Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Wednesday, May 30, 2012
6 things which could cause a crash by June 6 ( note loss by Bank of Greece is 666 million euros , just saying.. )
1) Ireland rejects current consensus and votes no on May 31 , 2012 regarding the Fiscal Compact. Regardless of what might suggest , at the end of the day , undecided voters will determine the outcome. They usually do.
A ) UPDATE for result of referendum - Yes carries the day , however , European , Chinese and
US Data on Manufacturing and Unemployment totally overwhelm this news item...Looking at commentary and voter thoughts , yes may have been merely the lesser of two evils as Ireland voted to merely get Europe's money even if they are debt slaves for awhile longer. clearly , this had no impact on the hugely negative sentiment today.
2.05pm: Back to the Irish referendum, where the No campaign are looking to the future.
Speaking at Dublin Castle Sinn Fein's Mary Lou McDonald said the Irish government now had to deliver on their promises to acheive stability and growth following the Yes vote. The Dublin TD said her party would hold the Fine Gael-Labour coalition to account.
McDonald told reporters in Dublin:
Now let's see what happens next because when you have been out on the campaign trail and we held public meetings right across this state, we talked to, I lost count of how many people, and things are really really tough.
People want to see progress, they want to have a sense of hope and I remain absolutely sure that if the government persists with its policy of austerity and cutbacks then we won't see that improvement, we won't have that hope.
We will be holding the government to the clear promises it made during this campaign.
12.16pm: Senator Darragh O'Brien, the leader of Fianna Fail in Ireland's Senate, acknowledged that the Yes outcome was a "grudging, pragmatic vote" but said the outcome was the right one.
O'Brien said that even in his constituency of North Dublin Yes voters had backed the treaty even though they were angry about austerity and the four year long recession.
12.12pm: Henry has also interviewed Declan Ganley, one of the most prominent No campaigners.
Ganley said that a Yes victory (as appears certain) had sent the wrong signal back to Brussels.
Speaking inside the Dublin Castle media centre, Ganley argued that by voting Yes Irish people were "vesting trust one more time" into the EU leadership to do the right thing.
He said the EU should start dealing with the issue of personal bank debt with Ireland having the largest private debt in Europe.
Ganley said:
That issue cannot be allowed to continue and what the Irish votes have said with this Yes vote is they still have good faith in Europe's leadership to address this issue and do the right thing by us.
I am concerned that this signal will be misinterpreted as being a message that everything is OK here and that nothing needs to be done. That's not what this signal is because I do not believe the Irish electorate is saying everything is fine.
Danley added that he was not optimistic that the EU leadership would tackle head-on the crippling personal bank debt in Ireland.
ANALYSIS: VOTERS NOW have 24 hours to pause for reflection before deciding on the fiscal treaty after one of the most hard-fought referendum campaigns in living memory.
The Yes and No campaigns have matched each other for intensity over the past six weeks, with the result that there has been no evidence of a decisive shift in public opinion in the course of the campaign as undecided voters gradually made up their minds.
The Coalition knew it would have a serious fight on its hands to persuade the Irish public to back the treaty, and has waged probably the strongest campaign by any government on Europe since the original decision to join in 1972.
From the start, the Taoiseach and his Ministers were keenly aware that the treaty could face rejection from a public disillusioned by the ongoing need for cuts in public spending and new forms of taxation.
In the past, referendums have been lost when a significant proportion of the electorate opted to ignore the actual question in front of them and instead vented their frustration about issues that had little or nothing to do with the constitutional change under discussion.
The Government’s efforts to keep the issue focused on the treaty itself and the implications of a rejection has been helped by the strong and coherent support for the Yes case provided by Fianna Fáil leader Micheál Martin as well as the array of civic society forces who have been campaigning in favour of the treaty.
The No side has also fought hard every inch of the way sensing that there is a real chance of not only defeating the Government but of creating an international impact by persuading the Irish people to reject the treaty.
Sinn Féin and the United Left Alliance have spearheaded the No campaign and both have campaigned effectively with daily press conferences, extensive postering and a strong media presence.
The McKenna judgment, which obliged broadcasters to give equal time to both sides, has helped to raise the profile of those campaigning for a No and they have had some success in trying to define the issue as a vote for or against austerity.
The arrival of Declan Ganley on the scene with his postering campaign and Shane Ross’s decision to get off the fence and call for a No vote helped generate more publicity for the anti-treaty forces as the campaign entered its final stages.
While there were a number of television debates, Taoiseach Enda Kenny took the decision to stay out of them and focus his attention on campaigning up and down the country. While he has faced some media criticism for that decision, the outcome of the referendum will tell whether he was right or wrong. Some of the shambolic television debates certainly did nothing to illuminate the nature of the choice facing the Irish people tomorrow.
As for the issues, the Taoiseach summarised the Yes campaign neatly on Monday by boiling it down to three fundamentals. He called on people to vote Yes to ensure access to a future bailout fund if needed, to protect the euro with new budgetary rules and to ensure the flow of foreign direct investment and jobs into the country.
The No campaign disputed all three assertions and has insisted throughout the campaign that a No vote would not prevent the State from accessing the European Stability Mechanism (ESM) if it is needed after the current bailout fund expires in the middle of next year.
There has been heated controversy on this issue with the two sides baldly contradicting each other about the precise implications of a No vote.
While the Referendum Commission and the High Court judge who chairs it, Kevin Feeney, have stated unequivocally that the country will be denied access to ESM funding if we do not ratify the treaty, their views were batted aside by Sinn Féin president Gerry Adams, who has continued to insist that funding will be available in the event of a No vote.
The fact that the fiscal treaty will come into effect whether Ireland ratifies it or not has been an important issue in the campaign. It will take just 12 of the 17 euro zone countries to ratify for it to come into effect and as that looks certain, an Irish No will not derail the treaty.
In the referendums on the Nice and Lisbon treaties, one of the key No arguments was that an Irish rejection would prevent the treaties in question coming into effect as they required ratification by all 27 EU states. The absence of that argument this time around could be crucial.
International events have also had an impact on the campaign. The unfolding Greek drama has sent mixed messages to the Irish campaigners. On the one hand, the victory for the anti-treaty forces in Greece and the failure to form a government there came as a heartening morale boost to the No campaign here. On the other hand, the focus on the real hardship now afflicting Greece and the prospect of the country having to exit the euro has also served as a warning that the Yes side has been able to use in the campaign.
The election victory of François Hollande in France was also interpreted differently by each side. The No campaign put it down to a defeat for austerity while the Government insisted that it only reinforced their arguments in favour of a growth strategy at EU level.
What did become clear at the EU summit last week was that Hollande has no intention of seeking to open up the terms of the existing treaty for further debate. What he wants is for it to be accompanied by a growth strategy. Those who argued for a postponement of the referendum on the basis that the treaty could be changed have had their case undermined by the summit outcome.
However, most No campaigners had never argued for a postponement, believing that the momentum is with them to defeat the treaty now.
Whether it will be a Yes or a No tomorrow depends on whom the majority choose to believe. The arguments have been laid out clearly and voters can’t say they have not been given enough information this time around.
The Government decision to send the treaty to every household was vital. Along with the Referendum Commission booklet arriving through every letterbox it meant lack of information was certainly not a problem.
2) Spain spirals out of control as bond yields cross 7 percent and the ECB refuses to restart its SMP bond buying program , signal another LTRO is imminent and let's Spain decide when it will crawl to the ECB / EU and Troika for a bailout - conversely Spain could take the tack of Argentina and tell the Troika to go to hell......
George Orlwell coined the term doublethink in his classic book 1984. Doublethink is the power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them.
Have you listened to the conflicted beliefs coming from Spain lately?
Conflicted Beliefs
“I don’t know if we are on the edge of a precipice, but we are in a very, very difficult situation” said Spain's finance minister, Luis de Guindos, at a conference on Thursday night. "Madrid needs assistance, no strings attached" says Spain’s deputy prime minister, Soraya Sáenz de Santamaria. Meanwhile, Guindos has made overtures to the ECB, EU, and now US treasury secretary Tim Geithner to help capitalize Spanish banks.
Guindos, Santamaria, and prime minister Mariano Rajoy insist Spanish banks are sound and Spain does not need any international assistance
Madrid has begun openly discussing outside assistance for its troubled banking sector, with a top Spanish official saying she had raised the issue with Tim Geithner, the US Treasury secretary, who urged the EU to “find a solution” to stabilise Spain’s banks.
Soraya Sáenz de Santamaria, Spain’s deputy prime minister, said after a meeting with Mr Geithner that the two had discussed proposals to recapitalise Spanish and other European banks “without state intervention and without conditions,” a clear reference to Madrid’s wish to get EU bailout assistance without strings attached.
“It’s something in the debate, and we’ve been discussing that possibility,” Ms Santamaria said. “Treasury secretary [Geithner] has indicated that we are working in the same direction and that we must find a solution to the banks, because the problem is not just a problem in Spain as a nation, but our financial system.”
Madrid has insisted it will not need an international rescue, with the government in complete opposition to any form of externally imposed programme as seen in Greece, Portugal and Ireland.
Luis de Guindos, Spain’s finance minister, travelled to Germany earlier this week to meet his counterpart, but received no compromise from Berlin on its opposition to European funds being injected directly into troubled banks.
“I don’t know if we are on the edge of a precipice, but we are in a very, very difficult situation,” Mr De Guindos said at a conference on Thursday night.
De Guindos is globe-trotting the world, holding meetings with the EU in Brussels, with French president Hollande in France, with Germany's finance minister in Berlin, with Treasury secretary Tim Geithner and the IMF in the US, asking for "assistance with no strings attached" while insisting "Spain does not need a rescue and its banks are not in trouble".
This is exactly the kind of Orwellian story that is nearly impossible to make up.
In response, gold is bucking the overall market trend as is the $HUI unhedged miner index up nearly 7% on the day as of 1:30 central while the overall market is down 3.3%.
So what can Geithner really do? Nothing is the answer. What did Geithner say? Undoubtedly something along the lines and as pertinent as "Rah! Rah! Rah! Ciscoom Bah!"
Spain is leaking capital. Data from the Bank of Spain released yesterday showed that almost €100bn has left the country in the first three months of the year (chart from El Pais):
Analysts were forced into cliché to explain the record outflows. From the FT:
“My concern is that we haven’t yet seen the most recent numbers, which could be far worse,” said Raj Badiani, an economist at IHS Global Insight. “We are seeing a perfect storm.”
However, it should be remembered that Wednesday’s M3 figures showed no clear signs of intensifying deposit flight out of Spain. From JP Morgan’s Greg Fuzesi (with our emphasis):
In the M3 data through to April, Spanish bank deposits from the nonbank private sector continued to decline. The fall in 1Q12 was €23bn, while April’s €32bn drop was partly due to the volatile nonbank financial intermediaries, rather than just households and/or corporates. As we noted, declines in bank deposits do not necessarily reflect deposit flight caused by concerns about the domestic banking system. They can also reflect deleveraging (repayments of household and corporate debt), use of savings for spending (if income is being squeezed), payment for exports, etc…
The BoP suggest that 60% of the outflow in 1Q12 was driven by foreigners exiting Spain, with the rest initiated by domestic residents. But, it looks as if the majority of the latter was driven by Spanish banks, rather than by Spanish households and corporates. And Spanish banks may have temporarily moved some LTRO cash abroad (and in addition they had €89bn on average parked in the Bank of Spain’s deposit facility during March). Hence, foreigners are pulling out of Spain, but whether domestic residents are abruptly shifting funds abroad is still less clear based on these data. In this sense, the BoP and M3 data seem quite consistent.
The aim is not to downplay the severity of Spain’s situation. In fact, we think that Spain will end up having to ask for external assistance. The available BoP and M3 data also do not cover the last few weeks. But, for now, the main driver appears to be capital rather than deposit flight, and it appears to be driven by foreigners rather than Spanish residents. Even that is troubling of course and has pushed up the Bank of Spain’s TARGET2 liability to the ECB to an average of €285 billion in April.
But even if deposit flight might not have speeded up, Spain’s banks are living on borrowed time and an actual recapitalisation is of utmost importance.
The dithering (or more probably gamesmanship) going on at the moment seems to be leaving the ECB frustrated. Again from the FT:
In a damning indictment of Spain’s handling of the problems at Bankia, its third largest lender, ECB president Mario Draghi said national supervisors had repeatedly underestimated the amount a rescue would cost. He also cited the rescue of Dexia, the Franco-Belgian lender, as an example.
