Items of interest from Harvey's blog - China / Russia dumping the dollar ? A bit of Greece.....A little Euro insanity.....

http://harveyorgan.blogspot.com/2012/04/italian-10-yr-bondsspanish-10-yr-bond.html

Food for thought here:  Why are China and Russia dumping USA dollars.
Graham Summers believes that it is not because they are disenamoured with the USA dollar, it is because they need to rescue their number one trading partner: Europe. They have huge exposure if Europe fails.

April 26, 2012

Are China and Russia Really Dumping the US Dollar? 

The blogosphere has been making a huge deal of the fact that foreigners are no longer buying Treasuries. In particular, the fact that Russia and China have lowered their exposure here is seen as a sure sign that the US Dollar is doomed.

This analysis is naïve.

For starters, both China and Russia have substantial exposure to Europe from an economics standpoint. The EU taken as a whole is both China and Russia's single largest trade partners. So both countries have been diverting investments and funds to the EU as they attempt to prop it up.

Secondly, I want to dispel the notion that China and Russia are the economic powerhouses everyone believes them to be. I will be addressing this further in later articles but for now I simply wish to contend the idea that China and Russia are economic powerhouses capable of dumping the US Dollar for trade purposes.

Instead, both Russia and China should be viewed as what they are: totalitarian regimes that are barely maintaining control over their respective populations. These are not free, vibrant economies based on small business growth and Democratic Capitalism; they are Centrally controlled economies in which a tremendous amount of the economy and wealth is concentrated in the hands of a very select few.

I realize this flies in the face of what 99% of analysts claim. I also realize that the US itself has begun to resemble such economies in some regards. However, the fact remains that the US, while engaging in similar economic policies and witnessing a similar concentration of wealth, remains ultimately a free and open economy in which small business growth and success are possible.

Moreover, I believe that the US will differ dramatically from both China and Russia in terms of how it recovers from the coming global contraction. Even a cursory review of US history shows that this country has been in a continual state of collapse and renewal since its inception. The reason for this is the flexibility of the US government structure and the US's basis in capitalism.

I'm sure this might come as a shock to many as I am often thought to be "doom and gloom," based on the fact that I foresee a large-scale Crisis and economic contraction coming in the future. However, I believe the US will recover more quickly from this Crisis that either China or Russia due to the fact that the US's economic is unbelievably dynamic, based on innovation and entrepreneurialism.

In contrast, the wealth and capital accumulated in China and Russia have largely been the result of back-room deals in which a small minority were granted access to formerly state-controlled assets and entities at bargain basement prizes in return for political alliance with the controlling parties. Very few businesses in these countries started out as small entrepreneurial efforts that then grew into empires.

Having said that, I do not believe that China or Russia are in any position to dump the US dollar, at least not in the near-term. The US Dollar may one day no longer be the reserve currency of the world. But that day is years and possibly decades out. But the notion that China or Russia could just dump the Dollar and move around the US in terms of trade is unbelievably naïve and greatly underestimates the importance of the US to the global economy.

In this context, I do not believe China and Russia's recent dumping of Treasuries to indicate that these countries are moving away from the US. Rather I view them as both countries diverting cash away from the US and into Europe in an attempt to prop the EU up.

I also view these moves to indicate that both China and Russia are in fact facing problems at home that require their attention. Reports out of both countries show political instability increasing amidst mass protests. Both countries will be diverting cash towards dealing with these issues through various stimulus schemes, bribes, bailouts, etc.

In short: I do not believe that China or Russia are in fact dumping Treasuries or the US Dollar because the US is doomed. Rather I believe these moves to indicate both countries are facing larger, more pressing issues that require their capital.

Those pressing issues are Europe, namely:

They are:

1. According to the IMF, European banks as a whole are leveraged at 26 to 1 (this data point is based on reported loans... the real leverage levels are likely much, much higher.) These are a Lehman Brothers leverage levels.
2. The European Banking system is over $46 trillion in size (nearly 3X total EU GDP).
3. The European Central Bank's (ECB) balance sheet is now nearly $4 trillion in size (larger than Germany's economy and roughly 1/3 the size of the ENTIRE EU's GDP). Aside from the inflationary and systemic risks this poses (the ECB is now leveraged at over 36 to 1).
4. Over a quarter of the ECB's balance sheet is PIIGS debt which the ECB will dump any and all losses from onto national Central Banks (read: Germany)

So we're talking about a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1.

And all of this is occurring in a region of 17 different countries none of which have a great history of getting along... at a time when old political tensions are rapidly heating up.

and....

