Around the horn in Europe - September 18 , 2012....

http://www.ionline.pt/portugal/associacao-pracas-pede-demissao-primeiro-ministro-repudia-novas-medidas

The Association of Squares (AP) today called for the resignation of Prime Minister, accusing the Government PSD / CDS-PP to "destroy the country" and "the Portuguese people to use as a guinea pig for social experiments" with the new austerity measures.

"It is clear the failure of policies imposed by this Government, which was based on the devaluation of labor and social rights by imposing more and more austerity, more unemployment, more precarious," says the AP in a statement sent to media .

In reference to the new austerity measures announced, the AP says not want to "get more connected to this vile attack being perpetrated" and stresses that "not part of the military condition evade situations" and "make the Portuguese people as guinea pigs social experiences. "

"Mr. Prime Minister, for the sake of Portugal and the Portuguese, do them a favor, and resign yourself now emigre now," urges the AP.

In this note, the association accused the Government PSD / CDS-PP have transformed "the wretched poor of this country and the middle class to newly poor" and lead to "a country ravaged, and walking aimlessly into the abyss."

"We can not allow that, the flavor of any 'troika', are removed legally enshrined in the Portuguese Constitution they swore to defend and we can not nor should we allow a nation like ours with over 900 years wither because few gentlemen decided a colony of Portugal to the interests of high finance world and European, "advocates the AP.

The squares of the Armed Forces remember that all military personnel are required to "swear an oath to defend our homeland and keep and do save the Constitution and laws of the Republic" and repudiate "vehemently policies that are being followed because they contradict" everything vowed to "defend".

http://www.acting-man.com/?p=19643

European Banks Horror-Show

September 18, 2012 | Author Pater Tenebrarum

Spain's Banking System Woes Revisited

As we have mentioned in yesterday's 'Odds & Ends' on the euro area, Spain's banks are now supposed to lend money to the regions. This is like a blind guy asking another blind guy to be his guide when he climbs the Eiger north face. As financial creativity goes, it is a truly audacious stunt even by Spain's standards.

Keep in mind here that a euro-group bailout for Spain's banks has already been agreed upon – so it seems as though this has now been unilaterally transformed into a combined 'banks and regions' bailout.

Bloomberg reports that the Spanish banks are 'bleeding cash' and that this has 'clouded' the bailout debate. No sh*t, Sherlock.

Interesting is a comment on the exit of deposits, which confirms what we wrote back in late August: some of the deposit flight has indeed to do with securitizations and SPV's, which are not allowed to keep their cash with banks that fall below certain ratings thresholds. There are a few more comments in the Bloomberg article worth relaying, and we reproduce the most important points below:

On loan-deposit ratios and the possible imposition of limits:

“Governments must first seek wider help from Europe’s rescue mechanism before the ECB will buy bonds.Moreover, the terms of Portugal’s May 2011 bailout require its banks to achieve a loan- to-deposit ratio of 120 percent by the end of 2014, while Ireland’s deal demands a ratio of 122.5 percent by 2013. No such provision was included in the July memorandum of understanding for Spain’s bank bailout.

“The first consequence of a lower loan-to-deposit ratio being set is that you have to identify chunks of assets to sell and that inevitably leads to haircuts and capital implications,” said Eamonn Hughes, an analyst at Dublin-based Goodbody Securities. “It also forces you to pay up for deposits, as we have seen in the Irish case.”

Imposing a loan-to-deposit target for Spanish lenders may mean they would have to reduce lending by 14 percent to 24 percent, Daragh Quinn and Duncan Farr, analysts Nomura International, wrote in a report published today. “The need to strengthen customer funding could also see the emergence of a deposit war, putting additional pressure on revenues, which are already likely to suffer from the low interest rate environment,” they said.”

(emphasis added)

Whoa, Nellie! Now that would certainly lead to a swift liquidation of unsound credit.

On deposit outflows and securitizations:

“Scrutiny of customer fund outflows at Spanish banks has intensified since the ECB said Aug. 28 that so-calledprivate sector deposits shrank by 74 billion euros, or 4.7 percent, in July, the biggest drop on record.The ECB data include items such as deposits by securitization funds that banks say they don’t rely on for financing their business.

Banco Bilbao Vizcaya Argentaria SA (BBVA) said in a Sept. 4 report that a decline in securitization funds deposits helped explain the drop as banks substituted them by issuing covered bonds to discount at the ECB. Household and company deposits are stable once the practice of banks using instruments such as commercial paper to raise funds is taken into account. The loans-to-deposit ratio for BBVA’s Spanish business is 167 percent, according to the bank’s own data.