“There is a first assessment, then a second, a third, a fourth,” Mr Draghi said. “This is the worst possible way of doing things. Everyone ends up doing the right thing, but at the highest cost.”
Gosh.
Speeding along the bank recap
So, in the interest of hurrying things along, it’s handy that a few analysts took a quick look at how much a total recap of Spain’s banking sector might cost and whether Spain can handle it. Then all we have to worry about is how they do it.
For the purpose of the exercise, UBS’ analysts estimated the overall bank recapitalization needed to be near €100bn, deliberately above a consensus of €80bn or so.
(Credit Suisse, for example, estimate additional provisioning needs of just over €150bn which is likely to translate into a capital shortfall of €50-70bn or 4.5-6.5 per cent of GDP)
And what they wonder is, considering that the Spanish government has revised its 2011 budget deficit to 8.9 per cent of GDP and a host of new data on regional and central government deficits, including on the issue of arrears, have become available, is — can Spain afford it?
According to the government consolidation plan presented last month Spanish debt will increase by 11 percentage points this year, peak at 82 per cent in 2013 and then trend down:
Source: UBS
From UBS:
In order to achieve the targets above, central and regional governments will have to keep their deficits at or below the levels presented in table 2 below. These appear to be ambitious targets, particularly during a recession. We think a slippage in the 0.5% – 1% range is likely, leaving the 2012 deficit slightly above 6%.
So how sustainable is the debt/GDP level under the above circumstances? And how would a bank recapitalization affect it? Again from UBS:
Without the recapitalization, we expect Spanish debt to hit 81% this year, peak at 85% in 2014 and then trend down to 76% by the end of the decade. Assuming a bank recapitalization worth € 100 bln, the debt would instead pass 90% this year, peak at 94% in 2014 and then decline to 84% by 2020. These numbers suggest that, although putting considerable pressure on the sovereign market, the recapitalization would not push the debt to unsustainable levels. Notice that we conservatively assume a 1% fiscal slippage in both 2012 and 2013, a recession in both years and a nominal trend growth of 2.5% (1% real growth, 1.5% inflation).
But Credit Suisse suggest:
A worst case scenario assumes bank recapitalisation needs of €100bn (around 10% of GDP) and GDP growth 1pp below our base scenario. This year’s 1.7% downturn would be followed by another steep decline of 1.3% next year, raising Spanish debt to 110% of GDP by 2015 and –in the absence of more stringent fiscal austerity –continuing to rise thereafter.
While bank bailouts based on bursting property bubbles bring Ireland’s slide to mind, it is important to remember that Spain’s €100bn bill is still only some 9.3 per cent of its GDP compared to the whopping 29.7 per cent of GDP injection needed in Ireland two years ago:
Essentially, it’s a difference of magnitude which analysts suggest should allow Spain to wear the cost, assuming that €100bn figure remains conservative of course and these things can… just… keep… creeping.
Beyond the troubled banking sector, there is another potential problem on the Spanish horizon that could be instrumental in how the euro crisis develops: the central government’s relationship with the 17 Spanish regions, and particularly its ability to keep public spending at the regional level under control.
The 1978 post-Franco constitution designed Spain as a highly decentralised state. Regional statutes are treated as an integral part of Spanish law, and the regions legislate over a wide range of policy areas, from local infrastructure projects to culture and healthcare. As a result, they currently handle over 50 per cent of Spain’s total public spending.
Earlier this year, the new centre-right government, led by Mariano Rajoy, was quick to blame the regions for Spain’s failure to meet EU-mandated deficit targets. He had a point, but, ironically, some of the spendthrift regions – like Comunidad de Madrid and Comunidad Valenciana – have been led by the Prime Minister’s own party, Partido Popular, for years. More worryingly, earlier this month, excessive spending in these regions again forced Rajoy to revise upwards the country’s deficit.
This shows just how difficult it will be for Madrid to control the regions, and therefore Spain’s public spending. Spanish regions have committed to a total of over €18bn (£13.6bn) of savings by the end of 2012 – almost half of Spain’s planned deficit reduction for this year. Given their past record, the regions are unlikely to deliver, meaning that the central government would have to pick up the slack. This would put further strains on Spain’s public finances, which will need much of the ammunition at their disposal to deal with potential future bank bail-outs.
What can Rajoy do? The Spanish parliament has recently passed new legislation giving the government the power to take over the accounts of regions that look set to miss their deficit targets, and the tiny principality of Asturias may become the guinea pig for the new system. But will regions such as Catalonia or the Basque Country – which take their regional identity and independence extremely seriously – accept Madrid coming anywhere near their partial budget autonomy? It looks doubtful. The Basque Country is going to take the government to the Constitutional Court over planned cuts to health and education, while the Catalan governor, Artur Mas, has threatened to break his regional alliance with Partido Popular, unless Catalonia is granted greater tax autonomy.
Spain could be heading for a major political showdown. In theory, Rajoy’s Partido Popular holds a sufficient majority to push through legislation without the support of regional parties. This is precisely what happened with this year’s budget, when the Prime Minister’s party rejected all of the over 3,000 amendments tabled by the opposition. However, the price of consistently taking such an inflexible stance may well be greater discontent in Barcelona and Bilbao.
In general, the feeling is that Rajoy may already have reached the political limit of how much he can encroach on regional autonomy, and any further steps in this direction would require important changes to the Spanish constitution – for which there would be very little support.
So what is the significance of all of this for the future of the Eurozone? First, those that put their hope in the Spanish government being able to deliver far-reaching deficit cuts, via equally far-reaching savings in the regions, are likely to be disappointed. Spain is not going to become France – a highly centralised country where the national capital rules supreme over public spending. Spanish regions will remain a liability, and pushing them too far may trigger a huge political backlash, which would hardly benefit the Eurozone either.
But second, there’s a bigger lesson. If Spain faces difficulties in achieving more fiscal centralisation in its own country, due to political constraints, how much more difficult will it be for the single currency to achieve similar centralisation at the level of all 17 Eurozone members – considering its own number of different parliamentary and economic models, government structures, and cultural preferences? Just a thought.
Felipe González, the country’s elder statesman, said: “We’re in a situation of total emergency, the worst crisis we have ever lived through.”
Global financial markets lurched yesterday at the spectre of the eurozone’s fourth biggest economy being locked out of international capital markets and being unable to fund itself.
Spanish borrowing costs soared, while the Madrid stock market fell 2.6 per cent, the euro sank to a 22-month low against the dollar and the price of Brent crude dropped 2 per cent.
Meanwhile, global investors fled to “safe havens” sending UK bonds to another low. The FTSE 100, however, dropped 1.7 per cent, along with European and American stockmarkets.
The rout on global markets paused briefly around midday when the European Commission published a report calling for radical new support for “sinner states” across the eurozone.
The report said the eurozone should create a “bank union” under which all countries would stand behind stricken banks. The Commission’s top economic official also said he was “ready to consider” relaxing Spain’s deficit reduction targets.
However, stocks and bond markets lurched again when traders realised the ideas were just recommendations and were likely to be dismissed by Berlin anyway.
International confidence in Spain has drained since Mariano Rajoy, the prime minister, announced plans for a €23.5 billion (£18.8 billion) rescue of Bankia, the country’s fourth biggest lender.
Economists have warned that Spain does not have the resources to rescue the bank and Brussels has refused to help. A raft of other Spanish banks are also struggling under toxic property loans. The European Central Bank said savers withdrew €31.44 billion from Spanish banks in April alone.
On Tuesday night, Miguel Ángel Fernández Ordóñez, Spain’s central bank governor, resigned abruptly, before testifying to the senate that he had been muzzled to avoid inflaming events. Spanish tax revenues have collapsed, replicating the pattern in Greece. Fiscal revenues have fallen 4.8 per cent over the last year and VAT returns have slumped 14.6 per cent, while the cost of servicing debt has risen by 18 per cent.
Andrew Roberts, credit chief at Royal Bank of Scotland, said Spain was caught in a classic deflationary vice: a rising debt burden on a shrinking economic base. “Once you get into such a negative feedback loop, you can move beyond the point of no return quickly,” he said.
Yesterday Olli Rehn, the EU economic affairs commissioner, said he was “ready to consider” giving Madrid an extra year to cuts its budget deficit from 8.9 per cent to 3 per cent of GDP. However, Mr Rehn said Spain would first have to curb the spending of its regional governments and produce “solid” budget plans for the next two years.
Bankia is done: at this point the only questions left are i) what will be the final bailout cost ii) who will pay for these costs, and iii) whether the bank has enough beach towels to satisfy the onslaught of manic Spaniards desperate to hand over their €300 euros to the insolvent bank in exchange for some Spiderman-embossed linen. Oh, there is one more question: who is next.
Now, as we showed earlier today, in the aggregate the answer is simple: everyone.Because as JPM said "if a Spanish EU/IMF bailout package covered the government’s gross funding needs through the end of 2014, and included €75bn for bank recapitalisation, then it would amount to around €350bn." At roughly a third of its GDP, this is, needless to say, more money than Spain can procure. But, in a very Stalinesque sense, where everyone is merely a statistic, that is essentially the same as saying no one. It is also certainly not helpful to any Spanish readers who may be worried about their deposits (and investments) which in a world of total disinformation, will first be lost before the government advises caution and safety. So instead we go to Goldman Sachs which has conveniently constructed the following analysis, which replicated the loss provision calculation of Bankia, and applies it to the other listed banks. The result: in addition to the €19 billion in bail out costs for Bankia,Spain will need to spend at least another €25 in bailout funding for six other listed banks which include CaixaBank SA, Banco Santander, Banco Popular Espanol, BBVA, Banco Espanol de Credito SA, Bankinter SA.
So now we are not dealing with mere "statistics."
The capital need breakdown is as follows: "Pro-forma capital gap assuming 9.5% CT1 hurdle rate, loss estimates comparable to those outlined by BKIA and front-loaded in 1H12"
And in the grand scheme of things:
And some pretty Appendix slides as well as the math behing the analysis:
Calculation of residual losses and capital needs under BFA-Bankia scenario
We outline our analysis of residual losses and capital needs for eight listed banks in Spain, assuming a level of loan losses broadly in line with the scenario presented by BFA-Bankia in their recapitalization plan. We show capital below and above the 9.5% CT hurdle used by the entity assuming both full front loading of losses in 1H12 as well as taking into account 2-year credit buffers.
Residual losses: Similar to our estimates after RDL-2 is put in place
Retained earnings, loss absorption, and capital: Higher hurdle and elimination of PPP are key
We show the analysis on cumulative and expected losses for the top eight banks in Exhibit 10. These losses are calculated based on the assumptions laid out in our note Still very difficult but manageable for internationals, April 20, 2012. In our view, RDL-1 and RDL-2 adequately address loss on real-estate exposures. The market focus is now shifting to residual losses embedded in other portions of the book. We lay them out in the analysis below, but note that it is not our view that these losses should be capitalized for today. We expect them to be met largely through pre-provision profits and do not believe they should be used as a benchmark for potential capital shortfalls.
Just when talks of Accelerated Kinetic Action In Close Proximity To Cash Dispensing MachinesTM in Spain were quieting down, here comes Goldman to reminds us that nothing is fixed. "The ECB released April deposit data today. Italian deposits in April were stable, with a moderate increase in retail (+€7 bn) more than offsetting a small reduction in corporate deposits. In Spain, April saw €31 bn (or 1.9%) deposit outflow from banks. Within this only half is attributable to corporate (down €7 bn or -3.4%) and retail balances (down €8 bn, or -1.1%). The residual outflow is attributable to deposit reductions by others (financial institutions / pension funds / etc)."
And a pretty chart to go with this as we focus on the next Spain story:
3) Greece continues to thwart the schemes of the Troika and oldline parties ( New Democracy and Pasok ) and opts to vote for the SYRIZA led left coalition while still believing it will remain in the EMU. To dissuade such folly , the Troika continues to exert threats , offer promises for compliance , encourages concerted efforts to disable the malfunctioning Greece economy. Regardless of all Troika efforts , SYRIZA picks up strength for the upcoming June 17 , 2012 election.
A few days ago it looked like the tide was turning in Greece.
The pro-bailout New Democracy party had taken the lead, and there was good reason to think that a pro-bailout coalition could win after the election.
