Tag Archives: EU debt crisis

The Truth About Europe’s Banks … And Ours

23 Feb

From Phoenix Capital Research (via ZeroHedge):

Europe is Safe… Just Ask Spanish Depositors… Who Have Lost EVERYTHING

Anyone who wants to get an inside look at both the European banking system and the politicians in charge of fixing it need to only look at Spain’s Bankia.

Bankia was formed in December 2010 by merging seven totally bankrupt Spanish cajas (regional banks that were unregulated). The bank was heralded as a success story and an indication that European Governments could manage the risks in their banking systems.

Indeed, in 2011, Bankia even reported a profit of €41 million. And in April 2012, it was proposing paying a dividend. Then, in the span of two weeks, the bank revised its 2011 profit to a €3.3 billion LOSS, requested a formal bailout from Spain, and had to be nationalized.

What’s striking about this sequence of events is that throughout it, Spain’s Prime Minister Mariano Rajoy was claiming that Spain’s banks were in great shape. Indeed, on May 28 2012, (after Bankia had already requested a €19 billion bailout, the single largest bailout in Spanish history), Rajoy stated , “there will be no rescue of the Spanish banking sector.”

Bear in mind, Spain itself was just days away from requesting outside aid from the EU…

Fast forward to December 2012, and Bankia is again in the news, this time with Spain revealing that despite receiving the largest bailout in Spanish history, the bank still had a NEGATIVE value…

At this point the following is obvious:

  1. Europe’s banks are in far far worse shape than anyone publicly admits
  2. The political class in Europe has no idea how to solve this mess
  3. No one has quantified the bank’s actual losses or their capital needs
  4. Everyone is lying about just about everything related to Europe’s financial system

It’s a little known fact about the Spanish crisis is that when the Spanish Government merges troubled banks, it typically swaps out depositors’ savings for shares in the new bank.

So… when the newly formed bank goes bust, “poof” your savings are GONE. Not gone as in some Spanish version of the FDIC will eventually get you your money, but gone as in gone forever.

This is why Bankia’s collapse is so significant: in one move, former depositors at seven banks just lost virtually everything.

And this in a nutshell is Europe’s financial system today: a totally insolvent sewer of garbage debt, run by corrupt career politicians who have no clue how to fix it or their economies… and which results in a big fat ZERO for those who are nuts enough to invest in it.

Be warned. There are many many more Bankias coming to light in the coming months. So if you have not already taken steps to prepare for systemic failure, you NEED to do so NOW. We’re literally at most a few months, and very likely just a few weeks from Europe’s banks imploding, potentially taking down the financial system with them. Think I’m joking? The Fed is pumping hundreds of BILLIONS of dollars into EU banks right now trying to stop this from happening…

A couple of things worth noting.

Our Aussie banking system is massively leveraged to our housing bubble, and only survived the GFC thanks to being backstopped by the government (using the “government guarantee” of access to taxpayers’ future earnings as collateral).

And in March last year, we saw in The Bank Deposits Guarantee Is No Guarantee At All that your savings are not as safe as you may believe:

There is a hidden flaw in the government’s Bank Deposits Guarantee scheme. One which renders the guarantee largely useless.

The Government Guarantee is just another con-fidence trick, to prevent another bank run … like the silent bank run we had during the GFC peak in late 2008.

Richard Gluyas at The Australian has the story of the Great Big Government Bank Deposits Guarantee … that isn’t (emphasis added):

… There is no doubt that the guarantee, reduced last month to a permanent cap of $250,000 per person per institution, has facilitated the stampede into term deposits.

Flows into products like mortgage funds, and even the booming annuities market, have suffered as a result.

But the question is whether the stampede would be slowed if bank customers read the fine print of the guarantee.

How many of them would know, for example, that the standing appropriation to meet any initial payout of deposits is limited to $20 billion per failed bank?

It might seem like a lot, but it pales when compared to about $200bn in eligible deposits for each major bank.