(emphasis added)

This essentially confirms what we said last month, but note that little detail about ECB funding (more on that below) and BBVA's loan-to-deposits ratio. 167% isn't exactly the pinnacle of conservatism.

On declining term deposits:

There is “a clear underlying trend of accelerating deposit decline,” Nomura’s Quinn wrote in a Sept. 4 report. Term deposits by households fell 6.9 percent in July from a year earlier, while those of companies fell 24 percent, which “points to continued deposit declines in the future,” he said.

A 24% decline in corporate term deposits in one month is a lot of wood.

On the reliance of Spain's banks on ECB funding – now this is really quite interesting:

“About 86 percent of Bankinter SA (BKT)’s estimated 2013 profits derive from its ability to borrow cheaply from the ECB, the analysts said, with Banco Popular Espanol SA dependent on central bank funds for about 79 percent of earnings. Meanwhile, Bank of Spain data shows lenders are offering higher deposit rates to attract cash, with interest rates on account for as long as one year climbing to 2.5 percent in July, the highest level since March.

Declining deposits may inflict more damage on the Spanish economy if the seepage of the most reliable source of funding further dries up credit, said Maughan at Olivetree. The International Monetary Fund predicts Spain’s economy will contract 1.7 percent this year and 1.2 percent in 2013.

“If deposits are falling, then the only option for Spanish banks to bring down their loans to deposit ratio is to cut back on the loans side,” Maughan said.

(emphasis added)

If 86% of a bank's profits depend on 'borrowing cheaply from the ECB', then it obviously means that these banks are not only held aloft by the central bank's ability to conjure up money from thin air, but they also enjoy a sizable subsidy. Obviously no subsidy comes for 'free' – it only appears that way when a central bank is providing it. In the end, all users of the euro are paying for the subsidized profits of banks in Spain and elsewhere in the euro area.

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Spain's 10 year government bond yield, weekly candlestick chart. Yields have begun to tick up again as the 'complications' attending Spain's banking and economic woes take center stage again.

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Germany's Biggest Bank – An Accident Waiting to Happen?

There was also an interesting article on Bloomberg about Deutsche Bank, Europe's biggest bank, which holds assets worth 80% of Germany's GDP.

“Will Germans Pick Up the Tab for Deutsche Bank, Too?”

The entire article is worth reading, but here is an especially noteworthy paragraph:

“Its official capital ratios might seem respectable to a casual observer: At the end of the second quarter, it reported a core Tier 1 capital ratio (a regulatory measure of equity) of 10.2 percent of total assets.

The problem with this measure is that it uses risk-weighted assets. In other words, if a bank can convince itself and its regulators that it can apply lower risk weights to a given portfolio, its capital ratio will look higher.

What is considered to be a low-risk asset in the context of European banks? Typically, the sovereign debt of euro-area countries has been regarded as very low risk. But Draghi is being forced into extraordinary measures and the German constitutional court is being asked to rule on the ESM and other bailout measures precisely because sovereign debt for some euro countries has become so risky. And if you think there is a non – zero probability of the euro area breaking up, then risk-free assets have become a meaningless concept in Europe.

To evaluate any global bank today, it is much more advisable to look at its leverage ratio, the total size of its balance sheet relative to its equity, without any risk adjustments.

At the end of the second quarter, Deutsche Bank had total assets of 2.241 trillion euros ($2.93 trillion). Its total shareholder equity capital was 55.75 billion euros — a little less than 2.5 percent of total assets. That is a lot of leverage. Bloomberg News reported that this is the least equity (and most leverage) “among the 24 biggest European banks.”

(emphasis added)

Run that by us again? A bank holding € 2.25 trillion in assets has less than 2.5% of that figure in capital? Yes, you could say that is a lot of leverage. It's a good sight bigger than Lehman's was on the eve of its collapse. Obviously, not a whole lot must go wrong here, since a decline of more than 2.5% in the value of the bank's assets would evidently wipe its entire capital out.

How convenient that it can all be blown up to far more respectable figures via 'risk weighting' for regulatory purposes. And as the author of the Bloomberg article correctly states, it seems obvious that Germany will attempt to bail this bank out should it ever get into serious trouble.