But then this weekend, an interview from Christine Lagarde, in which the IMF chief blasted Greek parents for not paying their taxes, pissed off everyone in Greece.
SYRIZA is now pulling over 30 percent, and New Democracy is at just 26.5 percent.
There's still time before the election, but at the moment, it looks like Greece is heading for a major showdown with the rest of Europe.
and.....
http://www.athensnews.gr/portal/8/55975
( polls are all over the place but this one will give the Troika headaches - or maybe not.... )
1 Jun 2012
On the last day that polls can be published, one gives Syriza at 31.5 percent and New Democracy at 25.5 percent
A new poll published on Friday shows the Radical Left Coalition (Syriza) on its highest performance yet and a full six points ahead of its main opponent.
The Public Issue/Kathimerini poll, published on Friday, shows Syriza on 31.5 percent and New Democracy on 25.5 percent.
Pasok came in third at 13.5 percent, with the remaining parties achieving less than ten percent: Democratic Left is on 7.5 percent, Independent Greeks 5.5 on percent, Communist Party (KKE) on 5.5 percent, and Golden Dawn 4.5 on percent.
Two more polls appeared on Friday, when a moratorium on their publication comes into force at midnight.
By contrast, pollsters Rass (for Ta Nea) and Kapa (for Eleftheros Typos) out New Democracy ahead by between 2.3 and 2.5 points.
Both these polls were of voter intent and include undecided voters. (Reuters)
and are we approaching a" things fall apart " moment in Greece ......
http://www.athensnews.gr/portal/1/55982
Power regulator warns of energy meltdown
1 Jun 2012
Public Power Corp chief says the troika are viewing "too dogmatically" and must allow a state loan to ensure supplies
The Regulatory Authority for Energy (RAE) told Reuters on Friday it was calling an emergency meeting next week to avert a collapse of the country's electricity and natural gas system.
"RAE is taking crisis initiatives throughout next week to avert the collapse of the natural gas and electricity system," the regulator's chief Nikos Vasilakos said.
RAE took the decision after receiving a letter from the Public Gas Corporation (Depa), which threatened to cut supplies to electricity producers if they failed to settle their arrears with the company.
Ealier, the chief of the Public Power Corporation (DEI) said that the country may suffer power cuts later this year unless the troika allows an emergency cash injection into electricity producers to allow them to buy fuel,.
A yawning gap of more than 300m euros in the accounts of state-run Electricity Market Operator (LAGIE), which acts as a clearing house for power transactions, is causing the system to clog up. If unchecked, that may halt operations at independent power producers, DEI CEO Arthouros Zervos told Reuters in an interview.
Weighed down by debt, LAGIE is unable to reimburse independent power producers for the electricity they generate.
"This is an emergency and it has to be addressed immediately," said Zervos. "There's a real threat of power cuts."
DEI would be forced to hike its own hydro and coal production to plug immediate energy gaps. But in the longer run, it would not be able to cover the shortfall and it would have to resort to rotating power cuts – both to businesses and households – in order to prevent a general blackout.
State-controlled DEI meets about two thirds of local power demand.
Independent power producers have suspended payments to Public Gas Corporation (Depa), which provides them with most of the fuel they need to produce some 70 percent of their energy.
"Depa is the weakest link in the chain because they have to pay the Russians," said Zervos, whose company is Depa's biggest customer.
Liquidity injection
According to newspaper reports, Depa has said in a letter to the government that it does not have enough cash to fund gas deliveries to Gazprom due on June 22.
The Russian energy group provides about 80 percent of all the natural gas Greece uses.
Depa declined to comment on the reports.
A liquidity injection of about 300 to 400m euros via a loan from a state bank - the Consignment Deposit and Loans Fund (TPD) – would remove the risk of a shortage, Zervos said.
But the troika, particularly the European Commission, are reluctant to allow such a loan, using it as leverage to force the country to overhaul the country's inefficient market rules.
"They are seeing things too dogmatically," Zervos said.
The EU has long been impatient about structural flaws in the market, particularly its rigid regulated retail prices.
"It is true that the rules must change. The system is at breaking point. But this is not the moment to do it," Zervos said.
The crisis in the power sector would be a foretaste of what the country might experience were it ever to quit the euro, Zervos said.
If Greece was unable to pay for oil and natural gas, which is all imported, it would be forced to depend on its coal, hydroelectric power and renewables which cover only about half the country's electricity demand.
"If things get that far, there will obviously be electricity shortages," he said.
Refinancing
DEI itself settled all its arrears to LAGIE in April, with the help of a temporary liquidity injection of 260 million euros from the government, Zervos said.
But the economic crisis has still hit the company particularly hard. Falling power demand as a result of the bailout-fuelled austerity, coupled with soaring fuel prices, has caused it to report three consecutive quarters of losses.
Non-payment by cash-strapped customers has also soared, especially after the government used DEI bills as an easy way to collect the hugely unpopular property tax.
With unemployment reaching record levels, 300,000 customers have applied for lower electricity tariffs. Electricity theft has also skyrocketed, often leading to deaths as people clamber up electricity poles to tap power for their homes.
Metal theft has increased too as gangs steal the company's copper wires and other equipment to sell on the black market.
"The theft is not important in itself, but they add up," Zervos said.
DEI has about 170m euros in cash left - not enough to repay maturing bank debt of 525m euros that is due by the end of this month.
But Zervos said he was optimistic he could persuade Greek banks to refinance the amount in the coming days. "No Greek bank would have an interest in pulling the plug from under our feet," he said.
Greece's four largest banks received a long-awaited liquidity injection of 18 billion euros from the EU last week.
"I am confident we will wrap it up in the coming days," Zervos said.
But provided the electricity system's liquidity shortfall is overcome, things might look up for DEI, said Zervos, who is slashing labour costs to cope with the crisis.
Non-payment by clients has decreased since April, when the company resumed cutting power to people shirking their bills. Wholesale power prices, DEI's biggest cost item, have also fallen in line with power demand.
"We've done better in April and May," Zervos said. (Reuters, Athens News)
and hits keep coming...... first and second largest trade credit insurers cut off new shipments to Greece
Atradius stops covering new shipments to Greece
Atradius NV, the world’s second-biggest trade credit insurer, stopped covering new shipments of goods to Greece following a similar decision by Euler Hermes SA, the biggest provider.
“While we will not cover supplies to new buyers in Greece, we continue to cover the trade credit risk with regard to selected existing buyers of our customers,” the company said in an e-mailed statement on Friday. The lack of export insurance, which pays companies if a client defaults, raises the prospect that certain goods will no longer reach Greek companies and stores.
Euler Hermes, said this week it will no longer cover new shipments of goods to Greece because of the risks of the nation leaving the euro currency and customers defaulting, while France’s Coface said it’s only doing business with “the healthiest Greek companies.”
“For those Greek buyers where we see, for example, a high dependency on imports or business with the public sector we are withdrawing or reducing limits,” Atradius said. “We remain on cover for risks already taken on before withdrawal, or reduction of the credit limit in accordance with the policy conditions.” [Bloomberg]
and AIG assigns Argentina staff to Greece as they have been through this before.....
AIG assigns Argentina staff to aid Athens
American International Group Inc has assigned staff from Argentina to advise their counterparts in Athens as the bailed-out insurer prepares for a possible Greek exit from the euro.
“Our Argentina team that has been successful before, during and after their currency crisis has been working with our team in Athens,” Peter Hancock, chief executive officer of the Chartis property casualty unit, told an investor conference in New York late on Thursday.
“We’ve been as ready as we can. The team in Argentina has been through a number of eruptions and has had to deal with situations of extreme uncertainty and capital flight that would be not unlike what AIG will be dealing with” if Greece leaves the euro, said Clark Troy, a consultant to insurers who’s based in Chapel Hill, North Carolina.
AIG is “calling attention to the fact that they have been through this before,” he said. [Bloomberg]
and tax statement deadline extended until....wait for it....from June 15th until July 16th ......
Tax statement deadline is extended
Tax office queues should be shorter this year as people with annual incomes in excess of 12,000 euros will only be able to submit their statements via the Internet.
The Finance Ministry announced on Friday that the deadline for taxpayers who submit their statements via Taxisnet has been extended by one month, from June 15 to July 16, regardless of their tax registration number. Those who submit handwritten statements have until July 2 to do so.
Taxpayers who submitted their statements electronically last year can use the same code, while those using Taxisnet for the first time will received a new code soon.
Pensioners with an income of over 12,000 euros per year are spared the obligation of electronic submission.
SYRIZA prepares to unveil economic program as polls show leftists neck and neck with New Democracy
Opinion polls Wednesday showed New Democracy and SYRIZA neck and neck for first place at the June 17 elections, as the leftists prepare to unveil their economic program, which could be vital in deciding the outcome of next month’s polls.
A survey by Pulse for To Pontiki weekly had the two parties tied at 24.5 percent. A VPRC poll for Epikaira magazine indicated SYRIZA was leading with 30 percent, ahead of ND on 26.5. A GPO survey for Mega TV gave the conservatives a narrow lead of 23.4 percent over 22.1.
SYRIZA’s hopes of clinching first place could hinge on its economic policies, which leader Alexis Tsipras is set to unveil at a news conference Thursday. The leftists denied Wednesday that a leaked document which set out the party’s positions was the framework that Tsipras will present.
The paper suggested that a SYRIZA-led government would immediately cancel the memorandum of understanding with the European Union and International Monetary Fund. The second step would be to repeal the laws applying the measures agreed as part of the loan deal. This would be followed by a bid to renegotiate the bulk of Greece’s debt. The document also suggested the party would call for the nationalization of banks, the scrapping of Greece’s privatization fund and bringing all public enterprises under total state control.
Tsipras spoke to voters in Keratea, southeast of Athens, Wednesday and accused political opponents of scaremongering in a bid to damage SYRIZA. A report by Reuters claimed that Greece’s former interim Prime Minister Lucas Papademos had contacted European Commission President Jose Manuel Barroso after the May 6 election to ask him to make a strong statement with regard to Greece’s position in the euro.
Barroso’s response, according to the news agency, was to say, “If a member of a club does not respect the rules, it’s better that it leaves the club, and this is true for any organization or institution or any project.”
“The biggest enemy and danger for Greece and our people is not our partners but domestic forces that have direct lines to institutional and noninstitutional centers in Brussels,” said the SYRIZA leader. Papademos denied he had asked Barroso or anyone else to make such a statement.
Commission report calls for improvement in implementation of bailout agreement, or else
By Nikos Chrysoloras
BRUSSELS - The European Commission issued a clear warning to Athens on Wednesday in its Economic Report on the policy Greece should follow in the next year, saying it would need to apply the financial agreement to the full and improve its reform performance, or else there will be no more funding for the country.
“Greece should implement the measures described in the Memorandum signed on March 14, 2012. The integrated financial assistance by the international community may continue only provided that the implementation [of the Memorandum] improves,” the report states.
Asked whether Greece’s timetable could be made more flexible, as in Spain’s case, the European Union’s Economic and Monetary Affairs Commissioner Olli Rehn said in the press conference after the report’s publication, “In Greece’s case we should all remember that a few weeks ago the second economic adjustment program was adopted, providing for the extension for the achievement of the fiscal targets from 2013 to 2015.”
The Commission report paints a dramatic picture of the situation in Greece, noting that the country has failed to stick to its commitments in key sectors: “The progress registered in the tax system reform and in the improvement of the tax collection mechanisms is insufficient.” The report adds that “a simpler and investment-friendly” tax bill should have been voted through last September.
It further points out that the implementation of the measures passed to combat tax evasion has been limited, and singles out specific areas that have not shown the progress required by the bailout agreement, placing part of the blame on political uncertainty.
It also expects the Greek economy to contract by an estimated 4.75 percent this year.
EUROBLOWN: Syriza leaps into opinion poll lead as Greek President has talks with the military.
A new poll by VPRC tonight has Syriza as the biggest Greek Party with 30% of voting intentions, followed by New Democracy on 26.5%, while Pasok continues to languish at 12.5%.But there were disturbing reports of military discussions with the caretaker government.
Opinion polls in Greece are about as stable as flies in a hurricane, but there is now a real possibility that the Left in Greece could put together a majority Coalition. With the Democratic Left at 7.5%, and the Communist Party at 5.5%, those together with Syriza would add up to 43%. And Louka Katseli – a former PASOK minister who now leads the small leftist party Social Pact – today threw her weight behind Alexis Tsipras.
