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Posts tagged ‘Bank for International Settlements’

what is a credit default swap ?and why we should be trembling right now!

Allow me to teach you what a credit default swap is and why it’s so important to what is happening to the economy today.

Virgle Kent borrows $50 from me. I want to get insurance on his debt in case he goes broke. I go to Roissy and say, “Hey, Virgle Kent owes me $50. Can you insure that debt?”

“I’ll insure it if you pay me $4 a year,” Roissy says.

“Done!”

Roissy is betting that VK will pay me back, especially since he did his homework by looking at VK’s credit rating and saw it was superb. Roissy wrote me a credit default swap, an unregulated derivative invented in 1995 by JP Morgan.

Unfortunately Roissy has some problems with his business, and he no longer even has $50 to pay me in case VK goes broke. The premiums I gave him are long gone. Credit agencies notice this and tell Roissy to find some cash or his credit rating goes down. Roissy is fucked because if his credit rating goes down then he won’t be able to raise cash at good rates to keep his business open (today’s large businesses need a constant flow of credit to maintain operations). Sure enough his rating gets killed and Roissy goes bankrupt.

Now I’m in trouble. The debt I had on my books that was insured is now uninsured. The agencies look at my books and see I have this exposed debt and they downgrade my ass. I have no choice but to enter bankruptcy as well. But I happened to be knee deep in the CDS game too. I wrote a ton of them for Arjewtino, insuring the debt owed to him by other parties. When I go down it puts pressure on him. Like dominoes we fall.

In the carnage it turned out that the ratings we used to judge each other’s debt worthiness was bogus from the start. Essentially we all gambled like we would at a blackjack table, but we did it while drunk. And blind.

The insurance company AIG wrote $78 billion worth of swaps.

Ivy League MBA’s turned the CDS into an even more insidious device. In ways that I will not begin to understand, swaps were used not just to insure against debt but to speculate if companies would fail or not. It turned out that while VK only owed me $50, there were swaps written worth $500 between parties that VK didn’t even know about! The swaps became a means to make money instead of a simple insurance policy. This was enabled by a government run by politicians whose treasure chests were stocked full of kind donations from the big bankers. They did not hesitate to look the other way.

A lot of swaps were written by banks and businesses that are now very sick from making bad bets and possibly outright fraud in the housing boom. (Who would have thought that giving no money down / no-doc loans was a bad idea?)

Here’s the bad news:

…there are $45 trillion of credit default swaps out there. A default on a mere 10% would cause an economic disaster. Unfortunately, it’s guaranteed to happen.

Actually that was the good news. Here’s the real bad news:

The Bank for International Settlements recently reported that total derivatives trades exceeded one quadrillion dollars – that’s 1,000 trillion dollars. How is that figure even possible? The gross domestic product of all the countries in the world is only about 60 trillion dollars. The answer is that gamblers can bet as much as they want.

The quote up top was said by Henry Paulson

 

How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months

 

by Tyler Durden

While everyone was focused on the impending European collapse, the latest soon to be refuted rumors of a quick fix from the Welt am Sonntag notwithstanding, the Bank of International Settlements reported a number that quietly slipped through the cracks of the broader media. Which is paradoxical because it is the biggest ever reported in the financial world: the number in question is $707,568,901,000,000 and represents the latest total amount of all notional Over The Counter (read unregulated) outstanding derivatives reported by the world’s financial institutions to the BIS for its semi-annual OTC derivatives report titled “OTC derivatives market activity in the first half of 2011.” Indicatively, global GDP is about $63 trillion if one can trust any numbers released by modern governments. Said otherwise, for the six month period ended June 30, 2011, the total number of outstanding derivatives surged past the previous all time high of $673 trillion from June 2008, and is now firmly in 7-handle territory: the synthetic credit bubble has now been blown to a new all time high. Another way of looking at the data is that one of the key contributors to global growth and prosperity in the past 10 years was an increase in total derivatives from just under $100 trillion to $708 trillion in exactly one decade. And soon we have to pay the mean reversion price.

full article at source: http://www.zerohedge.com/news/707568901000000-how-and-why-banks-increased-total-outstanding-derivatives-record-107-trillion-6

What Happens When That Juggler Gets Clumsy?(Reggie Middleton)

 

Anybody thinking of going into the markets now should at least take a look at this blog Reggie has been spot on now for the last 4 years I’ve been following him.

