Archive - Nov 19, 2011 - Story

"Nervous investors around the globe are accelerating their exit from the debt of European governments and banks, increasing the risk of a credit squeeze that could set off a downward spiral. Financial institutions are dumping their vast holdings of European government debt and spurning new bond issues by countries like Spain and Italy. And many have decided not to renew short-term loans to European banks, which are needed to finance day-to-day operations. " So begins an article not in some hyperventilating fringe blog, but a cover article in the venerable New York Times titled "Europe Fears a Credit Squeeze as Investors Sell Bond Holdings." Said otherwise, Europe's continental bank run in which virtually, but not quite, all banks are dumping any peripheral exposure with reckless abandon is now on. Granted, considering the epic collapse in bond prices of Italian, French, Austrian, Hungarian, Spanish and Belgian bonds which all hit record wide yields and spreads in the past week, and furthermore following last week's "Sold To You": European Banks Quietly Dumping €300 Billion In Italian Debt" which predicted precisely this outcome, the news is not much of a surprise. However, learning that everyone (with two exceptions) has given up on Europe's financial system should send a shudder through the back of everyone who still is capable of independent thought - because said otherwise, the world's largest economic block is becoming unglued, and its entire financial system is on the edge of a complete meltdown. And just to make sure that various fringe bloggers who warned this would happen over a year ago no longer lead to the hyperventilation of the venerable NYT, below, with the help of Goldman's Jernej Omahan, we bring to our readers the complete annotated and abbreviated beginner's guide to the pan-European bank run.

It must be at least a few days since the last one because CitizenLink is currently webcasting yet another GOP presidential debate this time the Thanksgiving Family Forum in Iowa which is hosting a round table for the candidates not to be confused with the pumpins generously strewn around, and in which Ron Paul is not unexpectedly projected to potentially win.

The consequences of excess debt are now facing the leaders of Europe head on, and a monumental decision must be made whether explicitly or implicitly. Excess debt leads to a long chain of D words: Deleveraging in an attempt to retire debt results in a depressed economy and declining asset prices. The depressed economy breeds private debt defaults that in turn produce distressed banks. The chain then runs through depositor flight from the banks, producing a financial crisis and in turn a devaluation of the currency as capital flees. When foreign goods become more expensive there is a declining standard of living as import prices rise faster than wages. Then in an effort to stop the government debt trap, there is a default on promised entitlements under an austerity program leading to the swift defeat of the political leaders. But ultimately there is a sovereign restructuring or a default of the government debt. Most, if not all, the D words are visiting Europe at the moment and its leaders are falling by the wayside. There is not a precise science that tells us when the debt trap begins the downward spiral that takes the ship down, but there are some rough guidelines. Reinhart and Rogoff (This Time is Different) have found to the extent one can generalize when a country’s debt-to-income ratio reaches the 90 percent level the ship of state begins to list and currently the OECD aggregate of 30-country gross debt-to-income ratio is 105 percent.

An interesting and succinct compare-and-contrast (by MEP Daniel Hannan) of the U.S. Constitution and its European equivalent (Lisbon Treaty) presented with little comment except to note in the last week we have discussed how the Irish view their German masters, how the French/Italians/Spanish will do pretty much anything in order that the Bundesbank will enable ECB monetization, and perhaps more critically the exodus of capital not merely from peripheral European debt markets but from the core also. We suspect the status quo cannot exist much longer (Keynesian Endgame?) and regimes (fiscal/monetary/political) will change as tail risk becomes the only risk.

When back in May 2010 Greece was bailed out for the first time, the corrupt authorities and the conflicted media said this is the beginning of a new beginning, and soon everything would be fixed. Nothing has been fixed and everything has gotten far worse. Back then we were among the few to point out that the "bailout" was a travesty and that you can't fix an excess debt problem with more debt, yet that has been precisely the methodology of every bailout ever since the first. Unfortunately, the world is caught in a Keynesian paradigm where this is the only recourse to kick the can, unfortunately the strength of every kick is getting weaker and weaker until one day, the can refuses to move, and it is game over. Looking back at this historic period which sealed the fate of the Keynesian system, nobody has caught the paradoxes of the current broken economic and financial model better than Kyle "Nickels" Bass. Below, for everyone's must read pleasure, we once again present his May 11, 2010 letter titled "The Pattern is Set ? Betting the Bank on a Keynesian Free Lunch" which fuses everything that has happened in Europe since then on the fiscal side, and is about to happen on the monetary one. "From now on, it seems everything will be deemed to be a liquidity crisis that will be met with more "bail?outs" and debt financed spending. This will eventually break traction in a violent way and facilitate severe inflation or even hyperinflation. The one thing the EU taught us this weekend is that paper money will be worth less (maybe much less) in the future." And indeed it will, because more than anything, money is increasingly and rightfully seen as the symbol of the free lunch that Keynesian economics promises, after that "just one final debt hit." Is there much or any hope? Not really, but being prepared while watching the inferno blazes get higher and higher is the best we can all do.

Pick the odd one out of the following 7 banks, while in the process pointing out what they have in common: Bank of America Corp, Citigroup Inc, Deutsche Bank AG, Goldman Sachs Group Inc, Jefferies Group Inc, JPMorgan Chase & Co and Royal Bank of Scotland Group Plc. As it so happens 6 of the 7 are Bank Holding Companies, and have access to the Fed's various emergency facilities. The seventh, Jefferies, which a few years ago, boasted that it is now the largest remaining true investment bank after all its competitors had converted to BHC status, may soon regret it said that and did not join its peers. Why? For the same reason why on November 1, the day after MF Global filed for bankruptcy, we tweeted: "Here is why Jefferies is in deep doodoo: http://1.usa.gov/uNBhzq" The reference of course is to the now legendary prospectus for the MF Global 6.25% notes of 2016 that had the infamous Corzine key man event: "interest rate applicable to the notes will be subject to an increase of 1.00% upon the departure of Mr. Corzine as our full time chief executive officer due to his appointment to a federal position by the President of the United States and confirmation of that appointment by the United States Senate prior to July 1, 2013." At this point the only appointment Obama may give Corzine is that of a presidential pardon for a criminal felony offense (assuming of course Corzine brings a sleeping bag to Zuccotti square: the only offense for which he may ever be arrested). Alas, Jefferies, and the 6 other banks, do not have that luxury: as of late this afternoon, all six were sued by pension funds "who said the bonds' offering prospectuses concealed problems that led to the futures brokerage's collapse." Precisely as Zero Hedge expected. And unfortunately for Jefferies, this may well be the final nail in the coffin - because while the market had punished the bank for its Exposure, the biggest unknown in the past 2 weeks was whether and when it would be sued precisely for its MF Global liability. That time is now: next up - every single entity that was impaired in part or in whole as a result of the MF Global bankruptcy will follow suit and sue the same 7 banks... of which only Jefferies does not have the benefit of an infinite backstop.