Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Thursday, December 27, 2012
Live from two " Bazooka " spheres - Europe and Japan ...... In Spain , Bankia will wipe out 350 ,000 shareholders and the protest of the day features medical professionals ...In Italy , the Bazooka circus gets going regarding their Febuary Election - unelected Viceroy Monti and Village idiot Berlusconi trade barbs while Bundesbank Weidmann warns Italy to keep their eyes on the ball and maintain their reform program......As for Japan , the wall beckons and should be hit in a couple of years if Kyle Bass is proven correct.... ..
With four days to go until the end of 2012, it means that Europe can finally reveal its dirty underwear, and as it does at the end of every year, scramble to "window dress" its banks, who for one reason or another, suddenly find themselves needing gobs of liquidity - not USD-denominated liquidity, but domestic, EUR-based. So what do they do? They all, or at least those without direct access to FX markets and without assets to dispose of, engage in what is now a traditional year end surge in loans at the ECB's Marginal Lending Facility, whose punitive rate of 1.5% - a true outlier in this day and age of global ZIRP - makes borrowing from this facility truly a last resort option. And as the chart below shows, in the past few days, various European banks have come begging at the front door of the ECB's Frankfurt HQ and have demanded a whopping €16.3 billion, the highest amount in just about a year, going back to December 29, 2011.
What is interesting here is that this confirms, as we have been suggesting over the past several weeks, that the relentless push higher in the EUR virtually oblivious of global newsflow (which in turns correlates into a higher ES level) is nothing but more EUR repatriation by those banks who are notlocked out of FX markets, and which don't have to pay an exorbitant fee to the ECB to procure much needed year-end Euros, and instead can go the foreign exchange route, sell USD assets, and repatriate the proceeds by selling USD and buying EUR.
Which also means that, just like last year after the surge in MLF loans going into 2012, the EUR too will proceed to slide, as the need for EUR goes de minimis, and everyone scrambles for the "safety" of the USD all over again.
And while on the path of the artifice that is the EURUSD rate, these 3 charts suggest the richness is unsustainable...
EUR vs Sov Risk...
EUR vs Swap-Spreads...
and comparing Fed and ECB balance sheets (implies a mere EUR300bn spend on OMT from the ECB - not enough to solve anything!)...
Looking for a synopsis of the problems facing Spain? A summary of bullet points I gathered from the Spiegel article Evictions Become Focus of Spanish Crisis shows just how hopeless the situation is.
There were a record number of evictions in 2012, foreclosures are expected to increase in 2013.
Some 400,000 eviction proceedings have been opened in Spain since 2007, with roughly half of the families involved having already lost residential properties due to foreclosures. That means Spain is only half-way through the crisis.
There are now 1.7 million Spanish households in which not a single family member still earns a salary.
4 million people have lost their jobs since 2007
27 percent of the population lives below poverty level
Evictions now affects pensioners, who have used their own homes as collateral to take out loans for their sons and daughters
A joint study by UNICEF, Oxfam and Doctors Without Borders concluded that the country will need over 20 years to regain the standard of living it attained in the prosperous, pre-crisis years.
In the Catalonia region, unemployment is 26 percent
Youth unemployment is over 50%
Social Trap
Spanish Prime Minister Mariano Rajoy has issued a moratorium on foreclosures for "extreme hardship" cases. The definition of "extreme hardship" is "families with two children and an annual income of less than €19,000, more than half of which has to be used for mortgage payments." Single parents with children under the age of three also qualify.
Notice that the hardship rule still requires over half of income to go to mortgage payments. Meanwhile interest accrues indefinitely.
There is no way for these families to ever pay back debts accumulated at or near the height of the bubble.
If there are evictions people are thrown out on the street. If there are no evictions, then there is no way for banks to sell the properties to someone who is able to afford mortgage payments.
Euro Trap
In mid-December, Spain received nearly €40 billion ($53 billion) from the European Stability Mechanism (ESM) to restructure its ailing banks. Yet every day Spanish banks acquire more properties not marked-to-market.
Moreover, moratoriums delay the process as interest accrues.
The longer Spain tries to stay on the euro, the deeper Spain goes into debt to the rest of the EU. This is what happened to Greece, and the result was the rise of "Golden Dawn" a neo-Nazi group.
Constitutional Crisis
There are no sign of Nazism in Spain. However, Pro-Referendum Parties Won 87 of 135 Seats in Catalonia and a constitutional crisis is brewing as Catalans wish to secede from the rest of Spain.
Can anyone tell me how Spain can possibly exit their trap that does not involve Germany pouring vastly more money into Spain?
The only way I can come up with is default with Spain leaving the Euro.
Sooner Spain Leaves the Euro the Better for Everyone
Note that the ECB, IMF, and the rest of Europe (including Spain), threw money at Greece, turning a relatively small problem into a much bigger one. As Greece has shown, the sooner a country leaves the Euro, the better off everyone will be.