 

By Reggie Middleton

 

It has been hard for true fundamental investors to reliably make money since the bear market rally of this generation (c. 2nd quarter 2009) due to the fact that global market central planners world wide (read as central bankers and their cohorts) have been distorting price discovery and realistic valuations to an unprecedented extent. Counting the money just doesn’t work when no one truly respects and valued money but you. In essence, central bankers world wide (starting here in the US, with our central bank) have disrupted and disrespected the economic circle of life. For a detailed explanation of this happenstance, see Do Black Swans Really Matter? Not As Much as the Circle of Life, The Circle Purposely Disrupted By Multiple Central Banks Worldwide!!! But….. Those very same central bankers/central planners have to juggle many, too many, balls in order to keep this charade afloat. Yes, sink this charade will – and when it does, it will probably look very ugly. Now, its a timing game. As the title inquires…

source and full article here :http://boombustblog.com/BoomBustBlog/What-Happens-When-That-Juggler-Gets-Clumsy.html

A Phony EU Crisis

by Staff Report at the Daily Bell

Now a deal has been struck to “save” Greece (though it is the banks that are being saved yet again, not Greece). The Germans won’t like it as Merkel seems now to have committed them to guarantee, at least informally, hundreds of billions of euros in PIGS assets. But apparently whether the “little people” like something or not doesn’t matter now in this “new” world.

The only danger is over-reach. The crisis, long expected, may still spin out of control or prove insoluble. But there is no doubt the Eurocrats expected this crisis and planned for it. The idea was to use its chaos to create a closer European federation and that is just what they’re trying to do. Out of chaos, order …

The elites that stand behind the EU are trying to build a one-world order, and they will stop at nothing to get it. The same thing is going on in the US with the debt crisis. An orchestrated agenda. The Americans will eventually get European-style austerity. They simply don’t understand the ramifications yet.

These economic crises cannot be pure happenstance. We’ve suggested they can spin out of control, and perhaps they will; but they are all manmade events, the direct outcome of economic constructs and policies of enormous wealth and control. Somebody set up the 100 central banks around the world that report directly to the Bank for International Settlements in Switzerland. These are quasi-private entities, many of them. Are we supposed to believe that no one takes a profit on them? That there is no way they compensate their creators?

The money and power is unimaginable. The BIS controls the central banks that in turn control the big banks around the world. The stock exchanges with their endless mergers are controlled as well; and the bond markets, it seems. If the elites control the banking industry – and they do – then they must also control currency markets – at least to some extent. And we are supposed to believe that Greece, little Greece, caused such havoc with this financial system that Merkel and Sarkozy had to meet to save it in the nick of time?

Increasingly, we don’t believe it. The entire amount of the Greek default is in the low hundreds of billions. That’s pocket change for these trillionaire, globalist banking families and their corporate, religious and military enablers. It’s walking-around money. They can spend more than that in a day, an hour even.

read full artical here at source:http://www.thedailybell.com/2713/A-Phony-EU-Crisis

 

 

 

