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Things that make you chuckle in the morning…

European Union leaders gather for their first summit of 2012 as a deteriorating economy and struggle to complete a Greek debt writeoff risk sidetracking efforts to stamp out the financial crisis.

EU chiefs arrive in Brussels about 2 p.m. today to put the finishing touches on a German-led deficit-control treaty and endorse the statutes of a 500 billion-euro ($661 billion) rescue fund to be set up this year. Greece and its private creditors said Jan. 28 they expect to complete a deal in coming days after bondholders signaled they would accept European government demands for a bigger cut in their debt holdings.

Uh huh.  That’s not the problem.  The problem is that Germany is screaming that Greece must surrender its national sovereignty in order to continue to receive “help”, effectively becoming a vassal state of Germany. 

In the meantime Sarkozy says he’s going to unilaterally impose a financial transactions tax.  One wonders how he’s going to pull that off, given that I don’t think France re-installed a King.  Or did they?

Here in the US we still won’t face reality — although it’s at least being talked about in the media now.

The level of debt held now by governments, the financial industry and especially consumers remains a greater drag on the U.S. than in 1983, Reinhart said Jan. 27 in a radio interview from Davos on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. In the third quarter of 2011, total household debt was 86 percent of GDP, compared with 47 percent in the third quarter of 1983, according to the U.S. Commerce Department.

“The capacity for households to carry on to be the engine of growth that they have been in past recoveries is simply not there,” said Reinhart, a senior fellow at the Peterson Institute for International Economics in Washington.

Until this is recognized and we adjust for it we cannot have the sort of “recovery” everyone wants to see.  That is, we never hit the bottom, we never purged the bad debt, and we never set the stage for a “recovery”, instead covering up the problems with more debt and fraud.

In the final three months of 1983, average after-tax personal income had risen 4.2 percent from a year earlier, adjusted for inflation, according to the Commerce Department. In the final quarter of last year, it had dropped 0.8 percent.

Now now, let’s stop the intentional misuse of statistics there Bloomberg, and instead look at what we had just started doing back in 1983….

So did personal income actually rise?  Hmmmm…. we added, in 1983, a bit more than $100 billion in GDP.  But we also added $176 billion in debt, which means we were borrowing the so-called “increase” in after-tax personal income, we were not earning it.  Indeed, here’s the debt and GDP addition numbers for the quarters from 1981 through 1989:

Growth?  Where? 

We didn’t grow at all — we borrowed from roughly 2x to nearly 5x the increase in output each and every quarter during Reagan’s so-called “recovery”!

This is the fundamental scam that we have run for the last 30 years and we’re still not talking about it honestly!  Until we do and we reconcile the overblown asset prices and costs that go into both business and personal life that have come with this debt there can be no durable recovery — only further attempts to blow more Ponzi-style bubbles.

The problem is that in order to blow another asset bubble you need to find an asset where leverage is reasonably low and can be cranked up so as to support it, at least for a while. 

But we seem to be all out of those unencumbered assets……

European finance ministers and politicians have come to the conclusion that a deal, even one involving a credit event, is better than no deal at all. Thus it is increasingly likely the Greek Debt Wranglewill trigger credit default swaps.

Opposition to payouts on Greek credit-default swaps from European Union policy makers is softening as disputes over a voluntary debt exchange threaten to push the nation into default.

Any agreement between the Greek government and the Washington-based Institute of International Finance on debt writedowns will only bind 50 percent of investors in the 206 billion euros ($270 billion) of notes being negotiated, Barclays Capital estimates. Hedge funds may resist a deal, seeking to get paid in full or compensated from insurance contracts

“Politicians seem less concerned than before about CDS triggers,” said Michael Hampden-Turner, a credit strategist at Citigroup Inc. in London. “Having a payout on Greek CDS is probably better than the alternative: a loss in market faith of the product’s ability to provide a hedge against sovereign risk.”

Officials, including former European Central Bank President Jean-Claude Trichet, have insisted that a swaps trigger was unacceptable because traders would be encouraged to bet against indebted nations and worsen the crisis.

Greece said it may impose losses on investors who fail to support the debt restructuring by adding a so-called collective action clause, or CAC, into its bond documentation. That would force holdouts to accept the same terms as the majority.

