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Archive for the ‘Bailout’ Category

The euro system was doomed from inception for fundamental reasons; trying to conjure up “something for nothing” solutions will fail catastrophically, and soon.

As Europe flails helplessly in the waves of insolvency, its leadership has tossed it a life preserver. Too bad it’s plutonium, and will take Europe straight to the bottom.Plutonium is of course one of the most toxic materials on the planet, and the “rescue” cooked up by the EU leadership is the financial equivalent of plutonium.

Stripped of propaganda and disinformation, the “rescue” boils down to this: something for nothing.Sound familiar? Isn’t “something for nothing” what inflated the bubbles which have popped so violently? The EU “rescue” conjures something for nothing in two ways:

1. The financial alchemist’s favorite magic: leverage. Take a couple hundred billion euros in cash,  leverage it up with various magic (unlimited power is now at your fingertips!) and voila, you can suddenly backstop 1 trillion euros of banking-sector losses, all with illusory money.Something for nothing.

2. “Guarantees” to cover the first 20% of loan losses.This is being presented as  the equivalent of 100% guarantees, because it is inconceivable that losses could exceed 20%. In other words, the credulous buyer of at-risk Euroland bonds is supposed to be reassured enough to load the wagon because 20% of the bond is backstopped.

This is something for nothingbecause the EU leadership is explicitly claiming the  at-risk portion–80% of every bond–is somehow “safer” because the first 20% will be paid by EU taxpayers.

In essence, the EU is claiming that its illusory “something for nothing” magic will turn lead into gold. Abracadabra….oh well, close; it’s heavy, it’s metallic–oops, it’s plutonium.

The leadership is resorting to Cargo Cult incantations and legerdemain because the alternative  is to raise the 1 trillion euros in cold hard cash needed to bail out the first wave  of failed banks and underwater  bondholders by raising taxes and cutting budgets, i.e. austerity.  (Recall that the total bill will be at least 3 trillion euros, so 1 trillion is just a down payment.)

Raising cash the hard way is politically unacceptable in both France and Germany, not to mention every other nation in the EU, so the political lackeys of the banking sector and bondholders are cravenly substituting a “something for nothing” magic show which they hope will fool the global bond market.

Note to EU lackeys: there is no free lunch.Leverage is plutonium, not gold, and guaranteeing the first 20% of bonds that are doomed to lose 40%-75% is not terribly appealing to anyone not influenced by the ECB’s mind tricks. (“These are not the euros you’re looking for; move along.”)

No wonder France was so anxious for the ECB to crank up the euro printing press: they wanted– just like everyone else involved–something for nothing.

The best way to understand the EU’s current situation is to imagine an astoundingly dysfunctional family of  deep-in-denial-addicts,screaming co-dependent parents, and grown-up grifters acting  like spoiled brats, all trapped in a rat-infested, flooded flat that’s had the gas turned off for lack of payment–and there’s a plutonium life preserver glowing in the knee-high water.  Admittedly, this analogy is imperfect, but it does capture the essential psychology of the end-game being played out.

A slightly more formal model for understanding the increasingly unstable dynamics of the EU is the post-colonial “plantation” model I’ve described here before.  The key characteristics of the Colonial Model of Capitalism are:

1. Low cost labor and low-value materials flow from the periphery (colonies) to the Empire (center), which then ships high-value, high-profit finished goods back to the colonies.

2. The colonies must buy the high-value finished goods on credit that is issued and controlled by the Imperial center.

Hmm–doesn’t this sound like the relationship of Germany to the European periphery?The euro cemented this co-dependency: Germany had the most efficient production, and once the euro raised the cost of production in the periphery nations, then of course nobody could beat Germany’s cost advantages.  The euro actually lowered Germany’s cost of production in terms of foreign exchange rates while raising the costs in periphery nations that were previously able to lower their cost of production via currency devaluations.

Having surrendered that mechanism to access the deep credit markets of the center, then they had no choice but to buy the high-margin finished goods from  Germany, as nobody else could make the same goods for the low German price.

These booming high-profit German exports of finished goods to the European periphery generated vast surpluses of capital that were then loaned to the periphery to enable their further purchases of German goods.Why risk the heavy investment costs of production in the  periphery when Germany had the lowest costs of production and was willing to loan the buyers the cash needed to keep buying?

