Wednesday, June 26, 2013

Chinese economist Li Zuojun opines on what the new government in China may do rising housing prices ( guide them lower 20 percent ) , how China might deal with its own financial crisis centered on - a bursting real estate bubble , local debt troubles , hot money ( tough love doled out meticulously and vigilantly seems to be the plan. ) Meanwhile , the focus in Europe remains southern Europe in particular Italy , but keep your eyes on France as joblessness increases there !

http://www.zerohedge.com/node/475738


What Does China's Dr. Doom Foresee?

Tyler Durden's picture
Submitted by Tyler Durden on 06/26/2013 17:20 -0400



Chinese investors are holding their collective breaths to see if the banking crisis predicted two years ago by renowned Chinese economist Li Zuojun will come to fruition in the next couple of months. Li's astounding accuracy in predicting China's economy has led to him earning the nickname "China's most successful doomsayer." Though far from perfect, a lot of what he said here rings true, but the interesting insight is that he forecasts that the incoming regime will want to take its lumps early, in 2013, so as to minimize blame ("it was the old crew’s fault") and maximize praise for subsequent recovery... He notes three other drivers (aside from this political one) including external flows and credit expansion and fears social instability should the status quo be maintained.
Housing prices will definitely take a dive, Li said, though it is not clear how far. It is possible that the new Chinese government, led by president Xi Jinping, could maintain tight controls to limit the drop to about 10%-20%, though Li did not rule out the possibility of a US-like collapse where property prices dropped by as much as 50% to nearly 100% in some cases.

Li noted that the bankruptcies of small and medium sized companies, banks, and local governments are all signs of a nationwide economic crisis. Li gave four reasons for his prediction:
Economic
A bursting real estate bubble and the worsening local debt crises are two causes Li attributes to a potential economic meltdown.
He reasons that the overall economic downturn led to financial hardship for small and medium sized companies, which subsequently resulted in reduced industrial and commercial tax revenues. Local governments suffered from reduced revenues due to the depressed real estate industry.
Nevertheless, local governments are under a lot of pressure to keep spending more money on items such as national defense, local infrastructure, housing construction and social insurance policies, improvement of hydraulic structures, and, most important of all, “maintaining social stability.”
At the same time, maturity of local debts is adding further pressure and forcing some local governments into bankruptcy. This will inevitably lead to banks also declaring bankruptcy, and debts being passed on to Chinese citizens. As a result, Li predicts a full blown economic crisis is imminent.
Hot Money
China’s economy is slowing down while the United States is experiencing an economic recovery, therefore large sums of international hot money will flow out of China. This drain will also contribute to an economic implosion, he says.
Political
China’s 2013 leadership transition brings new leaders to the helm that might not be so anxious to address China’s economic woes. Li thinks they won’t expose any of the past problems until three to five months after they take their positions. So, the most likely recognition of an economic collapse, according to Li’s estimation, is July or August of 2013.
“Following the economic bubble bursting, there will be a subsequent period of suffering. But for the new leaders, this is nothing bad, since they are not to blame for the suffering,” Li said. Furthermore, “With the economic bubble bursting, the new leadership can adopt practical approaches. … New political achievements will be gained more easily, since the starting point is comparatively low.”
Cycles
The valleys of short term, mid term, and long term cycles converge in 2013, Li said. A short term cycle spans three or five years. Currently, this cycle is moving downwards and will reach bottom within the next two years, Li said.
A mid term cycle spans about nine or ten years. According to Li, mid?term cycles in China  occurred almost every ten years, in 1949, 1957, 1966, 1976, 1989, and 1998. Li said it has been over a decade since 1998, and the cycle should be around the corner. Initially, this cycle should have arrived in 2008 or 2009. Economic policies at that time delayed the cycle’s valley, but it shouldn’t be delayed for too much longer, he said.
There is also a long term cycle, which spans 60 years, Li said, giving his speech a traditional Chinese inflection with a reference to the I Ching, also known as the Book of Changes, a classic Chinese text on divination. From Li’s estimation this cycle is also approaching. With the economic crisis, social problems will also result. The current intensification of “mass incidents,” or large, often violent protests, can be seen as a forewarning of future turbulence, he said.
The Challenge of Accumulating Economic Bubbles
Along with the rapid economic growth,economic bubbles have also accumulated.High housing prices are one good example of an economic bubble. High priced assets represent another bubble. We no longer engage in manufacturing. Rather, we have all dived into the financial market, which in and of itself has created a bubble. Many industries suffer from serious overcapacity, another bubble. Many local governments have invested a great deal in development and spent heavily on financing, directly  engaging in the business of land  and city management,  with low efficiency and with many repercussions ,  which is likewise a bubble.
Many people are concerned that these bubbles will burst. If the government uses a superb macro control technique, lets the air out of the bubbles little by little without triggering an economic crisis or social unrest, and timely cultivates new economic growth and new competitive advantages so that businesses are restructured and upgraded, this would be considered a soft landing , and the bubbles would not burst. However, in 2013 there will be unprecedented pressure, which will warrant a high degree of vigilance and attention.
Li's Full China (and global) Outlook (via Google Translate) and press briefs:

(h/t Sean Corrigan of Diapason Commodities)


Meanwhile in Europe , the news just keeps getting grimmer as the tried and true methods aren't working but still are applied .....Italy coming into focus as the next hot spot , while France sees data getting grimmer.... apparently a bail deal has been reached .... some new flashes...


EU bail-in deal allows interbank loans under 7 days to be excluded from bail-in

Print00:05 - Asian News - Source: Newswires

Spanish finance minister says minimum 8% of banks' total liabilities to be bailed in

Says:
- Sweden has option of 20% of risk weighted assets as bail in measure.
- If Sweden uses 20% option, must set aside 3% of covered deposits for resolution and deposit funds.
- French finance minister says including ESM option in bail in makes whole deal coherent.
- German finance minister Schaeuble says today's bank deal still requires detailed rules.
Print23:48, 26 Jun 2013 - Asian News - Source: Newswires
http://www.zerohedge.com/node/475731

Can Southern Europe Keep The Show On The Road?

Tyler Durden's picture
Submitted by Tyler Durden on 06/26/2013 13:49 -0400



Three of the most important crisis hit countries in Southern Europe – Italy, Greece and Portugal – have been seeking to make progress under coalition Governments, representing a delicate balance of domestic political forces. In some ways they have been surprisingly successful; the pressure to avoid a more generalised crisis of confidence has pushed traditional opponents to cooperate in the interests of self-preservation. Recent events, as JPMorgan notes, have highlighted some of the existing fragilities however, and serve as a useful reminder that stability is far from guaranteed. In addition, the wounds inflicted by recent political battles may have a cumulative impact, weakening the commitment to cooperation in Government over the medium-term. This invites two questions; can they keep the show on the road, and for how long? The wear and tear of governing has created a series of cumulative pressures, which look a lot like the proverbial straws on the camels back. As JPMorgan concludes, at some point one of them is likely to cause a break (our instinct tells us risks are probably highest in Italy).
Via JPMorgan's Alex White,
  • Political developments in the South are making life more difficult for the region’s Governments
  • In Greece, the new Government has a slim majority, and little margin for error
  • In Italy, ongoing legal pressure on Berlusconi is making cooperation in Government more difficult
  • The cumulative impact of coalition tensions could be unmanageable in the long-term
  • Near-term however, we are unlikely to see enough pressure to trigger a Government failure
Greece: A difficult new world
Developments in Greece over the past ten days have disappointed. Prime Minister Samaras chose to take a significant political gamble this month in closing ERT, the state broadcaster. This was an opportunity to push symbolic change and could have led to more political space for reform (see our note of June 14th). The gamble didn’t pay off, Samaras has been forced to row back on most of his original policy, in addition to losing one of his coalition partners – the small left-wing party, DIMAR. The Prime Minister has just unveiled a new Cabinet comprising ND and PASOK Ministers, which will hold a slim majority (153 seats in the 300 seat parliament). In effect, this will become Greece’s fourth Government in less than 2 years.
There have been several negatives consequences to the ERT affair, as well as one significant positive. Firstly, and most obviously, the Government now has a much slimmer majority, and can potentially be held hostage by the interests of individual MPs (although it will still be able to count on DIMAR support in some cases). Secondly, the momentum for reform that could have been triggered by a more successful resolution of ERT is likely to be lost; the Government can evidently be forced into concessions on public sector payrolls if resisted robustly enough.