German and French banks call the shots

THE latest figures from the Bank for International Settlements (BIS) show that Ireland owes banks in other EU countries a massive €310bn, with €196bn of this money due to banks elsewhere in the eurozone. These huge exposures almost certainly explain why the ECB has refused to countenance “haircuts” for the senior bondholders of the Irish banks. One of the salient features of the Irish banking crisis since it first erupted two-and-a-half years ago has been the dogged refusal of the ECB to allow us to impose haircuts or discounts on the holders of the senior bonds of the Irish banks. This was despite the fact that these senior bonds were trading at a significant discount to their face value. Instead, for reasons best known to itself, the ECB — in clear contravention of both previous market precedent and financial logic — has insisted that the senior bondholders be repaid in full and has lent the Irish banks, institutions which it must have known were hopelessly insolvent, €70bn to do so. So why has the ECB been so solicitous of the interests of the senior bondholders. The most recent figures from the Bank for International Settlements, the umbrella body for the world’s central banks, provide us with some clues. At the end of September 2010 Ireland owed the banks of other EU member countries €310bn, of which €196bn was owed to banks in other euro zone countries. In fact the underlying situation may be even worse than even these figures indicate as they exclude €123bn of “other exposures”, mainly derivatives and government guarantees that could become payable. As we in Ireland know only too well, government guarantees have a nasty habit of coming back to bite the guarantor. Of these other exposures, €78bn are potentially payable to banks in other eurozone countries. While the fact that Ireland owes UK banks €113bn with other exposures of €45bn hardly comes as any surprise given the large presence of British banks in the Irish banking market, the extent of our debts to banks from other eurozone countries isn’t so widely known. So to whom in the eurozone do we owe all of this money? Top of the list are German banks, to whom we owe €92bn with a further €38bn of other exposures. Does the fact that Irish banks potentially owe their counterparts up to €146bn explain the German government’s implacable opposition to any write-down of the Irish banks’ debts? After the British and the Germans, it is the French banks — with total Irish bank loans of almost €32bn and a further €23bn of other exposures — who have the biggest exposure to Ireland. Does this provide at least a partial explanation for French president Nicolas Sarkozy’s truculence when faced with Irish requests that senior bondholders be forced to accept a haircut? The Spanish and Italian banks have relatively small exposures to Ireland with direct loans to this country of €9.2bn and €10.6bn respectively as well as other exposures of €3.2bn and €6.4bn. However, there is one other large European creditor listed in the BIS statistics. This is the unspecified “other euro area“. The banks from these countries are directly owed almost €42bn by their Irish counterparts with a further €6.1bn potentially due under the other exposures heading. Who are these other euro area banks? Up to now the general assumption had been that this heading mainly covered Dutch, Belgian and Luxembourg banks. But given the sudden emergence of Finland as one of the most vehement opponents of cutting Ireland any slack I can’t help wondering if one or more of the Finnish banks have large piles of Irish debt sitting on their balance sheets. What is clear from the BIS figures is that a complete collapse of the Irish banking system would have had very serious consequences not just for British banks but also for banks elsewhere in the eurozone. This almost certainly explains the ECB’s phobia of any “contagion” caused by imposing a haircut on holders of senior bonds in the Irish bank bonds. It also gave the Irish government serious leverage, if it had chosen to exercise it. On the basis that if you owe the bank a million euro it is the bank which has a serious problem, the Irish banks owing other EU banks up to €433bn should have meant that it was the other EU banks who had a problem. Why wasn’t this leverage employed in the run-up to this week’s publication of the results of the stress tests on the Irish banks? Was there a failure of nerve on the part of the new Irish government?

source:http://www.independent.ie/business/european/german-and-french-banks-call-the-shots-2607577.html

Comment :

 “Not one cent more” was the cry and now these same people are now looking to pump 24,000,000,000:00 Euros more into these self same toxic banks. In the entire announcement there is no mention of the derivates losses that are still been hidden be the two banks Allied Irish Bank and Bank of Ireland in their IFSC off-shore branches. Well firstly these losses are been hidden in their offshore branches in the IFSC and they would appear that they are not subjected to any regulation, as the Irish central Bank says it is the ECB’s job to regulate these banks (because of their perceived offshore status) but the ECB says it’s the Irish Central Bank ‘s job,  so in the meantime nobody is regulating and so the Boys in Allied Irish Bank and Bank of Ireland have the best place to hide such losses and possibly also hold on deposit vast sums of hot money from around the world .

There is no mention as to the status of current derivative trades belonging to Allied Irish Bank and Bank of Ireland why?

There is no mention as to the further requirements of Anglo Irish Bank, who has just announced 17.500, 000,000:00 losses .The largest corporate losses announced by any company in the Irish republic’s history. These losses are swallowing 72% of the new funds we are now about to put into Allied Irish Bank and Bank of Ireland .This is just madness. So the Bank Debts are now 150 Billion owed to the ECB and approximately 55 Billion owed to the Central Bank this is so called short-term debt then we have our own national debt of 94,000,000,000:00 and we are now putting 70 billion into the banks and not to forget the borrowings of 75 billion extra to run NAMA for the Next 10 years .We then need another 19 billion to fill the gap in our national yearly budget, this year and perhaps the next four years as well. So let’s see our totals then!