If this critical mass can be hyped by Syriza, then Tsipras really could be the next Greek Prime Minister. As he supports the idea of Greece remaining in the eurozone, the markets might well view his accession positively. But whether they do or not, a Syriza victory would be certain to put the moral and commercial onus back onto the Troika.
However, it became clear today that President Karolos Papoulias had received the caretaker government’s Defence Minister Frangos Frangoulis, along with the leadership of the country’s armed forces, for talks at 2.30 p.m. No details of the discussions have as yet come to light, but in an obvious move to make his position clear, Alexis Tsipras visited the Defence Ministry headquarters, where he condemned previous governments for spending excessively on arms – and expressed solidarity with armed forces employees who have seen their salaries and pensions cut due to the Troika austerity measures.
Another tragic suicide has caught everyone's attention today, in the Nikaia area. (file photo)
1. PENSIONER HANGS HIMSELF.Another tragic suicide case unfolded on Wednesday,when a 61 year old retiree, took his life, unable to further deal with mounting financial problems. His body was found by a Nikaia park attendant.
2. SYRIZA NOW LEADING ELECTION PACK. Alexis Tsipras and his Syriza party are leading the parliamentary race, less than a month before the elections, according to a poll by VPRC. New Democracy is behind them, while Pasok complete the leading trio.
3. PAPADEMOS: IT WASN'T ME. The former prime minister has issued a loud "you have the wrong man", after a report by Reuters, showed him up as being the man behind the Greek exit statement made by Manuel Barroso. Reuters anonymous sources said that Barroso was pressured into making the statement by Papademos, who was apparently distressed at the non-formation of a coalition government,but the former PM has stated that he had nothing to do with it.
5. THE NUMBER OF THE (BANKING) BEAST. Greece's largest lender National Bank on Wednesday reported a 537 million euro ($666 million) loss in the first quarter, as the country's deep recession led to weaker income and more non-performing loans. The group, also present in Turkey, said provisions for impaired loans rose 47 percent year-on-year to 559 million euros. That's 666 million dollars. I just thought I'd point that out.
4) Apart from Spain and Greece , there is the rest of Europe. Should contagion leap from Spain to Italy , from Italy to France and deep into the Core Europe States , there simply isn't the sums of digital money or digital bull shit confidence statements to stop that tsunami.
[ZH: While we do not agree that anything will happen on Wednesday (or pre-Greek-election to be more precise) - aside from perhaps a small bump in BoE LSAP, Peter Tchir provides a useful update to our original 'full central bank menu' two weeks ago.]
The ECB meeting on June the 6th seems key to me. Markets and economies are teetering across the globe. More and more people are coming to the conclusion that a Greek Exit would be catastrophic. Central banks won’t want to act as though they are panicking, but neither will they want to wait much longer to act. The regularly scheduled ECB meeting on the 6th is an ideal date for the first salvo to be fired.
Globally Coordinated Swap Lines
The easiest thing for central bankers to do in conjunction with the ECB would be to reduce the cost of the swap lines and once again extend their maturity and potential size. This is largely symbolic. The rate cut would help those that are using it, but 25 bps on that is not going to be a game changer for any bank in the near term. The lines are already in place, so any maturity extension or reiteration of commitment to swap lines is purely optics. On the other hand, it would show that once again all the major central banks are working together, are aware of the problems, and are committed to employing strategies to resolve it. It should calm growing chatter that the Eur/USD basis swap is trending weaker lately. An announcement like this is largely feel good, but since it costs next to nothing relative to what they are already doing, it is an easy step for central bankers to take and enhance any other policy announcements on that day.
ECB Rate Cut
The ECB should cut rates 25 bps on that morning. It would add to the “feel good” nature of yet another swap line announcement. The cut is unlikely to do much for sovereign debt yields. Unlike in the U.S. where treasury yields are sensitive to the Fed’s short term rate, the connection in Europe has long been broken. German and French yields trade far better than the ECB’s overnight rate and won’t move on the back of it. Italian and Spanish bonds yield far more than the overnight rate because of real credit and currency conversion risk. Spanish and Italian bond yields may improve on the announcement but it will be because of the “symbolism” of the cut and the ECB’s willingness to be aggressive.
The cut would also affect all the LTRO debt outstanding. Again, this is marginally better for banks as the weakest ones, that have relied on LTRO would see a funding reduction. Over time, this would become meaningful given the size of LTRO, but as we have seen time and again, carry takes time to work its magic and mark to market will play a far more significant role in the near term.
An ECB rate cut would be only slightly more useful from a practical sense than a renewed commitment to global swap lines, but combined they would send an indication that central banks are on top of the situation and should support risk assets.
New LTRO
The ECB could announce some new form of LTRO. They eased the collateral requirements on the last LTRO at one of these regularly scheduled meetings. If they are planning LTRO or something similar, this would be the day to do it. For any new LTRO to have meaningful impact for the market it probably needs to be at least 5 years in maturity. There is still enough unused LTRO money outstanding that just 3 years won’t excite the market much, but extending to 5 years could create some interest. If the ECB announces a new LTRO, look for them to emphasize that they will take corporate loans, EFSF bonds, and ESM bonds as collateral. If they do LTRO, they have to demonstrate it isn’t just so banks buy more of their own sovereign debt, but so that they can continue to lend to corporations or to load up on “safer” EFSF, EIB, and ESM bonds.
I think it is 50/50 whether get some new LTRO announcement. Without one, the support for risk assets will decrease. If we get one, and it has a longer maturity than existing ones, and the message is that banks can use it to fund things other than straight sovereign debt, it would be well received.
Pan-European Deposit Insurance
This could come up at the meeting. The ECB is clearly in favor of something like this and is likely to say positive things about the possibility but be careful. A program like this would take time to enact. This would be one of those cases where the bank would be saying what the market wants to hear, but limited probability of it ever occurring. Last year the markets would have responded well to a plan to plan a plan for an insurance plan. This year the market is likely to shrug off anything that doesn’t seem like a concrete proposal. This is especially true now that currency devaluation risk has been added to the solvency and liquidity mix.
China Stimulus
Data out of China continues to be weak, not just by their standards, but in some cases, just plain weak. China seems the country most willing to make decisions away from scheduled meetings so they have the most flexibility in announcing something in conjunction with other central banks as early as this Wednesday. With commodity prices dropping like a stone, with the Baltic Dry index down almost 25% in less than a month, China has room to act. China, more than any other country, is in the position to actually provide real stimulus along with monetary stimulus. It certainly seems that China could use a dose of stimulus and that they can afford it and that they would be least sensitive to launching a program on a specific day. If they get comfort that other central banks will act, it wouldn’t surprise me to see them act first and aggressively. It would put pressure on commodity prices, which no one really wants to see, but would be very supportive for risk assets. I expect we get something out of China, though it take a bit longer than the 6th of June.
Global QE
I fully expect the Fed, BOJ, and BOE to take aggressive stances and to announce either new QE programs, or to publicly recommit to existing ones. Too often the central banks have waited until the markets are in true crisis mode to act. When that happens, their policies do help the markets but do little for the economy. Acting sooner may allow some of their policy actions to actually trickle into the real economy. Bernanke probably faces the most opposition to another round of QE, but frankly he doesn’t seem to care. He “wrote the book” on what to do, and since it is his book he will follow what it says – as much money as fast as possible.
I expect the June 20th meeting to be the official launch of a new mortgage based QE program that creates new money (rather than being sterilized ala operation twist). There is no need to launch it on the 6th, but he will signal his support with swap lines and then follow up with very dovish testimony on the 7th.
Bank Recapitalizations
The ECB can only do so much on this front. This will require additional EU policy makers, but the ECB can highlight that this is the priority it should be. If Europe has any hope of turning the corner (or at least mitigating the damage) they have to get serious about finally getting bank recapitalizations done. They can no longer worry about the dilution for existing shareholders in weak banks. This has to be a priority. I don’t think the ECB has much real authority in this, but look for comments that point to progress and high prioritization on this front. If there signs that no progress is being made on this front, that is very bad, no matter what other policies they put in place.
Project Bonds
If the EIB is going to go down this path, it might as well announce some deals now. These will eventually get issued so might as well do it now. The size of the projects won’t be enough to change anything in Europe but once again the “feel good” factor will be high and it will encourage all of those who are championing European “growth”. Although they won’t be game changers, they are easy enough to push through and the “morale” benefit would be best if some started to get issued in conjunction with other policy initiatives. The “shock and awe” theory.
EFSF Intervention in Primary and Secondary Markets
The EFSF and ultimately the ESM are supposed to assume these roles from the ECB. It would not surprise me to hear that the ECB is ready to perform their role as agent on behalf of the EFSF for these purposes. Bond markets are so thin, that just the hint of renewed intervention in the secondary market, could cause Spanish and Italian bond prices to gap higher. This would affect the long end of the curve more than the short end since this would be more of a short covering rally than any real belief that the EFSF has the firepower to buy too much debt. The threat to intervene in the primary market is just that, a threat. The EFSF, as currently structured cannot get big enough to be meaningful. The ESM, especially with a bank license, could get big enough.
ESM as A Bank
I think the ECB will mention that they will take ESM debt as collateral, but don’t think they will be able to give it a bank license at this stage. Germany has been opposed to that. Germany cannot stop the ECB from taking ESM bonds as collateral and providing banks with a lot of leverage, but they can stop the ESM from becoming a bank in its own right. Any sign that ESM will be getting a bank license would be a big deal.
EuroBonds
If this is all they come up with, run. EuroBonds are a long way from being reality. The countries all have such divergent policies it would take years to create true EuroBonds if the economies were doing well, let alone when they are struggling. Germany is opposed and should be. Not only are they not going to get done anytime soon, I haven’t actually seen a credible plan of how to implement them without causing disruptions in this market. The dispersion between the different economies makes any form of implementation almost impossible. If the ECB takes a lot of other actions, then take some infinitesimal comfort from talk about Eurobonds. If the ECB does nothing but announce plans to work on EuroBonds, be extremely afraid.
Troika Debt Restructuring
Far less likely, but still a possibility is some form of announcement that the Troika is renegotiating their existing debt to reduce coupons or extend maturities. I don’t see this getting done yet, but possibly after the Greek elections, something along these lines could be announced. Whether countries are running primary deficits or not, a reduction in current interest expenses would be meaningful. I don’t see this happening now, but is worth keeping an eye on.
How to Play It
Look for action on the 6th. Be extremely disappointed if nothing happens and expect markets to decline rapidly. If central bankers do take some policy actions, it is key to figure out which ones are practical, which are merely symbolic, and which are just a dream and not an action. Who says what is just as important in some cases as what they say. When Merkel says something, we all need to listen. When anyone from the EU in Brussels says something, it will be the same thing they have said over and over and is completely self-serving and should be ignored. Anything Draghi and Bernanke might say is critical to listen to, because in this weird world, they have the most power to do something meaningful in a short period of time.
Europe was a sea of red (apart from Bund prices) today. With yesterday's window-dressing done and overnight dismissal of Spain's hopeful ECB-workaround, European equity and credit markets were dismal,EURUSD ended under 1.2400, and 2Y Bunds at 0.00% yield. Financials underperformed in stocks and credit with senior bank spreads back up to 300bps and LTRO Stigma jumping 12bps to 177.5bps(near record wides). Spain and Italy dominated both single-name banking and non-banking credit and equity moves as well as sovereigns with Spanish 10Y now +45bps on the week and Italy +37bps (with Belgium, France, and Austria all around 9bps wider). All European equity indices are down for the week with Spain down almost 8%. EUR-USD 3Y basis swaps turned back lower (worse) back to -70bps - not a good sign for funding (especially in light of the drop in LTRO we noted yesterday). On a final note of despair, Spanish 2s10s is now flatter than at any time since LTRO1 - implying that any LTRO debt used to fund a real carry trade is now a loser.
European sovereigns dismal...
and while European stocks (blue) have retraced most of the recent hope-driven rally, Crossover credit (black) remains rich as its high beta dispersion (green oval) has not fallen back to earth. Note also the financials (red and light blue) underperforming...
All European equity indices are down for the week with Spain's IBEX unsurprisingly the biggest loser down almost 8% (and the Swiss best at just under unch)...
and Spanish 2s10s curve is now flatter than any time post LTRO1 - so any of that LTRO debt used to fund a real carry-trade (as opposed to the losses on direct sovereign purchases) are now underwater...