There are significant positives as well. It has become obvious that the main parties will take almost any step to avoid an election, particularly PASOK. The new coalition arrangement effectively makes the two governing parties deeply co-dependent. ND dominates Government but couldn’t win a new election outright, while PASOK needs the oxygen of power to survive as a political force; creating an embrace that looks hard to break. There is a chance that DIMAR’s departure will concentrate minds, and a more coherent programme could potentially result (in effect the spell has been broken, and the two parties can no longer avoid the reality that they will live or fall together). The new Government will find life hard however; Greece is now led by a simple coalition of the two main parties who have governed since 1974, lending credence to opposition critiques of the way the country is managed.
Italy: Path ahead doesn’t look any easier
An Italian court has found against Silvio Berlusconi for the third time this year, ruling that he be disbarred from public office for life as a consequence of the ‘Ruby’ affair. In effect the ruling is even less likely to be implemented than the ones which preceded it, since it has yet to be put to appeal. However, it makes life incrementally more difficult for both sides of Italy’s fissiparous coalition, by reinforcing the polarising effects of Berlusconi’s role in public life. It will provide further support to those within PD (the centre-left) who argue that coalition with Berlusconi is unacceptable. It will also increase discontent within PdL, who see these developments as a politically motivated judicial ‘campaign’ to discredit their leader. In an environment where PdL has not got much of what it wants on major policy issues, this is likely to increase the perception that it is losing ground – which will create problems for the coalition.
These events come against the backdrop of increasing concern about a Government that has yet to deliver any substantive change.The ongoing increase in political distrust makes deadlock over the IMU property tax and other issues incrementally more difficult to overcome. Berlusconi’s problems are unlikely to trigger a new election in the near-term (there would be significant risks for all sides, including PdL). However, both main parties – and individual factions within them – are continuing to weigh up the balance of threats and opportunities inherent in a new campaign (particularly in the context of the recent fade in support for Beppe Grillo’s Five Star Movement).
Portugal: Positioning ahead of September elections
The Government continues to feel the impact of the political crisis of the last few months; which was triggered by the need to fill the fiscal hole created by the Constitutional Court’s ruling against aspects of the 2013 Budget.Pension measures remain particularly contentious, with the junior coalition party CDS-PP continuing to raise objections about aspects of the Government’s programme. Additional stresses are likely to emerge as the parties position for local elections in September, which will be particularly important for CDS-PP (the party will want to position itself as the restraining force within Government, and is likely to make life increasingly difficult for the Prime Minister). As with PASOK in Greece however, senior figures within the smaller party look to have made a strategic decision that their future lies in claiming credit for the success of the Government, while blocking what they can. The danger lies in the way that this particular balance continues to be delivered over the coming months.
More straws on the camel’s back
We expect all three Governments to survive the rest of the year, with the burden of responsibility for taking any decision that leads towards a broader crisis deterring individual parties from exiting. However, the wear and tear of governing has created a series of cumulative pressures, which look a lot like the proverbial straws on the camels back. At some point one of them is likely to cause a break (our instinct tells us risks are probably highest in Italy).


http://hat4uk.wordpress.com/2013/06/26/crash-2-draghi-implicated-as-italy-faces-cyprus-template/

CRASH 2: DRAGHI IMPLICATED AS ITALY FACES CYPRUS TEMPLATE

dragrakept

Snake hit by rake: Draghi rumours of malpractice in 1990s and 2012 resurface…looking more solid

