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Archive for the ‘EuroDollar’ Category

The lack of enthusiasm for the latest effort to centralize all banking and monitory regulation within the European Central Bank suggests that the surreal struggle for continental unanimity still resides in the minds of banksters. Elites still seek to perfect the class distinguish of century old traditions, into a modern version of feudal serfdom. Globalism is the brainchild of the cabal of international banking. As long as a financial monopoly dominates political institutions, the end result will be more consolidation of the rule of the House of Rothschild.

The European Commission recently announces and lays ground for banking union.

“A new proposal would see the European Central Bank (ECB) gaining new powers to monitor the performance of the 6 000 or so banks in the eurozone. The arrangement would be known as the single supervisory mechanism.

The ECB would take over tasks such as authorizing banks and other credit institutions, ensuring they have enough (liquid) capital to continue operating even when sustaining losses and monitoring the activities of financial conglomerates.

If a bank breaches – or is at risk of breaching – capital requirements, the ECB would be able to ask the bank to take corrective action. National supervisors would meanwhile continue to carry out day-to-day checks.

A single rulebook on capital requirements, standardized deposit protection schemes and new recovery and resolution provisions – all proposed earlier in the year – would complete the ‘banking union’.”

A champion for the proposal, Michel Barnier: European banking union is “necessary and possible”, explains the scheme further.

“It is also understood the ECB will have the power to wind up banks; remove bank licenses; and force recapitalization programs when it think it’s necessary, according to the documents.

The ECB will also be empowered to “enter into administrative arrangements” with regulators outside the eurozone – or act and negotiate on behalf of all members in talks on global financial regulation.” 

The City of London has never been a keen supporter of European governance. Britain opposes ECB as head of Banking Union illustrates push back.

“Britain is pushing for changes to a proposed euro zone banking union to dilute the power of the European Central Bank, EU officials said, potentially hampering efforts to build the infrastructure urgently needed to underpin the euro.

Britain intends to propose a system that would give countries outside the banking union the possibility of blocking those within the project from clubbing together to shape EU-wide regulations, said EU officials, speaking on condition of anonymity.

“The concern is that the Bank of England can find itself outvoted by the ECB on aspects of rule making,” said one official. Britain will not join the banking union.”

Another report in, Britain pushing to dilute powers of ECB in banking union, reveals the concerns about a diminished influence of the British financial houses.

“Britain’s finance minister, George Osborne, fears the ECB will use its authority to impose EU-wide regulation that would favor countries with the euro and put London’s financial centre, using sterling, at a disadvantage.

“It seems unlikely that the ECB would ride roughshod over the wishes of the Bank of England, but that is what the British Treasury is worried about,” said the first official. “They want safeguards to make sure that doesn’t happen.”

Britain and all other members of the European Union must give the green light to the banking union before it can go ahead, an approval that could be delayed or withheld if London’s concerns are not addressed.”

Empowering the European Central Bank regulatory authority over every country as part of the broad EU coalition requires surrender of even more national sovereignty. 

There was a time about a year ago, before the second Greek bailout was formalized and the haircut on its domestic-law private sector bonds (first 50%, ultimately 80%, soon to be 100%) was yet to be documented, when it was in Greece’s interest to misrepresent its economy as being worse than it was in reality. Things got so bad that the former head of the Greek Statistics Bureau Elstat, also a former IMF employee, faced life in prison if convicted of doing precisely this.

A year later, the tables have turned, now that Germany is virtually convinced that Europe can pull a Lehman and let Greece leave the Eurozone, and is merely looking for a pretext to sever all ties with the country, whose only benefit for Europe is to be a seller of islands at Blue Aegean water Special prices to assorted Goldman bankers (at least until it renationalizes them back in a few short years). So a year later we are back to a more normal data fudging dynamic, one in which Greece, whose July unemployment soared by one whole percentage point, will do everything in its power to underrepresent its soaring budget deficit.

Case in point, on Friday the Finance Ministry proudly announced its budget deficit for the first eight months was “just” €12.5 billion, versus a target of €15.2 billion, leading some to wonder how it was possible that a country that has suffered terminal economic collapse, and in which the tax collectors have now joined everyone in striking and thus not collecting any tax revenue, could have a better than expected budget deficit. Turns out the answer was quite simple. According to Spiegel, Greece was lying about everything all along, and instead of a €12.5 billion deficit, the real revenue shortfall is nearly double this, or €20 billion, a number which will hardly incentivize anyone in Germany to give Greece the benefit of another delay, let along a third bailout as is now speculated.