In the highly unlikely event of a major bank failure, any payments under the Financial Claims Scheme would be recovered through the liquidation of the bank.

An industry levy would be applied if there’s a shortfall from a realisation of assets.

But the fact remains that the initial payout is effectively capped by legislation at $20bn, albeit with provision for the government to go back to the parliament for more.

There is no mention of any of this in Swan’s press release.

After reading that document, you’d come away thinking that the government will cough up for pretty much all bank deposits of less than $250,000 in full.

The reality, though, is that the guarantee underwrites an initial payment, which then gives way to other measures.

The only winners in the banking game … are the bankers.

Everyone else is a loser.

Whether they real-eyes it or not.

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Boom State Busts

29 Dec

The WA government has revised its 2011-12 budget forecast downwards … by more than 50%:

The West Australian government has slashed its projected surplus by more than $200 million because of risks in the global economy, weaker royalties, a weak housing market and the high Australian dollar.

WA is expected to record a $209 million surplus, making it the nation’s highest surplus for 2011-12.

But the projected surplus is significantly lower than the $442 million forecast at budget time.

The figure was released on Wednesday as part of the Liberal-National government’s mid-year review.

Reasons given?

Treasurer Christian Porter said there had been many changes to the global economy since the May state budget.

“There’s been one single unanticipated economic phenomena that has occurred since the time of delivering the budget in May, which has had a very significant impact on the WA state economy – that is the events that are unfolding in Europe.

“It is self-evident that what’s going on in Europe is very serious.”

Mr Porter said the European sovereign debt crisis and a slower than expected recovery in the US economy had been major factors in the revised estimates.

He said the royalty revenue had been revised downwards to $970 million over the budget and forward estimates period because of a higher $US/$A exchange rate and the impact of lower iron ore, oil and base metals prices.

Mr Porter said that while the European Union accounted for just six per cent of WA’s merchandise exports, it provided 20 per cent of China’s exports, which could affect WA.

He said that if conditions in Europe worsened and negatively affected the availability and cost of credit, major resource projects in WA could be delayed.

Anything else?

… the housing market remains weak with both house prices and sales volumes lower than the budget forecasts.

And the future beyond the next 6 months?

Budget surpluses are still forecast until 2013/14 though these too have been revised significantly downwards.

Why?

Softening iron ore prices over the last six months have hit the State Government’s revenue projections hard, with Treasurer Christian Porter forecasting an almost billion dollar drop in mining royalties in the state over the next four years.

Speaking to reporters today Mr Porter said the government has slashed $951 million from its projections of mining royalties, with almost $820 million coming off iron ore royalties alone over the next four years.

This is despite the State Government increasing royalty rates on fines iron ore from 5.25 per cent to 6.5 per cent from July next year, and up to 7.5 per cent from the following financial year.

The State Government’s mid year financial review forecast a steady fall in iron ore prices over the next four years, however, following sharp falls in spot prices earlier this year as uncertainty over European debt and the health of the Chinese economy hit markets.

So, our “boom” state is now expecting a bust.

Of 50%+.

What was it that Senator Joyce said in response to the Federal government’s “truly extraordinary” May budget forecast?

Opposition frontbencher Barnaby Joyce has taken a swipe at the Gillard government’s approach to the economy, saying it had an unbounded belief in Asia’s demand for Australia’s resources.

“God help you when the prices go down,” he told reporters in Canberra on Wednesday.

The government’s approach to economics was “a clever ability to charge people to dig up red and black rocks.”

“They (government) have an unbounded belief that the people in South-East Asia will have an eternal gratitude to pay an excessive price for red rocks and black rocks.”

And what did he say in September (a must-read)?

Australia avoided recession because of the export of red rocks (called iron ore) and black rocks (called coal) in record volumes at record prices, record shipments of wheat, a 425 basis point drop in interest rates and a comparatively low dollar.