Use of CACs would trigger a restructuring credit event and a payout of default swaps, according to rules from the International Swaps & Derivatives Association.

“A CAC is looking increasingly like the best option,” Citigroup’s Hampden-Turner said. “That route seems to tick a lot of boxes: they don’t have a bond default, the official sector gets treated differently than the private sector, and everybody has to participate in the exchange without anybody getting paid in full.”

ECB Opposition

While the ECB oppose any involuntary restructuring of Greek debt, policy makers such as Dutch Finance Minister Jan Kees de Jager say they aren’t against a credit event.
The softer stance signals Greece is unlikely to get sufficient participation in a voluntary bond swap to make its debt burden sustainable.

The ECB is now alone in its opposition to a credit event. Then again, the ECB alone was against haircuts, soft defaults etc.

As late as May 7, 2011 former ECB president Jean-Claude Trichet insisted there would be “no Greek debt restructuring”. I wrote about it in Trichet Reiterates Restructuring “Not on the Agenda”, Market Reiterates “Trichet is a Pompous Fool”.

Since then there have been two restructurings, and we are now headed for an involuntary restructuring that will trigger credit default swaps.

I suspect an effort will be made to placate the ECB somewhat so that the ECB does not take a loss on the 40 billion euros of Greek debt it stupidly bought, but otherwise, the ECB is about to have this crammed down their throats.

Portugal waits on deck.
Mike  “Mish”  Shedlock – Global Economic Analysis

The euro is a dying currency.  On Thursday, the EUR/USD fell below 1.28 for the first time since September 2010.  In fact, as I write this the EUR/USD is sitting at 1.2791.  Back in July, the EUR/USD was over 1.45.  But this is just the beginning.  The euro is going to go a lot lower.  At this point, there are several major European nations that are on the verge of default, the European financial system is overflowing with debt and toxic assets, and most major European banks are leveraged about as badly as Lehman Brothers was when it collapsed.  Most Americans simply do not grasp the gravity of what is happening.  Just because the Dow is sitting above 12000 and a few U.S. economic numbers have improved slightly does not mean that everything is going to be okay.  As I wrote about recently, the EU has a bigger economy than we do and they have a bigger banking system than we do.  U.S. banks are massively exposed to European sovereign debt and European banking debt.  When the financial system of Europe collapses and the euro falls apart it is going to rock the entire planet.  So you better look out below – the euro is coming down and it is coming down hard.  After the euro implodes, nothing is every going to be the same again.

So how far are we going to see the euro decline?

Julian Jessop of Capital Economics expects the euro to fall much further….

The relative strength of the recent economic data from the US is supporting the dollar more generally, and we expect this divergence to persist as the euro-zone slides into a deep and prolonged recession. Above all, doubts about the very survival of the euro itself are likely to remain a drag on the currency. We therefore continue to expect the euro to fall to around $1.10 by the end of the year.

Others are even more pessimistic.

As I have written about previously, the head of global bond portfolio management at PIMCO believes that the euro is going to go even lower than that….

“Parity with the dollar next year is not out of the question”

Can you imagine that?

1 dollar = 1 euro?

Don’t think that it can’t happen.

But the decline of the euro is just part of the story.  The truth is that Europe is on the verge of a financial collapse that could end up dwarfing the financial crisis of 2008.

Sadly, most Americans have no idea what has been going on in Europe the past few days….

-The stock of the biggest bank in Italy, UniCredit, is absolutely collapsing.  Shares of UniCredit fell 14 percent on Wednesday and 17 percent on Thursday.

-Shares of another major Italian bank, Intesa Sanpaolo, fell 7.3 percent on Thursday.

-Shares of three major French banks all fell by at least 5 percent on Thursday.

-Even shares of German banks are falling like a rock.  Shares of Commerzbank fell 4.5 percent on Thursday and shares of Deutsche Bank fell 5.6 percent on Thursday.

-The yield on 5 years Italian bonds is back over 6 percent and the yield on 10 year Italian bonds is back over 7 percent.  Analysts all over Europe insist that that the Italian debt situation is not sustainable if rates stay this high.

-Italy’s youth unemployment rate has hit the highest level ever.

This is mind blowing news.

But what is the top headline on USA Today right now?

“Employers Impose Bans On Smokers”

These are some of the other top headlines on USA Today right now….