Of course we all know that nothing can possibly go wrong, right?

and.....


http://www.telegraph.co.uk/finance/debt-crisis-live/9549698/Debt-crisis-Spanish-bad-bank-loans-climb-live.html

15.14 The head of the Eurogroup of finance ministers has repeated that aGreek exit from the eurozone would be "disastrous for the Greeks" and Europe as a whole.

Jean-Claude Juncker also said that the eurozone would make "really tough" demands of Spain on reforms and budget savings.

Still no word from Spain on whether it will ask for a Brussels bail-out.

14.59 The full text of Mr Weidmann's speech has been posted on the Bundesbank website.

Mr Weidmann cites the first part of Faust II, where Mephistopheles, disguised as a jester, convinces an emperor to issue large amounts of paper money, which - for a time - solves the kingdom's financial problems.

But it all ends badly with the German version of hell: inflation.

Yes, this temptation certainly exists, and many in monetary history have succumbed to it

...Mr Weidmann said, adding that the antidote is an independent central bank free of political control.

13.59 Finland’s Europe minister has said that he is sceptical of givingGreece more time - especially if it involves a third bail-out. Alexander Stubb told reporters:

We are sceptical about giving more time, especially if it means more money, but we should not exclude any options at this stage.

13.34 Mr Weidmann, who has been criticised by both former ECB president Jean-Claude Trichet and Germany's finance ministerWolfgang Schaeuble for voicing his concerns to the media, defended his right to speak out.

He said that it was "important for trust" that the central bankers who are responsible for the value of money "justify themselves publicly."

13.25 Jens Weidmann, the head of the Bundesbank, has once again criticised unlimited bond buying by central banks.

Although he did not directly refer to the ECB's bond buying plans, Mr Weidmann said that central banks that promise to create unlimited amounts of money risk fuelling inflation and losing their "credibility". In a speech in Frankfurt, he said:

If a central bank can potentially create unlimited money from nothing, how can it ensure that money is sufficiently scarce to retain its value? Is there not a big temptation to misuse this instrument to create short-term room to manoeuvre even when long-term damage is very likely? Yes, this temptation is very real, and many in the history of money have succumbed to it.

If one looks back in history, central banks were often created precisely to give the monarch the freest possible access to seemingly unlimited financial means. The connection between states’ great financial needs and a government controlling the central bank often led to an excessive expansion of the money supply, and the result was devaluation of money through inflation.

The independence serves much more to establish with credibility that monetary policy can concentrate without hindrance on keeping the value of money stable.

12.18 More bond auctions this morning, where the eurozone's temporary bail-out fund has managed to get a sale of short term debt away at negative interest rates.

The European Financial Stability Facility (EFSF) sold six month debt at average rates of -0.0181pc, compared with -0.0179pc at the previous auction in August. This means investors were willing to pay to lend to the find.

Demand was also strong, with 2.8 bidders for every bond on offer.

11.43 Irish mortgage arrears have also continued to grow, with the number of people behind on payments by more than 90 days now accounting for 14.7pc of Ireland's total loan book. But it wasn't all bad news. The EC said:

However, the pace of increase in owner-occupier arrears appears to be slowing down in recent months, with a quarter-on-quarter increase in the balance of mortgages in arrears as a share of total mortgages of 1.1 pp. in the second quarter of 2012, down from 1.3 pp. in the first quarter and 1.5 pp. in the fourth quarter of 2011.

11.22 The European Commission has authorised Ireland's €1bn loan tranche as part of its EU/IMF bail-out. The news was released alongside a special report on Ireland, in which the EC said:

The economy continues to develop in line with expectations, though downside risks have increased, reflecting primarily growing headwinds in main trading partners. Relative to the sixth review, the GDP growth forecast was kept broadly unchanged for 2012 (down slightly from 0.5% to 0.4%) but has been revised down more appreciably for 2013 (from 1.9% to 1.4%), though the nominal outlook is slightly better due to an upward statistical revision of past data.

[...]Unemployment remains high (14.8%), and increasingly long-term in nature. despite the strong programme implementation and the successful bond auction in late July, securing a sustained return to market funding might prove challenging.

10.54 Spaniards also said that jobless rates remained one of their biggest concerns. 90pc said that they were “very concerned” about unemployment.

The jobless rate in Spain, at 25.1pc, is the highest in the industrialised world.