Last time we looked at Denmark it it was in the context of Luxor Capital which had some very ugly things to say about the Scandinavian country in "Rotten Contagion To Make Landfall In Denmark: CDS Set To Soar As Hedge Funds Target Country." Now, 6 months later, Moody's has finally gotten the memo: "Moody's Investors Service has today downgraded the ratings for nine Danish financial institutions and for one foreign subsidiary of a Danish group by one to three notches. The short-term ratings declined by one notch for six of these institutions. The rating outlooks for five banks affected by today's rating actions are stable, whereas the rating outlooks for two banks and for all three specialised lenders affected by today's rating actions are negative The magnitude of some of today's downgrades reflects a range of concerns, including the risk that some institutions' concentrated loan books deteriorate amidst difficult domestic and European conditions, with adverse consequences on their ability to refinance maturing debt. The latter concern is exacerbated by structural changes in the terms of Danish covered bonds and the mix of underlying assets that lead to increased refinancing risk. While Moody's central scenario remains that financial institutions show some resilience to what will likely be a prolonged difficult environment - and the revised rating levels for most Danish financial institutions continue to reflect low risks to creditors - today's rating actions reflect the view that these risks have increased."
More from Moody's:
Today's rating actions reflect two key sets of drivers:
1. A difficult operating environment, weakening asset quality and low profitability. Danish financial institutions face sluggish domestic economic growth, weakening real estate prices and higher levels of unemployment, as well as the risk of external shocks from the ongoing euro area debt crisis. Asset quality is deteriorating, and these pressures are expected to continue, exacerbated by (i) the junior-lien status of most mortgages in the loan books of Danish banks, and (ii) for specialised lenders, their concentrated exposure to certain sectors which leave them vulnerable to sector downturns. Further, Danish financial institutions' weak profitability limits their ability to absorb losses in this environment.
2. Substantial market-funding reliance of most financial institutions increases vulnerability. Most market funds are in the form of covered bonds which have historically been a stable funding source. But structural changes to that market have increased refinancing risk, posing a particular concern for mortgage credit institutions whose access to alternative funding is limited.
Additional drivers specific to individual rated institutions are detailed below.
Moody's recognises several mitigating factors that have limited the extent of today's downgrades, but they do not fully offset the above-mentioned concerns. These mitigating factors include (i) the still-moderate level of problem loans at many institutions, and their relatively good levels of capitalisation; (ii) sound government finances (as reflected in Denmark's Aaa government bond rating, with a stable outlook), (iii) the considerable (though not necessarily liquid) wealth of Danish households; and (iv) the high level of social security, which provides a level of support for borrowers and the economy.
OUTLOOKS MOSTLY STABLE FOR BANKS, NEGATIVE FOR SPECIALISED LENDERS
The rating outlooks are stable for most banks affected by today's actions. Stable rating outlooks reflect Moody's view that currently-foreseen risks are incorporated in the revised rating levels. The negative rating outlooks for two banks incorporate issuer-specific factors. The negative outlooks for Danish mortgage credit institutions and for Danmarks Skibskredit reflect their near-exclusive reliance on covered bond funding, and for mortgage institutions also increased refinancing risk as a result of growth in covered bonds that fund adjustable-rate mortgages.
AVERAGE RATINGS FOR DANISH FINANCIAL INSTITUTIONS DECLINED TO Baa1
The average senior long-term ratings for Danish financial institutions are now at Baa1, on an asset-weighted basis. This average reflects the impact of the above-described downside risks on standalone financial profiles and limited support-driven ratings uplift. Moody's believes that Danish banks and credit institutions are in a weaker position relative to their Nordic peers to manage the credit risks emanating from the challenging domestic operating environment.
OVERVIEW OF RATING ACTIONS
Today's changes to issuers' senior ratings can be summarized as follows:
- BANKS
1. Danske Bank (deposit rating Baa1, standalone bank financial strength rating (BFSR) C- / baseline credit assessment (BCA) baa2) was downgraded by two notches, and its short-term rating downgraded to P-2 from P-1. Danske's Finnish subsidiary Sampo Bank (deposits A2; BFSR C- / BCA baa1) was downgraded by one notch.
2. Jyske Bank (deposits Baa1; BFSR C- / BCA baa2) was downgraded by two notches, and its short-term rating downgraded to P-2 from P-1.
3. Sydbank (deposits Baa1; BFSR C- / BCA baa2) was downgraded by two notches, and its short-term rating downgraded to P-2 from P-1.
4. Spar Nord Bank (deposits Baa3; BFSR D+ / BCA baa3) was downgraded by one notch. The bank's short-term rating was downgraded to P-3 from P-2.
5. Ringkjobing Landbobank (deposits Baa1; BFSR C- / BCA baa1) was downgraded by one notch. The bank's P-2 short-term rating was affirmed.
- SPECIALISED CREDIT INSTITUTIONS
1. Nykredit Realkredit (issuer rating Baa2) was downgraded by three notches. Its subsidiary Nykredit Bank (deposits Baa2; BFSR D+ / BCA baa3) was downgraded by three notches. Short-term ratings for both institutions were downgraded to P-2 from P-1.
2. DLR Kredit (issuer rating Ba1) was downgraded by three notches.
3. Danmarks Skibskredit (issuer rating Baa2) was downgraded by three notches.
The Aaa ratings on government guaranteed debt issued by these institutions are not affected by today's rating actions.
RATIONALE -- STANDALONE CREDIT STRENGTH
FIRST DRIVER -- DIFFICULT OPERATING ENVIRONMENT, WEAKENING ASSET QUALITY AND LOW PROFITABILITY
The operating environment in Denmark is characterized by weak economic growth, weakening real estate prices and higher levels of unemployment. The International Monetary Fund (IMF) projects Denmark's gross domestic product (GDP) growth for 2012 at a low 0.5%. Low economic growth constrains credit demand, whilst prolonged stagnation strains debtors' ability to repay their loans. Both trends will likely affect loan performance. Unemployment has risen, albeit from very low levels. Another factor weighing on the Danish economy is the weakened real estate market.
In addition, Danish households are susceptible to adverse conditions because of their high debt burden. Total financial liabilities of households amounted to 142% of GDP at year-end 2010, about twice as high as the 79% European Union average. Furthermore, the large size of the Danish financial sector increases the risk of negative feedback effects between a weakening economy and the health of financial institutions.
Further shocks may also emanate from the ongoing euro area debt crisis. While not a euro member, Denmark's small, open economy and its financial markets are integrated into the EU, and neither would be immune from further external shocks.
The above-described adverse conditions have already led to moderately higher problem loans, contained in part by historically-low interest rates which reduce debt service costs. Moody's expects further asset quality deterioration, particularly if real estate prices fall further and/or interest rates increase.
These asset quality concerns are exacerbated by Danish banks' providing either second or sequential-lien loans, given the practice of banks to transfer originated first-lien loans to mortgage credit institutions. Moody's believes that in a stress scenario this junior position leads to many Danish banks being at risk of higher levels of losses than similar institutions in other markets.
Meanwhile, Danish mortgage and shipping credit institutions tend to focus on specific sectors, for example commercial and household mortgages, agriculture, or shipping. As such, they are particularly exposed to a downturn in these sectors.
Finally, Danish financial institutions' low profitability limits their ability to absorb losses. Low and even negative credit growth, paired with the low interest environment, has negatively affected banks' interest and fee income, even as institutions have increased lending margins. Accordingly, pre-provision earnings of Danish financial institutions are limited and have in 2011 been largely absorbed by provisioning costs. Danish banks have improved capital, but low profitability means there is limited capacity to absorb additional losses without eroding capital.
SECOND DRIVER -- MARKET FUNDING RELIANCE
Moody's views the reliance of many Danish financial institutions on wholesale market funding as a weakness, because it leaves them vulnerable to potential sudden changes in investor sentiment. Moody's recognises the historical stability of the Danish covered bond market, on which many domestic financial institutions rely, directly or indirectly, for large parts of their funding. However, Moody's is increasingly concerned by the dependence of Danish institutions on the uninterrupted functioning of that market, particularly given changes to its structure that increase refinancing risk.
The Danish covered bond market has shifted from long-term issuance that matched mortgage duration, to covered bonds of shorter maturities (funding adjustable-rate mortgages, ARMs, with annual rate adjustments). The maturity mismatch between long-term mortgages and the covered bonds funding them raises issuers' exposure to refinancing risk very significantly. This is a credit negative, as refinancing risk has materialised repeatedly in global funding markets over the course of the financial crisis, even for ostensibly reliable and resilient sectors.
Our ratings downgrades on specialised mortgage lenders are larger than for Danish banks. Given their near-complete reliance on covered bonds, specialised lenders would likely struggle to access alternative funding sources in a funding stress scenario. Furthermore, most Danish covered bonds require additional collateral to be provided if the market value of existing collateral falls. However, specialised issuers possess limited unpledged assets and may need recourse to unsecured markets or to support from Danmarks Nationalbank in a stress scenario.
In addition, we recognise that covered bonds play a central role in Denmark, amounting to DKK2.4 trillion, or approximately135% of GDP, at year-end 2011. They are widely issued by financial institutions who also hold them as liquid assets. Any issuer-specific problem would therefore likely spread and affect other institutions.
For Danmarks Skibskredit, we recognise that their market funding, via shipping bonds, continues to operate on a matched maturity basis that reduces refinancing risk, assuming continued asset performance. However, our rating downgrade reflects the risks associated with the institution's concentrated asset portfolio, combined with the reliance on this single market funding instrument.
SYSTEMIC SUPPORT UPLIFT REMAINS LIMITED
Moody's has not changed its support assumptions for Danish financial institutions with respect to local or national governments. The senior long-term ratings for several institutions continue to be positioned one notch above their standalone credit assessments, as Moody's expects them to benefit from a degree of government support, if needed. Support-driven ratings uplift is, however, limited compared with other European systems, given that the Danish authorities have created a legislative and institutional structure which allows them to impose losses on banks' senior creditors, and have used this structure in the resolution of two small institutions.
Moody's recognises that large, more complex institutions are inherently harder to resolve without disruption to markets, and that the incentive for the government to provide support to bondholders is commensurately greater. Nevertheless, the clear desire of the Danish government to protect taxpayers by ensuring that bondholders bear losses, clear statements of intent to that effect and the legislative framework put in place argue for limiting systemic support uplift.
The subordinated debt and preferred stock ratings for seven of the affected financial institutions have been downgraded today by the same number of notches as their senior ratings. Subordinated debt at Danske Bank's Finnish subsidiary, Sampo Bank, was downgraded by three notches, following the removal of systemic support for these securities. The removal of support for this debt class reflects Moody's view that in Finland, systemic support for subordinated debt may no longer be sufficiently predictable or reliable to be a sound basis for incorporating uplift into Moody's ratings.
ACTIONS FOLLOW REVIEW ANNOUNCEMENTS ON 15 FEBRUARY 2012 AND PREVIOUSLY
Rating upgrades are unlikely in the near future for banks affected by today's actions, for the reasons cited above. A limited amount of upward rating momentum could develop for some banks if a bank substantially improves its credit profile and resilience to the prevailing conditions. This may occur through increased standalone strength, e.g. bolstered capital and liquidity buffers, work-out of asset quality challenges or improved earnings. Improved credit strength could also result from external support, e.g. via a change in ownership or improved systemic support.
While the current rating levels and outlooks incorporate a degree of expected further deterioration, ratings may decline further if (i) operating conditions worsen beyond current expectations, notably if Denmark's sovereign creditworthiness and economic environment encounter material negative pressure, leading to asset quality deterioration exceeding current expectations, and (ii) Danish banks' market funding access, via covered bonds or wholesale markets, experiences a sharp decline.
and.....
http://ransquawk.com/headlines/225411
Moody's banking review update; Reviews of the following are expected by the end of June, in sequential order by system included below:
- Austrian banks - German banks - Danish banks - Finnish banks - Firms with global capital markets operations - French banks - UK banks - Luxembourg banks - Belgian banks - Dutch banks
Already reviewed: - Italian banks - Spanish banks - Swedish banks - Norwegian banks
5) Psychological impact of Facebook aka faceplant and JP Morgan debacles on further retail revulsion of equities and also business investment
HONG KONG, May 31 (Reuters) - London luxury jeweller Graff Diamonds has pulled its planned $1 billion Hong Kong initial public offering, the fourth major IPO to be called off in Asia this week, as tumbling stock markets threaten to claim yet more casualties in the region.