So when does Spain, or Germany come to its senses? Either one will do.
In the meantime, politicians will kick the can for as long as they can, making the situation messier and messier along the way.
Pick Your Poison
The bottom line is Germany will pony up (and by pony up I mean "give" not lend) massive amounts of money to Spain, or Spain will have no choice but hard default.
Ultimately, a charismatic politician in Spain will blame Germany, blame the euro, and pledge to default. That politician will be elected.
Alternatively, a charismatic politician in Germany will get tired of making handouts to the club-med states and promise to put Germany back on the Deutschmark. That politician will be elected.
This is a clear case of pick your poison, and Germany will take a hit one way or another. Timing is the only uncertainty
Been a while since we had some amusement out of the Bazooko Circus known as Europe, which for the past month has gone completely dormant, not because "it is fixed" but because, just like in Japan where the JPY has plunged on expectationsof an action by the BOJ, so Europe has continued to benefit from the threat of the latest and greatest proposed ECB intervention: the OMT, which on one hand keeps the vigilantes in check, but on the other delays any painful reforms even as the underlying Spanish economy continues to deteriorate without any real structural reforms: something which a surge in rates would promptly precipitate (and once expectations turn to reality, it's all over: just see the recent QE3 and QE4 attempts by the Fed). So speaking of Spain, today's recap sentence of the day goes to Reuters' Julien Toyer with the following: "Spanish lender Bankia will wipe out 350,000 shareholders, many of them small savers with little knowledge of financial markets, after it emerged it had a negative value of 4.2 billion euros." Now if only the Spanish wipe out ended with Bankia's shareholders...
The measure, which will hit shareholders who were encouraged by aggressive marketing tactics to invest in the company, is seen as vital if the nationalised bank is to be refloated.
A source close to the Bank of Spain said Bankia would receive 18 billion euros of European money by Friday and launch a capital increase in the first half of January when current shareholders will lose practically their entire investment.
Under the European Union plan to prop up Spain's banking sector, shareholders must be the first in the queue to suffer losses. This has already been the case in Ireland where shareholders in Anglo Irish Bank were left with nothing.
"Are we looking into leaving shareholders with something? Yes. How much? That's too soon to say. Will it be very little? For sure," said the source on condition of anonymity.
"But that will be purely symbolic. I can assure you they will lose up to the shirt on their back."
Bankia shareholders today; Spanish bondholders tomorrow... at least according to the brains behind the ongoing slow motion train wreck European restructuring Lee Buccheit.
and once again Spain but also Italy in focus.......
Protests have been taking place in Madrid today against the Spanish government's plans to cut health spending, and proposals to privatise some public hospitals and health centres.
Medical staff again urged Spain's politicians to ditch the plans, warning they will hurt patients by eroding the quality of care:
A public health worker holds up a sign reading, "With less staff, worse quality". Photograph: Paul White/AP
Demonstrators shout slogans, outside Madrid's health regional office today. Photograph: JUAN MEDINA/REUTERSPhotograph: JUAN MEDINA/REUTERS
Bundesbank chief: Italy must stick with Monti's reforms
Back to Italy, and the head of the Bundesbank has warned that investors would lose faith in the Italian government if the reform programme put underway by Mario Monti faltered.
Jens Weidmann, Germany's top central banker, told business news magazine Wirtschaftswoche that it would be "disastrous" if the country's targets were called into question by next February's election:
Italy suffers from low growth, low productivity and lack of innovation. But under the Monti government, Italy has set ambitious goals for reform in order to regain the confidence of investors, and had success with it.
Weidmann added that central bankers were not "sweepers", there to clean up the mess created by politicians.
He was also cautious about suggesting the worst of the eurozone crisis was over, saying:
We have progressed a long way, but we must not underestimate the distance ahead.
The battle has already escalated this morning -- with SIlvio Berlusconi launching an attack against Mario Monti on Italian TV today.
Berlusconi told Rai 1's Unomattinathat Monti's government had been 'crushed' by pressure from the rest of the eurozone, and repeated his pledge to abolish a key property tax.
With JPY bleeding lower once again overnight extending to 28-month lows against the USD (and the long-end of the JGB curve starting to show some signs of anxiety), it is perhaps timely to revisit Kyle Bass's five key reasons why Japan is the epicenter of the world's failed monetary policy experiment. In this excellent and much-requested summary 8-minute clip, Bass summarizes his Japan thesis and destroys several of the mythsthat talking-heads like to assign to the so-called widow-maker trade.
JPY/USD...(higher = weaker JPY)
The long-end of the Japanese yield curve is at near-record steeps...
Submitted by Tyler Durden on 12/27/2012 08:22 -0500
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