150 Billion ECB

55 Billion Irish Central Bank

94 Billion Current National debt

70 Billion Bank bailout so far.

75 billion to run NAMA next 10 years

19 billion current projected year budget deficit.

Total so far 463 Billions and counting!

Note :

My figures seem to be conservative as I have not taken into consideration the debts Irish banks have to other European banks as highlighted above . I have only the ECB figures so things are in fact worse ,the overall figure could be well over  the 500 billion mark god help us !

 We are spending 54 Billion running the country, and we will end up paying 9 -10 billion just on interest payments every year and that is on current interest levels which are heading up by the way. The government have committed to cutting 3 billion in spending cuts in the next budget .But with these new borrowings I expect this figure to rise or they will have to cut a lot more civil service jobs either way spending 19 billion more than we are taking in will have to stop and the new masters in Europe will soon demand results      

 The number of mortgages outstanding in the Irish state is 786,164 and the total amount due on these mortgages is €99.08bn by the end February 2011. Surely it would be cheaper for the government to pay off all outstanding mortgages in the state and let the banks go down as would be the norm in any other capitalist system. In the Unites States last year 240 banks went out of business while here in Ireland we cannot close down even one bank however toxic it is! To keep NAMA going we are going to have to pay another 75,000,000,000:00 Billion over the next 10 years and that money is just going to waist, as this is the cost of running this new financial Quango. All we are doing is keeping X Bankers, solicitors, and estate agents in well paid jobs and these “insiders” are consistently telling the rest of us to tighten our belts and take our collective austerity medicine and shut up! By paying off the mortgages of all citizens we effectively are giving the largest stimulus the state has ever see and this would overnight put money into people’s pockets and would remove the massive mortgage millstone around every Irish families neck .Suddenly people would have money to spend and the economy will take off .it is certainly better that just pouring these billions into black holes and get nothing in return!

The economy is not likely to generate any serious jobs growth in the next three years as we are now more than likely going to have to endure even harsher budgets to come up with the funds to pay off the interest on these lost billions. More and more people will be losing their jobs and emigration is just getting started and home prices are heading down at least another 30 % from here.  The new government are fast abandoning promises to the voters of Ireland and we are left with the question what it all was for the good ship Ireland is still maintaining the course set by the previous despots and traitors who promised us that this bailout would be the cheapest in history! Nama is now turning out to be the mother of all Quangos and its jobs and Jobs for the well connected.

EU/IMF Bailout =”Kicking the can down the road” e

How often did we as young kids go down the street kicking a can? “Kicking the can down the road” is a universally understood metaphor that has come to mean not dealing with the problem but putting a band-aid on it, knowing we will have to deal with something maybe even worse in the future.

While the US Congress is certainly an adept player at that game, I think the world champions at the present time have to be the political and economic leaders of Europe. Today we look at the extent of the problem and how it could affect every corner of the world, if not played to perfection. Everything must go mostly right or the recent credit crisis will look like a walk in the Jardin des Tuileries in Paris in April compared to what could ensue.

From the point of view of not wanting to so soon endure another banking and credit crisis, we must applaud the leaders of Europe. The PIIGS collectively owe over $2 trillion to European and US banks. German, French, British, Dutch, and Spanish banks are owed some $1.5 trillion of that by Portugal, Ireland, Spain, and Greece by the end of June, 2010. That figure is down some $400 billion so far this year, which means that the ECB is taking on that debt, helping banks push it off their balance sheets. For what it’s worth, the US holds, according to the Bank for International Settlements, about $353 billion, or 17%, of that debt, which is not an inconsequential number.