Wayne Swan likes to regularly point to Australia’s $400 billion investment pipeline but he doesn’t control that. That is a promise of someone else’s benevolence. What he does control is the public sector debt and it is going through the roof.

Barnaby was right.

Again.

Now, about that revised fudged $1.5bn Federal government budget surplus, forecast for 18 months away.

Wayne? … Wayne?!?!

Oh, of course. Silly me. We don’t need to hear it again.

We all know the mantra by now:

“Our economy has blah blah strong fundamentals blah blah low debt blah blah trend growth blah blah a huge investment pipeline.”

IMF Gives Goose His Cue To Lay Their Golden Egg

16 Dec

It’s not that Wayne needs much convincing to create more debt.

One need only look at the epic, world-beating rise in Australia’s public debt under The Goose, using the GFC as the excuse.

Now, just when he might be beginning to run out of excuses, here comes the IMF with the cue Wayne needs:

IMF boss says no country in the world is immune from the crisis and all must take steps to boost growth, with risks of inaction including ‘isolation and other elements reminiscent of the 1930s depression’.

Regular readers know that the IMF has decades of ‘form’.

It will always call for nations to “stimulate” growth. Why? The deeper in debt, the sooner the IMF is called in to “bail out”.

Taking the nation’s infrastructure (airports, highways, ports, railways, telecomms, electricity grids, etc) as collateral.

And, the nation’s sovereignty.

Wayne is just the Goose to lay the IMF’s golden egg.

None Castigate Their Peers So Well As The Well-Bred Englishman

16 Dec

The English language can be a beautiful weapon of truth when wielded by a master.

Witness Daniel Hannan, conservative MEP for the South East of England, speaking to the EU Parliament in response to the Eurocrats recent hatefest on Britain for refusing to join in their latest imbecilic “plan”, one amusingly dubbed by London mayor Boris Johnson as a “Supra National And Fiscal Union” (SNAFU):

“How’s that working out for you by the way, gentlemen” … ziiiiiiiiing.

Here’s Mr Hannan in March 2009, rising to international prominence with this truly epic smackdown of then PM Gordon Brown:

“You cannot spend your way out of recession or borrow your way out of debt”

He could almost be a beautifully-spoken Barnaby Joyce.

To quote The Merovingian from The Matrix Reloaded:

“Fantastic language, especially to curse with … It’s like wiping your arse with silk, I love it.”

And finally, wise words from Mr Hannan in summarising what all the global economic troubles are really about:

Yesterday, our own government took on another $3 billion of debt.

Adding to Australia’s unpredecented, world-beating increase in public debt, since the global debt crisis began.

So the last word inevitably must go to our own Senator Joyce:

“If you do not manage debt, debt manages you” – Feb 2010

Barnaby is right.

Is THIS The “Trend” Growth You Are Banking On, Wayne?

1 Dec

Isn’t it wonderful how inveterate liars and deceivers eventually get caught out?

From the Australian:

The Treasurer today declared the government was banking on growth remaining at trend to deliver its wafer-thin budget surplus in 2012-13, despite the threat posed by worsening economic circumstances in Europe and the United States.

Here is the newly-revised MYEFO budget “forecast” for GDP growth that Wayne is “banking on”:

MYEFO 2011-12, Part 1 Overview | Click to enlarge

Er … 3.25% annual GDP growth?

I have one chart for you Wayne.

From the RBA’s latest chart pack (trend line added):

Click to enlarge

So … Wayne.

“Trend growth” for Australia over at least the past 18 years (since 1993), has been slowly but steadily sinking towards 2%.

And yet, you really expect us to believe that we will witness way above-trend 3.25% growth both this financial year, and next? In spite of all the increasing turmoil and volatility in a debt-saturated world right now?

Mr Swan said revised budget forecasts outlined yesterday were based on the “best judgment” of Treasury.