“Automakers Rush To Offer Apps In Your Car”

“Bargain Season At Taco Bell, Pizza Hut, Wendy’s”

“Does Your Dog Understand You? Study Says Maybe”

Is that what passes as news in this country?

A financial meltdown of historic proportions is happening in Europe and you cannot even find anything about it on the front page of USA Today.

Amazing.

All of us need to snap out of our television-induced comas and start waking up.

Things are about to get really bad for the global financial system.

At this point so much confidence has been lost in the euro that even the Council on Foreign Relations is admitting that the euro is a failure….

The euro should now be recognized as an experiment that failed. This failure, which has come after just over a dozen years since the euro was introduced, in 1999, was not an accident or the result of bureaucratic mismanagement but rather the inevitable consequence of imposing a single currency on a very heterogeneous group of countries. The adverse economic consequences of the euro include the sovereign debt crises in several European countries, the fragile condition of major European banks, high levels of unemployment across the eurozone, and the large trade deficits that now plague most eurozone countries.

If even the CFR is throwing in the towel, that should tell you something about what is about to happen to the euro.

There is a very real possibility that we could see the euro break up at some point during the next couple of years.

It now seems that a report produced a while back by Credit Suisse’s Fixed Income Research unit was right on target….

“We seem to have entered the last days of the euro as we currently know it. That doesn’t make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks.”

The European debt crisis just continues to get worse and worse.  None of the solutions that European leaders have tried have worked.  We are rapidly approaching the meltdown phase of this crisis.

As I have written about previously, it doesn’t take a genius to figure out what is happening in Europe.  The equation is simple….

Brutal austerity + toxic levels of government debt + rising bond yields + a lack of confidence in the financial system + banks that are massively overleveraged + a massive credit crunch = A financial implosion of historic proportions

Unfortunately, what is happening right now in Europe is eventually going to happen in the United States as well.

As I wrote about yesterday, U.S. debt is a ticking time bomb that is going to devastate the entire global economy at some point.  Nobody knows when the implosion will happen, but everyone knows that it is inevitable.

When Europe falls apart financially, that is going to make our own financial system much less stable.  What is happening in Europe could turn our “limited recovery” into a “major recession” almost overnight.

So keep your eye on the euro.

If the euro keeps going down, that is going to be really bad news for the global economy.

Unfortunately, the truth is that the decline of the euro is just getting started.

Hold on to your hats.

The Economic Collapse

Well look what we have here….

America’s central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.

The Fed is using what is termed a “temporary U.S. dollar liquidity swap arrangement” with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or “swaps” dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

…

The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.

Actually, The Fed claimed it was not bailing Europe out in direct conversations with Senators at a closed-door meeting.

It’s convenient that Bernanke wasn’t under oath in recorded testimony when he made those comments isn’t it?

The reality of the so-called “bailout”, however, is small.  We’re talking about $60 billion, more or less, which is tiny in the grand scheme of things.

This makes one wonder “why”?  If it’s just year-end shenanigans, well then it is.  But what if it’s a trial balloon — to see if Congress — or anyone else — calls Bernanke on it?

If so then we better pay attention eh?

Bond action in the Eurozone has modestly picked up (yields steady or falling) since the ECB’s 3-Year LTRO program – Long Term Refinance Operation. However, European banks still do not trust each other, not even for overnight lending.

Instead, banks park all available funds with the ECB, as noted by the Wall Street Journal in Deposits at ECB Hit Record High.

Use of the European Central Bank’s overnight deposit facility hit the second all-time high in a row Tuesday as euro area banks increased the amount of cash they park at the central bank’s safe haven, ECB data showed Wednesday.

Banks parked €452.034 billion ($589.72 billion) at the ECB, up from €411.813 billion the previous day. The high level reflects prevailing distrust among banks which prefer using the ECB’s facility rather than lending to each other.

The increase in deposits follows the ECB’s first-ever three-year liquidity tender last week in which it allocated nearly half a trillion euros to more than 500 banks.

The ECB also said banks borrowed €6.225 billion via its overnight lending facility, up from €6.131 billion the previous day. When markets are functioning properly, banks use the facility to the tune of a few hundred million euros overnight.

The “first-ever three-year liquidity tender” offer cited by the Wall Street Journal is the 3-year LTRO that I mentioned at the top.