Greek central bank chief warns of euro exit

25.04.12 @ 09:20

RELATED

1. EU commission tries to win Greek sympathy
   
2. EU on Greek statistics scandal: 'Never again'
   
3. France: Hollande leads, Le Pen shocks in third place

1. BY VALENTINA POP
2. 
3. 

BRUSSELS - Greece's central bank governor said his country would have to leave the eurozone if politicians do not stick to the austerity programme after elections due to take place on 6 May.

"What is at stake is the choice between an orderly, albeit painstaking, effort to reconstruct the economy within the euro area, with the support of our partners, or a disorderly economic and social regression, taking the country several decades back, and eventually driving it out of the euro area and the European Union," George Provopoulos said in a speech on Tuesday (24 April).

Greece has signed up to a second, €130 billion loan paid mainly by other eurozone countries to reduce the country's debt and recapitalise its banks, along with a major debt restructuring agreed with private lenders.

But in return, an already austerity-weary Greek society has to stomach further spending cuts for at least another three years.

Meanwhile the economic outlook for 2012 is worse than expected. Instead of a 4.5 percent of GDP recession, the central bank on Tuesday estimated that the economy would shrink by five percent this year, Greece's fifth year of recession.

For a long time a taboo topic, Greece's euro-exit was first floated by French and German leaders last year when the former Prime Minister said he would organise a referendum on the austerity measures linked to a second bail-out.

EU officials, along with Nicolas Sarkozy and Angela Merkel, have since repeatedly said that Greece will stay in the euro and that the agreed bail-out proves eurozone countries do not want Athens to leave.

But public support for more cuts in pensions, wages, healthcare and education has vanished, with anti-EU fringe parties on the left and right of the political spectrum set to score well in the 6 May general elections.

According to recent polls, two-thirds of the Greeks say the programme must be renegotiated by the next government. Last year, a majority thought the measures were unfair but largely unavoidable no matter who was in power.

EUROPEAN INVESTMENT BANK

Meanwhile, the Luxembourg-based European Investment Bank has started including a new legal clause in its contracts with Greek companies allowing them to repay loans in a currency other than the euro.

An EIB spokeswoman on Monday said the move does not mean the bank believes Greece will leave the eurozone.

“The fact that a company will repay in a different currency does not mean that the currency of the country will change,” Helen Kavvadia told Associated Press.

and.....

Jim Sinclair’s Commentary

Whatever is required will be provided as long as the nation asking opts to remain in the EU. The funds will be provided for by the European Stability Mechanism Treaty due for passage in July of 2012.

Greece reported to be in talks about one-year deficit extension

Greece’s Finance Ministry is in talks with the country’s lenders to extend the period of fiscal adjustment by one year to 2015, according to reports.

Finance Minister Filippos Sachinidis discussed the issue with International Monetary Fund officials in Washington over the weekend, according to Ta New newspaper.

PASOK leader Evangelos Venizelos, who Sachinidis succeeded, has made the issue one of the central themes of his campaign. He says he will ask the troika to give Greece until 2015, rather than 2014, to reduce its public deficit.

"We believe that this will make the adjustment a little easier, PASOK spokeswoman Fofi Gennimata told Skai TV on Thursday.

Poul Thomsen, the head of the International Monetary Fund team for Greece, is expected to visit the country on his own after the May 6 election before a mission visit takes place the following month.

IMF sources in Washington said that Thomsen is likely to conduct a staff visit that will last a couple of days to assess the situation in Greece following the election.

More…

The following is a great explanation again of how faulty the Target 2 system of payments of exports and imports exist within Europe. It could have been avoided  as the two country's banking system could have been alerted if trade was all one sided by similar mechanisms in place in the USA between states:

This is also a must read:

The Secret System that Blew Another Hole in the Euro

APRIL 25, 2012

BY MARTIN HUTCHINSON, Global Investing Strategist, Money Morning

This may sound arcane and boring, but I promise you it's not.

What I've learned will blow yet another hole in the already shaky euro.

It begins with Bernd Schunemann, a law professor at the Ludwig-Maximilian University in Munich. He has sued the German Bundesbank over its participation in the Eurozone "Target-2" settlements system.

Now I'll be the first to admit that yes, my eyes do glaze over when thinking about settlements systems-and I used to be a merchant banker.

But looking at the details of the case I had something of a banker's moment of clarity.

I realized that Schunemann was claiming that the settlements system had saddled German taxpayers with a potential liability of 615 billion euros, over $800 billion, in exposure to Greece, Italy, Spain and Portugal.

After all, who would have to bail out the Bundesbank if it became insolvent?What's more, when you un-glaze your eyes and look closely, the risk is entirely unnecessary. It is yet another huge botch-up job by the EU bureaucrats.

Here's what I mean...

The Euro and the Target-2 Settlement System

The Target-2 settlement system was introduced in 2007, as a replacement for Target (Trans-European AutomatedReal-time Gross Settlement Express Transfer System).