Having confidence in Treasury’s “best judgment”, is akin to having confidence in the “best judgment” of the band playing “In the Shadows” as the Titanic slowly sank beneath the waves.

Rather like Australia’s GDP “trend growth” slowly but surely sinking beneath the waves of a debt-soaked world economy.

And to think this government is introducing a world’s-highest carbon dioxide derivatives trading scheme scam from July next year.

Based on more modelling tea-leaf reading by the same Treasury “bozos” who originally predicted 4% GDP growth back in May.

The same “bozos” who could not foresee an onrushing GFC that even Blind Freddy could see (“Why Would Any Sane Person Believe Treasury’s Carbon Tax Modelling When Its Budget Forecasting Record Is This Bad?”).

Goldman Sachs Conquers Europe

28 Nov

From the UK’s Independent:

Click to enlarge

What price the new democracy? Goldman Sachs conquers Europe

The ascension of Mario Monti to the Italian prime ministership is remarkable for more reasons than it is possible to count. By replacing the scandal-surfing Silvio Berlusconi, Italy has dislodged the undislodgeable. By imposing rule by unelected technocrats, it has suspended the normal rules of democracy, and maybe democracy itself. And by putting a senior adviser at Goldman Sachs in charge of a Western nation, it has taken to new heights the political power of an investment bank that you might have thought was prohibitively politically toxic.

This is the most remarkable thing of all: a giant leap forward for, or perhaps even the successful culmination of, the Goldman Sachs Project.

It is not just Mr Monti. The European Central Bank, another crucial player in the sovereign debt drama, is under ex-Goldman management, and the investment bank’s alumni hold sway in the corridors of power in almost every European nation, as they have done in the US throughout the financial crisis. Until Wednesday, the International Monetary Fund’s European division was also run by a Goldman man, Antonio Borges, who just resigned for personal reasons.

Even before the upheaval in Italy, there was no sign of Goldman Sachs living down its nickname as “the Vampire Squid”, and now that its tentacles reach to the top of the eurozone, sceptical voices are raising questions over its influence. The political decisions taken in the coming weeks will determine if the eurozone can and will pay its debts – and Goldman’s interests are intricately tied up with the answer to that question.

Simon Johnson, the former International Monetary Fund economist, in his book 13 Bankers, argued that Goldman Sachs and the other large banks had become so close to government in the run-up to the financial crisis that the US was effectively an oligarchy. At least European politicians aren’t “bought and paid for” by corporations, as in the US, he says. “Instead what you have in Europe is a shared world-view among the policy elite and the bankers, a shared set of goals and mutual reinforcement of illusions.”

This is The Goldman Sachs Project. Put simply, it is to hug governments close. Every business wants to advance its interests with the regulators that can stymie them and the politicians who can give them a tax break, but this is no mere lobbying effort. Goldman is there to provide advice for governments and to provide financing, to send its people into public service and to dangle lucrative jobs in front of people coming out of government. The Project is to create such a deep exchange of people and ideas and money that it is impossible to tell the difference between the public interest and the Goldman Sachs interest.

Mr Monti is one of Italy’s most eminent economists, and he spent most of his career in academia and thinktankery, but it was when Mr Berlusconi appointed him to the European Commission in 1995 that Goldman Sachs started to get interested in him. First as commissioner for the internal market, and then especially as commissioner for competition, he has made decisions that could make or break the takeover and merger deals that Goldman’s bankers were working on or providing the funding for. Mr Monti also later chaired the Italian Treasury’s committee on the banking and financial system, which set the country’s financial policies.

With these connections, it was natural for Goldman to invite him to join its board of international advisers. The bank’s two dozen-strong international advisers act as informal lobbyists for its interests with the politicians that regulate its work. Other advisers include Otmar Issing who, as a board member of the German Bundesbank and then the European Central Bank, was one of the architects of the euro.