Graff had been due to price its IPO on Friday, putting it on the verge of becoming Asia's biggest completed flotation so far this year, but investors baulked at the issue amid market-wide fears over the euro zone crisis and China's economic slowdown.
"Consistently declining stock markets proved to be a significant barrier to executing the transaction at this time," Graff said in a statement. Graff was due to list next week.
A slump in Asian equities in the past week has already derailed three major IPOs which were aiming to raise a collective amount of up to $1.37 billion: two in Hong Kong and one in Singapore.
Deal volumes in Hong Kong, Asia's IPO capital, have plunged 85 percent in the first five months of 2012 from a year earlier. Across the Asia-Pacific, overall volumes for share issues, including secondary offers, are down by about one-third.
The value of IPOs pulled in Asia ex-Japan has jumped to $7.7 billion so far in 2012 from 46 planned offerings, up from $5.8 billion, according to Thomson Reuters data. Hong Kong accounted for most of the scrapped deals.
Graff, which had planned to raise capital to help build a bigger Asian business centering on China, pulled its IPO as European and U.S. markets tumbled more than 1 percent on Wednesday. Asian shares followed suit on Thursday, with an MSCI pan-Asia index falling 1.6 percent.
Rival Tiffany & Co had added to the pressure, cutting its sales forecast last week and blaming slower demand from key markets such as China.
The market slump could also pressure IPOs now on the road, such as a deal worth up to $3 billion by motor racing firm Formula One in Singapore. Despite expectations the deal will be priced next month, Formula One chairman Peter Brabeck said last week he had yet to give the final go-ahead.
"Appetite for new listings is pretty weak generally because of the macro situation," said Eugene Mak, an analyst at brokerage Core Pacific Yamaichi in Hong Kong, adding the Graff IPO did not offer a lot of upside potential.
Credit Suisse Group, Deutsche Bank, Goldman Sachs and Morgan Stanley were hired as joint global coordinators on the Graff IPO. Rothschild acted as financial adviser to the London company on the transaction.
MALAYSIA'S FELDA IPO SEEN SAFE
Malaysia launched on Thursday the biggest Asian IPO to hit the road so far this year: a $3 billion offer in Felda Global Ventures Holdings Bhd, the world's third-largest palm plantation operator. It is preparing for a market debut on June 28.
But the Felda IPO is unlikely to suffer the same fate as Graff. Cornerstone investors are taking about two-thirds of the shares, and the Malaysian government is using the sale to deliver a windfall of more the $500 million to tens of thousands of landholders ahead of an expected election.
"The chance of it being successfully listed is quite high," said Alan Tan, fund manager for Asian equities at Lion Global Investors in Singapore.
The biggest IPO still in the Asian pipeline is Chinese state-owned insurer PICC Group, which plans to raise up to $6 billion in a Hong Kong-Shanghai dual listing. IPOs from Chinese state-owned entities could be less sensitive to market volatility because they tend to be supported by funds of other government companies and by China's sovereign wealth fund.
Deals from so-called defensive sectors such as utilities or high-dividend companies should also fare better in the current market, though no IPOs are seen as easy sells, bankers said.
Formula One, whose revenues are underpinned by multi-year contracts, could appeal to defensive-minded investors, although one banker not involved in the IPO noted: "Even so, they would be quite brave to do it."
Alan Lam, Julius Baer's Greater China equity analyst, said the window for Asian IPOs could still reopen later in the year, if China eases monetary policy and buoys markets, but one capital markets lawyer in Hong Kong sounded less hopeful.
"Bankers aren't very optimistic for the second half, it's going to be very difficult," said the lawyer, who was not authorized to speak publicly on the matter.
DOUBTS OVER GRAFF VALUATION
Graff Diamonds was founded in 1960 by Briton Laurence Graff. Born to Jewish immigrant parents in London, he has always kept control of the firm, attracting wealthy and celebrity clients such as the sultan of Brunei, Oprah Winfrey and Imelda Marcos.
Some analysts and fund managers had already begun questioning Graff's valuation before Wednesday's global market sell-off, citing a slowdown in luxury spending in China.
Hong Kong's benchmark Hang Seng index has plunged 12 percent since May 7, when Graff executives, its bankers and advisers began meeting institutional investors and fund managers to gauge demand for the offering.
Stocks in the luxury goods sector have been hit particularly hard, with Chow Tai Fook down about 23 percent over the same period and Tiffany falling 14 percent.
"We decided at the end of the day that it would be better to wait for a better time," said a person involved in the Graff IPO, who was not authorized to speak publicly on the matter.
While it may come as no surprise to market-watchers, the market for over-priced internet IPOs seems to have become a littlesoft. Bloomberg is reporting that Kayak, which first filed to go public in November 2010 and put its plans on hold earlier this year because of choppy market conditions, is delaying its IPO. The online-travel service roadshow was just postponed and guess who the lead bank on Kayak's IPO was - yep, Morgan Stanley.
The penalty for laying a big egg on Wall Streetused to be a 10 percent markdown. Now, it’s 20 percent or more. Facebook as a new issue shoulda come in at $28, not $38, and it woulda closed in the low thirties with no Congressional hearings. Prior to its London caper, JPMorgan Chase sold at 10 times earnings power, now an also ran carrying a 7 multiplier.
Psychologists explain this as the syndrome where you fill too much space and end up battered black and blue. Fifty years ago, you couldn’t find financials in terms of GDP. Wall Street was a tiny village. Now it’s 9 percent of GDP, 15 percent of the S&P 500 Index with a boatload of embedded regulators and dozens of congressmen vying for airtime and tomorrow’s headlines.
JPMorgan as a whale got noticed, then harpooned, not for $3 billion in paper losses, but $40 billion in market value blubber. This is an enormous comeuppance. Call it 25 percent on a market capitalization over $170 billion. The stock’s now worth $125 billion and has given up all of its 32 percent gain this year.
Wells Fargo’s market capitalization stood at $177 billion six weeks ago, now ticking at $170 billion, hardly changed. Wells deals mostly in mortgages, not a major player in derivatives, deals, stock brokerage and underwriting, now the twelfth largest capitalization in the Standard & Poor’s Index. The House of Morgan has slipped down several rungs, resting below Intel and nearer Merck.
Citibank, which was number 25 on the S&P 500 Index Hit Parade, with a market cap of $102 billion, has broken badly below the top 25 list, now ticking at a $78 billion valuation. So far, Citi shows no black swans surfacing nearby so its 25 percent schmeiss is in pure sympathy with JPMorgan.
The market is placing a huge “complexity” discount on loose jointed Tier One capital market players including Goldman Sachs and to some extent Morgan Stanley, whose Facebook pricing fiasco will go down in financial history text books.
One of the precious national resources is our capital markets distribution capacity for financing corporations as well as bringing successful ventures like Facebook public. Actually, Facebook didn’t need new capital to run its business but it did sell a lot of peanuts to hungry but foolish investors. (See last week’s column.) It cashed out early investors and management, but nothing wrong with that.
Unfortunately for me, Facebook’s advertising revenues on the Internet stuttered some of late and this took down Apple and Google. The ramp in smart phone advertising lags expectations. Microsoft’s joint venture with Barnes & Noble’s Nook e-book business centers on Microsoft’s need to build up content revenues with its Windows 8 intro just months away.
Financials were nearly 15 percent of the S&P 500 Index but the sector seems headed towards 12 percent. Only JPMorgan and Wells Fargo remain in the top 25 listing. Take JPMorgan down another 20 percent and it sinks into some kind of purgatory, below a $100 billion valuation. Exxon Mobil and Chevron are the only 2 energy names among the top 25, but they are non-performers year-to-date, in minus territory.
For better or worse, I believe $90 a barrel is the right clearing price for oil based on supply-demand projections which favor supply. The U.S. actually could become a nearly self sufficient energy country in a decade, but it’s premature to factor this into our balance of trade deficit which is largely oil imports, some 8 million barrels per diem.
As anyone who has ever traded CDS (or any other OTC, non-exchange traded product) knows, when you have a short risk position, unless compliance tells you to and they rarely do as they have no idea what CDS is most of the time, you always mark the EOD price at the offer, and vice versa, on long risk positions, you always use the bid. That way the P&L always looks better. And for portfolios in which the DV01 is in the hundreds of thousands of dollars, marking at either side of an illiquid market can result in millions of unrealistic profits booked in advance, simply to make one's book look better, mostly for year end bonus purposes. Apparently JPM's soon to be fired Bruno Iksil was no stranger to this: as Bloomberg reports, JPM's CIO unit "was valuing some of its trades at prices that differed from those of its investment bank, according to people familiar with the matter. The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., may have obscured by hundreds of millions of dollars the magnitude of the loss before it was disclosed May 10 , said one of the people, who asked not to be identified because they aren’t authorized to discuss the matter. "I’ve never run into anything like that,” said Sanford C. Bernstein & Co.’s Brad Hintz in New York. “That’s why you have a centralized accounting group that’s comparing marks” between different parts of the bank “to make sure you don’t have any outliers,” said the former chief financial officer of Lehman Brothers Holdings Inc."
At this point, Zero Hedge assumes that Iksil was merely abusing the little loophole used by every CDS trader since time immemorial, which however on a TRSed position of $100 billion in notional, which based on our calculations has a DV01 of $200 million, means that the bid/ask spread itself is worth $500 million in profit (and not so much loss).
However, it what Bloomberg is implying that Iksil was effectively overriding "real" marks, and using imaginary bids and asks then that bring into question the validity of CDS marks reported by MarkIt, the same MarkIt partially owned by Goldman and... that's right, JP Morgan (read herefor much more into how broker-owned MarkIt may itself manipulate and influence markets).
Jennifer Zuccarelli, a spokeswoman for New York-based JPMorgan, declined to comment on whether the CIO and investment bank were using different prices.
“All components of the synthetic credit portfolio in the chief investment office were mark-to-market,” she said.
The trades in question, made by a CIO group that included Bruno Iksil, nicknamed the London Whale because his positions grew so large, were on so-called tranches of credit-swap indexes, the people said.
Tranches allow investors to wager on varying degrees of risk among a pool of companies. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
Because JPMorgan had amassed such large positions, even a small change in how the prices were marked may have generated a big difference in the value of the trades, one of the people said.
While very little is known at this point, the realization that JPM did in fact abuse mark-to-market of a Level 1 security means that if Iksil's book was marked fairly, to mid-market alone, let alone to the real exit level opposite where it is most profitable (i.e., long risk as in the case of Bruno Iksil's IG9 holdings -> mark at offer, and vice versa), the losses would be materially greater, potentially up to hundreds of millions in the remarking process itself? And any further uncertainty about JPM's accrued losses, which we now know had to be covered up by tens of billions in asset sales from its portfolio (but, but JPM certainly did not need the cash) will merely add to the toxic spiral that is the pounding of JPM stock, coupled with further widening in IG9-10, which leads to even more JPM stock losses, which further blows out IG9-10 and so on.
One thing we do know is that in a recent case of a UBS prop trader, caught mismarking his CDS book, there was some serious litigation involved, and major accusation of illegalilty. Once again, from Bloomberg:
Ramon Braga, a trader on the bank’s corporate-credit desk in London, was fired for collusion in the alteration of “marked-to-market” values of credit default swaps by Denis Minayev, UBS staff said at an employment tribunal yesterday. Minayev, a proprietary trader, “re-marked” Braga’s trading book on 66 occasions, even though he shouldn’t have had the authority to do so, UBS investigator Richard Kennedy said.
“If you shift one of those markers, it can give a completely false picture,”employment Judge Graeme Hodgson said at the hearing.
Braga, who is suing for unfair dismissal, was an inexperienced trader who was “thrown in at the deep end,” his lawyer, Amy Sander, said at the hearing. He wasn’t aware of many of the changes Minayev made, she said, and thought his actions were permitted by managers. Braga was also accused by UBS of “procuring a false broker quote,” she said.
UBS is already dealing with the fallout from what the bank said were unauthorized trades by London-based UBS employee Kweku Adoboli, which led to a $2.3 billion loss, regulatory probes and the resignation of Chief Executive Officer Oswald Gruebel. JPMorgan Chase & Co. (JPM) CEO Jamie Dimon said yesterday his New York-based firm suffered a $2 billion loss after a trading unit’s “egregious” failure to manage risks.
Dominik Von Arx, a spokesman for Zurich-based UBS, said Braga “was a junior employee” in the bank’s fixed-income, currency and commodities unit.