The first Target was the large-scale payments system between central banks that had been introduced with the euro in 1999.

Under the system, when a Greek makes a large euro payment to a German, his Greek bank makes a payment to the Greek central bank, which in turn makes a payment to the Bundesbank. Once it reaches the German central bank, it pays the German bank, which pays the German.

For ordinary trade transactions, that's all fine and good. Greek exports to Germany are balanced with German exports to Greece.

If, however, there's a big trade imbalance between the two countries, then gradually an imbalance grows up between the central banks. As it develops, the Bank of Greece ends up owing the Bundesbank more and more money.

Even more serious is when Greek citizens rush to get their money out of Greek banks and put it in German banks. Every million euros Greek citizens remove from their banks is a million euros by which the Bundesbank increases its exposure to the Bank of Greece.

You can see how this could be big problem-especially since that's the arrangement all around the Eurozone. 

According to financial consultant David Marsh, writing in CBSMarketwatch, the Bundesbank's net Target-2 assets ballooned to 615 billion euros ($800 billion) in March, while the Banco de Espana's net liabilities rose to 252 billion euros and the Banca d'Italia's to 270 billion euros.Don't forget: the Italian and Spanish central banks can no longer print money to satisfy their obligations; that is the function of the European Central Bank.

Thus the Bundesbank has taken on around $800 billion of credit risk against the weaker economies of Europe.

Since the German taxpayers would have to bail out the Bundesbank if it got in trouble (again, it cannot print money) the lawsuit looks reasonable. The amount involved is, after all, about $10,000 for every German man, woman and child.

Unnecessary Risk for the Euro

At first sight, this just seems like one of the costs of the Eurozone.

However, when you think more carefully and look at the U.S. example, you realize this mess is entirely unnecessary.

If an Alabama depositor of $1 million doesn't like the prospects for Regions Financial Corp. (NYSE: RF) and decides to transfer his money to JPMorgan Chase (NYSE: JPM) his $1 million moves directly from Regions to JPMorgan Chase. In the process, it sets up an interbank liability of $1 million owed by Regions to JPMorgan Chase.

There's no Alabama Central Bank or New York Central Bank getting in the middle of the transaction. There's no need for one, since Alabama and New York use the same currency.

In the U.S. case, it means no possibility whatsoever of a huge imbalance building up in the payments system.

If all the Regions depositors start transferring money to New York, eventually the JPMorgan Chase "line" for Regions gets exhausted, or close to it. At that point, payments don't bounce; the correspondent banking relationship officer from JPMorgan Chase calls his counterpart from Regions and tells him Regions needs to pay down its line.

Regions then goes out and borrows some money, from another Alabama bank or maybe from the Fed, pays JPMorgan Chase, and everybody's happy.

If all the Alabama banks find money has gotten tight and nobody will deposit with them, they reduce their lending and raise the rates they pay on interbank deposits. Thus any shortage of cash is quickly alleviated, although local Alabama businesses find their loans have got more expensive.This system could perfectly well have been used in Europe, with Greece as Alabama and Germany as New York. The Deutsche Bank and Commerzbank undoubtedly have (or at least, had) interbank lines with National Bank of Greece and Piraeus Bank, so payments could have been organized in the Eurozone just as they are in the United States.

As imbalances built up with Greek overspending after 2001, the Greek banks would have had to pay down their obligations to German banks and Greek interest rates would have risen. The Greek bubble would have been choked off earlier than it was, and at less cost, and there would have been only modest amounts owed by the Greek banks to the German banks - probably very modest, as the German banks would have seen which way the flows were going, and would have reduced their credit lines to Greek banks.

Pious Euro Nonsense

However, the bureaucrats had to get involved, and set up Target/Target-2, making all payments go through the national central banks which were otherwise pretty redundant, once the ECB was set up.

But if you read the Wikipedia article on Target-2, it's full of pious stuff about "Supporting the implementation of the Eurosystem's monetary policy and the functioning of the euro money market; Minimizing systemic risk in the payments market; Increasing the efficiency of cross-border payments in euro."

In reality what Target-2 did was take the credit monitoring out of the system.

By giving national central banks something to do and allowing them to deal with each other, it allowed the system to pretend that Eurozone central banks would never default and that payment imbalances were not a problem.

The credit risks of the payments system, which would have been handled by the banking system, were transferred to central banks and allowed to grow to their current monstrous size.

And the normal local money tightening that would have been generated by persistent payment imbalances never happened, so Greek overspending and Spanish dodgy real estate loans grew unchecked.

It's another huge weakness in the euro system, which will cause endless trouble in the years ahead.

And it was all completely unnecessary. Too bad someday it will help sink the euro.