A report submitted earlier this year to the Corte dei Conti, Italy’s state auditors, suggests not only that Italy faces a potentially massive derivatives hit, but also that Mario Draghi may be personally implicated in those and other frauds. In particular, several appear to have been central to Italy gaining entry to the eurozone in 1999….based on clearly falsified data.
Allegations being made against Signor Draghi insist that he ‘cooked’ Italy’s debt picture when seeming to reduce Italy’s budget deficit from 7.7 % in 1995 to 2.7% by the crucial entry-qualification year, 1998. It was, by a country kilometre, the steepest debt reduction among any of the (then) eleven eurozone applicants. Draghi went on to join Goldman Sachs in 2002, and by then accusations of book-cooking were already starting to emerge. In 2005, the Bank of Italy was forced to issue a denial, but several eminent commentators found it unconvincing. In 2006, news agency Bloomberg  applied to Draghi’s mentor Jean-Claude ‘Tricky’ Trichet for the release of further information, which Trichet refused to give…again, to the consternation of a number of mainstream financial journalists.
Author Simon Johnson, for example, not only found the answers given by Draghi “unpersuasive”, he also pointed out how unlikely it was that, as a Goldman employee, the Italian had “known nothing” about the fraudulent marketing of debt cover-up assistance to the Greek Government. Pascal Canfin, Member of the Italian Parliament and former chairman of the ECON committee, grilled Draghi on how he could have known about these transactions and allowed them to go through. He was not satisfied with the answers. The New York Times reported, after Draghi’s nomination for the ECB was approved, that Supermario had marketed similar transactions to other European governments. So it’s pretty clear there have been clouds above Il Draghi’s head for some time.
Meanwhile, the present Italian Government faces  billions of euros in derivatives contract losses that it restructured at the height of the eurozone crisis, according to the Corte dei Conti report. Those having had sight of it say the document ‘sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999′ (linking straight back to Draghi’s time at the Italian Bank) while in turn – according to the FT – it ‘details Italy’s debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7bn’. There was a suggestion from one US source last night that Draghi is also implicated in these.
Meanwhile, new information received at The Slog suggests the Knights Template may be at it again.
Another source emailed The Slog yesterday to point out that a US banking major (unidentified as yet) has told all its staff, on Fed Treasury orders, ‘to inform the US government about all deposits emanating from Italy, from any entity, company, individual or institution, with full and complete comprehensive details of any account opening or transfer or balance in excess of $100,000′.
There is only one reason for such an order: to trace any and all bailin escapees. Yesterday, The Slog posted in Smoke Signals that Italy’s second biggest financial institution, Mediobanca, ‘has overtly warned that the country is going to need a further rescue-cum-bailin within six months at the most. “Time is running out fast,” said Mediobanca analyst, Antonio Guglielmi, “The Italian macro situation has not improved over the last quarter, rather the contrary. Some 160 large corporates in Italy are now in special crisis administration.”’
Last Saturday’s Slogpost  on Draghi’s financial power in the EU accused the EC the previous Thursday of ‘having handed absolute power to the unelected [Draghi]….at the expense of the citizen.’ I went on to accuse the ECB boss of being ‘completely unaccountable to any body or institution – elected or otherwise. Under the ECB’s Constitution guaranteed by the European Commission he is totally immune from prosecution. He cannot be removed from his position. He is obviously censoring any and all information that might reveal the true situation in the eurozone. He illegally subordinated an entire class of bondholders over the second Greek bailout. He managed and spearheaded an overt heist to steal the banking expertise and economic wellbeing of Cyprus, and in so doing committed an act of grand larceny against innocent depositors in the Island’s banks.
It looks suspiciously like Italy is heading for a Cyprus, and pretty soon. I can only repeat the bold type warning I gave then:
This is not a queue for the showers, European nations. It is the line heading directly to the extermination of your democratic rights, individual liberties, and personal wealth. There may be 27 of you and only one Draghi; but your divisions just make his job far easier. Step in the way of the Beasts now, or you will have a jackboot stepping on your face forever. 
Stay tuned.


http://www.zerohedge.com/news/2013-06-26/france-jobseekers-hit-another-all-time-record

France Jobseekers Hit Another All-Time Record

Tyler Durden's picture
Submitted by Tyler Durden on 06/26/2013 12:09 -0400




Despite the jump in French PMI (though still in contractionary region), the number of French Jobseekers rose once again (up 11.5% year-over-year) to a new all-time record. As the nation struggles with near Depression-era activity, it seems the green shoots that Draghi's jawboning once again provided today remain a long way off in real-world land.