“He was dismissed for gross misconduct in October 2011 following an investigation into alleged mismarking,” Von Arx said in an e-mailed statement. “UBS has zero tolerance for such behavior.”
During cross-examination of Braga today, UBS lawyer Bruce Carr said Braga had asked a broker friend to send him a quote that justified changes made to his valuation, after a colleague said the price was too high.
“You get an entirely unsolicited e-mail that happens to fit” the valuation, Carr said. “That’s quite a coincidence, isn’t it?”
Braga responded that his “dismissal shouldn’t be based on speculation or coincidences.”
The product being re-marked was a credit default swap on European industrial-company bonds, which was illiquid and difficult to value because it was rarely traded.
Lawyers for Braga questioned Paolo Croce, UBS’s European head of rates, at the continuation of the hearing today about the close relationship between proprietary traders such as Minayev, who trade with the bank’s money, and flow traders like Braga, who execute orders on behalf of clients.
“All the other flow traders followed the direction of Mr. Minayev,” Braga’s lawyer said.
Croce said while flow and proprietary traders exchanged information, they weren’t supposed to take instructions on pricing.
Minayev had told Braga, “I need this to move,” according to Croce. “He told him ‘I’m down $9 million today.’”
Here are some preliminary question to set prosecutors on their marry way?
How many times did JPM's CIO office "procure a false quote"?
How many times did Iksil tell his middle office or subordinates: "I need this to move" - and if he kept it to himself, how many times did Iksil "make it move" on his own?
How many times did the CIO "shift the IG-9 market and give a completely false picture?"
How many times did Iksil get an external "quote" that overrode the official closing day MarkIt price?
And this is just the beginning. The reality is that with this revelation it likely means that JPM is probably lying about the fair value of thousands if not millions of other OTC-based products. Which goes to one simple thing. Non-existent internal controls!
Because while JPM can blame an entire prop trading office for a pair trade gone wrong, it will have a very tough time explaining how marks impacting billions in P&L could have sneaked past the middle and back office.
Which, however, is possible, at least in theory.
This brings us to MarkIt - a company that has long been in the public eye for being the primary source of CDS marks, which would be great if not for one small glitch: it is also partially owned by the same banks which stand to benefit if MarkIt "nudges" the market in one way or another.
The following report from Mark Mitchell from 2009 does a great job of exposing some of the potential dirt that MarkIt may be involved in, and raises some critical questions that have never been answered, and which if addressed in the past could have spared JPM shareholders, and potentially US taxpayers, billions in losses:
Last year, the media reported that New York Attorney General Andrew Cuomo had sent subpoenas to Markit Group as part of an investigation into possible manipulation of credit default swap prices by short sellers. This investigation, like Mr. Cuomo’s other investigations into market manipulation, have yielded no prosecutions.
The Department of Justice is reportedly investigating Markit Group for anti-trust violations. This investigation (which is reportedly focused on how Markit Group packages and sells its information) seems to acknowledge that Market Group has near-monopolistic control of information about credit default swap prices. However, if the press reports are correct, the DOJ has not considered the possible appeal of this monopolistic control to market manipulators.
Meanwhile, Henry Hu, the director of the Securities and Exchange Commission’s division of risk, has said that it has been nearly impossible for the SEC to conduct investigations into any matter concerning credit default swaps because the commission does not have access to any data on the trading of CDSs. In itself, this is a shocking admission. It is all the more shocking when one considers that the necessary data exists and might be in the hands of The Markit Group – a black box company based in London.
A thorough investigation of Markit Group is urgently required.
Here is what we know so far:
Markit Group was co-founded by Rony Grushka, Lance Uggla, and Kevin Gould. Prior to founding Markit Group, Mr. Grushka’s main line of business was investing in Bulgarian property developments. He recently resigned from the board of Orchid Developments Group, an Israeli-invested company based in Sophia, Bulgaria. Messrs. Uggla and Gould formerly worked for Toronto-Dominion Bank in Canada.
Markit Group’s founders also include four hedge funds. However, Markit Group refuses to disclose the names of those hedge funds. In response to an inquiry, a Markit Group spokesman said it was “corporate policy” to keep the names of the hedge funds secret, but he would not say why Markit Group had such a policy. It seems worth knowing whether those hedge funds have any influence over Markit Group’s published information or indexes, and whether those hedge funds are trading on that information. It would also be worth knowing whether those hedge funds or affiliated hedge funds have engaged in short selling of public companies whose debt and stock prices were profoundly affected by the information that Markit Group published.
Goldman Sachs (NYSE:GS), JP Morgan Chase (NYSE:JPM) and several other investment banks also have ownership stakes in Markit Group. The investment banks received their stakes in exchange for providing trading data to Markit Group. It would be worth knowing whether these investment banks engaged in short selling ahead of Markit Group’s published indexes and price quotations.
Markit Group is secretive about how it creates its indexes. In early 2008, The Wall Street Journal noted that the CMBX simply “doesn’t make sense” and that Markit Group’s indexes “might be exaggerating the amount of distress” in the home and commercial mortgage markets. In 2008, the average prediction for defaults on commercial mortgages was 2%. The CMBX implied that the default rate could be four times that level.
When short seller David Einhorn initiated his famous public attack on Lehman Brothers, one of his central arguments was that the CMBX (the index that was likely “exaggerating the amount of distress”) proved that Lehman had overvalued the commercial mortgages on its books.
In March 2008, the Commercial Mortgage Securities Association sent a letter to Markit Group asking it disclose basic information about how the CMBX index is created and its daily trading volume. “The volatility in the CMBX index, caused by short sellers, distorts the true picture of the value of commercial-mortgage-backed securities,” the group said in a statement.
Markit Group is equally secretive about how it derives its “prices” for credit default swaps. A spokesman for the company spent close to one hour talking to Deep Capture. He did his job well and sounded like he was trying to be helpful. But he told us as little as possible.
However, in the course of this conversation, we did learn that Markit Group’s “prices” are not actual, traded prices. They are mere quotations. The Markit Group has what it calls “contributors” – hedge funds and broker-dealers that provide it with information. Markit Group has a grand total of 22 “contributors.” Deep Capture asked Markit Group’s spokesman for the names of these “contributors.” The spokesman said he would try to find out the names and call back later. He never called back.
The 22 “contributors” provide Markit Group with quotations, and these quotations become the Markit Group’s “price.” In other words, the “contributors” can quote any price for a CDS that they choose, regardless of whether anyone is actually willing to buy the CDS at that price. Markit Group looks at these quotations. Then it somehow decides which quotations make the most sense. Then it publishes information that purports to represent the actual market price of that CDS. This process is certainly unscientific. And it is ripe for abuse.
Consider, for example, the Markit Group “price” for CDSs insuring the debt of company X. The Markit Group price strongly suggests that company X is going to default on its debt in the immediate future. Short sellers eagerly point to the Markit Group CDS “price” as evidence that company X is doomed. Panic ensues, and suddenly, company X really is doomed. But the fact is, nobody ever bought a company X CDS at the price quoted by Markit Group. Rather, that panic-inducing “price” was, in effect, pulled out of a hat. Who pulled it out of a hat? That is matter of immense importance. There are two possible scenarios:
The first possible scenario is that the 22 “contributors” report their quotations in good faith. They should be sending the actual traded price, not just a quotation, but assume they are just doing what was asked of them. From these quotations, Markit Group somehow decides what the “price” should be. It is possible that this decision is based on some secret formula (which would be worrisome); or it is possible that Markit Group executives sit around a table debating what the price should be and take a shot in the dark (which would be even more worrisome); or it is possible that Markit Group deliberately chooses the most horrifying price possible in order to assist the short sellers who are affiliated with its owners (which would be a matter for the authorities).
The second possible scenario is that Markit Group acts in good faith (if not scientifically), but one or more of the 22 “contributors” or their affiliates has an interest in seeing company X fail. If just one of those “contributors” sends in an astronomically high quotation, that could be enough. Markit Group factors the absurd quotation into its posted “price” and it suddenly becomes possible to convince the world that company X is about to default on its debt. Panic ensues, the firm’s layer of debt dries up, the stock price plunges, and perhaps the “contributor” or its affiliate make a lot of money.
As Deep Capture understands it, CDS quotations suggested by the 22 “contributors” also help determine the movement of the CMBX and ABX indexes. The movement of these indexes did serious damage to the American economy in multiple ways. The indexes prompted write downs at most of the major banks and mortgage companies. They were ammunition for short sellers, like David Einhorn, who claimed that companies had cooked their books by not writing down to the rock bottom prices suggested by the Markit Group indexes. They helped precipitate the decline in prices of mortgage securities, and contributed mightily to the panic that spread across the markets. A lot of people made a lot of money as result of those indexes moving downward. So, it is rather important to know more about how those indexes are formulated, and if they can be driven by the same people who are making directional bets on their movements.
Conclusion: Ten years ago, there was no such thing as a credit default swap. Six years ago, a very small number of investors traded credit default swaps as hedges against the long-shot possibility of corporate defaults. Nobody looked to credit default swaps as reliable indicators of corporate well-being.
Then, suddenly, there were over $60 trillion in credit default swaps outstanding. That is, over the course of a few years, somebody had made over $60 trillion (many times the gross domestic product) in long shot bets that borrowers would default on their debt. As this derivative risk marbled through the system, the trading in credit default swaps was completely opaque. Nobody knew who bought them, who sold them, or at what price.
These “prices” were not prices in any meaningful sense of the term. But, suddenly, these “prices” became perhaps the single most important indicator of corporate well-being.Assuming that those four hedge funds and the 22 “contributors” (or hedge funds affiliated with them) bet against public companies, it seems more than possible that short-sellers got to run the craps table, call the dice, and place bets, all at the same time.
So perhaps it is not surprising that a lot of long-shot rolls paid off quite nicely.
Bottom line: Jamie Dimon's "tempest in a teapot" just became a fully-formed, perfect storm which suddenly threatens his very position, and could potentially lead to billions more in losses for his firm.
and..
6) Bilderberg meeting starts May 31st and continues until Sunday June 3rd - naturally the
market crash won't happen until the PTBs bless what is to come next....
Indiana governor Mitch Daniels “is on a short list of well-connected individuals” attending the Bilderberg confab this year, according to The Journal Gazette in Fort Wayne, Indiana.
Daniels’ office, however, did not mention his presence at the meeting.
“While two other Washington D.C. events – the unveiling of George W. Bush’s portrait at the White House and a visit to the National Press Club to talk road funding – were listed on the public schedule released by Daniels’ office, there was no mention of Bilderberg,” Niki Kelly writes for the newspaper today.
Daniels Press Secretary Jane Jankowski said Daniels will participate in a panel discussion today and then leave. The Bilderberg meeting was not on his public schedule because it’s not a public event, she said.
The Logan Act forbids unauthorized citizens from negotiating with foreign governments. It was passed in 1799 and last amended in 1994. Violation of the Logan Act is a felony, punishable under federal law with imprisonment of up to three years.
Daniels is a well-connected Republican who served as the Director of the U.S. Office of Management and Budget under George W. Bush before holding the office of Indiana’s governor. He is also the former Senior Vice President of Eli Lilly and Company.
It was widely speculated that we would run for president in 2012. On March 6, 2011, Daniels won a Republican straw poll in Oregon. He subsequently decided not to run.
Following rumors that he might be considered as Romney’s vice president, Daniels said he would “disconnect the phone” if Romney called and made the proposition.
On Thursday, the Washington Post suggested that the Bilderberg Group may have a decisive role to play in picking Mitt Romney’s running mate, thus continuing a recent trend in which the secretive cabal has had a direct influence on the U.S. presidential election.
In 2004, John Edwards was selected as John Kerry’s number two by the Bilderbergers. Kerry lost the race to Bush, who served a second term.
The Rubio-Bilderberg rumors caught fire last month. | AP Photo
By KENNETH P. VOGEL | 5/19/12 4:33 PM EDT Updated: 5/21/12 10:22 AM EDT
Mitt Romney isn’t very far into the vice presidential selection process. But according to a dedicated band of conspiracy theorists, the pick is all but a lock: Sen. Marco Rubio.