It’s the classic mercantilist-consumer co-dependency on a gigantic scale, with low-cost credit fueling both increased consumption and production.  As long as the credit flowed in vast torrents of low-cost, easy to borrow money, the co-dependency looked like a “virtuous cycle.”  Debt junkies eventually have to start servicing their debts, of course, and that’s when the ugly realities of colonial dominance become visible.

Germany casts itself in this melodrama as the wronged party, the industrious craftsfolk  churning out high-quality goods who have somehow been lured into pouring hard-earned cash down various ratholes to save nefarious EU banks–including their own.

But setting aside the melodrama for a moment, let’s ask: how many German goods would have been imported by the EU periphery if those nations had been forced to pay cash for everything from the start?Precious little is the answer; the cash–in the form of actual surpluses available to spend on imports–would have run out immediately after the euro was launched.

In other words, the debt orgy enabled not just carefree consumption, it also enabled vast German exports to the Eurozone.Now we start seeing how the once-mutually beneficial co-dependency has become toxic: now that the periphery’s debtors have become debt-serfs, German exports to the periphery are contracting.

This helps explain why even the supposedly prudent Germans are seeking something for nothing  as the painless answer to an intrinsically unstable and self-destructive system.  When it all implodes, German exports to the periphery will be a shadow of their past glory, and the surpluses which enabled the leveraged orgy of credit will dwindle. (Germany’s other big export markets, China and the U.S., are also contracting.)

Sovereign currencies are the only mechanism for discounting differences in credit worthiness and production costs.The euro was established as the currency equivalent of gold, holding the same value in every member country.  But the mercantilist/quasi-colonial model requires credit to flow from the center to the periphery, and that is precisely what has happened in the EU.

In the colonial model, the colonists are indebted and poor.The net value of their labor flows to the Imperial center as interest payments, and the banks at the center set the cost of money and the terms–naturally.

This co-dependency based on credit flowing from the mercantilist center to the periphery is both exploitative and systemically unstable. Now that the ontological instability of the euro is being revealed, the dysfunctional family members are blaming each other and desperately trying to conjure up something for nothing to bail themselves out of a system which was doomed to implode from its very inception.

All the complexity and confusion distills down to this: the EU leadership needs something for nothing to save the EU, but there is no free lunch. There is only one solution to the exploitation, the illusory leverage, the crushing debts: massive write-offs of all the bad debt everywhere in the EU. And since debt is someone else’s asset, then that means writing down the assets, too.  The only way to clear the insolvency is to write off 3 trillion euros of debt-based assets and re-enable sovereign currencies. Anything else is simply more tiresome melodrama.

Charles Hugh Smith – Of Two Minds

And so it begins.  The first major European bank bailout of 2011 has now happened.  French/Belgian banking giant Dexia has failed and both governments have pledged to participate in a rescue plan.  But Dexia will not be the last major European bank to fail.  Even now, governments all over Europe are feverishly developing plans to bail out major national banks in the event that the current financial crisis goes from bad to worse.  Instead of learning the lessons of 2008, most major European banks have continued to pile up huge mountains of debt, leverage and risk.  Now the bill for that stupidity is about to be passed on to the taxpayers of those nations.  But with most nations in Europe already drowning in debt, are bank bailouts really the right course of action?  What is it going to happen to Europe if dozens of major banks start failing and trillions of euros are needed to bail them all out?

Dexia is the first victim of the new credit crunch.  It got to the point where Dexia simply could not get access to the funding that it needed in the credit markets.

We are starting to see this all over Europe.  Nobody wants to loan much money to European banks right now because it is unclear what is going to happen next in Europe and it is uncertain which banks are stable and which are on the verge of collapse.

This is so similar to what happened back in 2008.

But Dexia is not going to be “the next Lehman Brothers” because the governments of France and Belgium are stepping in to save Dexia from collapse.

A recent article in the Financial Post described how the rescue of Dexia is likely to proceed….

Dexia will effectively be broken up, with the sale of healthier operations while toxic assets, including Greek and other peripheral euro zone government bonds, will be placed in a state-supported “bad bank.”