Chart: Bloomberg

L'Horreur: Goldman Finds Europe's Two Worst Capitalized Banks In France

( Based on simple leverage , 3 of the worst 5  banks are french banks -  4 of the top 13 for a broader view ! ) 
Tyler Durden's picture
Submitted by Tyler Durden on 06/26/2013 18:36 -0400




Now that even the media world is once again looking closely at the impact of wild bond swings on bank balance sheets, and especially the P&L impact of their Available For Sale portfolios, it makes sense to take a quick glance at just which banks are considered the most overl evered in the world. Luckily, Goldman did just that, and the results are below. Some advice to our French readers: you may want to turn away. If the ongoing bond volatility continues, Credit Agricole and Natixis may be the first two banks that the French socialist president will proudly be forced to nationalize to avoid a collapse of the country's banking sector.
So without further ado, L'horreur, L'horreur(from Goldman's Jernej Omahen).
And some more from Goldman:
RWA, leverage debate reopened

Over the past 10 days, statements on RWA and leverage (by a long list of global regulators) have reignited the European capital debate. It appears that simple leverage – possibly calibrated higher – is becoming a point of regulatory consensus. For those European banks that screen well on riskbased capitalization, but poorly when the total exposure measure is, simply, assets, this is a troubling prospect.

Leverage: (Trying to) keep it ‘simple’ The differentials for simple leverage, among European banks, are large. This is neither a new, nor a binding regulatory constraint. However, with the ‘new Basel leverage ratio’ as a supplement for CT1, it is bound to change. There are three main definitions of ‘simple’ leverage: the US-style leverage; the Basel leverage ratio; and CRD IV leverage. We are able to estimate only the US-style leverage. We know, however, that the Basel leverage ratio is more conservative as it expands the total exposure metric from assets to include off balance sheet and derivative exposures.
And a quick look at that other perrennial most undercapitalized bank, Deutsche Bank.
DBK’s recent capital raise has improved its CT1 ratio to 9.5% (fully phased B3). In our mind, the central question, “is it enough?”, remains. On the basis of CT1 ratio (i.e. risk-based capitalization) DBK has indeed lifted its capital towards the levels of the better capitalized banks in the sector. However, at 29x, its simple leverage (a non-riskbased metric) remains high in the context of the European sector and the global peers. In our view, the return of the leverage debate is unwelcome for DBK share performance.

For Deutsche Bank, the interplay of three factors – (1) focus on simple leverage, (2) geographical capital fragmentation, and (3) potential upward calibration of US minimum leverage requirement – represents a new challenge.
So there's a chance for, Das Horror, Das Horror


http://www.zerohedge.com/node/475719


Guest Post: Europe's Precarious Banks Will Determine The Future

Tyler Durden's picture
Submitted by Tyler Durden on 06/26/2013 10:42 -0400



Submitted by Alasdair Macleod via Peak Prosperity blog,

Crying Wolf?

