Bank Run

Just As I Warned Of JPM's Exposure, Those Other Warnings Will Come To Pass As Well. I pull stuff out of my analytical archives and low and behold, who do I find?

Well, my hat is off to the global central planners for averting the next stage of the unfolding financial crisis for as long as they have. I guess there’s some solace in having had a nice break between the events of 2008/09 and today, which afforded us all the opportunity to attend to our various preparations and enjoy our lives.

Alas, all good things come to an end, and a crisis rooted in ‘too much debt’ with a nice undercurrent of ‘persistently high and rising energy costs’ was never going to be solved by providing cheap liquidity to the largest and most reckless financial institutions. And it has not.

So nobody can say, "But no one could have seen this coming", I'm letting all know what's coming.

Overnight: just more of the same, as markets collapsed, first in Asia, then in Europe, on ever more concerns what a Greek exit would do to Europe. The most important story of the night was a report in Dutch Dagblad claiming that ECB has turned off the tap for Greek bank liquidity: "At the end of January, Greek banks had received EUR73 billion in liquidity support from the ECB, but this amount has dropped by more than 50% now, according to the newspaper. The ECB is cutting back support because Greece has been holding off on recapitalizing its banking system, despite receiving EUR25 billion in funds for that purpose, the paper says." Whether this move is to force Greece to blink (even more) by making the previously reported bank run even more acute, or just general European stupidity, is unclear but it is certain to make the funding stresses across all of Europe far more acute. The news sent all peripheral bond yields soaring, and the EURUSD tumbling to under 1.27 briefly. 

Now that the Greek exit is back to being topic #1 of discussion, just as it was back in the fall of 2011, and the media has been flooded by groundless speculation posited by journalists who have never used excel in their lives and are merely paid mouthpieces of bigger bank interests (long live access journalism and the book sales it facilitates), it is time to rewind to a step by step analysis of precisely what will happen in the moment before Greece announces the EMU exit, how the transition from pre to post occurs, and the aftermath of what said transition would entail, courtesy of one of the smarter minds out there, Citi's Willem Buiter, who pontificated precisely on this topic last year, and whose thoughts he has graciously provided for all to read on his own website. Of course, take all of this with a huge grain of salt - these are observations by the chief economist of a bank which will likely be swept aside the second the EMU starts the post-Grexit rumble.

The implications of a nation leaving the Euro (and its contagion effects) are becoming clearer but are by no means discounted by the market. The risk of an interruption in the Greek adjustment program has increased significantly - and as Goldman notes - is the most likely eventual outcome for Greece and fears of the missed interest payment in June continue to concern many. The tough decision and dilemma for the international community remains between a rock (of acquiescence and just funding a belligerent member state) and had place (ECB deciding to let Greek banks go) with an odd middle ground seemingly the most likely given Europe's tendency for avoiding the hard decisions. There is no doubt that the near term implications from such an unfortunate turn of events would be profound for markets; fiscal risk premia would widen, the EUR would decline in value and European equities would underperform. The true question though, is how much lasting damage such a situation can do and whether, in the long run, systemic risks can be contained. In principle, to the extent that no other country chooses to go down the same path as Greece, there is no political or practical hurdle for the ECB to crucially safeguard the stability of the Euro area with unlimited liquidity provisions. A liquidity driven crisis can be averted in that sense. Whether risk premia stay on a higher tangent after such an event is a separate and complicated question but game-theoretically it strengthens the renegotiating position of Ireland, Portugal, and obviously Spain with the ECB (and implicitly the Bundesbank) being dragged towards the unmitigated print-fest cliff.

There has been much speculation about how the Greek endgame will play out, but precious little from the perspective of Germany. Until today. Courtesy of a three part series from Handeslblatt (here, here and here) we now know precisely what the next steps are as visualized by Europe's piggybank, which now is telegraphing it is set to cut Europe's most wayward child loose.

Back in November we penned "The Complete And Annotated Guide To The European Bank Run (Or The Final Phase Of Goldman's World Domination Plan)" in which we described what the long-term reality of Europe, not that interrupted by the occasional transitory LTRO cash injection and other stop-gap central bank measure, would look like. And yet there was one piece missing: after Goldman unceremoniously set up its critical plants in Italy via Mario Monti and the ECB via Mario Draghi, one key target of Goldman domination was still missing. The place? Why the center of the entire modern infinitely rehypothecatable financial system of course: England, which may have 1,000x consolidated debt/GDP, but at least it can repledge any asset in perpetuity thus giving the world the impression it is solvent (no wonder AIG, MF Global, and now the CME are scrambling to operate out of there). Which is why we read with little surprise that none other than former Goldmanite, and current head of the Bank of Canada, is on his way to the final frontier: the Bank of England.

Back in October, there were those who were confused how it was possible that European sovereign bond yields could be exploding to their highest in a decade, even as the EURUSD keep grinding higher. We explained it, and said to prepare for much worse down the road. Sure enough, much worse came, and was promptly forestalled as both the Fed expanded its swap lines and lower the OIS swap rate, and the ECB "begrudgingly" ceded to LTRO 1+2 (that this resulted in nominal price gains was to be expected - after all humans enjoy being fooled when price levels rise when in reality just the underlying monetary base has expanded). But how did the EURUSD spike fit into all this? Simple - FX repatriation. This was explained as follows: "the sole reason for the EUR (and hence S&P and global 100% correlated equity risk) surge in the past 9 days is not driven by any latent "optimism" that Europe will fix itself, but simply due to the previously discussed wholesale asset liquidations (as none other than the FT already noted), which on the margin are explicitly EUR positive due to FX repatriation, courtesy of the post-sale conversion of USDs to EURs. Which means that the ever so gullible equity market has just experienced one of the biggest headfakes in history, and has misinterpreted a pervasive European, though mostly French, scramble to procure liquidity at any cost by dumping various USD-denominated assets, as a risk on signal!" It appears we are now back into liquidation mode, and the higher Euro spread surge, the faster EURUSD will rise as more and more FX is "repatriated." In other words, as back in the fall of 2011, the faster the EURUSD rises, the worstr the true liquidity situation in Europe becomes: a critical regime change, which will naturally fool the algos who assume every spike up in EURUSD is indicative of Risk On, and send ES higher when in reality, the underlying situation is diametrically opposite.

Even With Back Dated Deals Featuring Only One Party, One Can't Escape Greece's Problem Shared By Much Of The EU. Let's look at some nasty consequences...

Not many websites, analysts or authors have both the balls/temerity & the analytical honesty to take Goldman on. Well, I say.... Let's dance! This isn't a collection of soundbites from the MSM. This is truly meaty, hard hitting analysis for the big boys and girls. If you're easily offended or need the 6 second preview I suggest you move on.

Re: LTRO2, banks, CRE and the oppurtunity to see just how much free really costs...

Here's concrete proof of a mass European bank run. If you missed it, don't worry - there'll be plenty more from where these came from...

The Blokes across the pond are starting to sound as bad as some of the sell side charlatans stateside. Either that or the weed over there is just that much better!