The details of the plan will be negotiated over the coming days, but authorities are making it clear that Dexia is not going to be allowed to collapse.  Bank of France Governor Christian Noyer is assuring everyone that Dexia is going to have access to plenty of liquidity….

“We will loan Dexia as much as it needs”

It appears that the “too big to fail” doctrine is alive and well in Europe.

Sadly, this is not the first time that Dexia has been bailed out.  France and Belgium also bailed out Dexia back in 2008.

But this was not supposed to happen.

Just three months ago, Dexia received “a clean bill of health” from regulators during European Union bank stress testing.

It just shows how credible those “stress tests” really are.

So are more European bank bailouts coming?

It certainly looks that way.

An article in the Financial Post on Tuesday stated the following….

European finance ministers agreed on Tuesday to prepare action to safeguard their banks as doubts grew about whether a planned second bailout package for debt-laden Greece would go ahead.

Of course when they talk about the need “to safeguard their banks” they are talking about those that are deemed “too big to fail”.  Just like in the United States, banks that are “too small” don’t get bailed out at all.

But western governments are very protective of the big banks.  The big banks are allowed to take gigantic risks, and if they succeed they make tons of money and if they fail then the taxpayers bail them out.

With big trouble on the horizon in Europe, authorities are already getting ready to bail out the major banks.  A Bloomberg article from last month acknowledged that the German government has been very busy getting ready to bail out their major banks in the event that a Greek default becomes a reality….

Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said.

As you read this, there are already signs of trouble at major German banks.  For example, Deutsche Bank has just announced that it is eliminating 500 more jobs.

The fundamental problems that Europe is facing are not being solved and the financial crisis is getting progressively worse.  With each passing day, more bad financial news comes pouring in.

For example, Moody’s slashed Italy’s bond ratings by three levels on Tuesday.

A reduction of just one level is very serious business.  For Moody’s to hit Italy that hard is a really big deal.

Italian banks have also been targeted by the credit rating agencies.  The other day, S&P slashed the credit ratings of seven different Italian banks.

If Italy goes down, it is going to be an absolute nightmare.  The Italian economy absolutely dwarfs the Greek economy.  The EU has been really struggling to bail out Greece, and there is no way in the world that they would be able to bail out Italy.

So if nations such as Italy or Spain start collapsing, will the U.S. Federal Reserve step in to help bail them out?

You never know.

The sad truth is that the Federal Reserve can do pretty much whatever it wants and nobody can stop them.

As I wrote about the other day, the Federal Reserve has agreed to join with other major central banks to lend hundreds of billions of dollars to major European banks in October, November and December.

As the past few years have shown, wherever big, global banks are in trouble, the Federal Reserve is sure to step in and help.

And many big banks in Europe are definitely headed for trouble.  Right now, European banks are holding more than $4 trillion in European sovereign debt.

A lot of that debt is bad debt.  Today, troubled European nations Greece, Portugal, Ireland, Italy and Spain owe the rest of the world about 3 trillion euros combined.

That is a whole lot of debt out there, and many big banks are so leveraged that just a 5 percent reduction in the value of their holdings could wipe them out.

Hold on to your hats folks.

So what should we be watching next?

Well, Greece continues to be a huge problem.

The IMF, the European Central Bank and the European Union are very frustrated with Greece right now.

On Monday, it was revealed that Greece is not going to hit the deficit reduction targets set for it by the “troika” either this year or next year.

European officials have been particularly displeased that Greece has been getting all of this aid money and yet has not been strictly adhering to the austerity measures that they agreed to.

However, the reality is that the austerity measures that Greece has actually bothered to implement have hit the Greek economy really hard.  The more Greece reduces government spending the more the Greek economy seems to slow down.

Greek Finance Minister Evangelos Venizelos recently announced that the Greek economy is projected to shrink by 5.3% in 2011, and Greek debt continues to spiral out of control.

Meanwhile, severe economic pain continues to spark huge protests all over Greece.  Scenes of riot police firing tear gas and protesters throwing stones at police have become so common in Greece that most of us don’t even pay much attention anymore.

But all of us should pay attention to what is happening in Greece.

Eventually these kinds of economic riots will spread throughout the rest of the western world as well.

And every day Greece just seems to get closer and closer to default.

At this point, global financial markets seem to consider a Greek default to be inevitable.  The yield on 2 year Greek bonds is now over 65 percent.  The yield on 1 year Greek bonds is now over 135 percent.