Perhaps the most prominent ex-politician inside the bank is Peter Sutherland, Attorney General of Ireland in the 1980s and another former EU Competition Commissioner. He is now non-executive chairman of Goldman’s UK-based broker-dealer arm, Goldman Sachs International, and until its collapse and nationalisation he was also a non-executive director of Royal Bank of Scotland. He has been a prominent voice within Ireland on its bailout by the EU, arguing that the terms of emergency loans should be eased, so as not to exacerbate the country’s financial woes. The EU agreed to cut Ireland’s interest rate this summer.

Picking up well-connected policymakers on their way out of government is only one half of the Project, sending Goldman alumni into government is the other half. Like Mr Monti, Mario Draghi, who took over as President of the ECB on 1 November, has been in and out of government and in and out of Goldman. He was a member of the World Bank and managing director of the Italian Treasury before spending three years as managing director of Goldman Sachs International between 2002 and 2005 – only to return to government as president of the Italian central bank.

Mr Draghi has been dogged by controversy over the accounting tricks conducted by Italy and other nations on the eurozone periphery as they tried to squeeze into the single currency a decade ago. By using complex derivatives, Italy and Greece were able to slim down the apparent size of their government debt, which euro rules mandated shouldn’t be above 60 per cent of the size of the economy. And the brains behind several of those derivatives were the men and women of Goldman Sachs.

The bank’s traders created a number of financial deals that allowed Greece to raise money to cut its budget deficit immediately, in return for repayments over time. In one deal, Goldman channelled $1bn of funding to the Greek government in 2002 in a transaction called a cross-currency swap. On the other side of the deal, working in the National Bank of Greece, was Petros Christodoulou, who had begun his career at Goldman, and who has been promoted now to head the office managing government Greek debt. Lucas Papademos, now installed as Prime Minister in Greece’s unity government, was a technocrat running the Central Bank of Greece at the time.

Goldman says that the debt reduction achieved by the swaps was negligible in relation to euro rules, but it expressed some regrets over the deals. Gerald Corrigan, a Goldman partner who came to the bank after running the New York branch of the US Federal Reserve, told a UK parliamentary hearing last year: “It is clear with hindsight that the standards of transparency could have been and probably should have been higher.”

When the issue was raised at confirmation hearings in the European Parliament for his job at the ECB, Mr Draghi says he wasn’t involved in the swaps deals either at the Treasury or at Goldman.

It has proved impossible to hold the line on Greece, which under the latest EU proposals is effectively going to default on its debt by asking creditors to take a “voluntary” haircut of 50 per cent on its bonds, but the current consensus in the eurozone is that the creditors of bigger nations like Italy and Spain must be paid in full. These creditors, of course, are the continent’s big banks, and it is their health that is the primary concern of policymakers. The combination of austerity measures imposed by the new technocratic governments in Athens and Rome and the leaders of other eurozone countries, such as Ireland, and rescue funds from the IMF and the largely German-backed European Financial Stability Facility, can all be traced to this consensus.

“My former colleagues at the IMF are running around trying to justify bailouts of €1.5trn-€4trn, but what does that mean?” says Simon Johnson. “It means bailing out the creditors 100 per cent. It is another bank bailout, like in 2008: The mechanism is different, in that this is happening at the sovereign level not the bank level, but the rationale is the same.”

So certain is the financial elite that the banks will be bailed out, that some are placing bet-the-company wagers on just such an outcome. Jon Corzine, a former chief executive of Goldman Sachs, returned to Wall Street last year after almost a decade in politics and took control of a historic firm called MF Global. He placed a $6bn bet with the firm’s money that Italian government bonds will not default.

When the bet was revealed last month, clients and trading partners decided it was too risky to do business with MF Global and the firm collapsed within days. It was one of the ten biggest bankruptcies in US history.

