Archive - Jun 27, 2011

Not surprisingly, the personal household weakness continues into May, when both personal income and spending came lower than expected, the first printing at 0.3% on expectations of 0.4%, in line with a revised 0.3% in April, while spending printing coming unchanged in May on expectations of a 0.1% rise, down from a revised 0.3% in April. Most important was that the PCE deflator increased by the most since late 2009, surging from 2.2% to 2.5%, just as expected. Squatters rent component of income once again increased: "Rental income of persons increased $3.3 billion in May, compared with an increase of $2.9 billion in April." More importantly, "Private wage and salary disbursements increased $14.1 billion in May, compared with an increase of $26.4 billion in April." This in line with observed decline in tax withholdings by the government over the past several months. Net result, in May the savings rate increased modestly from 4.9% to 5.0%, much to the chagrin of spending advocates everywhere, as in addition to deleveraging, US consumers also saved more. And this is before the market flush in June...

That the Spanish savings banks, or cajas, have long been a source of instability is well-known to everyone with more than a passing knowledge of the pitfalls of the Spanish economy. Last year, in "The Ticking Time Bomb That Are The Spanish Cajas", we said "Cajas are likely hiding losses on home loans by taking non-performing mortgages out of securitized pools. Absent this unsymmetrical onboarding of risk, the overall deterioration of the broader pool would have become ineligible as collateral in ECB refi operations." We also noted that at 264 bps, Spain CDS "is cheaper than a deserted Salamanca hotel." (it is 320 bps today and soon going much wider). So now that Ireland (of all bankrupt countries) is slinging feces in a desperate attempt at distraction and pointing fingers at Spain, it is logical that the mainstream media would once again remind the world that Spain's financial system is effectively hollow, and that the greatest mystery in the financial world continues to be that Spanish CDS is not trading 2 or 3 times wider than where it is now. As Bloomberg says "Spanish banks have 50 billion euros ($70.7 billion) in unrecognised problematic real estate assets, El Confidencial reported, citing a report by the Boston Consulting Group. The consulting group estimates that Spanish banks need between 20 billion euros and 30 billion euros in additional capital and that Spain’s bank rescue fund, known as the FROB, could end up taking over 20 percent of the banking industry, El Confidencial added." But not before the second European Stress Test finds that all Cajas, just like last year, are perfectly capitalized, in what will be the latest daily lie out of Europe.

• Uncertainty persisted over the outcome of Greece’s 5-Year austerity package vote in the Parliament on Wednesday as lawmakers continued to switch sides
• French Finance Minister Lagarde said that the government has a first draft for a deal with French banks on a Greek debt rollover
• According to ING, Fitch could downgrade Italy after Moody’s placed the country’s sovereign rating on watch negative earlier this month
• According to the Bank for International Settlements, global interest rates must rise to avoid high inflation becoming entrenched

• China Auditor Warns of Risk on Local Debt (Reuters)
• Germany's Weber Slams Rescue Efforts (WSJ)
• Papandreou Faces Showdown on Austerity (Bloomberg)
• Obama to meet Senate leaders, keep debt talks alive (Reuters)
• Deutsche Bank, UniCredit May Have to Raise Additional Capital After Basel(Bloomberg)
• China to stimulate domestic demand: Wen (Reuters)
• Outflows a 'Major' Risk for Greek Banks (WSJ)
• Brussels eyes Tobin tax to aid EU coffers (FT)
• Threat of $100bn hit if US top rating lost (FT)
• Fed Seen Buying $25 Billion a Month in Treasuries After QE2 Comes to End (Bloomberg)

George Soros, Chairman of Soros Fund Management and famous for breaking the Bank of England in 1992, has warned that "we are on the verge of an economic collapse which starts, let's say, in Greece but it could easily spread." The 80-year-old investor said that the “financial system remains extremely vulnerable." Soros added that "there are fundamental flaws that need to be corrected." The core flaw, says Soros, is that the euro is not backed by a political union or joint treasury, so when something goes wrong with a participating country, there is "no provision for correction." Soros said that it is "probably inevitable" that highly indebted countries will be given a way to quit the euro. Gold has been the strongest currency in the world in recent years and all major fiat currencies, including the Swiss franc, have fallen against it. Should Greece revert to drachmas, Ireland to punts, Spain to pesetas, Italy to lira and Portugal to escudos, these countries would suffer massive inflation and the price of gold would surge in terms of these local currencies.

Quiet day on the economic front where the US personal savings rate is expected to pick up following an increase in Personal Income and a small rise in Personal Spending. A few Fed speechs complete and otherwise boring day which sees the 4th to last QE2 POMO as Brian Sack monetizes $4-5 billion.

That Greeks are massively against being "bailed out" in a circular process whereby Europe's bankers rescue Europe's bankers, using Athens as an intermediary is no surprise. What is perhaps also not surprising is that German, or the citizens of the country to truly benefit the most from the "rescue" are also very much against this bailout. According to Goldman's Dirk Schumacher, a poll published in FAS newspaper this Sunday showed that a majority of the surveyed were against any further financial help. Back in May, a slim majority was still in favour of additional support for Greece. The poll also asked how the Euro's future would be assessed: some 71% voiced 'doubts' or 'no trust' or 'no future' for the Euro. Meanwhile, the discussion between the finance ministry and banks about a roll-over of maturing debt continues. The German finance ministry expects banks to make specific proposals during the course of the week. Finance minister Schäuble rejected again the idea of any financial incentives for banks to participate in a roll-over, arguing that banks would have a strong interest themselves to stabilise the situation. The finance minister also said that governments would take preparations for the case of a Greek default if the Greek parliament were to reject the new austerity package this week: "We need to make sure that the contagion risk for the financial system and other Euro-area countries remains low".

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