That’s the current thinking among a worldwide collection of activists who are obsessed with the secretive Bilderberg Group, an alternating roster of global power players who loom as large — if not larger — in the online fever swamps of the fringe as the Trilateral Commission or the Council on Foreign Relations.The Bilderberg Group, which takes its name from the Dutch hotel where it first gathered in 1954, exists solely to bring together between 100 and 150 titans of politics, finance, military, industry, academia and media mostly from North America and Western Europe once a year to discuss world affairs.
Yet in the netherworld of conspiracy theory, the group is part of an insidious corporate-globalist scheme. And this year, the speculation holds, the Bilderberg Group is set to hold its annual meeting in the coming weeks at a Northern Virginia hotel where, among other things, they likely will select Rubio as Romney’s running mate.
Paranoid? Perhaps.
But like any good conspiracy theory, there’s just enough there to stoke questions. John Edwards’s speech to the Bilderberg Group’s 2004 meeting in Stresa, Italy, reportedly helped clinch his selection as that year’s Democratic vice presidential candidate. And Jim Johnson, the man who chaired that vice presidential selection process and initially was tasked with spearheading Barack Obama’s 2008 search for a running mate, is a leading Bilderberg member, while prominent Romney advisers including Robert Kagan and Vin Weber have attended past meetings, as have Bill Clinton, Donald Rumsfeld and top finance, media and tech executives.
“These are influential folks — and they’ve all got friends in American politics — so if they see somebody that impresses them or doesn’t, I expect that they would pass that view on,” said Weber, a former Minnesota congressman who has attended two Bilderberg meetings. “But I would tell all of those bloggers and protestors to save their outrage for a real conspiracy, because this is just a conference.”
That assessment is rejected as pure spin by the international community of Bilderberg obsessives. They’re convinced that the meeting is ground zero in an worldwide plot by big banks, mainstream media, defense contractors and governments to suppress working people around the world.
This year, anti-Bilderberg activists are planning an “OccupyBilderberg” protest outside the Westfield Marriott in Chantilly, Va., where they believe the group will hold its conference May 31-June 3.
That was enough for the popular anti-government website Infowars to conclude in a blaring headline: “Washington Post Suggests Bilderberg Group to Pick Romney’s Running Mate,” while a website called the Globalist Report also relied on Kamen’s column for a post asking: “will Mitt Romney be attending the next Bilderberg Group meeting?”
Radio host Alex Jones, a hero on the anti-government fringe who also runs Infowars, this month told the Russian government-funded cable network Russia Today that at their upcoming meeting Bilderberg attendees will decide on “wars with Iran, ways to censor the Internet … how to sell the public on more banker bailouts” and “how to ram through carbon taxes.”
But the most immediate issue on the agenda, he said, will be a decision on “Should the elite get behind Mitt Romney or Barack Obama? Both men are bought and paid for by the same financial interests, and so the discussion will be which candidate can basically con the American people into laying down to tyranny for another four years.”
The pending Bilderberg meeting is “one of the most important globalist meetings ever,” said Jones, who has tried to crash past Bilderberg meetings and called for “tens of thousands” to turn out at the Marriott.
The annual meetings, which alternate between Europe and North America, are funded partly by a nonprofit group that gets donations from regular participants.
The Washington Post Co. and its chairman Don Graham, a frequent attendee, have donated $100,000 over the past few years, according to tax filings. They also showrepeat donations from Bilderberg regulars such as David Rockefeller (who has given a total of $150,000 since 2004), Henry Kissinger ($90,000) and mega-Romney donor Henry Kravis and his wife ($145,000).
Over the years, the meetings have drawn Obama cabinet members Tim Geithner and Kathleen Sebelius, not to mention Margaret Thatcher, Queen Beatrix of the Netherlands, King Juan Carlos of Spain, Tony Blair, Condoleezza Rice, Rick Perry and top officials from BP, Barclays and the Bank of England.
More recent guest lists have been heavy on politically active techies, including Facebook co-founder Chris Hughes and Google Chief Executive Eric Schmidt — both of whom have assistedObama — and Peter Thiel, who co-founded PayPal and was the first major investor in Facebook. He has donated $125,000 to the Bilderberg nonprofit and contributed $2.6 million to a super PAC supporting Ron Paul’s bid for the GOP presidential nomination.
Ironically, Paul, whose libertarian sensibilities have made him a darling of the Bilderberg conspiracists, has expressed discomfort with the influence of the Bilderberg Group as well as organizations that host similar confabs — the Trilateral Commission and the Council on Foreign Relations.
“And my biggest concern is what they preach: Keynesian economics and interventionism and world planning,” he told POLITICO in 2009.
Such concerns are not uncommon on the far edges of the anti-government spectrum of thinking, where the far left and the far right find common cause over their distrust of Wall Street and Washington. The rise over the past few years of the tea party and Occupy protests has spread similarly strong anti-establishment messages. And that’s expanded the audience for conspiracy theories about U.S. government involvement in the Sept. 11, terrorist attacks and plots hatched at Bilderberg, Trilateral and the Council on Foreign Relations.
Even so, Bilderberg remains a preeminent focus of such conspiracy theorizing, perhaps because it’s more secretive than other confabs.
Participants are barred from revealing the identities of other attendees or what they talked about and the group doesn’t issue public minutes, policy statements or resolutions. In recent years, the group has opened up a bit, creating a website on which it lists some attendees and panels on its website at the end of its meetings.
It lists a panel at the 2007 meeting in Istanbul called “Democracy and Populism,” in which Weber participated. He began by telling attendees, “It’s difficult to identify or define exactly what populism is. But I can tell you this isn’t it.” The joke fell flat, recalled one attendee, though former deputy defense secretary Paul Wolfowitz got a kick out of it, laughing out loud.
“Mostly, with all due respect to all of them, it’s a lot of vaguely uninteresting people giving vaguely uninteresting lectures and then having nice meals in nice places,” said Kagan, who has only attended one such meeting. “People getting together to talk about world politics is not any more exciting than anybody thinks it is.”
Neither he, nor Weber are attending this year, and Rubio is not expected to go, according to a source close to him.
The Washington Post’s Kamen, meanwhile, laughed when told how his column had spawned a theory that the Bilderberg meeting was going to tap Rubio as Romney’s running mate.
“They’re misreading the item,” he told POLITICO. “It’s bizarre.”
Of course, Bilderberg theorists would point out, Kamen’s ultimate boss, Graham, is a Bilderberger himself.
Talk of machine guns & surveillance spooks hotel guests
Paul Joseph Watson Infowars.com Wednesday, May 30, 2012
The Bilderberg Group has launched an unprecedented security crackdown on the eve of tomorrow’s secretive confab of global power brokers, with guests at the Westfields Marriott Washington Dulles hotel being intimidated by talk of machine guns and high-tech surveillance.
Surveying the scene at the hotel today, radio host Alex Jones described a chaotic picture, with Bilderberg security, including a particularly vocal Swedish woman, stomping around the building announcing that “machine gun nests” were being set up in anticipation of a deluge of protesters arriving over the next few days.
Given the fact that a record number of demonstrators are expected to attend, Bilderberg has been more stringent than ever before in its efforts to get people out of the way, telling customers who had made room reservations for two days before the start of the conference that their bookings would not be honored.
Undercover Fairfax police, secret service, hotel security, as well as diplomatic service personnel are all now rushing to finalize preparations for the arrival of Bilderberg members tomorrow morning.
According to London Guardian journalist Charlie Skelton, conference organizers were also using iPhones to film guests who had arrived for brunch. Regular guests as well as journalists are also having background checks run against their names.
Alex Jones also heard discussions between members of Bilderberg security about how sophisticated surveillance equipment using satellites was being used to tap phones of prominent activists and media personalities set to cover the event.
Although well over a thousand people have signaled their intention to attend the protest, Bilderberg only expects around 500 to be in place at any one time.
Alex Jones himself was contacted yesterday by Bryan Stolz, Director of Hotel Operations at Marriott International, who told Jones that his room booking was cancelled and that he and his crew would be banned from entering the premises of the hotel.
People who are already staying at the hotel have had letters delivered to their rooms ordering them to leave the premises before noon on Thursday.
We are also expecting to receive details of Bilderberg’s 2012 agenda within the next few hours. One topic of discussion already confirmed to be up for debate will be ecological issues and Agenda 21 – part of Bilderberg’s efforts to usher in a post-industrial revolution.
Paul Joseph Watson Infowars.com Wednesday, May 30, 2012
Bilderberg’s security apparatus is planning to announce a fake bomb threat as an excuse to widen the exclusion perimeter around the Westfields Marriott hotel and keep protesters and journalists away from arriving attendees, according to our source close to the secretive organization.
Should Bilderberg security decide to go ahead with the hoax, it will take place either tonight or tomorrow morning, the source told radio host Alex Jones. The hotel itself is set to be swept by security for bombs in the morning.
In addition, other provocateur actions are being planned to demonize protesters and beef security around the confab.
As we reported earlier, preparations for the arrival of over a hundred global power brokers tomorrow have been intense, with threats of machine guns nests and Bilderberg security harassing the last hotel guests to leave.
Alex Jones’ source also confirmed to him that Barack Obama and Hillary Clinton did indeed attend the 2008 Bilderberg meeting in Chantilly, which we first reported at the time when the media was baffled as to why Obama and Clinton had managed to evade the press and slip away to a secret location.
Any serving U.S. politicians who attend Bilderberg are in violation of the Logan Act, which states, “Any citizen of the United States, wherever he may be, who, without authority of the United States, directly or indirectly commences or carries on any correspondence or intercourse with any foreign government or any officer or agent thereof, with intent to influence the measures or conduct of any foreign government or of any officer or agent thereof, in relation to any disputes or controversies with the United States, or to defeat the measures of the United States, shall be fined under this title or imprisoned not more than three years, or both.”
Globalists fear Greek exit could torpedo single currency
Paul Joseph Watson Infowars.com Wednesday, May 30, 2012
President of the European Council Herman Van Rompuy will join fellow elitists at the 2012 Bilderberg conference this week to discuss the collapsing euro and how the Greek debt crisis threatens to unravel the quest for a European federal superstate.
According to veteran Bilderberg sleuth Jim Tucker, Van Rompuy will be joined by former president of the European Central Bank Jean-Claude Trichet to wargame with other Bilderberg members on how to handle a potential Greek exit from the single currency system.
Van Rompuy’s presence at Bilderberg is particularly noteworthy given the fact that just days before he was announced as EU president. Back in 2009, the Belgian attended a dinner organized by the Bilderberg Group in Brussels, where he met with top Bilderberg steering committee members.
Van Rompuy held discussions with Bilderberg chairman Étienne Davignon, who earlier the same year had bragged to the EU Observer about how the Euro single currency was a brainchild of the Bilderberg Group. Van Rompuy also had a meeting with lifelong Bilderberg member Henry Kissinger.
Both Trichet and Van Rompuy have been staunch advocates of the single currency, in line with other Bilderberg members who, as we have highlighted, are desperate to prevent a Greek exit.
In a recent Financial Times piece written by Arvind Subramanian, a Senior Fellow at the Peter G. Peterson Institute for International Economics, which counts amongst its directors numerous influential Bilderberg members, including former Federal Reserve chairman Paul Volcker, former United States Treasury Secretary Lawrence Summers, and Bilderberg kingpin David Rockefeller, the elite’s true concerns over a ‘Grexit’ are perfectly encapsulated.
“Suppose that by mid-2013 Greece’s economy is recovering, while the rest of the eurozone remains in recession. The effect on austerity-addled Spain, Portugal and even Italy would be powerful. Voters there would not fail to notice the improving condition of their hitherto scorned Greek neighbour. They would start to ask why their own governments should not follow the Greek path and voice a preference for leaving the eurozone. In other words, the Greek experience could fundamentally alter the incentives for these countries to remain in the eurozone, especially if economic conditions remained grim,” writes Subramanian, adding that Greece’s potential exit “may prove an infectious model” and lead to the demise of “the eurozone and perhaps for the European project.”
The euro crisis has been a key talking point at each of the last three Bilderberg meetings. In both 2010 and 2011, political consensus formed by Bilderberg members was enough to keep the euro on life support for another 12 months each time, and the same globalists will once again try and hammer out a strategy behind closed doors that will provide redemption for their cherished pet project.
Jim Tucker’s inside source also told him that the prospect of a war with Iran would again be a topic of this year’s confab.
According to Tucker, Bilderberg members will be convening in the west wing of the Westfields Marriott Washington Dulles hotel.
Submitted by Tyler Durden on 05/30/2012 18:44 -0400
In today's City AM, we argue:
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