To quote Greg House: “Everybody lies”

From Spiegel:

The gap in the Greek national budget is greater than previously expected. According to a preliminary Der Spiegel finding, the troika of European Commission, European Central Bank and International Monetary Fund reported that the government of Prime Minister Antonis Samaras is missing currently around 20 billion euros - nearly twice as much as last admitted. Only if the funding gap is closed, the next EU tranche will be transferred to Athens.

What is well-known is that for all intents and purposes Greece has already stopped trying:

That Greece can bridge the financing gap on its own seems unlikely. The already adopted austerity program has encountered great opposition in the population. In one published study in Athens on Saturday 90 percent of survey respondents declared that the new reform package go almost exclusively to the detriment of the poorer sections of the population. Only 33 percent also believe that the new cuts in the social network can not solve the country’s problems would be. Nevertheless, 67 percent of respondents argued that Greece remains in the euro zone.

But at what cost? Already 8000 people in Athens alone have to resort to soup kitchens to find some food in a country in which there are virtually no opportunities left to make a living.

Sure enough, in a world in which no politician has any credibility left, it took Greece a few short hours to issue its canned response to the allegation that it has been making up numbers all along… as usual. Per Dow Jones:

Greece’s finance ministry late Sunday refuted a report in a German magazine claiming that Athens must cover a 20 billion euros ($26 billion) budget shortfall–twice previous estimates–in order to satisfy international conditions for emergency aid.

Now we just need two more denials to have no doubt that every number out of that particular economic basked case is a lie. Which we don’t now. Don’t forget: this is what the Greek Finance Ministry looks like:

And the kicker of course is that as reported on Friday, Europe is now desperate to not rock the boat ahead of the Obama reelection, because as Reuters reported all of Europe wants to give Obama a second term. Which makes sense: in a world of wealth redistribution, it will be only fair that America, which has taken the place of China as the world’s growth dynamo, and where fund flows out of Europe have pushed the S&P to a few percentage point shy of all time highs, will repay its reelection debt to Europe for avoiding reality as long as possible, by “sharing” US taxpayer funding, from those who for one reason or another still pay taxes, with its European proletariat cousins and bailout all of Europe’s insolvent countries on Uncle Sam’s tab yet again, starting just after November 6, 2012.

Because it’s only “fair.”

Zero Hedge

Replacing old impaired debt with new impaired debt does not generate growth. Borrowing more money will not reverse financial death spirals.

Sorry, Bucko–Europe is still in a financial death spiral. Friday’s “fix” changed nothing except the names of entities holding impaired debt. We can lay out the death spiral dynamics thusly:

1. Growth was dependent on borrowing money and blowing it on consumption and malinvestment. Replacing old impaired debt with new impaired debt does not generate growth.

2. Borrowing more money to pay the interest on past borrowing will not generate growth. Money must be borrowed to pay the interest and additional money borrowed to fund current consumption. As interest increases, this creates a geometric increase in debt and interest costs.

3. Borrowing more money to fund current consumption is a death spiral, as the interest payments eat up future revenues, starving productive investment and future consumption.

4. Borrowed money must be backed by either collateral or future income streams. The collateral remaining in malinvestments (villas in Spain, etc.) is either impaired, near-zero or simply non-existent. There is no legitimate collateral on which to base more borrowing.

5. Future income streams are already committed to paying interest on past debt and mandated consumption (entitlements, government payrolls, etc.), so there is no legitimate collateral on which to base more borrowing.

6. Interest rates will rise as investors question whether their capital will be returned in full or if it will be returned in depreciated currency.

7. Export-based economies will contract as China’s expansion slows to a crawl. Future projections of national income are overly optimistic.

8. As income is bled off to pay rising interest, there is less money available for consumption or investment. Without investment, income declines. As taxes rise, there is less private-sector income available for either investment or consumption. This is the “austerity death spiral,” and borrowing more for State malinvestment will not halt it.

The more money that is borrowed to maintain Status Quo consumption, the higher the future interest payments. This is a financial death spiral.

9. There is no collateral for more borrowing, but “growth” depends on more borrowing.

10. Transferring bad debt to central banks does not mean interest will not accrue: interest on the debt still must be paid out of future income, impairing that income.

11. Lowering interest rates does not create collateral where none exists.

12. Lowering interest rates only stretches out the death spiral, it does not halt or reverse it.

13. Centralizing banking and oversight does not create collateral where none exists.

14. Europe will remain in a financial death spiral until the bad debt is renounced/written off and assets are liquidated on the open market.

15. Anything other than this is theater. Pushing the endgame out a few months is not a solution, nor will it magically create collateral or generate sustainable “growth.”

16. The Martian Central Bank could sell bonds to replace bad debt in Europe, but as long as the MCB collects interest on the debt, then nothing has changed.

The Martians would be extremely bent when they discovered there is no real collateral for their 10 trillion-quatloo loan portfolio in Europe.

