, analysts said. The second-quarter losses to date would wipe six basis points off banks’ core Tier 1 capital, a measure of a lender’s ability to absorb losses, analysts at Milan-based brokerage Equita SIM SpA said in a note to clients today. A basis point is 0.01 percentage point. Italy, which yesterday said the new rule is effective immediately, is following European nations such as France and Germany that have already ended the mark-to-market requirement, Derek De Vries, an analyst at Bank of America Corp.’s Merrill Lynch unit said in a separate note today. The decision is “important because a number of the banks start with a weak capital position,” De Vries wrote, citing Banca Monte dei Paschi SpA, Italy’s third-biggest bank, as an example. “Most of the Italian banks hold significant amounts of Italian government bonds.”

8. Will you outlive your savings? - That's a question Canadians are asking themselves, the Globe and Mail reports. They all need to move to New Zealand where the taxpayer simply keeps paying...forever...until they revolt...

9. Good news for foresters - The LA Times reports Canada has suspended logging on 111,000 square miles of forests. It won't push up log prices globally for a while because the North American housing sectors are bombed out for now. But wait a while and it might actually be worth it for New Zealand to grow logs again.

Industry analysts said the three-year moratorium would not likely have an immediate effect on lumber prices, especially because the pact calls for mills, where production has already been ramped down about 50% because of the housing downturn, to continue to receive a steady supply of timber now that housing starts are beginning to inch back up. "Too much supply vs. demand will be the likely story for the next year or so," said Russell E. Taylor, president of International Wood Markets Group in Vancouver, but he said a widening outbreak of mountain pine beetles and rapidly growing sales to China could shrink the supply of Canadian lumber to the U.S. "And finally you have this new agreement. I expect it's not going to have a huge impact on the supply, but it will have some impact, I'm sure," Taylor said. "One of the big questions we have is: Where will the U.S. get its lumber at the end of the decade?"

10. Totally relevant video - John Stewart has a go at the US banks. Like shooting fish in a barrel...