10.45 More than half of Spaniards believe the country will need a full-scale bail-out, according to a new report.

The report, penned by Cicero Group and titled: the Pain in Spain, found that 57pc of Spaniards believed the country will need to be bailed-out by the eurozone.

A more surprising finding was that German Chancellor Angela Merkelwas the politician most admired by the 1,000 people surveyed. Half of those questioned believed that she showed the best leadership during the crisis.

Unsurprisingly, the next most popular response was “none” (23pc). Spanish PM Mariano Rajoy was selected by just 2pc, while our own PMDavid Cameron received just 1pc of the vote.

10.26 Investor sentiment in Germany was slightly less downbeat in th first half of September, breaking a run of four monthly declines, according to a respected think-tank.

The ZEW economic poll showed economic sentiment rose to -18.2, from -25.5 in August. ZEW surveyed 263 analysts. The numbers reflect the difference between positive and negative assessments.

10.23 Here's a closer look at how the Spanish bad loan rate hasincreased over the past 18 months. It's also worth noting that pre-crisis bad loan rates (in 2006/2007) were less than 1pc.

10.00 Back to Greece, where finance minister Yannis Stournaras has admitted that talks between Europe's debt inspectors and the country have been difficult.

In a speech in Athens this morning, Mr Stournaras said that the Greekcrisis had been caused by an inefficient state, but insisted that reforms since 2010 had been significant, with unit labour costs falling by 15pc.

Meanwhile, state-run news agency ANA reported this morning that politicians were still struggling to find €4bn in spending cuts as part of an €11.5bn package that is needed to unlock its next bail-out tranche.

09.47 Despite yesterday's jitters, Spain has paid lower interest rates to get a short term debt auction away this morning. The country sold €3.56bn of 12-month debt at average yields of 2.835pc. This compares with 3.070pc at a previous auction in August.

It also sold €1.02bn of 18-month debt at average rates of 3.072pc (v.3.335pc).

Demand was steady, with two bidders for every bond on offer at the 12-month auction (v. 1.9).

09.25 Lots of Greek updates this morning.

Charles Dallara, the outgoing head of the Institute of International Finance (IIF), has said that Greece should get cheaper rates and more time to repay its multi-billion euro bail-out - but only after Athens delivers on its reform commitments. He told a news conference in Beijing:

Once that has been done, and I am confident it will be done, Europe and the IMF should move quickly to extend the adjustment period for at least two years and provide the modest additional financial support for that extension to be effective [...] Only some 15-20 billion euros is needed. This can easily be realised in part by reducing interest rates on the loans which Europe and the IMF made to Greece on more concessional terms.

09.15 Spanish bad bank loans climbed to a fresh high in July, with almost 10pc of households and companies now behind on their payments.

Bad debts climbed to 9.86pc of total lending, the according to Bank of Spain data, the highest since records began in 1962.

The data showed that €169.3bn of loans were more than three months past their repayment deadlines. June's bad loan rate was also revised up, to 9.65pc.

09.01 With speculation swirling about whether Spain will ask for aid, the country's deputy prime minister, Soraya Saenz de Santamaria, said in a television interview this morning that Spain is still considering the conditions of a possible European Union bail-out. Europe must recognise the sacrifices and reforms Spain is carrying out, she added.

08.54 Spain's short-term bond auction comes amid persistent speculation that the country will ask for aid. Yesterday, the ECB governing council member Luc Coene said that rising bond yields may force Spain into asking for aid submitting to the ECB's conditions for granting it.

He told a panel discussion in London that if “markets see that Spain will not” ask for assistance, “then it will not last long before spreads will rise again, and then Spain will be somewhat forced to come back on its decision and submit to the conditionality programme”.

08.50 Rising borrowing costs will create unease as the country prepares to auction 12 and 18-month bonds this morning, testing investor appetite following Mario Draghi's move to backstop the euro with his proposal for an "unlimited" bond buying programme.

08.48 Spanish borrowing costs were on the rise again yesterday, writes Louise Armitstead:

Spanish borrowing costs rose above 6pc again as a continued stand-off between Madrid and Brussels fuelled fears that the European Central Bank’s bond buying programme pledge is not enough to stabilise the eurozone.

The yield on Spain’s benchmark 10-year bonds were pulled back just below 6pc at the close, but their steady rise all day reflected bets by traders that Madrid’s determination to resist a bail-out will cause more volatility. Some argued that optimism that followed the unveiling of the so-called “Draghi Plan” to buy bonds was already wearing off.