The grave danger is that, if Italy stops paying its debts, creditor banks could be made insolvent. Goldman Sachs, which has written over $2trn of insurance, including an undisclosed amount on eurozone countries’ debt, would not escape unharmed, especially if some of the $2trn of insurance it has purchased on that insurance turns out to be with a bank that has gone under. No bank – and especially not the Vampire Squid – can easily untangle its tentacles from the tentacles of its peers. This is the rationale for the bailouts and the austerity, the reason we are getting more Goldman, not less. The alternative is a second financial crisis, a second economic collapse.

Shared illusions, perhaps? Who would dare test it?

And in Australia?

We have the Right Honourable Malcolm Turnbull MP.

I would suggest to readers that independent trader Alessio Rastani wasn’t too far wrong:

There’ll Be No EU Bailouts From China’s Empty Pockets

25 Nov

For weeks … months in fact … there’s been plenty of fevered speculative commentary about China sailing to Europe’s rescue, by using their vast foreign exchange reserves to buy up European sovereign debt that the markets increasingly distrust (thus, ever spiking interest rates).

Problem.

China’s vast foreign exchange reserves may not be so vast after all.

From Reuters via The China Post (h/t ZeroHedge):

Analysts suspect China’s forex may be weaker than perceived

Europeans searching for a bazooka to blast away eurozone debt problems might well eye China’s US$3.2 trillion foreign exchange arsenal with envy, but Beijing has far less firepower available than many assume.

Most of money in the world’s biggest store of foreign exchange reserves is prudently kept in near-cash instruments to fund import and debt service bills in the event of an unforeseen domestic emergency, or invested in long-term assets that, if sold in size to help Europe, would spark panic on global financial markets.

In fact, analysts reckon China’s armory has only about US$100 billion to spare.

“The sheer size of China’s foreign exchange reserves is massive, but the actual amount of money available for investing in Europe each year isn’t that big,” said Wang Jun, an economist at CCIEE, a top government think tank in Beijing.

A crucial constraint is China’s existing holdings of U.S. Treasury securities. Beijing is by far the biggest foreign owner, with an estimated 70 percent of the nation’s reserves held in U.S. government bills, bonds and other dollar assets.

Turn outright seller and the market value of the remaining holdings is likely to plunge.

That’s not a great investment strategy given the Chinese public’s unhappiness about the roughly 38 percent decline in the nominal value of the dollar in the last 10 years.

The government also may have to set aside some foreign exchange reserves to bailout the banking system if piles of loans to local governments and the property sector turn sour.

China injected nearly US$80 billion in reserves into its big state banks from 2003 to 2008 to help them clean up their balance sheets so they could float shares.

Shrinking Exports, Smaller Surplus

Meanwhile, China’s trade surplus, essentially the money it has to invest overseas, is shrinking as Beijing does what critics in the developed world have been urging for years and rebalances its economy away from exports.

Imports surged 28.7 percent year on year in October and the surplus of US$17 billion was well short of the US$24.9 billion forecast by economists.

Beijing holds an estimated one-quarter of its reserves in euro-denominated assets, so keeping that steady implies a US$117.5 billion increase this year if the country’s foreign exchange reserves grow by the US$470 billion estimated in 2011.

That’s roughly the amount economists expect China to invest in Europe in 2012.

“Assuming the FX reserve accumulation does not slow significantly, I think China will put at least US$80-100 billion in euro assets per year in the next two years,” said Wei Yao, China economist at Societe Generale in Hong Kong.

China recycles foreign exchange assets into overseas investments so outflows of cash roughly track inflows.

The build-up in FX reserves, a result of the central bank’s intervention to limit the yuan’s appreciation, tends to fuel inflation pressures even as the central bank issues bills to mop up the amount of local currency it pumps into the economy.

And it explains why foreign reserves cannot easily be used for domestic spending on infrastructure or shoring up pension systems, since simply converting the cash risks driving up both inflation and the value of the yuan currency.

This revelation comes hot on the heels of a similar one from a well-known Chinese economist and TV personality, who recently told a private audience that China is nearly bankrupt.

In his own words:

“Every province in China is Greece”

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