Robert Lenzner notes something very interesting about the latest BIS report, out this week:

“What’s curious, though, is that for the first time the BIS has broken out a new debt category termed ‘other exposures, which it defines as ‘other exposures consist of the positive market value of derivative contracts, guarantees extended and credit commitments.’ These ‘other exposures’ – quite clearly meant to be abstruse – amount to $668 billion of the $2 trillion in loans to the PIIGS.

“So, bank analysts everywhere; you now have to cope with evaluating derivative contracts that could expose lenders to losses on sovereign debt. Be on notice!”

What did I write just last week? That it is derivative exposure to European banks that is a very major concern for the world and the US in particular. It is not just a European problem. I predicted in 2006 that the subprime problem would show up in Europe and Asia. This time around, European banks present a similar if not greater risk to the US.

A collapse of a major European bank could trigger all sorts of counterparty mayhem in the US banking system, at least among our major investment banks. And then people would want to know which bank was next. This is yet another reason why the recent financial-system reform was not real reform. We still have investment banks committing bank capital to derivatives trading overseen by regulators who don’t really understand the risk. Who knew that AIG was a counterparty risk until it was? Lehman was solid only a month before until it evaporated. On paper, I am sure that every one of our banks is solid – good as gold – because they have their risks balanced with counterparties all over the globe and they have their models to show why you should go back to sleep.

Kicking the Can Down the Road

And that is why I applaud the ECB for stepping in and taking some risk off the table. We do not know how close we came to another debacle. Does anyone really think Jean-Claude Trichet willingly said, “Give me your tired, your poor, your soon-to-default sovereign debt?” Right up until he relented he was saying “Non! Non!” He did it because he walked to the edge of the abyss and looked over. It was a long way down. Bailing out European banks at the bottom would have cost more than what he has spent so far. It was, I am sure, a very difficult calculation.

I remember writing a letter not so long ago, quoting Trichet on that very topic. He was vehemently opposed to any ECB involvement in something that looked like a bailout. And then he wasn’t. I do hope he writes a very candid memoir. It will be interesting reading. The reality is that there was nowhere else to turn. There were no mechanisms in the Maastricht Treaty for dealing with this situation. What I wrote the following week (or thereabouts) still stands. This was and is a bailout for European banks in order to avoid a banking crisis. Many European banks, large and small, have bought massive sums on huge leverage of sovereign debt, on the theory that sovereign debt does not default. Some banks are leveraged 40 to 1!

The ECB is now earnestly continuing to kick the can down the road, buying ever more debt off the books of banks, buying time for the banks to acquire enough capital, either through raising new money or making profits or reducing their private loan portfolios, to be able to deal with what will be inevitable write-downs. It they can kick the can long enough and far enough they might be able to pull it off.

There is historical precedent. In the late ’70s and early ’80s, US banks figured out that if you bought bonds from South American countries at high rates of interest and applied a little leverage, you could practically mint money. And everyone knew that sovereign countries would not default. That is, until they did.

Technically, every major bank in the US was insolvent then. I mean really toes-up, no-heartbeat bankrupt. So what happened? Mean old Paul Volker – he who willingly plunged the US into recession to vanquish the specter of inflation – allowed the banks to carry those South American bonds on their books at full face value. He kicked the can down the road. And the banks raised capital and made profits, shoring up their balance sheets.

In 1986 Citibank was the first bank to begin to write down those Latin American bonds. Then came Brady bonds in 1989. Remember those? Brady bonds were as complicated as they were innovative. The key innovation behind their introduction was to allow the commercial banks to convert their claims on developing countries into tradable instruments, allowing them to get the debt off their balance sheets. This reduced the concentration risk to the banks. (To learn more about Brady bonds, and a very interesting period, go to http://en.wikipedia.org/wiki/Brady_Bonds and also google “Brady bonds.”)

So it worked. Kicking the can down the road bought time until the banks were capable of dealing with the crisis.

Different Cans for Different Folks

The ECB has chosen a different way to kick that old can (and a large and noisy one it is!), but it is not without consequences. Trichet has let it be known that dealing with sovereign-debt default issues should not be the central bank’s problem, it should be a problem for the European Union as a whole. And I think he is right, for what that’s worth.