It is easy to get the impression that the naysayers are wrong on Europe. After all the predictions of Armageddon, ten-year government bond yields for Spain and Italy fell to the 4% level, France which is retreating into old-fashioned socialism was able to borrow at about 2%, and one of the best performing bond investments has been until recently – wait for it – Greek government bonds! Admittedly, bond yields have risen from those lows, but so have they everywhere. It is clear when one stands back from all the usual euro-rhetoric that as a threat to the global financial system it is a case of panic over.
Well, no. The decline in government bond yields for the troubled nations in the eurozone was and still is a reflection of the ability of the ECB to manipulate markets and expectations. There has been some behind the scenes help from the Fed, which with easy money has helped foreign banks, mostly European, to the tune of over $700bn since 2009.
The ECB has basically managed to talk yields down, and here it had some unexpected and temporary luck from Japan. Since Japan declared a policy of printing huge amounts of yen to get the currency down, global hot money was given a seemingly guaranteed profit by borrowing depreciating yen at negligible cost, buying euros and investing in eurozone debt. Since the introduction of Japan’s new monetary policy eurozone debt yields took a shift down, spreading happiness and joy to beleaguered eurozone governments. That honeymoon was short-lived, as the fallacies behind Abenomics dawned on markets, and Japan’s latest export became monetary and financial instability.
And if you are a European insurance fund, pension fund, or bank wondering what to do with your liquidity, you probably took the view that falling yields on Italian debt, for instance, was evidence of a return of confidence. Therefore the dramatic fall in yields had more to do with the ECB skilfully rigging bond markets and in partnership with the Fed global money flows rather than any underlying improvements. As a result, the can has been kicked down the road one more time, but the underlying problems are very much intact.
Meanwhile the on-going slump in the periphery nations is now so bad it is even being reflected in official statistics, which as we should all know are more fiction than fact. Spain’s economy according to official statistics contracted by only 0.5% annualised in the first quarter 2013, Italy’s also by 0.5% and France’s by 0.2%. Germany is the only significant eurozone economy still growing, having chalked up a magnificent 0.1%. But, as we should all know, official figures are a mixture of spin and manipulated statistics.
The fact is that, between unproductive government spending and high levels of unemployment, the eurozone economy should be doing significantly worse than government statistics suggest. The difference between reality and government numbers can only be bridged by consumers drawing down on their savings. However, figures from the ECB database also tell us that private sector borrowing fell over the period, so gross private sector savings must have been further reduced by the sum of the two. In other words the headline GDP statistic is masking a significant fall in the level of private sector savings; a fall that has accelerated from mid-2012 and which is a trend clearly picked up in the chart below. People are spending their savings to exist.
This analysis gives the lie to GDP statistics that complacently tell us that the whole eurozone is contracting by less than 0.5%. It confirms and is in accordance with the hard evidence that unemployment is high -- exceptionally high in the periphery countries.
Keynesians might argue that so long as people draw down on their savings to keep the rate of spending up it doesn’t matter, but there are two problems with that. Firstly, savings are being diverted from capital investment, starving the eurozone economies of their long-term economic potential. And secondly, after a time, savings simply run out.
The effect on prices is a complex balance. The flight out of savings amounts to a preference for goods relative to money, which other things being equal would normally drive prices up. However, eurozone inflation, including the recent fall in oil prices, was recorded at only 1.2% annualised in April, consistent with savings being drawn down to maintain essential spending at current levels rather than increasing it. This is fine so long as there are savings to draw upon, but this source of funding for everyday spending is at best a temporary fix. When it slows, GDP numbers will turn down, most probably rapidly, setting off alarm bells in the banks, central banks and governments seeing tax revenues disappear.
The underlying situation is therefore very deflationary, which is bad for banks and bad for tax revenues. How do you stop it moving from being an underlying problem to coming out into the open?
The Keynesian solution is for the ECB to step up injections of credit and money, following policies instituted by the Bank of Japan. The alternative in black and white terms is the ECB throws in the towel and allows deflation to take its course. The latter is never going to be considered as a policy option, because ever since the 1930s depression the establishment has had one over-riding priority: to prevent it happening ever again. Therefore the ECB will seek to remove constraints on her ability to expand money supply.
This is the background to seemingly intractable problems in not just the small fry of Greece, Cyprus, Portugal and Ireland, but also in Spain, Italy and France. Things are not that rosy in the Netherlands either, crippled by private sector debt, and Belgium whose government debt to GDP is about 100%. The eurozone’s central banks realise the seriousness of these dangers to the banking community, and they are aware that individual nations do not have the resources to stage a rescue when needed. This is why the European Parliament (which covers all 27 EU member states) is urgently considering how to legislate for the cost of bank rescues to be borne by uninsured depositors instead of taxpayers.