Charles Hugh Smith – Of Two Minds

As the following image from Spiegel summarizes, three things will happen simultaneously when the unthinkable finally occurs: i) economic output plummets, ii) unemployment rate soars, and iii) consumer prices explode.Of course, this is nothing but merely deferred consequences for Europe partying for over a decade under an unsustainable regime that borrowed from the future (sound familiar?). And now the inevitable hangover. In other words: payback is a bitch.

Source: Spiegel

Zero Hedge

Steen Jakobsen, chief economist of Saxo Bank in Denmark, asks via email: “Is Merkel Misinterpreted? Will the FOMC Move Decisively?”

 The misunderstood Chancellor.

The market clearly believes Ms. Merkel will, ultimately, not withstand the pressure – and she will end up collateralizing rising debt. I remain extremely skeptical. I even dusted off my school German to read Der Spiegel and Focus, two major German weeklies, which give you a very different perspective.

As a generalization, the Anglo-Saxon driven investment banks and media tend to rely on poorly translated English versions of domestic financial papers, hence they lose the subtle difference on what Merkel is REALLY saying. This is what I believe Ms. Merkel, and Germany, think.

• When countries join the euro, they also directly and indirectly accept the Stability-and-Growth Pact, hence anything that moves Germany and Europe closer to Stability-and-Growth will be supported by Germany.
• Germany knows it will take time – more time than the market wants it to take. But Germany also realizes it will probably mean more crisis before the whole of Europe moves in the same direction.
• The big loser if Germany “caves in” is Germany. Bund yields will rise and all of Europe will have to finance itself at higher rates – the exact same reason the Alexander Hamilton sinking fund will not work – why should Germans pay more for issuing debt and the high debtors pay less?
• Germany has a game-theory upside in Greece failing to comply – only through more crisis will Club Med (Italy, France and Spain) move to more Europe. (The only thing Club Med wants for now is more German money, not more Europe…)
• Merkel needs to reach across to SPD, the opposition, to get her 2/3 majority for the Fiscal Compact. Watch closely what “concessions” she is willing to give SPD. That will give us clear indication on where she stands vis-a-vis the Club Med call for the easy solution of Euro-bonds and Banking Union.
• Merkel and Germany are pro-European. They want the EU to succeed and they will never leave the euro. But they are also aware that collateralizing debt without the Stability-and-Growth pact will end in tears as it will be extend-and-pretend squared. Throwing liquidity at a solvency issue avoids any real reforms and will be the fastest way to Japanisation.

From this old cynical trader’s point of view, the more likely Merkel and Germany give up and bow to the pressure, the sooner will we face a full-blown crisis and collapse of Europe.

European Crisis Summit Score 0-19

Rhetoric and non-plans cannot continue to dominate the agenda at the EU Summits. The meeting on the 28/29 June is, by my count, meeting number 19 without a real result. Zero from nineteen games – talk about a team going towards relegation!

FOMC – more of the same The US data is still getting weaker, but not weak enough to warrant a panic from the FOMC tomorrow. Bernanke failed to provide the juice in his speech last week, so now the consensus is it will have to happen tomorrow. Otherwise… you know the rest of the sentence. The Fed will lower growth; it will probably also extend Operation Twist, but I doubt it will go all in considering the banking system issues and the overall need for having reserves.

On the other hand, however, the Fed also realizes that “promising” has a real impact on the market. So, overall, expect some small adjustment from FOMC/FED, but not enough.

Strategy

We would be almost square into this meeting, but looking to be heavily bearish on equities post the FOMC and EU Summit.

We still see a summer of discontent as the misinterpretation of Germany and FOMC will lead the market to realize that, for once, central banks and the politicians can’t buy more time.

It is time to reflect not act, as their five-year experiment of doing the same thing expecting different results is leading them nowhere. Probably naive thinking by me… But I think we will all lose if I’m wrong, as extend-and-pretend squared is the road to the poor house.

Safe travels,
Steen Jakobsen

Market Won’t Wait

I believe Steen has this essentially correct and that Germany giving in would ultimately just make matters worse in spite of all the “mother hen calls” from nearly every other economist.

Yet,  the market cannot and will not wait long enough for Merkel to be proven correct. Interest rates in Italy and Spain are at disaster levels and will likely get worse.

My position is summed up in these three posts.

• It’s Just Impossible
• Six Reasons Why Italy May Exit the Euro Before Spain; Ultimate Occupy Movement
• Greek Election Sideshow; Socialists Win Absolute Majority in France

In the meantime, I offer another musical tribute, this one from The Animals.

Please Don’t Let Me Be Misunderstood

Mike “Mish” Shedlock
Global Economic Analysis