If the ECB were to keep this up, even in a deflationary, deleveraging world it would eventually bring about inflation and the lowering of the value of the euro against other currencies. That is not the stuff that German Bundesbankers are made of. So they have been pushing for a European Union solution.

At first, the political types came up with the stabilization pact in conjunction with the IMF. But this was never a real solution, other than for the immediate case of Greece … and then Ireland. It has some real problems associated with it. It could deal with Portugal but is clearly not large enough for Spain. It is worth nothing that the political leaders of both the latter countries have loudly denied they need any help. Hmm. I seem to remember the same vows just the week before Ireland decided to take the money.

One of my favorite writers, Michael Pettis penned this note:

“Its official – Spain and Portugal will need to be bailed out soon. How do I know? In one of my favorite TV shows, Yes Minister, the all-knowing civil servant Sir Humphrey explains to cabinet minister Jim Hacker that you can never be certain that something will happen until the government denies it.”

Ultimately, the EU has three options. But before they get there – or maybe better said, before there is a crisis that forces them to get there – they will continue to kick the can down the road. They are really very good at it. We will consider those options in a little bit; but first, let’s look at just one aspect of the problem that will lend some context to the various paths among which they must choose. And that will take us on a detour back to our old friend Greece, where this all started.

More Debt is NOT the Solution to Too Much Debt

Greece is being forced into an austerity program in order to be able to continue to borrow money. But it has come with a cost. Unemployment is now at 12.6%, up from less than 7% just two years ago. And Greek GDP continues to slide. Let’s look at some charts and data from my favorite slicer and dicer of data, Greg Weldon ( http://www.weldononline.com for a free 30-day trial).

Notice that Greek GDP is down over 7% for the last 9 quarters, and there is no reason to believe there will be a reversal any time soon.

Greece GDP

A declining GDP is just not good for the country, but it also makes it more difficult for Greece to get back into compliance with its EU fiscal deficit-to-GDP requirements. The problem is that GDP is declining faster than the fiscal deficit. Normally, a country would devalue its currency (and thus its debt), maybe restructure its external debt (or default), and then try to grow its way out of the crisis.

Let’s go back and look at what Iceland did, as compared to Ireland, which is trying to take on more debt to bail out its banks, that is, to bail out German and French and British banks.

This is what I wrote a few weeks ago, and it bears repeating:

Look at how upset the UK got when Iceland decided not to back their banks. Never mind that the bank debt was 12 times Iceland’s national GDP. Never mind that there was no way in hell that the 300,000 people of Iceland could ever pay that much money back in multiples lifetimes. The Icelanders did the sensible thing: they just said no.

Yet Ireland has decided to try and save its banks by taking on massive public debt. The current government is willing to go down to a very resounding defeat in the near future because it thinks this is so important. And it is not clear that, with a slim majority of one vote, it will be able to hold its coalition together to do so. This is what the Bank Credit Analyst sent out this morning:

“The different adjustment paths of Ireland and Iceland are classic examples of devaluation versus deflation.

“Iceland and Ireland experienced similar economic illnesses prior to their respective crises: Both economies had too much private-sector debt and the banking system was massively overleveraged. Iceland’s total external debt reached close to 1000% of its GDP in 2008. By the end of the year, Iceland’s entire banking system was crushed and the stock market dropped by more than 95% from its 2007 highs. Since then, Iceland has followed the classic adjustment path of a debt crisis-stricken economy: The krona was devalued by more than 60% against the euro and the government was forced to implement draconian austerity programs.

“In Ireland, the boom in real estate prices triggered a massive borrowing binge, driving total private non-financial sector debt to almost 200% of GDP, among the highest in the euro area economy. In stark contrast to the Icelandic situation, however, the Irish economy has become stuck in a debt-deflation spiral. The government has lost all other options but to accept the E85 billion bailout package from the EU and the IMF. The big problem for Ireland is that fiscal austerity without a large currency devaluation is like committing economic suicide – without a cheapened currency to re-create nominal growth, fiscal austerity can only serve to crush aggregate demand and precipitate an economic downward spiral. The sad reality is that unlike Iceland, Ireland does not have the option of devaluing its own currency, implying that further harsh economic adjustment is likely.”