Greece is toast without more bailout money.

But now major politicians all over Germany are declaring that Germany is done contributing money to the European bailout fund.

And without Germany, the rest of the eurozone is not going to be able to continue the bailouts.

So the clock is ticking.

Once the current bailout fund has dried up, the bailout game will be over.

What will happen then?

Will that be what sets off a massive financial collapse in Europe?

Could we actually see the end of the euro?

For a long time there was speculation that it would be weak nations such as Greece that would leave the euro.

But now it appears increasingly likely that if someone is going to leave the euro it might be Germany.

Most German citizens would be in favor of such a move.  One recent poll conducted for Stern magazine actually found that 54 percent of all Germans would favor leaving the euro.

But if Germany left the euro it would absolutely implode.  German economic strength is the primary thing holding the euro up at this point.

In any event, it is going to be very interesting to watch what will happen to Europe over the coming months.

Greece, Italy, Portugal and Spain are all steadily marching toward collapse.

Germany says that it is done bailing out other members of the eurozone.

Dozens of major European banks are teetering on the brink of disaster.

People get ready – a storm is coming.

Time is running out for Europe and there is no help in sight.

The Economic Collapse

Well, here’s something that’s gone mostly unnoticed.  From the FDIC:

Acting chairman stresses that the agency’s own planning is just as important as plans submitted by companies.

Seems that the big banks were asked to submit a sort of ‘plan’ for their own demise.

The Federal Deposit Insurance Corp. on Tuesday approved a rule requiring the nation’s largest banks to submit “living wills” to help regulators shut them down in an orderly way if they are seized on the brink of failure.

And now it appears that the FDIC may not be willing to wait much longer.

Personally, I think we’ve waited long enough.  This country can function just fine without the banks that have committed fraud.  You know, the ones for which the majority of our taxpayer money has been providing life support.  Allowing these banks to fail is probably the best thing that can happen….well, besides the officers and board members of these banks being prosecuted and put in jail.  Then we’d be cooking with gas.

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[Bernanke's Office]

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BTW, did you catch Banzai7 on Today’s Keiser Report? Watch the bit about Timmah and Fatso…”It’s war, btut we have the Art…”

And now for a brief public service announcement:

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ZeroHedge

The tragedy of the too big to fail banking sector – over $1 trillion in deposits are over the $250,000 FDIC limit.  $6.5 trillion in insured deposits backed by $3.9 billion.

It is amazing how much ill placed faith is thrown into the current banking system when there is plenty of evidence of insatiable malfeasance.  The FDIC recently released its quarterly banking report and somehow dismal information was twisted as being positive.  Take for example the reality that $6.5 trillion in insured deposits are backed by $3.9 billion.  Does this give anyone any comfort?  What is even more staggering is you have $1 trillion in deposits above the $250,000 FDIC protection limit riding it out with absolutely no protection.  The banking sector is going to face dramatic problems ahead because the past issues of bad loans have yet to be realized.  Sure, accounting trickery and fancy financial magic can buy you a few years but ultimately you have to come to terms with the deep issues in the balance sheet.  The FDIC is overseeing an industry with $13 trillion in “assets” and only carries a $3.9 billion insurance fund.  It appears the wizard behind the curtain is blowing more smoke than ever.

$1 trillion in deposits with no protection

One of the upsetting revelations in the quarterly report is the fact that over $1 trillion in deposits are not insured by the $250,000 limit.  Most of these deposits are placed in the too big to fail institutions.  As you can see from the table above, the U.S. has over 7,500 banking institutions but only 19 with over $100 billion in assets.  Incredibly, these are the most problematic banks as well.  The vast majority of these deposits are simply out to sea with no sail.  This only brings up the issue of potentially more bailouts as if the trillions of dollars given to the banking sector were not enough already.  Look at how well the bailouts have helped the wilting economy.

Contrary to what the public is told, the banking sector is not in healthy shape.  Take a look at these too big to fail banks and how well they have done in 2011:

Many of the biggest banks in the country are down from 12 percent all the way up to 38 percent including the recent rally.  Bank of America with over $2 trillion in banking assets has fallen by a jaw dropping 38 percent.

Read the rest at My Budget 360