Depositor Discrimination

There is nothing new in this. It has been a topic under consideration since the publication by the Financial Stability Board (a BIS committee) of a paper, Key Attributes of Effective Resolution Regimes for Financial Institutions in October 2011, which was endorsed at the Cannes G20 summit the following month. This was followed by a consultative document in November 2012,Recovery and Resolution Planning: Making the Key Attributes Requirements Operational. In this latter document it is stated in the introduction that “Reforms are now underway in many jurisdictions to align national resolution frameworks more closely with the Key Attributes” (i.e. the October 2011 paper). In other words any changes to law to facilitate bail-ins have been or are being quietly made.
This confirms that all G20 members and anyone hanging on to their coat-tails are ensuring that they can legally favour some creditors over others, targeting uninsured depositors. This outcome is not difficult to achieve in practice when the alternative in almost all bank failures is for uninsured deposits to be wiped out completely. Governments have neatly extracted their liabilities to small depositors from the insolvency process. However, now that those who bear the cost will be decided by the relevant central bank, in a bank reconstruction it is more than likely that deposits by banks and other systemically important financial institutions will be given creditor priority as well as insured depositors, in the interest of stopping one insolvency taking down other banks. So those depositors which do not fit in either of these categories will bear the whole burden of a financial reconstruction, after subordinated loan holders.
The first clumsy attempt to introduce this new regime was perpetrated on little Cyprus, and it won’t be the last. The implications are that any person or business with deposit balances in excess of the insured amount (generally €100,000 or about $130,000) anywhere in the eurozone risks losing the excess.
Discrimination among bank creditors will probably spread to subordinated bond holders. It is proposed in Germany, for instance, that a bank rescue be facilitated by a good-bank/bad-bank regime, which will allow the authorities to select what gets transferred into the bad bank on both sides of the balance sheet. Subordinated bond holders are first in line to lose their rights to the good bank and be transferred to the bad. Further discrimination against private equity, hedge funds, sovereign wealth funds and similar institutional investors and creditors cannot be ruled out, since they are commonly branded by politicians and the media as speculators and “locusts”.

The ECB and Germany’s Constitutional Court

The plaintiffs at the Karlsruhe court, who include German politicians, lawyers and ordinary citizens numbering some 35,000, claim that the ECB has created a risk over which German taxpayers and officials have no control, through an open-ended commitment to purchase government bonds in secondary markets with the express purpose of lowering bond yields. These purchases are known as outright monetary transactions, or OMTs.
The purchases of OMTs are conditional on the relevant eurozone government’s request for this assistance and its agreement to the ECB’s terms. The ECB also made it clear that it would claw back the money supply created by OMTs through sterilisation “by any means necessary”. The amazing thing is that no country has yet requested OMT support, so the whole exercise has been no more than a successful bluff, a threat to any short-sellers of Italian or Spanish debt to stay clear.
There is no doubt the OMT programme was constructed with a view to avoiding legal challenges, such as from the German Constitutional Court, whose 2-day hearings on this matter began on June 12th.  The Court will now deliberate, and it is expected to delay its ruling until after the German election in September.
It seems unlikely that the GCC will find against OMTs, though they may impose some conditionality. Anticipating this, the ECB is rumoured to be suggesting a limit on this unused facility. The most likely outcomes now are either to defer consideration until such time as it is used (How can the Court rule on something that does not yet exist ? ), or to kick the matter upstairs to the European Court of Justice which is the superior court.
Meanwhile, the ECB led by Mario “whatever it takes” Draghi appears to have little more than hot air in its monetary tool chest. Given the acceleration of money-creation in Japan, the US and potentially the UK under her new Bank Governor Mark Carney, the euro is likely to rise against the other major currencies. It will be an interesting summer, given the prospect of a rising euro and the effect on weaker eurozone states. And it will be a challenge to German monetary orthodoxy, when the consequences are likely to be growing unemployment ahead of the German elections.

As Go the Banks Will Go the Rest of Europe

The rest of this analysis is devoted to the condition of selected banks in selected jurisdictions.
As analysts like Kyle Bass have been warning about, Europe has not recapitalized its banking system the way the US has (at great taxpayer expense, of course). Therefore, it is much more vulnerable. Where European governments and regulators have failed to make their banks more secure it is because they tied their strategy to growth arising from an economic recovery that has failed to materialize. The reality is that the Eurozone GDP levels are only being supported at the moment by the consumption of savings; in orther words, the consumption of personal wealth. Wealth that is not infinite; and held by those not likely to tolerate footing the bill for much longer.
In Part II: Where Will the Minsky Moment Occur?we look at each major EU country and the (poor) health of its banking system. Which are most vulnerable? Which have the greatest likelihood to set off a conflagration that could burn down Europe's -- and then the world's -- financial system?
Time (and savings) is running out.
Click here to read Part II of this report (free executive summary; enrollment required for full access).

Posted by at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)