This is what it looks like in the charts. Notice that Iceland is seeing its nominal GDP rise while Ireland is still in freefall, even after doing the “right thing” by taking on their bank debt.

Ireland versus Iceland

Greek five-year bonds are now paying 12.8%. It is hard to grow your way out of a problem when you are paying interest rates higher than your growth rate and you keep adding debt and increasing your debt burden.

Greece 5-Year Soverign Bond Yield

Each move to deepen government cuts in Greece will result in further short-term deterioration of GDP, which makes it even harder to dig out of the hole. And Greece is a particularly thorny problem. The taxi drivers are outraged that they might have to use meters. Why? Because that means someone could actually track the amount of money they take in. Government workers are striking over 10% pay cuts. And on and on.

It is the same song but with a different verse for the rest of the countries in Europe that have problems. While Ireland is very different from Greece, assuming massive debt in a deflating economy will only turn Ireland into an ever-larger burden unless they can get on the path to growth again. Ditto for Portgual, Spain, and….

Et Tu, Belgium?

One country after another in Europe is coming under pressure. This week the debt of Belgium was downgraded, and the accompanying note from Standard and Poor’s observed that:

“Belgian’s current caretaker government may be ill-equipped to respond to shocks to public finances. The federal government’s projected 2011 gross borrowing requirements of around 11 percent of GDP leaves it exposed to rising real interest rates.”

At some point, if a country does not get its fiscal deficit below nominal GDP (and this is true for the US as well!) it will run into the wall. Credit markets will no longer lend to it. In Europe, the lender has become the ECB, but that may – and I emphasize may – change with the establishment of a new authority for the European Union to sell bonds and use the proceeds to fund nations in crisis. Under the proposal, each nation would assume a portion of the total debt risk. That may be a tough sale, as it appears there will need to be a treaty change and then country-by-country votes for such a change.

It will also mean that countries that accept such largesse will endure a very stern hand in their fiscal affairs. This is potentially a very real surrender of sovereignty. Some countries may decide it’s worth the price. Others, on the funding side of the equation, may decide they have to “take one” for the good of the European team.

This fund is to be launched in 2013, which gives EU leaders some time to flesh out the idea and sell it.

A second choice is for some countries to leave the euro but stay in the EU. Not all members of the EU participate in the eurozone. Leaving would be hugely messy. It is hard to figure out how it could be done without serious collateral damage. Even if Germany were to decide to be the one to leave, which they actually could, as the new German currency would rise over time, it would also mean their exports would be less competitive within Europe.

A third choice (which could be combined with the first choice) is radical debt restructuring. Convert Greek bonds into 100-year low-interest bonds, giving the Greeks (or Irish or Portuguese …) the time and ability to service the debt, along with real controls on their spending. Of course, that is default by another name, but it allows the fiction. Something like Brady bonds. You hit the reset button and kick the can a long way down the road.

That choice too has political and economic consequences. Someone has to cover the losses on the mark-to-market for those bonds. Who takes the hit?

Let me close with this bit of insight from one of my favorite analysts, Martin Wolfe of the Financial Times (www.ft.com):

“This leads to my final question: could the eurozone survive a wave of debt restructurings? Here the immediate point is that the crisis could be huge, since one restructuring seems sure to trigger others. In addition, the banking system would be deeply affected: at the end of 2009, for example, consolidated claims of French and German banks on the four most vulnerable members were 16 per cent and 15 per cent of their GDP, respectively. For European banks, as a group, the claims were 14 per cent of GDP. Thus, any serious likelihood of sovereign restructuring would risk creating runs by creditors and, at worst, another leg of the global financial crisis. Further injections of official capital into banks would also be needed. This is why the Irish have been “persuaded” to rescue the senior creditors of their banks, at the expense of the national taxpayer.

“Yet even such a crisis would not entail dissolution of the monetary union. On the contrary, it is perfectly possible for monetary unions to survive financial crises and public sector defaults. The question is one of political will. What lies ahead is a mixture of fiscal transfers from the creditworthy with austerity among the uncreditworthy. The bigger are the former, the smaller will be the latter. This tension might be manageable if a swift return to normality were plausible. It is not. There is a good chance that this situation will become long-lasting.