ECB’s LTRO Won’t Stop Collateral Contagion

Gordon Long put out an outstanding report on his website on why the ECB’s LTRO Won’t Stop Collateral Contagion. I picked up the link from Zero Hedge. Following are a few snips:

Here is the stark reality of what forced the ECB to offer unprecedented three year loans at absurd rates and most alarmingly, the acceptance of collateral that no other financial institutions will accept. The ECB has sacrificed its balance sheet in yet another EU “kick at the can”.

1. COLLATERAL CONTAGION: There is a cascading Collateral Contagion crisis in which secured lending, based on sound assets, has replaced unsecured lending based on future expected cash flows.

2. WHOLESALE LENDING: Wholesale bank lending, which is a unique cornerstone of European banking, has completely frozen since the failure of Dexia and US Money Market Funds will no longer risk short term capital having learned their lesson in 2008.

3. BANK RUNS: Bank Runs are quietly and insidiously occurring throughout the peripheral EU countries as corporate and private depositors seek safe havens for their cash holdings. … WHOLESALE LENDING

There are approximately $55T of banking assets in the EU. This compares to only $13T in the US. Bank Assets in the EU are 4 times as large as the US.

In the US, debt held by the bank is smaller because retail deposits are a primary source of funds. EU banks use wholesale lending and, as a consequence, the debt held by banks is closer to 80% versus less than 20% by US banks.

Wholesale bank lending in the EU approximates $30T versus only $3T in the US, a 10 X differential.

Wholesale lending is fundamentally borrowing from money market funds and other very short term, unsecured instruments. The banks borrow short and lend long. It all works until short term money gets scarce or expensive. Both have occurred in the EU and this recently placed DEXIA into bankruptcy, forcing them to be taken over by the Belgium and French governments. The unsecured bond market fundamentally closed in the EU in Q3 2011, as fears mounted that an EU solution was not forthcoming.

Assuming $30T of loans is spread over three years, EU banks have a requirement for $800B / Month of rollover financing for wholesale lending outstanding.

Where is this money going to come from? No one is waiting around to find out as there will be cascading counterparty failures soon surfacing. Banking money in Europe is fleeing to custodial and official accounts of the ECB, the US Federal Reserve and any other central Bank willing to accept their cash.

Excerpts do not do the article full justice. It’s well worth a read in entirety.
Mike  “Mish”  Shedlock – Global Economic Analysis

Think “all is fine” in Europe after today’s largely irrelevant Italian bill auction (the auction was for 6 month debt – even Greece can raise that kind of money)? Think again. Here is the Fermentation Committee Chairman explaining why Europe is so hard pressed to create a fake sense of calm, allowing those who know the real story to take advantage of the situation while they still can, and sharing the behind the scenes truth you won’t get anywhere else. Certainly not SWIFT. 

From UBS:

Europe Rumbles Continue Beneath More Upbeat Headlines – Ever since last week’s liquidity operation, most headlines out of Europe have leaned toward the reassuring side. Beneath those headlines, however, there are signs the strains remain and may, in fact, be growing.

European banks are making great use of the ECB’s overnight deposit facility. Last night they parked $590 billion at the ECB breaking the record they had set the night before. They are clearly unwilling to lend to other European banks, highlighting the distrust and fear in the interbank marketplace. While the ECB’s lending initiative calmed the markets somewhat, it apparently has done nothing to free up the logjam blocking interbank lending.

The distrust on the streets is said to be growing also. Barroom gossip says that safe-deposit boxes are in a demand that borders on frenzy. They allow you to take your Euros and covert them into something of value (gold, Swiss Francs, etc.) and sock it away in a safe place.

Others are said to be buying property in London and elsewhere lest you awake one day and discover that your Euros have reverted to drachmas or lira.

Savvy bankers are said to be setting up personal and communal trusts domiciled in places like the Bahamas, the Caymans or the Isle of Jersey. Some banks are offering depository accounts denominated (and repayable) in alternate currencies like the dollar or the yen.

We think a Lehman-like event would most likely be triggered by a run on a bank or a series of banks. The scramble for currency (value) protection among the public could turn into that bank run in the same way that a crowd can instantly turn into a mob. Watch the money flows out of Greece and Italy very carefully. The pot continues to bubble.

Zero Hedge