“Still worse, once a country has been forced to restructure its public debt and seen a substantial part of its financial system disappear as well, the additional costs of re-establishing its currency must seem rather smaller. This, too, must be clear to investors. Again, such fears increase the chances of runs from liabilities of weaker countries.

“For sceptics the question has always been how robust a currency union among diverse economies with less than unlimited mutual solidarity can be. Only a crisis could answer that question. Unfortunately, the crisis we have is the biggest for 80 years. Will what the eurozone is able to agree to do be enough to keep it together? I do not know. We all will, however, in the fairly near future.”

My only small disagreement is on whether it will be in the “near future.” World champion can kickers can put off the day of reckoning longer than you might think. On the other hand, when that day does come, it will seem to have come so quickly and with so little warning. There is no way to know what the markets will do about this, so it pays to stay especially vigilant and flexible.

Africa, Old Friends, and Pensacola

In a former life that seems ages ago (in the late ’80s), I banged around Africa for a few years, chasing the dream of starting a cellular telephone company somewhere. I had actually won some lotteries here in the US and wanted to see if I could get lightning to strike twice. I went to Africa because no one else at the time was paying attention. I was actually in 15 countries, researching the possibilities and working on licenses. I even got one (which was not good luck, but that is another story).

In the process, I found and hired a US ex-pat attorney based in Kinshasha, Zaire, named Pat Mitchell. He introduced me to lots of people all over, but in particular I became good friends with Kevin O’Rourke, a raconteur with the Irish gift (shared with Pat) of spinning yarns. Both of these guys were larger than life and just fun as hell. It was one of my favorite times in life. A learning experience to be sure, but as I look back on it now, I have fond memories. If I had gone a few years later, I might have had more luck. Those African franchises now are worth multiple tens of billions. Oh well.

Yesterday, Pat called me from his home in Pensacola, Florida, where he is now based, and told me that Phil had just flown in and that I should come on down. I have been threatening to visit Pat for a few years, but time and stuff just happens. It goes so fast.

I sat and thought for a few minutes and realized there was nothing on my schedule that could not wait 24 hours. American has a straight shot in less than two hours. So Saturday night I will be in some bar in Pensacola with my amigos, telling stories and maybe a few lies, talking about the old days, and remembering that it is friendships over the years that make the journey worthwhile.

It is time to hit the send button. I intend to get a good night’s sleep, as I suspect I will need it. Have a great week.

Your somewhat nostalgic for Africa analyst,

John F. Mauldin

johnmauldin@investorsinsight.com

Comment:

This article is an excellent piece of work and one that every Minster in our government should be forced to read

Fresh on the back of one of the most severe austerity budgets in the history of our state it is astonishing that so called intelligent people in government would continue with this madness

Their control of the media here has ensured that the people are like sheep and just follow the mad pipers

Cowen and lenihan   

Time to Act in the Nations Best Interest

This letter was sent to me today

Dear Ladies and Gentlemen of Ireland.

The most important vote in recent Irish history is to be taken on Wednesday 15th December 2010. This vote is taking place because the Irish constitution demands a vote when Irish sovereignty is substantially mitigated. The Dail must cast out this treasonous agreement negotiated by Mr. Paddy Honohan on behalf of his international masters. Its terms are unacceptable and are solely for the benefit of cosmopolitan bankers and their local carpetbaggers who have sold out the nation through their corruption and disloyalty. This “crisis” taking place is no accident. When will we all wake up? The game was well spelled out by Carroll Quigley former professor of Georgetown University and mentor to President Bill Clinton in his classic book “Tragedy & Hope.” I quote:

“The powers of financial capitalism had a far reaching plan, nothing less than to create a world system of financial control in private hands able to dominate the political systems of each country and the economy as a whole.

 The system was to be controlled in a feudalist fashion by the central bankers of the world acting in concert, by secret agreement. The apex of the system was to be the Bank for International Settlements in Basel,  Switzerland (and the I.M.F.), a private bank owned and controlled by the world’s central bankers which were themselves a private corporation.”

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